Most Popular ArticlesLatest Unemployment Report Reveals the Growing Problem of the Long-Term Unemployed
American Century Investments
March 16, 2010
  
Last Friday, the U.S. Bureau of Labor Statistics (BLS) released its monthly Employment Situation report for February. The national rate of unemployment remained unchanged versus January at 9.7%. This was no surprise as many economists have predicted the unemployment rate will be slow to decline despite recent economic growth. (See the January 11 Weekly Market Update titled “Unemployment and Labor Underutilization Will Be Stubborn Problems to Solve” for a detailed explanation).
Beyond the continued high level of overall civilian unemployment, what concerns many is the unusually high proportion of long-term unemployed. These people are still part of the civilian labor force (i.e. available for work) and actively seeking a job, but who have been unemployed for at least half a year (27 weeks or more). Since December, about four out of 10 unemployed workers have fallen into this long-term unemployed category.
Historical Trends in Long-Term Unemployment The chart below illustrates the monthly overall rate of unemployment (top line) and the rate of long-term unemployment (lower line) from January 1948 through February. The vertical shaded bars highlight past periods when the overall rate of civilian unemployment peaked (nine times since 1948). Historically, when the overall rate of unemployment has peaked, the rate of long-term unemployment has also peaked either concurrently or within six months of the overall unemployment rate.
Prior to the recent recession (beginning December 2007), the highest rate of overall and long-term unemployment occurred in late 1982 and early 1983 when the overall rate reached 10.8% and the long-term rate reached 2.6%. In fact, this was the only time over the last nine peaks in overall unemployment where the long-term unemployment rate exceeded 2%.
However as the chart illustrates, the rate of long-term unemployment based on the most recent recession has far exceeded anything we’ve seen since the late 1940s. Last month, while the overall civilian unemployment rate remained unchanged at 9.7%, the long-term rate of unemployment was 4%.
Source: Bureau of Labor Statistics Note: Tan bars indicate periods of peak overall unemployment
Another way to illustrate this unusual and unprecedented recent trend is shown in the chart below. For the same time period of January 1948 to February 2010, we have plotted the long-term unemployment rate as a percentage of the overall unemployment rate on a monthly basis. As the chart shows, this statistic has always peaked approximately when the overall unemployment rates likewise peak (as indicated by the vertical shaded bars). During a number of historical periods (1960, 1963, 1978, 1983, 1993 and 2002), it has reached a peak value in the range of 20-25%. In contrast, the current value of this ratio (41.2%) is well above this range or the overall historical average since 1948 for peak periods of overall unemployment. To say that growth in long-term unemployment is a substantial contributing factor to the growth in the overall rate of unemployment over the past two years (i.e. the unemployed having a challenging time finding new jobs) is not only correct but unique compared to past periods.
Source: Bureau of Labor Statistics Note: Tan bars indicate periods of peak overall unemployment
What Are The Causes for Unprecedented Long-Term Unemployment Rates? According to the BLS statistics, one of the prime reasons for the extremely high level of long-term unemployment can be tied to education level. In the chart below, we break down the overall rate of unemployment by level of education for workers age 25 and older for two past periods when it peaked (June 1992 and June 2003) and last month (February 2010). The level of education has always been an indicator and explanation for unemployment rates, especially in tough economic times. As we have increasingly evolved towards a service- and knowledge-based economy, generally those individuals with at least an undergraduate degree have fared better both in terms of lower unemployment rates and higher wages. And relative to the past two periods of peak unemployment in June of 1992 and 2003, this trend has become even more pronounced with the recession that began in December 2007.
As the chart illustrates, unlike past periods of peak unemployment, no educational level of worker has been unaffected in the current environment. Whereas having at least a bachelor’s degree meant you were effectively unaffected during the 1992 and 2003 periods (unemployment was slightly above 3%, which is what economists call “frictional” and reflects normal job-holder turnover), as of February this year that rate had increased to 5%.
The biggest change is among workers with only a high school diploma or lacking one. While this unemployment rate increased to a range of 9.5% to 12% with the last two periods of peak unemployment, it has now risen to 15.6% as of February. And even more striking is the increase in unemployment among those workers with a high school diploma. Their unemployment rate increased to a range of 5.7% to 6.8% with the last two periods of peak unemployment. It has now risen to 10.5%.
The group least affected has been those individuals with some college or an associate’s degree. Here the rate of unemployment increased to an approximate range of 5% to 6% with the last two periods of peak unemployment compared to 8% last month. Included in this category of are people with a technical trade, whether in industries such as health care or information technology.
Source: Bureau of Labor Statistics
Some may be quick to point out that unemployment among young high school dropouts or recent graduates can be exceedingly high (to wit, the unemployment rate for African Americans between the ages of 16 and 19 years old is currently a stunning 42%). But keep in mind that the data shown in the chart above only includes workers at least 25 years old—enough time to have learned a trade or employable skill even if the individual dropped out of high school or stopped their education with a high school diploma.
Summary The growing proportion of unemployed individuals who fall into the category of the long-term unemployed helps explain why expectations of declines in the overall unemployment rate coming out the recent recession will be slow in occurring. In the near-term, it highlights the need to extend unemployment benefits beyond what has been typical in past recessions. And it also suggests that, in order to address this problem, more than several quarters of robust GDP growth will be needed (or a one-time tax credit for businesses to hire workers as proposed by the Obama administration—despite its laudable goals) will be required.
One potential solution to this problem is increasing the rate of labor mobility. Unlike past recessions, the bursting of the housing bubble that accompanied this latest recession may be a factor in limiting the ability and willingness of the long-term unemployed to relocate in order to find a new job. In this respect, what the Obama administration is now attempting to do to ease the problem of homes with underwater mortgages can viewed as either a part of the solution to long-term unemployment (liberating people to “move on”) or a disincentive (if reducing or eliminating negative equity situations reduces the incentive to relocate). There is a strong correlation between high levels of underwater mortgages by state with higher-than-average (on a national basis) state unemployment.
Another potential solution to chronic long-term unemployment is re-training programs for individuals who either lack the skills necessary to compete successfully in today’s labor market or have seen their jobs permanently disappear as a result of automation or shifts of certain industries overseas. While this is an important longer-term solution, it is unlikely to bring down the rate of long-term unemployment within the next 12 to 18 months.
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