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Sunday, October 4, 2009

The perils of long-term unemployment

Alarming as the climb in unemployment is, the growing duration of joblessness is more worrying still.

America’s army of long-term unemployed — those without work for six months or more — swelled to 5.4 million, according to today’s figures. This is roughly equal to the combined populations of Los Angeles, San Diego and Sacramento. (For the internationally minded, it is slightly more than the population of Finland.)

More and more workers are exhausting benefits. As of the start of this month around 400,000 stopped receiving assistance. Another 1.3 million will use up their entitlement before the end of the year.

This calls for stronger action from the federal government.

A further extension of jobless benefits is now critical. These have already been stretched out to an unprecedented 79 weeks in some states with high unemployment. Congress should now press ahead with plans for an additional 13 weeks.

In addition to preventing large numbers falling into poverty, this is among the best forms of fiscal stimulus. Money given to the unemployed is almost certain to be spent quickly.

A recent survey for the National Employment Law Project found that 67 percent of unemployed adults had cut back on basics like food and groceries. Almost half had fallen behind with rent payments and a third had been forced to move in with friends or family.

No other form of government spending delivers such an immediate sugar rush to the economy. Unlike the cash for clunkers program, it is not merely stealing consumption from the future.

Still, there is a danger in such a stimulus. Allowing Americans the luxury of being pickier about which job they choose can have costs.

When it comes to unemployment, time matters. Skills atrophy after extended periods without work. Then, when growth picks up, these workers are no longer in a position to fill new jobs.

A slew of academic papers suggest that a quick return to the workforce — even in a humbler capacity — is often a good idea, especially for the young. Research by Tom Mroz at Clemson University showed that a six-month spell of unemployment at the age of 22 reduced wages even a decade later.

So the extra spending on unemployment benefit needs to be combined with much more assistance with job searching and retraining. According to the OECD, U.S. funding for retraining and job searching has risen by less than 20 percent during the crisis.

Failure to do more to retool the long-term unemployed will create lingering problems for the U.S. economy. Extending benefits is an important first step, but it is not enough to ensure that the administration’s stimulus is effective. For the more Americans are permanently dislocated from the workforce, the less robust any recovery will be.

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