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How to Fight the Scourge of Long-Term Unemployment: View

August 24, 2011

Aug. 25 (Bloomberg) -- President Barack Obama, as part of his contribution to the various job-creation plans politicians will unveil after Labor Day, is looking at ways to target one of the most intractable legacies of the economic slump: the long- term unemployed.

Long-term joblessness is reaching epic proportions. As of July, about 6.2 million job-seekers, or 4 percent of the U.S. labor force, had been out of work for more than six months -- close to the highest level in more than six decades (see chart).

The skills of the long-term unemployed are atrophying and their motivation waning, making them increasingly likely to end up as wards of the state, collecting various forms of government assistance.

Disability rolls alone were up 19 percent from their pre- recession level in July to 8.4 million people, at an average annual cost per beneficiary of about $13,000. The mounting burden will deplete the Disability Insurance Trust Fund by 2018, according to the Congressional Budget Office.

It would be folly to think the government can reverse all the damage, much of which is the tragic and unavoidable result of a financial crisis and a deep recession. Still, stimulative policies sharply focused on employment can help. Economists estimate that each new job adds, on average, roughly $60,000 to the country’s annual output. About $23,000 of that goes toward reducing the federal budget deficit through higher tax revenue and decreased spending on the social safety net.

Intangible Benefits

The intangible benefits of employment can also have a quantifiable value: Economists David Blanchflower and Andrew Oswald, for example, have estimated that the increased happiness associated with having a job is worth about an extra $60,000 a year to the individual.

The challenge for the president is to find the most cost- effective way to create the needed jobs, at a time when the political winds are blowing hard against new federal spending. The available evidence suggests that the best approach would be a combination of programs targeting the long-term jobless with those seeking to boost employment more broadly.

Among targeted programs, some of the most promising pay the wages of new hires as they get on-the-job training. One such effort in Georgia, called Georgia Works, allows recipients to receive as much as eight weeks of part-time, private-sector experience, paid for by the government. The president’s advisers are reportedly considering a version of the Georgia initiative, which focuses broadly on the jobless but could be aimed at the long-term unemployed.

Minnesota Program

While economists have yet to do a proper assessment of the Georgia program, a similar and more generous effort in Minnesota in the 1980s -- the Minnesota Emergency Employment Development program, which covered as much as six months of full-time work - - had an estimated cost per job of $34,000. At that rate, a program could help one in 10 long-term unemployed for about $21 billion, or for about $7 billion after accounting for taxes paid and federal program savings.

Specialized programs aren’t perfect. They have limited impact, require a lot of time to sort out qualified candidates, and can be seen as unfair to those who are left out. Such programs also tend to work much better when businesses are in hiring mode.

Tax Credits

A broader tax credit, aimed at all companies that expand their payrolls, would create many jobs on its own and would give impetus to smaller, targeted initiatives. Timothy Bartik, an economist at the nonpartisan W.E. Upjohn Institute for Employment Research, in Kalamazoo, Michigan, estimates that a two-year tax credit, if properly designed and advertised, could create 5.1 million jobs at a cost of about $29,000 each. The total outlay for the first year of a nationwide program -- not counting savings such as decreased unemployment payments -- would be about $80 billion.

And then there are public works projects. Yes, classic infrastructure spending is relatively inefficient when it comes to spurring employment: The CBO estimates the cost per job is at least $100,000, and possibly much more for programs that require a lot of equipment and materials. Even so, works projects are worth including in the mix. Building bridges and fixing roads can boost confidence and demand, improve the economy’s growth potential and complement other employment programs by focusing on more capital-intensive jobs.

All told, the combination -- a targeted job-training program, a broad-based hiring tax credit and a public-works initiative -- could cost the government more than $100 billion a year. The boost to economic growth, though, could go a long way toward making the government’s finances more manageable. Weighed against the long-term damage done by joblessness, using public money to put people to work seems a far more constructive, palatable choice than keeping them at home.

--Editors: Mark Whitehouse, Paula Dwyer

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To contact the Bloomberg View editorial board: view@bloomberg.net.


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