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Long Time Gone

Can American labor policies face the challenge of long-term joblessness?

But the biggest obstacle faced by the long-term unemployed may well be unemployment itself — a pattern known as “scarring,” where persistent unemployment itself stops them being rehired. A paper from the Boston Fed in 2012 found that, for people who had been unemployed for less than six months, as the number of available jobs rose, the jobless rate declined. For those out of work longer than six months, however, vacancies and the unemployment rate both rose. When one of the paper’s authors sent out 4,800 fictitious job applications, they found that inexperienced but newly jobless workers were far likelier to be called back than the experienced but long-unemployed.

the long-term unemployed

President Obama has proposed several policies aimed at helping the long-term unemployed. One would set up a National Infrastructure Bank and spend $40 billion on deferred-maintenance repairs. Another, the Community College to Career Fund Act, would award grants to educational institutions and state and local governments for better job-training programs. Congress has not approved them. In 2010 it passed a payroll-tax exemption for employers who hire the unemployed; this has since expired.

America is hardly the first country to face this problem. Across the European Union in 2012, the long-term unemployed comprised 62 percent of the total unemployed — a far greater share than in America, but around the same level it was in 2000. Few European countries share America’s odd aversion to active labor-market policies. Denmark, for instance, keeps unemployment low with flexible labour laws, relatively high unemployment benefits and education and job training. Germany takes much the same approach. In 2011 Denmark spent 2.3 percent of its GDP on active labor-market policies, compared with 0.1 percent for the United States. Among OECD countries, only Chile spent as small a share of GDP as that.

Yet there is not much hope for improvement in America’s polarized and poisonous political atmosphere. Instead, Congress will begin the new year by once again debating UI benefits. House Democrats have introduced legislation to extend benefits for three months, paid for by trimming farm subsidies. Harry Reid, the Senate majority leader, will try to pass a retroactive extension, without offsets, soon after the Senate reconvenes on January 6, a move Mr Obama says he supports. That is essentially an election-year dare: Republicans will either have to violate a core principle and vote for a measure that will raise the deficit, or they will have to hand Democrats a cudgel with which to thump them all the way to November.

© The Economist Newspaper Limited, London (January 4, 2014)

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