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News from EPI The Federal Reserve Should Take Note: High Long-Term Unemployment is a Clear Indicator of a Weak Economy

The theme of research presentations at this year’s Jackson Hole economic policy symposium will be labor market health, and how much of continuing labor market weakness can be attributable to continuing shortfalls of aggregate demand that can be ameliorated by continued monetary support from the Federal Reserve. A key piece of this debate is how to interpret the still-elevated long-term unemployment rate. While short-term unemployment (the share of the workforce unemployed less than 27 weeks) has fallen to nearly pre-recession levels, long-term unemployment (lasting for 27 weeks or more) remains significantly elevated. There is continued debate among economists about whether this elevated long-term unemployment is structural—the result of workers not having the skills employers need, not living where job opportunities exists, or facing other barriers to employment—or simply due to continuing weak economic conditions.

In Lagging Demand, Not Unemployability, Is Why Long-Term Unemployment Remains So High, EPI Research and Policy Director Josh Bivens and economist Heidi Shierholz show that there is no evidence that long-term unemployment has “hardened” into structural unemployment. On the contrary, the long-term unemployment rate is entirely in line with what we would expect given its historic relationship with broader measures of labor market health. In fact, over the past three years, as the broader labor market has slowly but steadily improved, the long-term unemployment rate has decreased more rapidly than one would expect from historical relationships.

Simply put, today’s elevated long-term unemployment rate is simply a sign that there is still a great deal of slack in the economy, and boosting aggregate demand through monetary or fiscal stimulus would bring down the rate of long-term unemployment.

“It’s too soon to give up on the long-term unemployed. We found no evidence that today’s high long-term unemployment rate is due to anything other than the weak economy,” said Shierholz. “For example, were we facing skills mismatches, there would be evidence of tight labor markets relative to 2007 for workers in at least some  occupations, industries, education levels, or demographics. However, the long-term unemployment rate is elevated across the board. There just aren’t enough jobs for everyone who’s looking.”

Bivens and Shierholz also examine indicators such as productivity, wage and price inflation, interest rates, and corporate profits, to show that there is still a significant gap between economy-wide demand and potential supply. If evidence from outside the labor market suggests that there’s still slack in the economy, it follows that high long-term unemployment is similar. These findings add further evidence that the Federal Reserve should not tighten monetary policy until the economy has truly improved.

“Today’s elevated long-term unemployment rate continues to be a clear signal about how much slack there is in the economy,” said Bivens. “Until this long-term unemployment rate is significantly reduced, wage and price inflation will remain subdued, and the Fed should not let up on monetary stimulus.”

This paper is part of EPI’s continuing work on long-term unemployment. Previously, EPI researchers have examined the role that cuts to jobless benefits have played in the labor market. Last month, EPI launched a new website examining long-term unemployment. Users can download data and view charts comparing long-term unemployment trends across states and demographic groups, as well as see the share of children with a parent who is long-term unemployed.