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News from EPI No Sign That Long-Term Unemployment Has Scarred the Employability of Workers: Boosting Demand Would Reliably Bring Down Long Term Unemployment

Economists have recently raised fears that long-term unemployment could have a “scarring” effect, wherein long stretches of joblessness damage the ability of workers to reenter the workforce once the economy improves, and hurt their productive capacity once they have found work. However, in Long-Term Unemployment Has Not Damaged the Productivity of Workers, EPI Research and Policy Director Josh Bivens finds little compelling evidence that longer periods of unemployment permanently damage the employability or productivity of workers suffering through them.

Regardless of duration, any involuntary job loss inflicts significant and long-lasting economic damage to workers and their families. Bivens cites research that indicates job loss during the Great Recession is likely to lead to more than $50 billion of lost wages a year, for the next 20 years. Job loss also leads to worse health outcomes for unemployed workers, as well as lower school achievement and decreased future earnings for their children. However, Bivens finds that, beyond the damage done by any period of involuntary job loss, the length of unemployment has no reliably estimated effect on workers’ skills, employability, or productive capacity.

“Losing a job is extraordinarily costly, and new research shows that the fallout from job losses extends even to the children of laid-off workers” said Bivens, “but one key concern about the scarring effects of long-term unemployment—that it will damage the employability or productivity of workers—is not borne out in the data. This is a rare bit of good news in the lessons from the Great Recession.”

Bivens also looks for evidence that persistent high unemployment can damage macroeconomic performance. He find that periods of high unemployment often lead to lower estimates of the economy’s long-term growth potential, but that this damage can be reversed once unemployment falls and stays low for an extended period of time.

There is little evidence that long-term unemployment hardens into structural unemployment, which means that today’s unusually high long-term unemployment can be brought down through increased aggregate demand. Congress could help boost demand with fiscal stimulus such as infrastructure spending or reinstating extended unemployment insurance benefits. Meanwhile, the Federal Reserve should keep short-term interest rates at their current low levels until long-term unemployment is considerably lower.

This paper is the third and final release in a series of reports on long-term unemployment. Previously, EPI researchers have examined the role that cuts to jobless benefits have played in the labor market, and the root causes of today’s elevated long term unemployment. 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.