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More jobless Americans: The new normal?

New research suggests that the recession—and Washington's inadequate response to it—could permanently damage the U.S. labor force.
Kim Sayers, seen outside her home in Denver, faced losing her unemployment insurance benefits in December, 2013.
Kim Sayers, seen outside her home in Denver, faced losing her unemployment insurance benefits in December, 2013.

The stock market's back. Housing prices are up.  And slowly but surely, folks are getting back to work. So sooner or later, most everyone who's been out of work will be in a position to land a job—right?

Maybe not.

Despite the gains the economy has made since the depths of the financial crisis, and the momentum that's expected to grow this year, there's growing concern that the recession—and Washington's inadequate response to it—may have inflicted lasting, even permanent damage to the U.S. labor force and our economic future.

In previous recessions, the surge in unemployment is considered to be cyclical: When the economy rebounds and demand returns, jobs will come back as part of the normal business cycle. Some economists worry that some of this cyclical unemployment could become a structural part of our economy—a long-term change that will hold us back for years, even after other parts of the recovery take hold. 

The greatest concern is over the fate of the long-term unemployed. While their numbers are slowly shrinking, new evidence suggests many remain on the margins of the workforce even as the economy improves—to the detriment of themselves, their families, and the U.S. economy as a whole.

"You had people perfectly good at their jobs, lost them for reasons unrelated, and due to a slow recovery, they are leaving the labor force permanently and reducing overall levels of GDP," says MIT economist and Brookings fellow Michael Greenstone. "That was a theoretical concern in 2009 and it is now a realistic concern—that we have permanently reduced our economy's capabilities by causing some workers to become disconnected and employers to become too suspicious of them."

Typically, a large number of jobless workers would put downward pressure on wages, as labor supply would outstrip demand. As the number of unemployed workers falls, wages would start climbing up. But new analysis from the New York Federal Reserve Bank points out that wages have actually grown moderately since 2009, despite the still-high numbers of jobless workers. There's debate about just how fast wages have grown, with some arguing that the increase is tame at best. But the NY Fed suggests what other evidence has already confirmed: that employers are still overlooking the long-term unemployed, instead hiring from the significantly smaller pool of newly jobless workers, who are pushing wages up. That adds to research showing that firms won't even look at the resumes of the long-term unemployed.

As a result, the U.S. economy could appear to be at the "natural rate of unemployment" even with millions of additional jobless workers left behind. This all means that the U.S. could return to full employment with larger number of unemployed and jobless workers than we were expecting, as UBS economists Drew Matus and Sam Coffin explain. "We do not view the long-term unemployed as necessarily 'ready for work' and therefore believe that their ability to restrain wage pressures is limited. In other words, the unusually high number of long-term unemployed suggests that the natural rate of unemployment has increased," they wrote in a recent research note.

It's not just the unemployment rate that has folks worried. As the job market has turned into "a tale of two recoveries"—with short-term unemployment almost back to normal, pre-recession levels and stubbornly high long-term unemployment—the danger is that discouraged workers could give up looking for a job altogether. That could reduce both the number of workers contributing to the U.S. economy and consumers spending in it, further burdening entitlement programs, reducing revenue, and slowing GDP for years to come, meaning even fewer jobs in the future. 

"Each year that goes by we are leaving more and more of an output gap laying on the floor," says Greenstone." "There is a reasonable fear that [part of the recession] is never going to leave—it's going to show up in our GDP statistic for years and years and years."

The U.S. workforce was already on a glidepath to slower growth, given the large number of aging Baby Boomers. But economists like Greenstone believe that the crisis has accelerated the decline in labor force participation: Older Americans are being pushed out of the workforce faster than they would have liked. And younger Americans who've been out of work for long periods of time could face increasingly high barriers to entry, as their skills deteriorate and become outdated. 

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In fact, declining labor force participation has been the single biggest reason driving down the unemployment rate, which has fallen from 10% in October 2009 to 6.6% last month. Two-thirds of that decline is because people have stopped looking for work and dropped out of the labor force, according to the New York Fed. This reality has prompted the Federal Reserve to acknowledge that the unemployment rate alone is no longer an accurate gauge of the health of the labor market. 

Other believe that it's far too early to draw sweeping conclusions about the fate of the long-term unemployed and any permanent damage wrought by the recession to the labor market. As demand comes back, employers will take another look at hiring the long-term unemployed, says Gus Faucher, senior macroeconomist at PNC Bank. "Firms will take a chance on workers they wouldn't previously," he explains, pointing to employers' willingness to hire welfare receipients moving to work in the 1990s, when the economy was strong and demand was high. 

"A well-performing economy should get the labor force participation back up," says Harvard economist Lawrence Katz. And while there has been a modest increase in wages, employers aren't writing off the unemployed for life. "The labor market is acting like there are lots of jobseekers per job," he adds.

But even among economists who are feeling more optimistic about the future of the long-term unemployed, many believe that it's critical for policymakers to take action they are integrated back into the workforce and able to fulfill their potential. "We would be creating a terrible tragedy if we decided these people are truly unemployable," says Katz.

Already, the federal government's insistence on austerity has destroyed jobs and undercut investment that could have boosted the economy and helped the long-term jobless, says Greenstone. And Congress can't even agree to restore unemployment benefits, which have proven to help the jobless to keep searching for work and stimulate demand. 

Both parties have expressed interest in workforce training that could help keep the long-term jobless keep their skills fresh and stay attached to the labor market. But for "workforce investment" to have any real heft, it would require spending—not just voluntary pledges to reduce discrimination against the jobless.  And Republicans continue to insist that such spending is counterproductive, ensuring that Washington to sit on its hands while the unemployment crisis continues to drag on.

"I really fear we're giving up on millions of people who could have long and productive careers," says Katz.