Long-term unemployment warrants action now and is projected to get worse

Snapshot for February 4, 2008.

The White House has demanded that legislators not extend unemployment benefits as part of the upcoming economic stimulus package, despite the fact that the latest jobs report from the Department of Labor shows that long-term unemployment is already a problem.

After the last recession, Congress first extended unemployment benefits to those who had exhausted their 26 weeks of standard benefits in March 2002. While the unemployment rate at that time was higher than it is now—5.7% in March 2002 versus 4.9% last month—the more relevant figure is how many jobless workers have exhausted their unemployment insurance. The chart below shows that the total number of long-term unemployed is substantially higher now-1.4 million workers last month compared to 1.3 million in March 2002. In other words, today 1.4 million workers have exhausted their entitlement to unemployment compensation but are still actively trying to find work.

The chart also shows projections to the end of this year. Independent researchers have forecasted that by the fourth quarter, the unemployment rate will have increased to 6.2%. Based on that forecast and the historical relationship between the unemployment rate and the share of the unemployed who are long-term jobless, nearly 1.9 million workers will likely be unemployed long term by the end of 2008.¹

Number of long-term unemployed

Long-term unemployment places an enormous strain both on families and on the economy. Extending unemployment benefits would not only give aid to the families hardest hit by the economic downturn but also provide a critical stimulus to the economy. The long-term unemployed, their savings depleted, quickly spend virtually every dollar they receive, mostly on necessities found in their local economy. Extending unemployment benefits during an economic downturn is not only the right thing to do for the families struggling in this economy, it is also excellent economic policy.

Note
1. Our forecast for the number of long-term unemployed comes from various sources. Data through January 2008 are from Bureau of Labor Statistics. We take the assumption that unemployment in the fourth quarter of will be 6.2% from Goldman Sachs forecast in their January 8 publication of US Economics Analyst. We then model the relationship between the share of the long-term unemployed and the unemployment rate using a time-series regression based on data from 1959q1-2007q4. The model regresses the long-term share on the unemployment rate, with two AR terms and a trend variable to whiten the residuals. We then perform a one-step-ahead forecast to estimate the long-term share associated with an unemployment rate of 6.2%, yielding 19.3%. To change this share into a number, we use the CBO projection that the labor force will grow 1.1% in 2008, and apply this to the CPS smoothed estimate of the labor force size, given here.[PDF]

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