The rate of short-term unemployment—six months or less—is almost back to normal. In January it was 4.9 percent of the labor force. That’s only 0.7 percentage point above its 2001-07 average. But the rate of long-term unemployment, 3 percent in January, is precisely triple its 2001-07 average, according to a Bloomberg Businessweek calculation based on Bureau of Labor Statistics data. (Those two rates—4.9 percent and 3 percent—add up to the overall unemployment rate of 7.9 percent.)
Pointer from Tyler Cowen.
Beware of the interpretation that there is a clump of “long-term unemployed” that is separate and distinct from the short-term unemployed. That is, I would not assume that the causality runs from long-term unemployment to the unemployment rate, with the former boosting the latter.
Consider the alternative of putting total unemployment on the right-hand side. That is, the length of time to find a job is a function of the number of unemployed people with whom you are competing. As the unemployment rate goes up, the rate of long-term unemployment goes up.
How much long-term unemployment can be mathematically explained by the overall drop in the job-finding rate, and how much represents a drop in the job-finding rate for the long-term unemployed relative to that for the short-term unemployed? The article hints that perhaps some of the latter has taken place, but it is not clear how much.
For years I have fantasized that I “still’ belong on the right hand side, but I have to be really careful about taking my chances (moving to where I pay rent or mortgage again) just because I believe it “must be so”. Therefore I continue to dwell on the left hand side and the reality they must make for themselves that doesn’t just involve pulling one’s hair out. When we measure the whole of human capacity (recent historical record of income potential) and forecast from that for new product development, we at least have a good feel for who actually belongs on the right side. Then we can set about finding solutions for the considerable left side, solutions which mean new valuations and product have to happen which don’t destroy one price concepts.