How Else Can We Help the Long-Term Unemployed?

by Patrick Brennan

As Reihan describes, AEI economist Michael Strain has an op-ed for Bloomberg View today on one of the solutions he’s been promoting for the long-term unemployed: Cut the minimum wage for workers who’ve been out of work for a long period of time, and have the government subsidize their wages.

As Strain explains, 3.6 million Americans — about 2.5 percent of the labor force — have been out of work for more than 26 weeks. In absolute terms, that’s still, five years into our recovery, the highest it’s been since World War II, and as a share of the labor force, it matches the peak of the early 1980s recession. In other words, while this line may be dropping steadily, it has to drop just as far all over again as it has since the peak of this recession to get back to historically normal levels:

As regards the job market for many Americans, in other words, we’re still in a crisis. Which is why it’s important to try unconventional policy solutions, like the ones Strain’s calling for.

President Obama had two suggestions in his State of the Union address for this problem: Restore unemployment benefits for workers who’ve been out of a job for more than 26 weeks, and get corporations to pledge not to discriminate against them.

To take the first, corporate pledges along those lines don’t have a sterling record of success. As Reihan explains in greater detail, there are rational reasons to discriminate against the long-term unemployed, and we can’t expect employers to ignore those in exchange for a free lunch with Joe Biden. The effect of this idea, while it’s nice to draw attention to the issue, has to be quite limited (“We’ve hired 10,000 long-term-unemployed Americans” doesn’t even fit in an ad like hiring veterans does).

What of extending unemployment benefits? Unemployment benefits by themselves, for all the snark on the left about this, clearly do reduce one’s incentive to take a job, because it reduces the marginal earnings they gain by going to work rather than not working. In fact, such benefits can actually drive up the wages the unemployed demand — when they’d be better off in the long term by taking jobs — though how much it does so, we don’t really know. (A new paper from the Atlanta Fed suggests this effect is not terribly large, but it is acutely, of course, concentrated among the long-term unemployed, so it’s relevant here even if it doesn’t have a huge effect on the unemployment rate overall.) This exacerbates a problem Reihan highlights, that the wage one is willing to take to begin a job is probably higher than it ought to be given the long-term benefits of becoming employed again. Unemployment benefits do keep people “in the workforce,” since recipients have to attest that they’re looking for work to receive them, but the main case for extending them, it seems, is a humanitarian one rather than a useful economic one. (Strain supports extending them.) 

Is the minimum-wage/tax-subsidy idea a good one? As Reihan points out, it certainly wouldn’t be very expensive: Strain estimates the federal government could provide a $6-an-hour subsidy for 20 percent of the long-term unemployed for a year at the price of $6 billion — which sounds like a decent amount, but is about one-fourth the estimated cost of the Democratic proposal to extend unemployment benefits for the next year. (He supports both measures.) But there are cheaper options to incentivize the same outcome, such as eliminating, for a year or two, the payroll taxes employers pay on the salary they pay any long-term-unemployed worker they hire — that wouldn’t cut the cost of hiring nearly as much (about 7 to 8 percent as opposed to maybe 40 or 50 percent) but it also wouldn’t cost very much (maybe $1 billion a year if implemented).

The underlying economics of these proposals don’t vary that much for employers, which is the group we’re trying to influence: One is just a much bigger (five times, or so) subsidy for hiring the long-term unemployed than the other. One question is just how much we need to correct for the bias described above — it would be okay to overcorrect, probably, but we wouldn’t want to do so too much, at least as much because of the economic distortions it’d create as because of the cost to the federal budget. There are a number of perverse consequences we might see with a big or even a small subsidy, of course, that could outweigh the benefits of reinvigorating the prospects of the long-term unemployed and keeping them from leaving the labor force forever. 

One way to ensure that we don’t distort things too much is by making Strain’s proposal temporary: Apply it to workers over the next year, say, to see how it works, and don’t make it a permanent feature of the tax code. Another way to ease in encouragement would be to do a less-generous subsidy, to see what economic distortions do pop up.

Practically, it’s possible, as Danny Vinik of Business Insider points out, that the appeal of a job where half one’s salary is a government subsidy will not be quite what the dollar amount of the take-home pay suggests, a problem the payroll-tax holiday avoids. There’s also a third option of variable size, which the federal government already offers for certain categories of workers: a one-time tax credit to the employer that’s calculated as a share of the hire’s first-year wages. These are already offered to employers that hire veterans, the disabled, ex-felons, welfare recipients, and more. It could obviously be a much bigger subsidy than the payroll-tax holiday, and would obviate Vinik’s concerns.

A tax credit thus certainly shouldn’t out of the question politically, nor should be a payroll-tax holiday: We already had a partial one for several years during the recession. Perhaps that’s why it has some political traction, with Senator John Thune of South Dakota suggesting he’d like to include it in a comprehensive jobs package this spring. But Strain’s idea, especially in the context of his larger jobs agenda, partly because it’s bold and partly because it points toward a more permanent system of “work-sharing” that could shield future workers from recessions by incentivizing companies to cut hours rather than lay workers off entirely. That comes with its own economic problems, but the persistent employment disaster this recession has been demands some new ideas.