Annie Lowrey of The Washington Independent has a sobering report on the shrinking labor force. I recommend reading the entire post. A year ago, Lowrey wrote an excellent piece for Foreign Policy magazine on the unemployment crisis facing young European workers. It’s now clear that the crisis has hit home for young U.S. workers:

The people hit hardest, though, were young workers, aged between 16 to 24. They made up 44.5 percent of the June decline, though they comprise only 13.5 percent of the labor force overall. Those young workers — who suffer from the highest unemployment rate out of any demographic group, particularly for young black men — also tend to suffer from the worst effects from periods of unemployment.
The long-term impact on these discouraged workers may be worse than simply a temporary spell of unemployment. Long periods of joblessness tend to leave workers — particularly young ones — with permanent scars: lower incomes in the future and more trouble finding work for years. The long-term unemployed often find it harder to get work in good labor markets as well. They lose their skills and confidence, and often have trouble switching from shrinking industries into growing ones. Like all members of the long-term unemployed, they tend to suffer from more depression, health issues and even relationship troubles and divorce, due to the financial, personal and emotional stress of joblessness.

Lowrey then cites Heidi Schierholz, an economist at the left-of-center Economic Policy Institute:

“When you’re in a downturn like this, the logic gets flipped on its head,” she explains. “To receive unemployment benefits, you need to be looking for work. You are actually required to be looking for a job, whereas if you aren’t getting unemployment insurance, and there aren’t any jobs, you might lose your incentive to look for work.”
Shierholz says the June labor market report indicates that workers are dropping out once they exhaust their benefits, or after months of fruitlessly searching for a job in an economy where five people are competing for every one opening and most economists do not foresee unemployment dropping to levels below 8 percent for years. “Even in a time of strong economic growth, there is lots of churn in the labor market and lots of people leave and later re-enter the labor force. There are plenty of good reasons to drop out — to go to school, or to take care of a relative,” she says. “But when it happens en masse, during a period of labor-market weakness, it is a further signal of weakness. The canonical example is someone who says, ‘I’ve knocked on every door in town ten times. This is futile.’ And there is a lot of that happening right now.”

I wonder if Shierholz is right about the impact of the requirement that recipients of unemployment benefits actively look for work. Much depends on the design of the search requirement, a subject I briefly touch on in this post from March.

There is considerable dispute as to what happens when unemployment benefits are exhausted. For example, Casey Mulligan has written the following:

One feature of the unemployment insurance program is that it specifies an exhaustion date: a person stops receiving benefits when he or she starts working again, or reaches the exhaustion date (often a fixed number of weeks after being laid off), whichever comes first.
In the past, economists observed that a large fraction of unemployed people suddenly started working again within a week or so of their exhaustion date, despite having been without work for so many weeks prior: evidence that the benefits themselves were sustaining unemployment.

He goes on to cite a study of unemployed workers in Pittsburgh that seems to confirm his point. There is, however, another possibility, as suggested by economists David Card, Raj Chetty, and Andrew Weber in a paper titled “The Spike at Benefit Exhaustion: Leaving the Unemployment System or Starting a New Job?” After a meta-analysis of existing research on unemployment exits and a study of data tracking unemployed Austrian workers, the authors offer the following:

We conclude that most job seekers in Austria are not waiting to return to work until their UI benefits are exhausted. Rather, a large fraction simply leave the unemployment registry once their benefits end and they are no longer required to register to maintain their eligibility for benefits. This finding underscores the importance of distinguishing between the effects of government programs such as UI on the decision to work vs. their auxiliary effects on the classification of non-working time. The effect of UI on whether individuals choose to be classified as “unemployed” or “out of the labor force” can be relatively large because it requires little change in actual behavior. The distortionary costs of the program, however, ultimately depend on how UI affects the time spent working. Hence, the spike in unemployment-exit hazards may substantially overstate the degree of moral hazard induced by UI. The “reporting” effects induced by UI benefits can also lead to biases in comparisons of unemployment rates across countries that have different unemployment systems.

I can’t speak to what Card, Chetty, and Weber make of the Pittsburgh study cited by Mulligan, but this is interesting.