Wasting Human Capital

Alan Krueger, Judd Cramer and David Cho have written a devastating analysis of the long term unemployment problem Are the Long-Term Unemployed on the Margins of the Labor Market? (full paper available here and the infographics here). As they point out, the long term unemployed are similar to the short term unemployed. But unlike the short term unemployed, a cyclical economic recovery does not lead to lower rates of long term unemployment. The long term unemployed suffer from more structural difficulties than just low labor demand.

Even in good times, the long-term unemployed are on the margins of the labor market, with diminished job prospects and high labor force withdrawal rates. Even after finding another job, reemployment does not fully reset the clock for the long-term unemployed, who are frequently jobless again soon after they gain reemployment. Only 11 percent of those who were long-term unemployed in a given month returned to steady, full-time employment a year later.

As the authors note:

The portrait of the long-term unemployed in the U.S. that emerges here suggests that, to a considerable extent, they are an unlucky subset of the unemployed.

This represents a huge waste of human capital and requires special attention. As the authors conclude:

Overcoming the obstacles that prevent many of the long-term unemployed from finding gainful employment, even in good times, will likely require a concerted effort by policy makers, social organizations, communities and families, in addition to appropriate monetary policy.

One of the findings of the study highlights the problem facing any such concerted efforts. The study notes that:

The subset of the long-term unemployed who do regain employment tend to return to jobs in the same occupations and industries from which they were displaced, suggesting that significant challenges exist for helping the long-term unemployed to transition to growing sectors of the economy.

This is a disturbing finding given that our displaced workers training system is built upon the premise that these worker will easily find work in new areas. It points out that the system is not working very well.
Maybe we need a new approach. Too often it seems that we ask the unemployed to throw away all their formal and tacit knowledge to chase the latest hot occupational trend. We need to recognize the specific skills and intangible asset that displaced worker have, and build upon those assets. Successful companies often build upon one set of knowledge assets to enter adjacent markets. Maybe we should structure our re-training system along the strategy as well.
– – –
As a side note: much of the press cover of the report has been on target. For example, the WSJ ran this summary: “Long-Term Unemployment Calls for Aggressive Policy Response
Of course, there are those who just don’t seem to get it — like this unfortunate headline in the Washington Post “Five reasons why the long-term jobless don’t matter to the economy”.
With thinking like that, no wonder we end up wasting precious human capital.

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