Long Term Unemployment and its Costs

In the first quarter of 2012 (the 3-month period from January to March), approximately 29.5 percent of the nearly 13.3 million Americans who were unemployed had been jobless for a
year or more, according to data released by the U.S. Department of Labor’s Bureau of Labor Statistics (BLS). That percentage translates into 3.9 million  workers, slightly more than the population of Oregon. The total unemployment rate (short-term and long-term unemployed) is currently at 6.3%, but an unusually large one-third of those who are counted as unemployed have been out of work for more than six months.

According to Pew analysis of Current Population Survey (CPS) data from the BLS, the percentage
of jobless workers who had been unemployed for a year or more reached  a peak of 31.8 percent in the third quarter of 2011. Despite modest improvement in the first quarter of 2012, the rate of long-term unemployment among the jobless remained stubbornly high. In fact, it was more than triple the 9.5 percent rate that it was in the first quarter of 2008, the first quarter of the Great Recession (see following table).

As discussed in A Year or More: The High Cost of Long-Term Unemployment, a report released by the Pew Fiscal Analysis Initiative in April 2010, persistently high long-term unemployment has significant implications for families, government budgets, and the country’s overall economic and social health.

A high rate of long-term unemployment has had a direct impact on the federal budget by prompting the extension of normal unemployment benefits, ratcheting up spending on other government safety-net programs (i.e., SSDI and SSI) and by reducing taxable wages. Please see Costing Taxpayers Billions of Dollars.

Long-term unemployment also affects the federal budget on the other side of the fiscal ledger by reducing income tax revenue and the amount of money flowing into the unemployment insurance pool. Unemployment benefits are taxable, but people on the unemployment rolls are receiving only a fraction of the income they would be getting if they were working. As a result, they are paying only a fraction of the taxes.