Long-term unemployment inflicts damage on the broad economy by causing a decay of skills across the work force, Eric Lascelles, chief economist at RBC Global Asset Management, writes in a recent research note.
The overall U.S. unemployment rate has been stuck in the high single digits since the beginning of 2009. Before the global financial crisis of 2008-2009, the norm was around 5 percent.
The average duration of unemployment used to be about 16 weeks. It currently is at 40 weeks.
The longer that people remain unemployment, the more “existing skills atrophy and cutting-edge techniques go unacquired,” writes Lascelles.
A study from British economist Wiji Arulampala shows that short-term joblessness, on average, diminishes worker productivity by 6 percent while multi-year unemployment on average diminishes it by 14 percent.
Because of this decline in the quality of jobs, many long-term unemployed individuals who eventually re-enter the workforce do so with jobs that are lower-paying and worse-fit, which exacerbates the skills decay problem.
Some long-term unemployed people face the problem of skills becoming obsolete.
The real estate bubble that precipitated the Great Recession created an excess of construction jobs. This oversupply will leave a permanent deficit of over 1 million construction positions, even if the economy recovers, according to Lascelles.
The U.S. manufacturing sector, meanwhile, has been suffering from a steady, secular decline for decades.
Even if these workers switch careers, their new jobs probably won't be as specialized and high-paying as their previous work in construction or manufacturing.
In the wake of the U.S. housing collapse, many of the long-term unemployed have taken on new careers, and learned new skills or honed old ones. However, even the prospect of relocating to seek or accept work presents problems: Many unemployed Americans who would be willing to move to another city, state or country can't do so because they're stuck with underwater mortgages and homes they can't sell.
Also, the U.S. standard of the two-income family makes it less likely a family can relocate to accommodate a job opportunity for one unemployed person if his or her spouse is gainfully employed already.
The fear of long-term unemployment has also reduced the underlying “churn” of the jobs market.
When employed individuals voluntarily switch jobs, their wages -- and, presumably, productivity -- rise on average by 9 percent. The drop in this churn, therefore, “represents foregone efficiency gains,” Lascelles writes.
In the knowledge-based global economy of the 21st century, worker knowledge and skills – more so than other factors like natural resources and capital – have become increasingly important.
Skills decay, therefore, has emerged as a serious threat to the future success of many developed countries in the Great Recession's aftermath.