Ran across this worthwhile piece by Bloomberg columnist Megan McArdle a couple of days ago where she discusses the question of what we should be doing to reduce the severe problem of long term unemployment. We still have 3.6 million people who have been out of work for 6 months or more. Should we be supporting them by extending unemployment benefits? Or should we be creating incentives that would be creating more opportunities for them to be hired?
McArdle cites research by Alan Krueger (just returned to Princeton after two years being Obama's top economic advisor) that shows what happens to the newly unemployed. At first they intensively search for positions. Then once they have tapped out their network, most become passive waiting for something to come along. Finally there is another burst of intense search as benefits run out.
Why does search effort follow this pattern? Some might see it as a rational response to poor market opportunities; faced with a tough market, why spend tons of time beating one's head against the wall. Others would see it as a rational response to living off the dole; this could very well be true in Europe where the ratio of benefits to lost salary income is fairly high (however, in the US benefits replace less than half of income). Krueger found that heightened anxiety may play the most important role; rejection is unpleasant and a less intensive job search means fewer fruitless encounters with potential employers.
One idea that merits consideration, McArdle argues, is the Danish system where the long term unemployed have to accept job retraining. Other options include tax credits to firms that hire the long term unemployed or grants to individuals who leave high unemployment regions to take jobs elsewhere.
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