Unemployment Insurance and the Long-Term Effects of Layoffs

1. Unemployment Insurance and the Long-Term Effects of Layoffs Till von Wachter Columbia University, NBER, CEPR Economic Policy Institute May 25th 2010 “Long-term unemployment: Causes, consequences and solutions”

2. UI and Long-Term Effects of Mass Layoffs Effects of layoffs persist even after labor market improves: 1) Reduction in Earnings Lasting up to 15-20 Years  von Wachter, Song, Manchester (2009) • Rise in Job & Employment Instability over 10 Years  von Wachter, Song, Manchester (2009) • Persistent Reduction in Health over up to 20 Years  Sullivan and von Wachter (2009) 4) Rise in Application & Entry to Disability Insurance  Rupp & Stapleton (1995), Autor & Duggan (2003) • UI can help buffer some of these long-term effects • May not be able to alleviate substantial cost of job loss

3. Extensions of UI Duration May Prevent Entry into DI Applications and entry into DI rises in recessions  Disabled workers most hard hit by recession  Definition of disability itself depends on labor market Total program cost of DI significantly higher than UI  Longer duration (higher benefits & foregone earnings)  Medicare payments after two years on program Extending UI may help prevent some entries to DI  With more time, some potential applicants find jobs  Existing approximations suggest potential cost-savings Given Costs of DI, Extending UI may be fiscally responsible

4. Effect of UI Extensions on Labor Force Participation Longer UI duration may prevent individuals from dropping out of labor force:  Effect of extending UI on DI applications  UI may induce workers to keep searching and some to find jobs before they become discouraged and stop searching  Additional Beneficial Effect of Extending UI  Higher labor force participation lowers foregone earnings from permanent drop outs and thereby increases tax base  Higher labor force participation also puts pressure on wages and may thereby help to speed job creation

5. Does Longer UI Duration Improve Earnings? • Does longer UI worsen job outcomes?  Skills depreciate, stigma of long unemployment 2) Does longer UI improve job outcomes?  More time to search for good job match  More likely to find job in better labor market Best evidence: longer UI durations do not affect wages [Card, Chetty, Weber 2007, Schmieder, von Wachter, Bender 2009]  No counter-indication of extending UI  Extended UI may not raise long-term lot of unemployed

6. What Can Be Done to Improve Long-Term Outcomes? • Improve help for job matching once economy improves • Raise awareness that recovery process can be very protracted • Provide information on changes in labor market, options for mobility across industries, occupations, regions • Build on existing infrastructure and existing evidence • Provide help for adjustment of skills • Subsidize retraining in Community Colleges, On-Job-Training • Provide vouchers to access training in private market • Provide direct incentives to reenter labor force • High fraction of individuals exhausting UI exit labor force • Prevent exit by giving monetary incentives to take job • Shown to be cost-effective if targeted to most at-risk beneficiaries • Not fundamentally different subsidies for job creation

7. Conclusion – Extension of UI Beneficial, But Problems Remain for Long-Term Unemployed 1) Many good arguments for extending duration of UI benefits 2) UI does not resolve all problems of long-term unemployed 3) Other measures to help prospects of long-term unemployed 4) Worth considering ways of reducing future concentrated layoffs  Job sharing programs can help to prevent destruction of viable jobs lost because firms are in short-term distress  By helping to spread destruction of non-viable jobs into better economic times, also help reintegration of laid off workers and prevent long-term unemployment