Government, Scars From Housing Bubble Both Raising Unemployment

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... but only slightly.

The combination of unemployment insurance and scars left by the popped housing bubble are elevating unemployment by 1.25 percent, at most. That's the conclusion from a San Francisco Federal Reserve report on the impact of structural unemployment on the economy.

[What's structural unemployment, exactly? Go here.]

There are three things happening here. First, jobless benefits pay unemployed people for up to 99 weeks. This is smart policy -- both humane and cash-effective -- but it also pays some people to stay unemployed who might otherwise find a job. How many people? The San Francisco Fed estimates that the unemployment rate would be about 9 percent without extended benefits.

Second, the median duration of unemployment today is about half a year. When workers spend six months out of a job, they lose contacts, lose skills, and sometimes lose entire industries they once belonged to, making it harder to rejoin the labor force. In this way, long-term unemployment can become a structural problem, branding millions of workers will dangerous signals of skill-atrophy that elevates the unemployment rate even after consumer demand returns to pre-recession levels.

Third, the epicenter of the recession was real estate and housing-related jobs continue to suffer uniquely. Construction employment declined nearly 25% from the start of the recession through the end of 2009 and there's reason to think we might not have hit the bottom. Some economists believe that the economy is structurally scarred, which means we suffer from not only a shortage of demand, but a mismatch of labor skills and employer needs.

In other words, there is reason to think that unemployment insurance and the popped housing bubble might be lifting joblessness. As for the final impact on the all-important unemployment rate, the Fed concludes:

We examined evidence in favor of the view that structural unemployment and the NAIRU have increased during and after the recent recession. Based on historical patterns, the recent shift in the relationship between unemployment and vacancies reflected in the Beveridge curve is consistent with an increase in the NAIRU of about 1¼ percentage points or less. The impact of extended unemployment insurance benefits likely explains about 0.4 to 0.8 percentage point of this increase. The remainder is probably associated with the bursting of the residential real estate bubble and the need for many unemployed construction workers to find work in other sectors. The effects of both of these factors are likely to be transitory rather than permanent.

Read the full story at the San Francisco Fed.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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