This theory seems possible, until you actually look at the numbers
Here's an interesting theory: maybe the unemployment rate is so stubbornly high because not enough jobless Americans are exiting the workforce as normally would have. Why might they be sticking around for longer than usual? Perhaps they're collecting extended unemployment benefits for as long as they can before exiting the workforce for good. After all, if the government puts money on the table, you might as well take it. Could this theory help to explain the high unemployment rate?
Before considering the validity of this idea, its origins should be noted. This isn't some wacky theory thought up by a little-known blogger with too much time on his hands: it was suggested by Federal Reserve economists. Most of the attention paid to the monetary policy committee's August meeting minutes stemmed from its consideration of other stimulus strategies, but they also included the following note:
Participants also discussed the labor force participation rate, and it was noted that extended unemployment benefits could be increasing the measured unemployment rate by encouraging some workers to remain in the labor force longer than they otherwise would have.
The way in which this might work has already been explained. The theoretical logic is clear enough, but does observation of the U.S. labor market back up this possibility?
If we're worrying about the unemployment rate being inflated by those who should have left the labor force, then we need to determine which sorts of people this includes. For example, what if a recent 24-year-old college grad was laid off a year ago and moved back home? Perhaps he's discouraged and can go without income for a while with no overhead, but continues to look for work occasionally so he can collect unemployment benefits. Should he be considered unemployed? I'd say yes: he does want a job and needs to find one eventually. His employment situation is a direct result of a poor labor market, so Fed economists should worry about his joblessness. At some point, he must work.
A fair criterion to determine who shouldn't be counted as unemployed would be those who have been laid off but would not re-enter the workforce at this time, even if a good job was available. There are really only two major groups of people who would fit this criterion that may be collecting unemployment after having been laid off. One group would consist of older Americans who consider themselves retired, but continue to collect unemployment because they can. The other group would consist of men or women who have decided to become full-time househusbands or housewives permanently rather than work again.
These should really be the only two groups that the Fed economists are worried about. After all, if someone wants a job but can't find one, then it's hard to understand why anyone would complain about considering them unemployed -- unless some weird circumstance prevents them from looking for a job, which also probably already precludes them from being counted as part of the labor force (e.g. illness).
It's hard to imagine that the number of men or women who became permanent homemakers after being laid off, but continue to collect unemployment, is very large. For starters, in the U.S., social trends generally result in far more women taking on this role than men. And the statistics show that men have fared much worse when it comes to layoffs, mostly because some male-dominated professions like construction and manufacturing were some of the hardest-hit. Moreover, fields that favor women, like healthcare and education, have been more resilient and continue to hire workers. As a result, women are more likely to be enticed back to work than men.
Turning to statistics, of the 13.9 million Americans unemployed in July, just 2.0 million were married women, while 2.8 million were married men. Those are relatively small portions of the unemployed population, as the vast majority appears to be unmarried. Unless independently wealthy, few single adults have the option of becoming a permanent homemaker. Domestic partners could come into play here as well, but such arrangements often lack the stability necessary to result in someone permanently exiting the workforce to become a homemaker.
There is likely a handful of Americans out there who have become permanent homemakers but continue to collect unemployment benefits anyway. But just a handful isn't likely to sway the unemployment rate very much.
What about older Americans who are retired but collect unemployment benefits anyway? For this group we've got even clearer data to work with. As I explained earlier this month, the percentage of Americans 55 years-old and over who are employed has barely changed since the recession began in December 2007. Instead, the employment rates of younger age groups have been hit hardest. Here's my chart:
In fact, the number of employed Americans in the 55+ group has increased by 9.3% since December 2007. Every other group's number of employed has declined. Furthermore, the unemployment rate for those 55-years-old and older was just 6.9% in July -- far lower than the national average and every other age group.
Part of the strong performance by the oldest group has to do with the aging population. But for falsely-unemployed retirees to be significantly skewing the unemployment rate, you would need to have many older Americans laid-off and many of those laid-off having left the labor market for good but continuing to collect unemployment. Considering how relatively strong the employment rate is for the age group of 55 and over, this just doesn't seem plausible. Since unemployed Americans are concentrated in younger age groups, few are likely falsely-unemployed retirees.
Unemployment Benefits Timing
Remember: the theory described above only includes Americans who are unemployed for more than 26 weeks, which would be the population eligible for extended benefits. Some Fed economists worry that those extended benefits are responsible for exaggerating the unemployment rate.
In July, 6.2 million Americans were unemployed for 27 weeks or more, about 45% of all unemployed. In December 2007, this group included 1.3 million Americans. So let's say there are approximately 5 million more long-term unemployed now than in a good job market.
But during this period of time the labor participation rate has been steadily declining, from 66% in December 2007 to 63.9% in July. This implies that about 5 million Americans left the workforce over this period. Now some of them retired or became homemakers without continuing to collect unemployment benefits, but a sizable portion also likely left for reasons like discouragement and eventually needs a job. Separately, the Bureau of Labor Statistics says 6.6 million people want a job but are not considered unemployed for technical reasons, up from 4.7 million in December 2007.
What can we gather from this? It's very likely that at least 2 million of the 5 million Americans who left the workforce still want a job but aren't considered unemployed. Are there at least 2 million Americans collecting extended unemployment benefits that don't really want a job? For that to be the case, at least 40% of the long-term unemployed would have to consist of permanent homemakers or retirees that are milking taxpayers. If fewer than 40% of the long-term unemployed are guilty of collecting unemployment but never wanting a job again, then I would argue that the unemployment rate understates the labor market's problem due to the large number who want a job, but aren't technically considered unemployed.
Considering all the numbers, it's hard to see how the Fed economists' worry could be legitimate. In fact, the opposite is more likely true. Extended unemployment benefits expire after 99 weeks, and unemployment has been well-elevated -- above 8% -- for 30 months. The few Americans who have likely exited the job market for good after being laid-off but continue to collect jobless benefits could easily be overshadowed by those who have run out of even those extended benefits and have temporarily given up looking.