Fiscal Cliff Could Strand Millions of Unemployed

Rick Newman

Three million Americans may become unwitting casualties of the political war in Washington over the fiscal cliff.

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Since 2008, the federal government has funded extensions of the unemployment insurance offered by states, more than tripling the amount of aid available to the unemployed in some areas. But the program is expensive, with the Congressional Budget Office estimating it would cost $30 billion to extend it through 2013. President Barack Obama wants to extend the benefits for another year, but Congress has already pared back the program, and Republicans insist it represents the kind of largesse Washington can no longer afford.

Though the costs of another year's benefits may be high, the bigger problem may be that the people receiving federal jobless aid are the least likely to find work any time soon. Since the federal benefits kick in once state aid--which usually lasts for 26 weeks--expires, recipients, by definition, tend to be the long-term unemployed. And they're increasingly the ones being left out of the tepid economic recovery.

Of 12 million unemployed Americans, about 4.8 million, or 40 percent, have been out of work for more than 27 weeks. But as employers create new jobs or fill open ones, the people who have been out of work longest may be the last ones in line. "Employers are not going to consider the long-term unemployed," says economist Sophia Koropeckyj of Moody's Analytics. "They're treated as damaged goods."

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As resources for helping those in need become more scarce, attitudes toward the long-term unemployed seem to be hardening. Part of the reason is that some people who are unemployed choose to collect a full run of jobless benefits--which range from about $200 to $600 per week, depending on the state--rather than go back to work. That may even be rational, if the only jobs available pay less than you'd pull in from the government. Economists estimate that such voluntary unemployment may push up the unemployment rate by anywhere from 0.5 to 1.5 percentage points.

But these days, a far bigger problem is simply that the demand for workers is so weak. If this were a typical recovery, the most qualified unemployed people would have been rehired by now, leaving those who have been out of work longer poised to get hired next. Yet since the recovery began in 2009, employment has recovered at the slowest pace following any recession since World War II. Economists estimate economic growth at the moment is less than 1 percent, which is closer to recessionary levels than to the benchmark of a healthy economy. Some of the things that normally occur after a recession--such as the re-emergence of discouraged workers who gave up looking for a job--haven't even started yet.

Over the last two years, the unemployment rate has dropped sharply, from 9.8 percent to 7.7 percent. But future improvements will be slower and more incremental. Forecasting firm IHS Global Insight, for instance, predicts the unemployment rate will still be at or above 7 percent two years from now. That's largely because the global economy is growing very slowly and most companies don't really need more workers.

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A glut of labor means companies can be more selective when they do hire, which is more bad news for people who have been out of work the longest. "The bar has been raised," says Koropeckyj. "A lot of jobs that used to require only a high-school education now require a college degree." Other jobs, such as those in advanced manufacturing, may require specific training that companies are reluctant to provide, unless a shortage of qualified workers causes them to lose business, leaving little choice but to offer training. All of those factors work against the long-term unemployed, whose aging skills and empty bank accounts may leave them without the resources needed to compete for jobs in the modern economy.

Even if Congress extends jobless aid for another year, it's hard to imagine it will remain in place until 2015 or 2016, which is when most economists think unemployment will return to normal. During that time, even more people will become permanently unemployment and simply drop out of the labor force. Even if the nation as a whole averts the fiscal cliff, some Americans will dangle over it indefinitely.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback to Success. Follow him on Twitter: @rickjnewman.