Will Unemployment Ever Go Down?

May 1 2012 @ 9:14am

Surowiecki warns about a long-term rut:

The phenomenon in which a sizable chunk of the workforce gets stuck in place, and in effect becomes permanently unemployed, is known by economists as hysteresis in the job market. This is, arguably, what happened to many European countries in the nineteen-eighties—policymakers did little when joblessness soared, and their economies got stuck, leaving them with seemingly permanent unemployment rates of eight or nine per cent.

The good news is that there’s not much evidence that hysteresis has set in here yet. The bad news is that we can ride our luck only for so long. If the ranks of America’s long-term jobless don’t start shrinking soon, it’s less likely that they ever will, and we’ll be looking at a new "natural" unemployment rate for the U.S. economy. This economy would be less productive as a whole (since there would be fewer workers), meaning that everyone would be less well off.