1979 1983 1987 1991 1995 1999 2003 2007 2011

0

2

4

6

8

10

Percentage of the Labor Force

All Unemployed

Unemployed for

More Than 26 Weeks

CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

CBO

Understanding and 

Responding to 

Persistently High 

Unemployment

FEBRUARY 2012
Pub. No. 4287
The Congress of the United States O Congressional Budget Office

A

STUDY

CBO

Understanding and Responding to 

Persistently High Unemployment

February 2012
CBO

Note

The numbers in the text and tables may not add up to totals because of rounding.
Preface

CBO

This Congressional Budget Office (CBO) study, which examines the state of the labor 

market and a broad array of policy approaches designed to reduce unemployment, was 

prepared at the request of the Ranking Member of the House Committee on Ways and 

Means. In keeping with CBO’s mandate to provide objective, impartial analysis, this study 

makes no recommendations. 

Gregory Acs and William Carrington of CBO’s Health and Human Resources Division wrote 

the study under the supervision of Linda Bilheimer. David Brauer and Benjamin Page contributed significantly to the analysis. Christi Hawley Anthony, Molly Dahl, Wendy Edelberg, 

Matt Goldberg, Heidi Golding, Michael Levine, Joyce Manchester, and Jonathan Schwabish 

of CBO provided helpful comments on the report. Jimmy Jin provided valuable research and 

production assistance.

Diana Furchtgott-Roth of the Manhattan Institute for Policy Research, Harry Holzer of 

Georgetown University, and Betsey Stevenson of the University of Pennsylvania also reviewed 

the report. The assistance of external reviewers implies no responsibility for the final product, 

which rests solely with CBO.

Loretta Lettner edited the study. Maureen Costantino prepared the report for publication and 

designed the cover. An electronic version is available on CBO’s Web site (www.cbo.gov).

Douglas W. Elmendorf

Director

February 2012

Contents

CBO

Summary vii

Unemployment and Its Consequences 1

Characteristics of the Unemployed 2

Effects of Job Loss and Unemployment on Workers and 

Their Families 3

Factors Causing High Unemployment 8

Weak Demand for Goods and Services 9

Mismatches Between Employers’ Needs and the Skills and 

Location of Workers 9

Incentives from Extensions of Unemployment Insurance 11

“Stigma” and the Erosion of Skills 12

Policies to Increase Demand for Workers 14

Fiscal Policies 14

Other Types of Legislative Actions 16

Other Policies to Reduce Unemployment 17

Improving Workers’ Skills 18

Modifying Unemployment Insurance 21

Facilitating Transitions to Employment 24
VI UNDERSTANDING AND RESPONDING TO PERSISTENTLY HIGH UNEMPLOYMENT

CBO

Tables

1. Characteristics of the Labor Force and the Unemployed, March 2011 5

2. Employment, by Industry, 2007 to 2011 10

3. Funding for Training Under the Workforce Investment Act (Title I), 

Fiscal Year 2012 17

Figures

1. The Unemployment Rate and the Long-Term Unemployed as a 

Share of All Unemployed, 1982 to 2011 2

2. Relationship Between the Unemployment Rate and the Long-Term 

Unemployed as a Share of All Unemployed, 1982 to 2011 4

3. Long-Term Unemployment During and Immediately Following 

Three Recent Recessions, by Reason for Unemployment 13

4. Ranges of Cumulative Effects of Policy Options on Employment in 

2012 and 2013 15

Boxes

1. Defining Unemployment 3

2. Programs That May Aid Unemployed People 6

3. Funding Mechanisms 19
CBO

Summary

The rate of unemployment in the United States has 

exceeded 8 percent since February 2009, making the past 

three years the longest stretch of high unemployment in 

this country since the Great Depression. Moreover, the 

Congressional Budget Office (CBO) projects that the 

unemployment rate will remain above 8 percent until 

2014. The official unemployment rate excludes those 

individuals who would like to work but have not searched 

for a job in the past four weeks as well as those who are 

working part-time but would prefer full-time work; if 

those people were counted among the unemployed, the 

unemployment rate in January 2012 would have been 

about 15 percent. Compounding the problem of high 

unemployment, the share of unemployed people looking 

for work for more than six months—referred to as the 

long-term unemployed—topped 40 percent in December 

2009 for the first time since 1948, when such data began 

to be collected; it has remained above that level ever 

since. 

Such persistently high unemployment has wide-ranging 

repercussions: It places financial, psychological, and even 

physical strains on people who are unable to find work 

and on their families as well; it places budgetary pressures 

on the federal government and on state and local governments, as tax revenues decline and expenditures increase; 

and it results in a long-term erosion of skills that will 

reduce the nation’s productivity and people’s income in 

the future.

In this study, CBO examines a broad array of policy 

approaches designed to reduce unemployment. Some of 

those policies would aim to boost the economy and 

demand for goods and services, reflecting the fact that the 

increase in unemployment in general and long-term 

unemployment in particular is primarily attributable to 

weak demand for labor, which, in turn, is the result of 

weak aggregate demand. Policies to increase demand for 

workers could reduce unemployment substantially in 

2012 and 2013, although those policies could be costly to 

the federal government and would vary greatly in their 

effectiveness per dollar of budgetary cost. Other policies 

that CBO examined, including worker training, changes 

to the unemployment insurance (UI) system, and helping 

the unemployed transition to new jobs, would probably 

not have a significant effect on the overall unemployment 

rate during the next two years, primarily because of their 

limited scope, but they could provide support to certain 

groups and have longer-run positive effects.

Unemployment and Its Consequences

Households with unemployed workers are adversely 

affected by joblessness in many ways. For workers who 

have been displaced through no fault of their own—

specifically, who lost or left a job because their plant or 

company closed or moved, because there was insufficient 

work for them to do or because their position or shift was 

abolished—the drop in earnings associated with 

losing a job during a recession may persist for many years, 

even when these workers eventually find a new job. Older 

workers and those with long tenure in their previous job 

are especially vulnerable because new jobs for those workers typically pay less and offer less potential for earnings 

growth. Other types of unemployed workers—for example, people entering the labor market for the first time 

(typically after completing school)—are also adversely 

affected by a weak economy. People who start their career 

in times of high unemployment tend to have persistently 

lower earnings than their counterparts who begin seeking 

work under better economic circumstances. 

In addition to its immediate and lasting effects on earnings and family finances, unemployment is also correlated 

with deteriorating mental and physical health and with 

increased mortality. A parent’s job loss can lead to worse 

schooling outcomes for children and, ultimately, to worse 

labor market outcomes for those children once they 
VIII UNDERSTANDING AND RESPONDING TO PERSISTENTLY HIGH UNEMPLOYMENT

CBO

become adults. In those and other ways, unemployment 

is costly for many households, and the adverse effects are 

probably worse for those unemployed for an extended 

period.

Factors Causing High Unemployment

Many factors are responsible for the rise in unemployment in general and in long-term unemployment in 

particular. Explanations include the following:

 Weak demand for goods and services, as a result of the 

recession and its aftermath, which results in weak 

demand for workers;

 Mismatches between would-be employers’ needs and 

the skills or location of the unemployed;

 Incentives from extensions of unemployment insurance for people to stay in the labor force and continue 

searching for work; and

 The erosion of unemployed workers’ skills and the 

belief held by some employers that people who have 

been unemployed for a long time would be lowquality workers (a phenomenon sometimes called 

stigma).

Slack demand for goods and services (that is, slack aggregate demand) is the primary reason for the persistently 

high levels of unemployment and long-term unemployment observed today, in CBO’s judgment; other factors 

appear to play smaller roles. However, when aggregate 

demand ultimately picks up, as it eventually will, socalled structural factors—specifically, employer-employee 

mismatches, the erosion of skills, and stigma—may continue to keep unemployment and long-term unemployment higher than normal. 

Policies to Increase Demand for 

Workers

In previous work, CBO examined the possible effects of 

a number of policies designed to increase output and 

employment in 2012 and 2013.1

 Those fiscal policy 

actions were intended to increase demand for goods and 

services and raise employment in three key ways: by 

boosting households’ disposable income, by providing 

support to businesses, and by increasing aid to state 

governments or government spending on infrastructure. 

Initiatives that would reduce the marginal cost to businesses of adding employees or that would target people 

most likely to spend the additional income (generally, 

people with lower income) would have the largest effects 

on employment per dollar of budgetary cost in 2012 and 

2013, CBO found. Policies primarily affecting businesses’ 

cash flow would have little impact on their marginal 

incentives to hire or invest and, therefore, would have 

only small effects on employment per dollar of budgetary 

cost. 

Despite the near-term economic benefits, such actions 

would add to the already large projected budget deficits 

that would exist under current policies, either immediately or over time. Unless other actions were taken to 

reverse the accumulation of government debt, the nation’s 

output and people’s income would ultimately be lower 

than they otherwise would have been. To boost the 

economy in the near term while seeking to achieve longterm fiscal sustainability, a combination of policies would 

be required: changes in taxes and spending that would 

increase the deficit now but reduce it later in the decade. 

Lawmakers could also influence employment—and 

unemployment—during the next few years by changing 

policies that do not involve, or whose scope extends well 

beyond, taxation and government spending. In its previous work, CBO considered some potential changes in 

regulatory and other policies related to energy and the 

environment, the financial and health care sectors, and 

international trade. In CBO’s judgment, the economic 

effects of the changes in regulatory policies or other types 

of policies that the agency examined—apart from fiscal 

policies—probably would be too small, or would occur 

too slowly, to significantly alter overall output or employment in the next two years.

1. See the statement of Douglas W. Elmendorf, Director, 

Congressional Budget Office, before the Senate Committee 

on the Budget, Policies for Increasing Economic Growth and 

Employment in 2012 and 2013 (November 15, 2011).
SUMMARY UNDERSTANDING AND RESPONDING TO PERSISTENTLY HIGH UNEMPLOYMENT IX

CBO

Other Policies to Reduce 

Unemployment

Lawmakers could aim to reduce unemployment by 

addressing factors other than weak demand for goods and 

services. In this report, CBO examines initiatives that 

would take the following approaches:

 Improving workers’ skills, 

 Modifying the unemployment insurance program, or 

 Facilitating transitions to work.

Examples include training programs (perhaps targeted at 

specific vocations, geographic areas, or age groups); 

changes to unemployment insurance to encourage 

unemployed people to return to work quickly, keep the 

unemployed connected to the workplace, or forestall job 

losses; and programs such as job-search assistance and 

housing-mobility assistance that help the unemployed 

transition to new jobs and locations. Such policies could 

be implemented using mechanisms ranging from providing funding through block grants to direct federal operation. But such policies would probably not have a significant effect on unemployment over the next two years, 

primarily because the policies the agency examined could 

probably not be implemented on a sufficiently large scale 

during that time. However, by reducing the extent of 

unemployment and long-term unemployment in the 

future, they might have longer-term benefits.

CBO

Understanding and Responding to 

Persistently High Unemployment

Unemployment and Its Consequences

The effects of the recent recession, which began in 

December 2007 and ended in June 2009, have combined 

to make the years since 2007 the worst period of unemployment in the United States since the 1930s. Contributing factors include the following:

 The unemployment rate reached a very high level, 

peaking at 10.0 percent in October 2009. That rate 

has been topped in the post–World War II period only 

once before—during the severe 1981–1982 recession 

(see the upper panel of Figure 1). From the end of 

2007 to October 2009, the number of unemployed 

people rose by almost 8 million. (For details about 

how unemployment is defined and measured, see 

Box 1.)

 Unemployment has been high for an extended period. 

As of January 2012, the unemployment rate had 

been above 8 percent for 36 months and at or above 

9 percent for 28 of the preceding 36 months. In contrast, the unemployment rate exceeded 8 percent 

for 26 months and was at or above 9 percent for 

19 months during the recession of the early 1980s.

 Many people would like to work but have not 

searched for a job in the past four weeks, or are working part-time but would prefer full-time work. If those 

people were counted among the unemployed, the 

unemployment rate in January 2012 would have been 

about 15 percent. 

 The share of unemployment accounted for by the 

long-term unemployed (people who have been seeking 

work for more than 26 weeks) has been at an all-time 

high. Over 40 percent of people who are currently 

unemployed have been out of work for more than half 

a year, as compared with about one-quarter during the 

1981–1982 recession (see the lower panel of 

Figure 1).1

The extent of long-term unemployment is much greater 

than would be expected on the basis of its historical relationship with the overall unemployment rate (see 

Figure 2 on page 4). Had long-term unemployment 

followed its historical pattern, it would have been 

between 20 percent and 25 percent of total unemployment in 2009 and 2010, rather than over 40 percent. 

That high share means that many of the same people 

have been unemployed from month to month and from 

year to year.2

 As a result, much of the impact of unemployment has fallen on people who have been unemployed for a long time rather than being shared by a 

wider set of people unemployed for shorter periods.

1. There are two approaches to measuring the duration of unemployment in the Current Population Survey, which is the basis for 

official U.S. unemployment statistics. The first and more widely 

used method, which the Bureau of Labor Statistics used to produce the figures reported here, relies on respondents’ retrospective 

characterization of how long they have been unemployed as of the 

survey date. An alternative approach relies on changes in respondents’ characterizations of their labor force status between consecutive months. That approach yields different measures of the 

average duration of unemployment. For many respondents, the 

two approaches yield mutually inconsistent information. For 

further discussion, see Michael W. L. Elsby, Bart Hobijn, and 

Aysegul Sahin, The Labor Market in the Great Recession: An 

Update, Working Paper 2011-29 (Federal Reserve Bank of 

San Francisco, October 2011), www.frbsf.org/publications/

economics/papers/2011/wp11-29bk.pdf. 

2. See Michael W. L. Elsby, Bart Hobijn, and Aysegul Sahin, 

“The Labor Market in the Great Recession,” Brookings Papers on 

Economic Activity, vol. 41, no. 1 (Spring 2010), pp. 1–65, 

www.brookings.edu/economics/bpea/past-editions.aspx; and 

Michael W. L. Elsby, Bart Hobijn, and Aysegul Sahin, “Updates 

of a Selection of Figures from Elsby, Hobijn, and Sahin (2010)” 

(March 2011), www.ny.frb.org/research/economists/sahin/

pub.html.
2 UNDERSTANDING AND RESPONDING TO PERSISTENTLY HIGH UNEMPLOYMENT

CBO

Figure 1.

The Unemployment Rate and the

Long-Term Unemployed as a Share of 

All Unemployed, 1982 to 2011

(Percent)

Source: Bureau of Labor Statistics.

Notes: The long-term unemployed have been unemployed for 

more than 26 weeks.

Data are based on the portion of the population ages 16 and 

older.

Characteristics of the Unemployed

People are generally categorized as unemployed if they 

meet the following criteria:

 They have lost a job (usually as a result of a layoff) or 

have left their previous job voluntarily and are actively 

seeking work; or

 They have recently entered the labor force (for 

instance, after leaving school for the first time) or 

reentered the labor force and are seeking work. 

People who have been laid off typically account for about 

50 percent of the unemployed, although that share 

increases during recessions. People who quit their previous job generally account for roughly 10 percent of the 

unemployed, but that share falls during recessions. People 

reentering the labor force (usually about 30 percent) and 

new entrants to the labor force (usually about 10 percent) 

constitute the remainder of the unemployed. 

People who were unemployed in March 2011 came disproportionately (relative to their share of the labor force) 

from certain demographic groups, including men, people 

with at most a high school diploma, married people, 

African Americans, former construction workers, and 

people under age 25 (see Table 1 on page 5). The unemployed and long-term unemployed were distributed 

across the major regions of the country in rough proportion to the labor force, with one exception: Unemployment was disproportionately high in the West. Broad 

regional categories mask significant variation among 

states, however. For instance, although the unemployment rate in December 2011 was particularly high in 

western states such as California (11 percent) and Nevada 

(13 percent), it was also high in nonwestern states hit 

hard by the mortgage crisis (Florida, 10 percent) or by 

the difficulties of the automobile industry (Michigan, 

9 percent). In contrast, unemployment rates were much 

lower in states less affected by those events, such as Iowa 

(6 percent), Virginia (6 percent), and Hawaii (7 percent). 

Although their populations are too small to greatly affect 

regional statistics, states such as North Dakota (3 percent), South Dakota (4 percent), and Wyoming (6 percent) all had very low unemployment rates, in part 

because of a boom in the oil industry in those locales. 

1982 1986 1990 1994 1998 2002 2006 2010

0

2

4

6

8

10

12

1982 1986 1990 1994 1998 2002 2006 2010

0

10

20

30

40

50

Long-Term Unemployed as a Share of

All Unemployed

Unemployment Rate
UNDERSTANDING AND RESPONDING TO PERSISTENTLY HIGH UNEMPLOYMENT 3

CBO

Effects of Job Loss and Unemployment on 

Workers and Their Families

Unemployment, and especially long-term unemployment, often leads to adverse consequences for unemployed workers and their families. Various federal programs assist unemployed people by providing income and 

other support, including some programs that are targeted 

particularly at those with low family income or disabilities (see Box 2 on page 6). Nevertheless, the effects of 

unemployment may be prolonged and may affect workers’ subsequent earnings, their health, and their family’s 

well-being.3

Reduced Earnings After Job Loss. For many displaced 

workers—those who permanently lose their job through 

no fault of their own—the effects on subsequent earnings 

can be substantial. They initially suffer a decline in earnings when they become unemployed. But displaced workers also often suffer longer-term losses in earnings from a 

combination of factors: reduced rates of employment, 

fewer hours worked, and lower hourly wages once they 

find a new job. Data compiled by the Bureau of Labor 

Statistics (BLS) show that, among workers meeting the 

following criteria—they lost a full-time job between 2007 

and 2009, had three or more years of tenure when they 

lost that job, and were working again in January 2010—

55 percent earned less per week than they had at their

Box 1.

Defining Unemployment

The Bureau of Labor Statistics (BLS) compiles labor 

force statistics and computes the unemployment rate 

using data from the Current Population Survey, a 

monthly survey of households that is conducted for 

BLS by the Census Bureau. On the basis of participants’ responses to the survey, adult respondents are 

assigned to one of three labor force categories: 

 Respondents are categorized as employed if they 

have a job or are self-employed at the time of the 

survey. 

 They are categorized as unemployed if they do not 

have a job but would like one and are actively 

searching for a position. Respondents in both 

categories—employed and unemployed—are 

considered to be in the labor force.

 Respondents who are neither working nor looking 

for work are characterized as out of the labor force. 

People classified as out of the labor force include 

retirees, full-time students who do not have a job, 

and full-time, unpaid caregivers. 

The unemployment rate is then calculated as the fraction of the labor force that is unemployed.

The distinction between people categorized as 

employed and those in the other two categories is relatively clear-cut. Ambiguities sometimes arise for 

people who are employed but work fewer hours per 

week than they would like or who are working at jobs 

that do not fully utilize their skills. Such workers are 

sometimes described as underemployed, but that designation is not recognized by BLS as a separate category. The distinction between being unemployed and 

out of the labor force is less clear-cut. Each group 

consists of people who are jobless, of course, but 

questions arise as to how to treat respondents who 

would like to work if a suitable job was available but 

who have stopped looking for work. Because they are 

no longer looking for work, such respondents would 

not be considered unemployed and would instead be 

classified as out of the labor force. In some alternative 

categorizations, used by BLS and by other analysts, 

such respondents are characterized as discouraged 

workers and included with the unemployed as a 

measure of those who would like a job but currently 

do not have one.

3. Some evidence suggests that average physical health in the population as a whole may improve during recessionary times, in part 

because of reduced consumption of alcohol and tobacco. See 

Christopher J. Ruhm, “Healthy Living in Hard Times,” Journal of 

Health Economics, vol. 24, no. 2 (March 2005), pp. 341–363; and 

Christopher J. Ruhm, “Good Times Make You Sick,” Journal of 

Health Economics, vol. 22, no. 4 (July 2003), pp. 637–658.
4 UNDERSTANDING AND RESPONDING TO PERSISTENTLY HIGH UNEMPLOYMENT

CBO

Figure 2.

Relationship Between the Unemployment Rate and the Long-Term 

Unemployed as a Share of All Unemployed, 1982 to 2011

(Long-term unemployed as a percentage of all unemployed)

Source: Congressional Budget Office based on data from the Bureau of Labor Statistics. 

Notes: The long-term unemployed have been unemployed for more than 26 weeks. 

Data are based on the portion of the population ages 16 and older. 

The most recent recession began in December 2007 and ended in June 2009.

The sloped line in the figure represents the historical relationship between the overall unemployment rate and the percentage of the 

unemployed who have been seeking work for more than 26 weeks, reflecting the individual observations that are shown in the figure 

for the years from 1982 to 2007. The points in the figure for 2009 through 2011 are far above that historical relationship.

previous job, and 36 percent took at least a 20 percent cut 

in weekly earnings.4

 Job loss is not always a financially 

costly event, as 45 percent of such displaced workers 

made as much as or more than they did before being laid 

off; but for most workers, job loss is costly.5

Studies indicate that displaced workers’ earnings may 

be lower for many years after their displacement. Workers 

displaced during the 1982 recession, for example, were 

earning 20 percent less, on average, than their nondisplaced peers 15 to 20 years later.6

 Displaced workers also 

experience greater earnings instability and subsequent 

periods of joblessness than other workers.7

 In part, the 

poor outcomes for displaced workers might be attributable to the decline of employment in a particular industry 

or state, rather than, for example, the closure of a specific 

firm. Displaced workers tend to have previously held jobs 

in industries, states, and occupations where employment 

is falling as a result of changes in markets and technologies. Some of the earnings losses experienced by such 

workers probably reflect their inability to continue working in those declining industries, states, or occupations

●

●

●

●● ● ●● ●

●

● ● ●

●● ● ●

●● ●

●

● ●

● ● ◆

◆

◆ ◆

0

10

20

30

40

50

0 1 2 3 4 5 6 7 8 9 10 11 12

Unemployment Rate (Percent)

● 1982 to 2007

◆ 2008 to 2011

2008

2009

2010

1983

1982

2011

4. See Bureau of Labor Statistics, “Worker Displacement, 

2007–2009” (August 26, 2010), www.bls.gov/news.release/

disp.nr0.htm.

5. See Congressional Budget Office, Losing a Job During a Recession, 

Issue Brief (April 2010).

6. See Till von Wachter, Jae Song, and Joyce Manchester, “LongTerm Earnings Losses Due to Mass Layoffs During the 1982 

Recession: An Analysis Using U.S. Administrative Data from 

1974 to 2004” (draft, Columbia University, April 2009), 

www.columbia.edu/~vw2112.

7. See Ann Huff Stevens, “Persistent Effects of Job Displacement: 

The Importance of Multiple Job Losses,” Journal of Labor 

Economics, vol. 15, no. 1, part 1 (January 1997), pp. 165–188.
UNDERSTANDING AND RESPONDING TO PERSISTENTLY HIGH UNEMPLOYMENT 5

CBO

Table 1.

Characteristics of the Labor Force and the Unemployed, March 2011

(Percent)

Source: Congressional Budget Office based on the March 2011 Current Population Survey.

Notes: The labor force comprises people ages 16 and older who have a job or who are jobless but available for work and actively seeking 

employment.

The long-term unemployed have been unemployed for more than 26 weeks.

a. People are not officially considered unemployed unless they are in the labor force.

b. Categories do not apply to all people in the labor force.

Sex

53 59 59

47 41 41

Educational Attainment

38 58 54

30 27 29

21 12 12

11 4 5

Marital Status

57 39 41

43 61 59

Race or Ethnicity

67 55 53

15 20 18

11 19 22

76 7

Industry

47 39 39

10 10 12

7 14 12

34 29 30

18 8

Reason for Unemployment

b 62 62

b 23 25

b 8 8

b 7 5

Age

14 26 19

68 61 64

19 13 17

Region

36 35 35

23 27 27

22 21 21

Northeast 18 17 17

25 to 54

55 to 69

South

West

Midwest

Lost job involuntarily

Reentered the labor force

Entered labor force for first time

Left job voluntarily

16 to 24

Service

Other

Manufacturing

Construction

No industry history

Labor Force Unemployeda Long-Term Unemployed

Caucasian

Hispanic

African American

Other

Male

Female

High school diploma or less

Some college

Bachelor's degree

Graduate degree

Not married

Married
6 UNDERSTANDING AND RESPONDING TO PERSISTENTLY HIGH UNEMPLOYMENT

CBO

Continued

rather than to their separation from a particular 

employer.8

Job displacement, unemployment, and the attendant 

drop in earnings have serious effects on many families’ 

overall finances. During the most recent recession, over 

half of the long-term unemployed withdrew money from 

their savings and retirement accounts to cover expenses; 

half had to borrow money from family and friends; and 

one-third had trouble meeting their housing expenses 

(including making mortgage or rent payments). Such 

outcomes can have adverse effects on family finances in 

the long term because of greater debt or depleted savings, 

higher interest payments (on borrowed money), forgone 

investment income, and higher tax bills (as a result of prematurely withdrawing money from a retirement 

account).9

Box 2.

Programs That May Aid Unemployed People 

The unemployment insurance (UI) program provides temporary, partial earnings replacement for eligible workers who have been laid off from their job. 

To qualify for benefits, unemployed people must 

have lost their job through no fault of their own and 

have sufficient recent work histories and sufficiently 

high earnings in their most recent job. UI payments 

range from 30 percent to 50 percent of their previous 

earnings for up to 26 weeks. The federal government 

pays states to administer the program, funds benefits 

for certain groups of unemployed workers, and provides general guidelines and some restrictions on how 

states may operate their UI programs. Each state sets 

its own eligibility requirements, determines the duration and amount of regular benefits, and specifies the 

payroll taxes that fund those programs. During the 

recent recession and its aftermath, federal legislation 

enabled states to extend the duration of UI benefits 

to as many as 99 weeks, depending on each state’s 

unemployment rate. In January 2012, more than 

half of the nation’s unemployed were receiving UI 

benefits.1

Several other federal programs provide assistance 

aimed particularly at people with disabilities or low 

family income.2

 The Supplemental Nutrition Assistance Program (SNAP, formerly known as Food 

Stamps) and Temporary Assistance for Needy 

Families (TANF) provide assistance to low-income 

families, regardless of their employment history. 

More families have received those benefits since the 

start of the recent recession; and, under the American 

Recovery and Reinvestment Act of 2009, the value of 

SNAP benefits increased, providing an additional 

financial backstop to beneficiaries.

1. CBO estimated that in 2009, 30 percent of all UI benefits 

went to individuals in households with income less than 

twice the federal poverty threshold and that the poverty rate 

in that year would have been 1.1 percentage points higher 

had it not been for those benefits. See Congressional Budget 

Office, “Unemployment Insurance Benefits and Family 

Income of the Unemployed,” attachment to a letter to the 

Honorable Jim McDermott (November 17, 2010). 

2. For discussion of unemployment insurance and other programs that might help reduce hardship during unemployment, see Congressional Budget Office, Losing a Job During a 

Recession, Issue Brief (April 2010).

8. See William J. Carrington, “Wage Losses for Displaced Workers: 

Is It Really the Firm that Matters?” Journal of Human Resources, 

vol. 28, no. 3 (Summer 1993), pp. 435-462; and Derek Neal, 

“Industry-Specific Human Capital: Evidence from Displaced 

Workers,” Journal of Labor Economics, vol. 13, no. 4 (October 

1995), pp. 653–677.

9. See Paul Taylor and others, The Impact of Long-Term 

Unemployment: Lost Income, Lost Friends—and Loss of Self-Respect

(Washington, D.C.: Pew Research Center, July 22, 2010), 

http://pewresearch.org/pubs/1674/poll-impact-long-termunemployment.
UNDERSTANDING AND RESPONDING TO PERSISTENTLY HIGH UNEMPLOYMENT 7

CBO

Lower Earnings for New Entrants. The effects of high 

unemployment on people entering the labor market for 

the first time may persist throughout their careers. Labor 

market entrants may face a prolonged search before landing a job, and prevailing wages for entry-level jobs may be 

lower because of limited demand for new workers. One 

recent study of white men who graduated from college 

between 1979 and 1989 found that graduating in a poor 

economy had a long-term negative impact on wages.10

Adverse Health Effects. In addition to the lasting impact 

on earnings, unemployment and job loss may take a toll 

on people’s health. A review of 104 empirical studies that 

assessed the impact of unemployment concluded that the 

unemployed were physically and psychologically worse 

off than their employed counterparts.11 People who lost 

their job were more likely than other workers to report 

being in fair or poor health and having stress-related 

health conditions such as depression, stroke, heart disease, or heart attacks. Further, a substantial minority 

of the long-term unemployed reported having trouble 

getting or paying for medical care.12 Moreover, research 

suggests that the negative effects of job loss on health may 

reduce life expectancy.13

Family Stresses. People’s anxiety about family finances 

and related issues rose sharply during the most recent 

recession and that anxiety has persisted in its aftermath, 

with heightened concerns about layoffs and reductions in 

Box 2. Continued

Programs That May Aid Unemployed People 

Medicaid is a joint federal and state program that 

pays for health care services for a variety of individuals with low income.3 Health insurance options for 

the unemployed will increase in 2014, as a result of 

expanded eligibility for Medicaid and the availability 

of subsidized coverage through health insurance 

exchanges under the Affordable Care Act enacted in 

2010.

Less government assistance is available for unemployed workers whose spell of unemployment lasts 

many years. Unemployment insurance eventually 

runs out, and federal support through TANF can be 

received for a maximum of five years. Some of the 

long-term unemployed eventually qualify for disability benefits through the Social Security Disability 

Insurance program (wherein the amount of the 

benefit is based on the individual’s prior earnings) or 

through the Supplemental Security Income program 

(which is available to people with low income who 

are elderly, blind, or disabled).4 Most people who 

qualify for those two programs leave the labor force 

and do not return to it. Disability insurance recipients collect those benefits until they qualify for retirement benefits through the Social Security program.

3. Medicaid and the Children’s Health Insurance Program 

are important sources of coverage for the children of the 

unemployed, but Medicaid has not been an important source 

of coverage for unemployed workers themselves. See Karyn 

Schwartz and Sonya Streeter, Health Coverage for the 

Unemployed (Washington, D.C.: Kaiser Family Foundation, 

June 2011), www.kff.org/uninsured/8201.cfm.

4. For additional information, see Congressional Budget 

Office, Social Security Disability Insurance: Participation 

Trends and Their Fiscal Implications, Issue Brief (July 2010); 

and Umar Moulta-Ali, Primer on Disability Benefits: Social 

Security Disability Insurance (SSDI) and Supplemental Security 

Income (SSI), CRS Report for Congress RL32279 (Congressional Research Service, January 6, 2012). 

10. See Lisa Kahn, “The Long-Term Labor Market Consequences of 

Graduating from College in a Bad Economy,” Labour Economics, 

vol. 17, no. 2 (April 2010), pp. 303–316. 

11. See Frances McKee-Ryan and others, “Psychological and Physical 

Well-Being During Unemployment: A Meta-Analytic Study,” 

Journal of Applied Psychology, vol. 90, no. 1 (January 2005), 

pp. 53–76.

12. See Taylor and others, The Impact of Long-Term Unemployment: 

Lost Income, Lost Friends—and Loss of Self-Respect.

13. See David J. Roelfs and others, “Losing Life and Livelihood: A 

Systematic Review and Meta-Analysis of Unemployment and 

All-Cause Mortality,” Social Science and Medicine, vol. 72, no. 6 

(March 2011), pp. 840–854.
8 UNDERSTANDING AND RESPONDING TO PERSISTENTLY HIGH UNEMPLOYMENT

CBO

wages, hours, or benefits.14 That anxiety has affected the 

employed as well as the unemployed. 

The loss of income and elevated levels of household stress 

associated with a parent’s job loss, particularly if the 

period of unemployment is prolonged, can also have 

lasting effects on children. According to one study, about 

one in nine children lived with an unemployed parent in 

December 2009.15 Some research suggests that children 

whose fathers lose a job are at elevated risk of problems 

related to personality and emotional development, as well 

as with interpersonal relationships.16 Parental job loss and 

subsequent unemployment are also associated with 

poorer schooling outcomes for children.17 Ultimately, 

children of displaced workers, on average, have poorer 

economic outcomes as adults than the children of otherwise similar workers who have never experienced job 

loss.18

Factors Causing High Unemployment

In December 2007, the unemployment rate was 5.0 percent. Four years later, in December 2011 (when CBO 

completed its most recent economic forecast), that rate 

was 8.5 percent. CBO has estimated that the three-and-ahalf percentage-point increase in the unemployment rate 

over that period could be attributed to four factors in the 

following amounts:

 Weak demand for goods and services as a result of the 

recession and its aftermath, which accounts for about 

two-and-a-half percentage points;

 Mismatches between the needs of employers and the 

skills and location of the unemployed, which account 

for about one-half of one percentage point; 

 Incentives from extensions of unemployment insurance for people to stay in the labor force and continue 

searching for work, which account for about onequarter of one percentage point; and

 Erosion of skills and the stigma attached to long-term 

unemployment—that is, employers’ perception that 

people who have been unemployed for a long time 

would be low-quality workers—which together 

account for about one-quarter of one percentage 

point.

Thus, in CBO’s judgment, roughly a third of the net 

increase in unemployment over that four-year period has 

stemmed from factors other than weak demand. Some 

evidence for those other causes comes from shifts in the 

relationship between the job vacancy rate (the ratio of job 

openings to the sum of job openings and employment) 

and the unemployment rate, which is known as the 

Beveridge Curve. An increase in the unemployment rate 

relative to the job vacancy rate may suggest that unemployed workers are facing unusual difficulties finding 

suitable employment among the available job opportunities.19 One recent study indicates such a shift in the relationship depicted by the Beveridge Curve: Before the 

recession, a job vacancy rate of 3.0 percent was associated 

with an unemployment rate of 5.0 percent; but, as of

14. See Steven J. Davis and Till Von Wachter, “Recessions and the 

Costs of Job Loss” (draft, Columbia University, November 2011), 

www.columbia.edu/~vw2112; and Cliff Zukin, Carl Van Horn, 

and Charley Stone, Out of Work and Losing Hope: The Misery and 

Bleak Expectations of American Workers, Heldrich Center for 

Workforce Development of Rutgers University (September 2011),

www.heldrich.rutgers.edu/news-updates/all/out-work-and-losinghope-misery-and-bleak-expectations-american-workers.

15. See Phillip Lovell and Julia B. Isaacs, Families of the Recession: 

Unemployed Parents and Their Children (Washington, D.C.: First 

Focus Campaign for Children, June 2010), www.brookings.edu/

papers/2010/0114_families_recession_isaacs.aspx.

16. See Vonnie C. McLoyd, “Socialization and Development in a 

Changing Economy: The Effects of Paternal Job and Income Loss 

on Children,” American Psychologist, vol. 44, no. 2 (February 

1989), pp. 293–302.

17. See Ann Huff Stevens and Jessamyn Schaller, “Short-Run Effects 

of Parental Job Loss on Children’s Academic Achievement,” Economics of Education Review, vol. 30, no. 2 (April 2011), pp. 289–

299; and Ariel Kalil and Patrick Wightman, “Parental Job Loss 

and Children’s Educational Attainment in Black and White 

Middle-Class Families,” Social Science Quarterly, vol. 92, no. 1 

(March 2011), pp. 57–78.

18. See Philip Oreopoulos, Marianne Page, and Ann Huff Stevens, 

“The Intergenerational Effects of Worker Displacement,” Journal 

of Labor Economics, vol. 26, no. 3 (July 2008), pp. 455–483. 

19. See, for example, remarks by Narayana Kocherlakota, president 

of the Federal Reserve Bank of Minneapolis, “Inside the 

FOMC” (presented in Marquette, Michigan, August 17, 2010), 

www.minneapolisfed.org/news_events/pres/

speech_display.cfm?id=4525.
UNDERSTANDING AND RESPONDING TO PERSISTENTLY HIGH UNEMPLOYMENT 9

CBO

June 2011, that same 3.0 percent job vacancy rate was 

associated with an unemployment rate of 6.4 percent.20

In that study, about 1 percentage point of the elevated 

unemployment rate was attributed to skill and locational 

mismatches, extended unemployment insurance, and 

other factors. That finding is consistent with CBO’s estimate that about 1 percentage point of the increase in the 

unemployment rate can be attributed to factors other 

than weak current demand. 

Weak aggregate demand is also the primary contributor 

to the increased average duration of unemployment; the 

incentives from the extensions of unemployment insurance benefits and changes in the characteristics of the 

unemployed played smaller roles.21

Weak Demand for Goods and Services

Most of the increase in unemployment during the past 

four years and its persistence at a high level have resulted 

from a cyclical decline in the demand for goods and services, which has, in turn, decreased employers’ demand 

for workers. Under current law, the cyclical weakness in 

demand stemming from the recent recession and slow 

recovery is likely to persist for the next few years; this 

cyclical weakness will continue to elevate the unemployment rate, though by diminishing amounts, through 

2017, CBO estimates. 

That weak demand can be attributed to various factors. 

Household spending fell and has remained weak, dampened by a loss of household wealth, an extraordinary 

decline in labor’s share of national income, a desire by 

families and businesses to reduce debt as well as tightened 

lending conditions, and increased uncertainty and 

pessimism—in part reflecting the poor state of the job 

market. Residential construction has been anemic, held 

down by overbuilding during the boom, by poor expectations for future house prices, and, to a lesser degree, by 

weak household formation—which, like households’ 

uncertainty and pessimism, in part reflects the poor state 

of the job market. Cutbacks by state and local governments have left government employment about 1.7 percent lower at the end of 2011 than it was at the end of 

2007, just prior to the recession. 

Moreover, business investment plunged during the recession, as businesses reacted to a decline in aggregate 

demand, a very uncertain outlook, and tightening credit. 

Since the recession’s end, growth in business investment 

has been a bright spot, relatively speaking, although business investment and hiring are still being restrained by 

businesses’ expectations that aggregate demand will continue to grow only moderately. In addition, some businesses may be concerned about how they will be affected 

by the implementation of recently enacted legislation 

dealing with the financial system and health care, by the 

government’s regulatory policies in other areas, and by 

possible future changes in federal tax and spending 

policies.22 However, the degree to which each of those 

factors has restrained investment and hiring is difficult 

to determine.

Mismatches Between Employers’ Needs and the 

Skills and Location of Workers

A distinctive feature of the U.S. labor market is its dynamism. Individual employers grow and shrink in response 

to changes in demand and business success, workers often 

change jobs as they seek out a position that best fits their 

skills and interests, and there are always shifts in the economy resulting from changes in technology, consumer 

preferences, and international trade, which have disproportionate effects on certain industries, occupations, and 

locations. The need for workers to shift from one industry or occupation to another, to acquire new skills to 

facilitate such a shift, or even to relocate in order to find a 

new job is often referred to as a skill or locational mismatch. Those factors mean that there will always be some 

unemployment—which has ranged from about 4 percent 

to 5 percent in recent decades—as firms with unfilled 

openings and workers looking for jobs sort themselves 

into the most productive matches. Economists refer to 

that type of unemployment as frictional and view it as an 

important information-gathering process that leads to 

improved matches between workers and employers 

(although government policies that facilitate or hinder

20. See Mary Daly and others, A Rising Natural Rate of Unemployment: Transitory or Permanent? Working Paper 2011-05 (Federal 

Reserve Bank of San Francisco, September 2011), www.frbsf.org/

publications/economics/papers/2011/wp11-05bk.pdf.

21. See Rob Valletta and Katherine Kuang, Why Is Unemployment 

Duration So Long? Economic Letter 2012-03 (Federal Reserve 

Bank of San Francisco, September 2011), www.frbsf.org/

publications/economics/letter/2012/el2012-03.pdf.

22. See Scott Baker, Nick Bloom, and Steven J. Davis, Has Economic 

Policy Uncertainty Hampered the Recovery? Chicago Booth 

Research Paper 12-06 (University of Chicago, February 2012).
10 UNDERSTANDING AND RESPONDING TO PERSISTENTLY HIGH UNEMPLOYMENT

CBO

Table 2.

Employment, by Industry, 

2007 to 2011

Source: Congressional Budget Office based on data from the 

Bureau of Labor Statistics.

such matching can affect the amount of frictional 

unemployment).

Unemployment may temporarily rise when extraordinary 

changes in technology or in the demand for various products necessitate a change in the distribution of workers 

among industries, occupations, or locales. As an example, 

the advent of computerized word processing in the 1980s 

greatly reduced the need for typists and secretaries; consequently, many people in those occupations had to find 

other lines of work, and some employers had to search for 

workers skilled in the new technology. At such times, the 

magnitude of skill mismatch increases significantly relative to its historical average, boosting unemployment 

while those adjustments take place. Such adjustments can 

take months or years, and thus can contribute to longterm unemployment. 

CBO estimates that an increase in skill and locational 

mismatches accounted for roughly half a percentage 

point of the increase in unemployment during and following the recent recession. That effect will diminish 

gradually over the next five years, in CBO’s judgment, as 

people acquire new skills, shift to faster-growing industries and occupations, and relocate to take advantage of 

those opportunities.23

Skill Mismatches. Although one source of such mismatches during the past few years has been the decline in 

demand for construction workers that followed the collapse of the housing market, two findings from analyses 

of the distribution of employment among industries support the conclusion that skill mismatches account for 

a small portion of the rise in unemployment. First, if 

workers’ skills and the needs of growing industries were 

increasingly mismatched, workers laid off in declining 

industries should have a harder time finding new jobs 

than workers laid off in other industries. That has not 

been the case.24 Second, because employment has 

declined in many industries, there are unemployed workers in most broad industry categories who have relevant 

skills and experience (see Table 2; educational and health 

care services is the only large industry showing employment gains). Nevertheless, shifts in the demand for labor 

could have occurred within broad industry categories. 

Although those facts do not rule out such industrial shifts 

as a partial explanation for elevated unemployment, 

developments affecting all industries are a more important part of the story. 

Locational Mismatches. Locational mismatches have 

probably played a minor role in the rise of both unemployment and long-term unemployment, despite the fact 

that unemployment rates vary substantially among states. 

For example, in December 2011, the four states with the 

highest rates of unemployment—California, Nevada, 

Mississippi, and Rhode Island—all had unemployment 

rates exceeding 10 percent. The three states with the 

lowest rates of unemployment—Nebraska, North 

Dakota, and South Dakota—had rates below 5 percent. 

Although that dispersion in unemployment rates suggests 

locational mismatches between workers and labor 

demand, it is important to note that those latter three 

Industry

Construction 7.6 5.5 -28

Manufacturing 13.9 11.7 -16

Information 3.0 2.7 -12

Financial Activities 8.3 7.6 -8

Trade, Transportation,

 and Utilities 26.6 24.9 -6

Professional and 

Business Services 17.9 17.2 -4

Leisure and Hospitality 13.4 13.2 -2

Other Services 5.5 5.4 -1

Government 22.2 22.1 -1

Mining/Logging 0.7 0.8 9

Educational and Health 

Care Services 18.3 20.0 9

Number of Employees Percentage

(Millions) Change,

2007 2011 2007–2011

23. See Congressional Budget Office, The Budget and Economic Outlook: An Update (August 2011), p. 46. This estimate is roughly in 

line with other recent calculations; for example, see Aysegul Sahin 

and others, “Measuring Mismatch in the U.S. Labor Market”

(draft, Federal Reserve Bank of New York, October 2011),

www.ny.frb.org/research/economists/sahin/papers.html. That 

research found that mismatches related to industry and occupation were substantial and those related to geography were not.

24. See Elsby, Hobijn, and Sahin, The Labor Market in the Great 

Recession. 
UNDERSTANDING AND RESPONDING TO PERSISTENTLY HIGH UNEMPLOYMENT 11

CBO

states have small populations and a very small share of the 

nation’s jobs; in contrast, all 10 of the largest states currently have higher unemployment rates. Thus, national 

unemployment would not decline sharply even if unemployed workers flocked to states with the lowest rates of 

unemployment.

The severity of locational mismatches may be exacerbated 

if workers cannot relocate because they are unable to sell 

their houses. In historical terms, a large number of homeowners are “underwater”—that is, their houses are worth 

less than what they owe on their mortgages. Some analysts suggest that homeowners who are underwater may 

be unable to move to locales where labor demand is 

stronger and where they might find work. Whether that 

is occurring is unclear, however: Three recent studies 

arrive at disparate conclusions as to whether homeowners 

with negative equity have been less mobile than other 

homeowners.25

Incentives from Extensions of 

Unemployment Insurance

The UI system helps unemployed workers and their families in several ways. Most directly, the system provides 

income support to people who have lost their job for reasons other than poor performance or misconduct. 

Research has shown that UI helps recipients to maintain 

their standard of living after losing a job. Research also 

suggests that UI allows job seekers to take a more entrepreneurial career path—which can be productive but 

risky—than they would have taken in the absence of such 

insurance.26

UI also encourages laid-off workers to continue searching 

for work rather than leaving the labor force, because continued receipt of UI benefits requires them to be actively 

looking for work. That requirement to search for work 

results in some laid-off workers returning to work rather 

than leaving the workforce altogether. However, the availability of UI also discourages unemployed people from 

taking a job they might consider unsuitable because those 

benefits reduce the hardship of being unemployed. Economists have traditionally viewed that effect as significant. 

One widely cited study from 1990 found that eligibility 

for five extra weeks of benefits led to, on average, a oneweek increase in the length of an unemployment spell.27

More-recent studies have suggested, however, that only 

about 40 percent of that one-week increase in the duration of unemployment was the result of a diminished 

incentive to take a job; the remaining 60 percent of that 

increase represented an expanded search effort, which can 

ultimately result in better job matches.28

In addition, the availability of UI benefits affects the 

employment of prospective workers who are ineligible for 

benefits, such as those who are new entrants or reentrants 

to the labor force. For example, to the extent that people 

who are receiving benefits are less likely to accept available jobs, those who are not receiving benefits are more 

likely to obtain and accept job offers. Moreover, by putting money in the hands of people who spend much of it 

on goods and services, UI benefits increase the demand 

for workers needed to produce those goods and services, 

indirectly raising total employment compared with what 

it otherwise would be. Thus, the effects of UI benefits on 

overall employment and unemployment differ from their 

effects on the employment and unemployment of recipients alone.

Because of the various ways that UI benefits affect people’s incentives and opportunities, analyzing the impact 

of the extensions of benefits (from the usual 26 weeks 

up to 99 weeks) during the recession and its aftermath is 25. See Fernando Ferreira, Joseph Gyourko, and Joseph Tracy, 

“Housing Busts and Household Mobility,” Journal of Urban 

Economics, vol. 68, no. 1 (July 2010), pp. 34–45; Sam SchulhoferWohl, Negative Equity Does Not Reduce Homeowners’ Mobility, 

Working Paper 682 (Federal Reserve Bank of Minneapolis, 

December 2010), www.minneapolisfed.org/publications_papers/

pub_display.cfm?id=4598; and Fernando Ferreira, Joseph 

Gyourko, and Joseph Tracy, Housing Busts and Household Mobility: 

An Update, Staff Report 526 (Federal Reserve Bank of New York, 

November 2011), http://newyorkfed.org/research/staff_reports/

sr526.html. 

26. See Daron Acemoglu and Robert Shimer, “Productivity Gains 

from Unemployment Insurance,” European Economic Review, 

vol. 44, no. 7 (June 2000), pp. 1195–1224.

27. See Lawrence F. Katz and Bruce D. Meyer, “The Impact of the 

Potential Duration of Unemployment Benefits on the Duration 

of Unemployment,” Journal of Public Economics, vol. 41, no. 1 

(February 1990), pp. 45–72. For more recent evidence, see David 

Card and Phillip B. Levine, “Extended Benefits and the Duration 

of UI Spells: Evidence from the New Jersey Extended Benefit 

Program,” Journal of Public Economics, vol. 78, no. 1-2 

(October 2000), pp. 107–138. 

28. For example, see Raj Chetty, “Moral Hazard Versus Liquidity and 

Optimal Unemployment Insurance,” Journal of Political Economy, 

vol. 116, no. 2 (April 2008), pp. 173–234.
12 UNDERSTANDING AND RESPONDING TO PERSISTENTLY HIGH UNEMPLOYMENT

CBO

difficult. The extensions of benefits have had two types of 

effects: 

 They have increased recipients’ spending and, thus, 

the demand for goods and services in the economy as a 

whole, which has tended to raise employment and 

reduce unemployment. CBO estimates that the twoand-a-half percentage point increase in unemployment resulting from weak demand would have been 

greater without the extensions of benefits.

 At the same time, in order to remain eligible for 

unemployment benefits, more people without jobs 

have continued looking for work—though, in some 

cases, less intensely and more selectively than they 

otherwise would have—after the normal 26-week 

benefit period; in that way, the extensions of benefits 

have kept more jobless individuals in the labor force, 

thereby pushing up the unemployment rate by 

roughly one-quarter of one percentage point, CBO 

estimates.29 (That effect will dissipate shortly after 

those extensions end, whereas the effects of some 

of the other factors raising unemployment will last 

longer.)

Whether the combination of those two effects has raised 

or lowered the unemployment rate in total in the short 

term is unclear. In CBO’s analysis, which encompassed a 

range of possible effects of UI extensions on demand and 

on people’s choices about staying in the labor force, the 

two effects together could have either raised or lowered 

the unemployment rate. (According to that analysis, 

the UI extensions have raised total employment, which 

has been constrained principally by weak demand for 

labor.)

UI extensions also contributed to the increase in the proportion of unemployed people who have been seeking 

jobs for more than 26 weeks, in CBO’s judgment. An 

important feature of the UI system is that only displaced 

workers are eligible for UI benefits; those who quit their 

job and people new to or reentering the labor force are 

generally not eligible. Thus, the disincentives to work 

stemming from the extensions of UI mainly affected 

displaced workers, particularly those who had already 

received benefits for 26 weeks. In fact, between 2008 

and 2010, the percentage of long-term unemployed 

among people who had lost jobs rose much more than 

that percentage among people who became unemployed 

for reasons other than job loss (see Figure 3). A recent 

study analyzing such differences found that UI extensions 

during and after the recent recession elevated the share of 

long-term unemployment.30

“Stigma” and the Erosion of Skills

Regardless of its initial cause, unemployment in general 

and long-term unemployment in particular can lead to 

subsequent difficulties for the affected workers. One 

mechanism by which unemployment reduces future 

employment prospects is through the stigma attached to 

long-term unemployment—that is, an employer’s inference that people who have been unemployed for a long 

time are low-quality workers. Long-term unemployment 

may also erode workers’ skills, and those two factors—

stigma and skill erosion—may have interactive effects. 

The extent to which stigma and skill erosion increased 

unemployment and long-term unemployment during 

and after the most recent recession is difficult to quantify. 

CBO estimates that those factors currently account for 

about a quarter of a percentage point of the increase in 

unemployment during and following the recession; CBO 

expects that effect to grow to about half a point during 

the next several years, and then to persist at that level for 

several more years before gradually diminishing.

Stigma. Prospective employers might interpret long-term 

unemployment as a negative signal about the worker’s 

skills, motivation, and general employability.31 When 

the unemployment rate is very high, however, employers 

29. For other recent estimates of the direct effects of unemployment may infer that a prospective worker’s unemployment is 

insurance on unemployment rates (apart from indirect effects on 

labor demand), see Jesse Rothstein, “Unemployment Insurance 

and Job Search in the Great Recession” (draft, University of 

California at Berkeley, October 2011), http://gsppi.berkeley.edu/

faculty/jrothstein/workingpapers/Rothstein-UI-Oct2011.pdf; 

and, see Henry S. Farber and Robert Valetta, “Extended Unemployment Insurance and Unemployment Duration in the Great 

Recession: The U.S. Experience” (draft, Princeton University, 

June 2011), www.irs.princeton.edu/sites/irs/files/event/uploads/

HenryFarber112811.pdf. 

30. See Robert Valletta and Katherine Kuang, Extended Unemployment 

and UI Benefits, Economic Letter 2010-12 (Federal Reserve Bank 

of San Francisco, April 2010), www.frbsf.org/publications/

economics/letter/2010/el2010-12.html.

31. For additional information, see Equal Employment Opportunity 

Commission, “EEOC to Examine Treatment of Unemployed Job 

Seekers” (transcript of meeting held February 16, 2011), 

www.eeoc.gov/eeoc/meetings/2-16-11/index.cfm.
UNDERSTANDING AND RESPONDING TO PERSISTENTLY HIGH UNEMPLOYMENT 13

CBO

Figure 3.

Long-Term Unemployment During and Immediately Following Three Recent 

Recessions, by Reason for Unemployment

(Percentage of unemployed people)

Source: Congressional Budget Office based on data from the Current Population Survey, Outgoing Rotation Groups.

Notes: The long-term unemployed have been unemployed for more than 26 weeks. 

Data are based on the portion of the population ages 16 and older. 

The category “other reasons” encompasses people who have reentered the labor force, entered the labor force for the first time, or 

left their previous job voluntarily.

The last three recessions in the United States spanned the following periods: July 1990 to to March 1991; March 2001 to November 

2001; and December 2007 to June 2009.

attributable to overall economic conditions rather than to 

his or her own shortcomings. Some research, for example, 

found smaller stigma effects for workers who lost their 

job as a result of a plant closing rather than through a 

more selective layoff process.32 Still, even if weak economic conditions lead to less stigma for any given duration of unemployment, stigma may be greater the longer 

a spell of unemployment lasts. Long-term unemployment 

may thus produce a self-perpetuating cycle wherein protracted spells of unemployment heighten employers’ 

reluctance to hire those individuals, which in turn leads 

to even longer spells of joblessness.

Erosion of Skills. Workers acquire skills through on-thejob training or, more commonly, through work experience. Evidence that skills erode during periods of unemployment comes in part from studies on the negative 

effects that time out of the labor force has on wages.33

Skill erosion may take the form of lost familiarity with 

the technical aspects of an occupation, such as how to use 

particular computer programs or how to manipulate certain equipment. Skill erosion is particularly problematic 

when the technology used in an occupation changes 

regularly—in such instances, even unemployed workers 

who maintain their old skills may fall behind because 

they do not actively work with newer technologies. The 

erosion of people’s productive capacity can take other 

forms; for example, an unemployed salesperson may lose 

contact with a particular client base or with the particular 

market niche in which he or she previously operated. 

Involuntary

Job Loss

Other

Reasons

Involuntary

Job Loss

Other

Reasons

Involuntary

Job Loss

Other

Reasons

0

10

20

30

40

50

1990 1992 1990 1992 2001 2003 2001 2003 2008 2010 2008 2010

32. See Robert Gibbons and Lawrence F. Katz, “Layoffs and Lemons,” 

Journal of Labor Economics, vol. 9, no. 4, (October 1991), 

pp. 351-380; and Martin Biewen and Susanne Steffes, “Unemployment Persistence: Is There Evidence for Stigma Effects?” 

Economic Letters, vol. 106, no. 3 (March 2010), pp. 188–190.

33. See Marianne Bertrand, Claudia Goldin, and Lawrence F. Katz, 

“Dynamics of the Gender Gap for Young Professionals in the 

Financial and Corporate Sectors,” American Economic Journal: 

Applied Economics, vol. 2, no. 3 (July 2010), pp. 228–255.
14 UNDERSTANDING AND RESPONDING TO PERSISTENTLY HIGH UNEMPLOYMENT

CBO

Although the specific knowledge that is lost or made 

obsolete varies by industry and occupation, some erosion 

probably occurs in all but the most low-skilled jobs, and 

the erosion of skills is a pervasive problem among the 

long-term unemployed. 

Policies to Increase Demand for 

Workers

Policies that increase demand for workers address the single most important factor behind today’s persistently high 

unemployment rates—weak demand for goods and services. CBO has previously assessed the potential impact 

of a variety of temporary fiscal policy actions that might 

promote economic growth and increase employment in 

the near term.34 This section summarizes those earlier 

estimates and the agency’s findings about other options 

that could affect the demand for workers. 

Fiscal Policies

Each of the policy options that CBO previously analyzed 

would primarily affect the economy in one of three different ways: 

 By boosting households’ disposable income, 

 By providing support to businesses, or

 By increasing aid to state governments or government 

spending on infrastructure.

Using evidence from empirical studies and econometric 

models, CBO assessed the impact of such policies on the 

nation’s output (GDP) and total employment in 2012 

and 2013 per million dollars of total budgetary cost 

(measured in terms of additional government spending or 

reduction in taxes). To encompass most economists’ 

views about the effects of each type of policy, CBO used 

low and high estimates of the effects on output and 

employment. By CBO’s estimates, the impact of the policies would range from a very small increase in employment to an increase of as much as 19 years of full-timeequivalent (FTE) employment per million dollars of 

budgetary cost over that two-year span (see Figure 4). 

(An FTE-year is 40 hours of employment per week for 

one year.) 

On the basis of that analysis, CBO concluded the 

following:

 Policies that would have the largest effects on employment per dollar of budgetary cost in 2012 and 2013 

are those that would reduce the marginal cost to businesses of adding employees or that would target people most likely to spend the additional income. Such 

policies include reducing employers’ payroll taxes 

(especially if limited to firms that increase their payroll), increasing aid to the unemployed, and providing 

additional refundable tax credits in 2012 for lowerand middle-income households; and 

 Policies that would primarily affect businesses’ cash 

flow but would have little impact on their marginal 

incentives to hire or invest would have only small 

effects. Such policies include reducing business 

income taxes and reducing tax rates on repatriated 

foreign earnings.

All of the options that CBO considered were sufficiently 

scalable—that is, able to be increased in size in an efficient manner—such that they could entail at least 

$10 billion in spending increases or tax cuts in 2012 and 

2013. The estimated effects of the policies on economic 

output varied from as little as 10 cents per dollar of budgetary cost to as much as $1.90 per dollar of budgetary 

cost. A rough rule-of-thumb applicable to the policies 

shown in Figure 4 would be the following: An additional 

$30 billion used in 2012 for an option that would boost 

employment in 2012 and 2013 by about 9 FTE-years per 

million dollars of total budgetary cost would translate 

into a reduction in the unemployment rate of one-tenth 

of one percentage point (say, at the beginning of 2013). 

Thus, changes in fiscal policy, if appropriately designed 

and large in scale, could substantially reduce unemployment during the next few years.35

34. See the statement of Douglas W. Elmendorf, Director, Congressional Budget Office, before the Senate Committee on the 

Budget, Policies for Increasing Economic Growth and Employment in 

2012 and 2013 (November 15, 2011).

35. A recent example of a large-scale fiscal policy action is the American Recovery and Reinvestment Act of 2009 (ARRA), which by 

CBO’s estimate will ultimately have a budgetary cost of about 

$825 billion, reduced the unemployment rate in 2010 by between 

0.4 and 1.8 percentage points. See Congressional Budget Office, 

Estimated Impact of the American Recovery and Reinvestment Act on 

Employment and Economic Output from July 2011 Through September 2011 (November 2011).
UNDERSTANDING AND RESPONDING TO PERSISTENTLY HIGH UNEMPLOYMENT 15

CBO

Figure 4.

Ranges of Cumulative Effects of Policy Options on Employment in 2012 and 2013

Source: Congressional Budget Office.

Notes: The ranges of estimates were chosen, on a judgmental basis, to encompass most economists’ views.

Estimates represent years of full-time-equivalent employment (FTE-years) with a given policy minus FTE-years without the policy. 

(An FTE-year is 40 hours of employment per week for one year.) Estimates are per million dollars of total budgetary cost, which is the 

amount of tax revenues or outlays over the full duration of a policy’s effects, except as specified in note b below.

All years are calendar years. Unless otherwise specified, increased spending authority was assumed to be available as of January 2012, 

and tax options were assumed to be in effect only for 2012.

a. Includes the effects of extending higher exemption amounts for the alternative minimum tax in 2012.

b. For this option, total budgetary cost is calculated as a discounted present value rather than as the sum of changes in tax revenues over the 

full duration of the policy’s effects.

Spending on Infrastructure

Providing Aid to States for Purposes

Other Than Infrastructure

Reducing Tax Rates on Repatriated Foreign Earningsb

Reducing Taxes on Business Income 

Allowing Full or Partial Expensing of Investment Costsb

Reducing Employers’ Payroll Taxes for

Firms That Increase Their Payroll

Reducing Employers’ Payroll Taxes

Reducing Income Taxes in 2013 Relative to

Those Specified in Current Law

Extending Higher Exemption Amounts for the

Alternative Minimum Tax

Subsidizing the Interest Rate on

Certain Mortgages That Are Refinanced

Reducing Employees’ Payroll Taxes

Providing Additional Refundable Tax Credits to

Lower- and Middle-Income Households in 2012

Increasing Aid to the Unemployed

0 2 4 6 8 10 12 14 16 18 20

Household Assistance

Business Support

Years of FTE Employment per

Million Dollars of Total Budgetary Cost

Aid to State Governments or

Spending on Infrastructure

a
16 UNDERSTANDING AND RESPONDING TO PERSISTENTLY HIGH UNEMPLOYMENT

CBO

Those policy actions would generally decrease FTE-years 

of unemployment by the same amount that they would 

increase FTE-years of employment, with the exception of 

the option of increasing benefits for unemployment 

insurance. In the current economic climate, extensions of 

UI benefits affect the labor market through some channels that tend to increase the number of employed people 

(such as by increasing demand for goods and services). 

However, such extensions also tend to increase the number of unemployed people (for example, because more 

jobless workers choose to remain in the labor force in 

order to receive benefits). Thus, the net effect of additional spending for unemployment insurance on the 

number of unemployed people is unclear.36

Policies not analyzed in CBO’s previous work, such 

as direct government employment in public service 

jobs, could also reduce unemployment. The federal 

government hired millions of unemployed workers during the Great Depression through the Work Projects 

Administration and the Civilian Conservation Corps. 

More recently, under the American Recovery and Reinvestment Act, the federal government provided aid to 

states to place applicants to the Temporary Assistance to 

Needy Families (TANF) program in jobs.37 It might be 

difficult, however, to efficiently and productively implement a program involving direct hiring on a scale at 

which spending would exceed $10 billion in 2012 and 

2013—a criterion that CBO used when selecting policies 

to analyze in its previous work.

The fiscal policy approaches discussed above would 

increase total demand for workers, although some—

such as tax credits for firms that expand payroll—

could explicitly target the long-term unemployed. People 

who have been unemployed for a long time could still 

benefit from untargeted approaches even if most jobs 

directly created by the policies went to other groups. 

Despite the near-term economic benefits that would arise 

from reductions in taxes and increases in government 

spending, such actions would add to the already large 

projected budget deficits that would exist under current 

policies, either immediately or over time. Unless offsetting actions were taken to reverse the accumulation of 

additional government debt, the nation’s capital stock 

(that is, the tools, machines, and factories used in production), its future output, and people’s future income would 

tend to be lower than they otherwise would have been. 

If policymakers wanted to boost the economy in the near 

term while seeking to achieve fiscal sustainability over the 

long term, a combination of policies would be required—

specifically, changes in taxes and spending that would 

widen the deficit now but reduce it later in the decade. 

Such an approach would work best if the future policy 

changes were sufficiently specific and widely supported so 

that households, businesses, state and local governments, 

and participants in financial markets believed that the 

future fiscal restraint would truly take effect.

Other Types of Legislative Actions

Lawmakers could also influence the demand for workers 

during the next few years by changing policies that do not 

involve, or whose scope extends well beyond, taxation 

and government spending. For example, legislation could 

modify existing or proposed regulations, significantly 

alter the government’s role in a particular sector of the 

economy, or change trade relationships with other countries. The near-term economic impact of changing a regulation or other policy—apart from fiscal policy—would 

depend importantly on how doing so affected businesses’ 

investment and hiring decisions. In addition, changes in 

policies that increased or decreased households’ purchasing power or wealth would affect how much they spend. 

Finally, changes to regulations and other policies could 

affect expectations about future income or make businesses and households more or less uncertain about 

future government policies and economic conditions, 

which would affect economic growth and employment in 

the near term. 

CBO has previously discussed some potential changes in 

regulatory policies and other policies related to energy 

and the environment, the financial and health care 

36. According to CBO’s low estimate, which incorporates a smaller 

effect on demand and a larger effect on people’s choices about 

staying in the labor force, an extension of UI benefits would cause 

unemployment to increase. Conversely, according to the agency’s 

high estimate, which incorporates a larger effect on demand and a 

smaller effect on people’s choices about staying in the labor force, 

UI extension would cause unemployment to decrease.

37. In the year and a half that those funds were available, 39 states and 

several territories used $1.3 billion to create short-term subsidized 

jobs, roughly equally divided between summer jobs for youth and 

jobs for adults. See LaDonna Pavetti, Liz Schott, and Elizabeth 

Lower-Basch, Creating Subsidized Employment Opportunities for 

Low-Income Parents: The Legacy of the TANF Emergency Fund

(Washington, D.C.: Center on Budget and Policy Priorities, 

February 2011), www.cbpp.org/cms/index.cfm?fa=view&

id=3400.
UNDERSTANDING AND RESPONDING TO PERSISTENTLY HIGH UNEMPLOYMENT 17

CBO

Table 3.

Funding for Training Under the 

Workforce Investment Act (Title I), 

Fiscal Year 2012

Source: David H. Bradley, The Workforce Investment Act and the 

One-Stop Delivery System, CRS Report for Congress 

R41135 (Congressional Research Service, January 13, 

2012).

sectors, and international trade.38 But estimating the 

near-term effects of such policy changes on overall economic activity is exceedingly difficult, and few analytic 

tools are available for that purpose. Accordingly, CBO 

did not attempt to quantify the effects of those potential 

changes with any precision. (Other types of policy 

changes that do not require legislation, such as those 

related to monetary policy or those that can be implemented by federal agencies under current law, could also 

affect economic activity, but they were outside the scope 

of that analysis.)

Some of the changes in policies that CBO considered in 

its previous work would probably raise output and 

employment over the next few years; other changes would 

probably lower output and employment; and some 

changes would have effects on economic activity that are 

difficult to determine. However, in CBO’s judgment, the 

economic effects of the specific changes in regulatory policies or other policies that the agency discussed in its previous work—apart from those related to fiscal policy—

probably would be too small or would occur too slowly to 

significantly alter overall unemployment in the next two 

years. That analysis did not speak to other considerations 

that are critical when evaluating such policy changes, 

including their long-term effects on the economy, on 

people’s health, and on the environment.

The policy changes that CBO examined were illustrative 

rather than exhaustive; many others, which might have 

larger or smaller economic effects, are possible. One such 

policy that CBO did not previously analyze would be a 

reduction in the minimum wage. Although estimates 

have varied, the bulk of the evidence indicates that such a 

reduction would increase employment by a small amount 

and correspondingly reduce unemployment by a small 

amount.39 The effects would be largest for teenage and 

other low-skill workers whose wages are affected by the 

legal minimum. One factor limiting the potential effectiveness of such a policy, however, is that 41 states and the 

District of Columbia have their own minimum wages 

that are equal to or higher than the federal minimum 

(although they differ somewhat in their coverage of workers and in their enforcement); lowering the federal minimum would have little or no effect in those states. Also, 

current federal policy already makes some allowance for 

lower minimum wages for students and youths.

Other Policies to Reduce 

Unemployment

Other types of policies could aim to reduce unemployment by addressing factors other than weak aggregate 

demand for goods and services. The United States currently has numerous programs that aim to help job seekers in those ways. Some of those programs provide 

services—including job-search assistance, counseling, and 

training—through One-Stop Career Centers operated by 

state and local workforce-development agencies. For fiscal 

year 2012, the Congress has appropriated $4.9 billion for 

those services and other training activities under title I of 

the Workforce Investment Act of 1998, including the Job 

Corps and a variety of grants to states (see Table 3). In 

addition to those dedicated funds, the federal government spends $10 billion to $12 billion per year on other 38. Those policies include the approval process for energy projects, 

regulations regarding emissions from coal-burning power plants, 

the Dodd-Frank Wall Street Reform and Consumer Protection 

Act (Public Law 111-203), the Affordable Care Act (P.L. 111-

148), and free-trade agreements. See Congressional Budget 

Office, Policies for Increasing Economic Growth and Employment in 

2012 and 2013, pp. 44–52.

State Formula Grant Programs

0.8

0.8

1.2

Job Corps 1.7

National Programs 0.4 ___

Total 4.9

Youth Activities Formula Grants

Adult Activities Formula Grants

Dislocated Worker Grants

Billions of Dollars

Funding in 

39. See David Card and Alan B. Krueger, Myth and Measurement: The 

New Economics of the MinimumWage (Princeton, N.J.: Princeton 

University Press, 1997); and David Neumark and William L. 

Wascher, Minimum Wages (Cambridge, Mass.: MIT Press, 2010).
18 UNDERSTANDING AND RESPONDING TO PERSISTENTLY HIGH UNEMPLOYMENT

CBO

training programs, though there is some overlap and 

administrative inefficiency in those programs.40

Relative to the size of the workforce, the United States 

spends far less on formal training programs for the unemployed than most other industrialized nations.41 However, a considerable amount of federal financial support is 

available for individuals pursuing training through community colleges and through certain proprietary education and training organizations.42 Among existing programs that aim to help job seekers, some appear to have 

generated high rates of return for some groups, but others 

have had no impact and may, indeed, have had harmful 

effects.43

CBO has examined a number of policies that would 

focus on the unemployed and long-term unemployed in 

one of the following three ways:

 Improving the skills of unemployed workers,

 Modifying unemployment insurance to provide continued support to the long-term unemployed or to 

encourage the unemployed to take new jobs quickly 

and retain their work skills, or

 Facilitating transitions to work. 

CBO has not estimated the effects on employment of any 

specific policy. The impact on employment per dollar of 

budgetary cost for those policies would probably be 

within the broad range of effects for the fiscal policies discussed earlier. But another important consideration for 

understanding the effects of such policies involves their 

potential scale; for many of those activities, spending tens 

of billions of additional dollars in 2012 and 2013 would 

be difficult. For that reason, their potential impact on the 

unemployment rate during the next two years is limited. 

Many of the policies that CBO examined for this report 

would involve collaboration between the federal government and states or other entities. Key elements of the policies include the funding mechanism, the amount of 

funding, and the program design. The extent to which 

federal policymakers would influence the specific design 

of the programs would depend on the details of the legislation and the funding mechanism. (For a discussion of 

funding mechanisms, see Box 3). 

Improving Workers’ Skills

Training programs—including those designed to develop 

general workforce skills and programs that target specific 

industries and occupations in specific locations—could 

make the long-term unemployed more attractive to 

employers by addressing skills mismatch, skill erosion, 

and stigma. The benefits of training programs depend on 

the skills unemployed workers already have and their 

work experience. Unemployed high school dropouts 

might benefit greatly from basic skills training, whereas 

more-highly skilled workers might be better served by 

specialized training. The higher earnings from better 

training for young people accrue for many years and are 

more likely to exceed the investment cost; investment 

returns would probably be lower for older workers with 

fewer years before retirement.

General Workforce Programs. Well-designed training 

programs improve the employment and earnings outcomes of properly targeted participants, at least in the 

short run, and can lead to higher output. Training programs funded under the Job Training Partnership Act of 

1982 had positive effects on adult participants’ earnings 

(relative to a control group) for up to four years following 

40. See Government Accountability Office, Multiple Employment and 

Training Programs: Providing Information on Colocating Services 

and Consolidating Administrative Structures Could Promote Efficiencies, GAO-11-92 (February 9, 2011), www.gao.gov/products/

GAO-11-92. GAO estimates that the federal government spent 

about $12 billion on training programs in fiscal year 2010. 

41. See Organisation for Economic Co-operation and Development, 

OECD Employment Outlook: 2011 (Paris: OECD, September 

2011), pp. 264–273, www.oecd.org/employment/outlook.

42. For example, the United States spent $30 billion on Pell grants 

during the 2009–2010 academic year. About $12 billion of that 

total was spent on independent students attending two-year or 

proprietary institutions. See Department of Education, Office of 

Postsecondary Education, 2009–2010 Federal Pell Grant Program 

End-of-Year Report (undated), www2.ed.gov/finaid/prof/

resources/data/pell-2009-10/pell-eoy-2009-10.html. 

43. For reviews, see David Card, Jochen Kluve, and Andrea Weber, 

“Active Labor Market Policy Evaluations: A Meta-Analysis,” Economic Journal, vol. 120, no. 548 (November 2010), pp. F452–

F477; and James J. Heckman, Robert J. LaLonde, and Jeffrey A. 

Smith, “The Economics and Econometrics of Active Labor Market Programs,” in Orley Ashenfelter and David Card, eds., Handbook of Labor Economics (Amsterdam: Elsevier B.V./North 

Holland, 1999), pp. 1865–2097.
UNDERSTANDING AND RESPONDING TO PERSISTENTLY HIGH UNEMPLOYMENT 19

CBO

Box 3.

Funding Mechanisms

If federal lawmakers wanted to address unemployment by improving workers’ skills, modifying the 

unemployment insurance program, or facilitating 

transitions to work, they could use various types of 

funding mechanisms to support those efforts.1

 Block grants typically give states broad flexibility 

to use funds to tailor programs to local conditions. 

For example, the Community Services Block 

Grant program, which is administered by the 

Department of Health and Human Services, provides states with funding for local entities that 

offer services and sponsor activities addressing 

employment, education, household budgeting, 

housing, nutrition, emergency services, and 

health.

 Categorical formula grants are directed to specified activities. For example, funding for the training of displaced workers is currently provided to 

states as a categorical grant; the formula allocating 

funds depends on states’ shares of overall unemployment and long-term unemployment and on 

other factors. Categorical grants are sometimes 

structured to require state matching funds or to 

reimburse states for qualifying activities.

 Categorical project grants are generally awarded 

on the basis of a particular proposal’s perceived 

merits. For instance, the Trade Adjustment Assistance Community College and Career Training 

Grants Program, which is administered by the 

Department of Labor, competitively awards grants 

of this type to institutions of higher learning that 

provide services to certain displaced workers.

 Federal operation of programs typically involves 

direct federal contact with participating entities, 

rather than partnership with state and local governments. The Job Corps, for example, provides 

training opportunities to low-income youth, and 

the Department of Labor directly contracts with 

participating institutions on behalf of eligible 

clients.

The different funding mechanisms entail different 

degrees of federal involvement. The role of the federal 

government in selecting, implementing, and overseeing the various programs is typically limited when 

those programs are funded through block grants and 

much more extensive for direct operation. That role 

can vary greatly for programs funded through categorical formula or project grants, depending on how 

the authorizing legislation is written.2

1. For further discussion of these approaches, see Shama 

Gamkhar, Federal Intergovernmental Grants and the States: 

Managing Devolution (United Kingdom: Edward Elgar 

Publishing, 2002).

2. See Harry J. Holzer, “Raising Job Quality and Skills for 

American Workers: Creating More-Effective Education and 

Workforce Development Systems in the States,” Brookings 

Hamilton Project Discussion Paper 2011-10 (November 

2011), www.brookings.edu/papers/2011/11_workforce

_holzer.aspx. 
20 UNDERSTANDING AND RESPONDING TO PERSISTENTLY HIGH UNEMPLOYMENT

CBO

training.44 The extent to which the training approaches 

studied might work for the long-term unemployed, 

however, is unclear. Those who benefited the most from 

the training were those with the least skills and work 

experience. Because many of the long-term unemployed 

have work experience and basic job skills, they may need 

higher-level training to obtain new jobs that pay more 

than entry-level wages. 

Sectoral Programs. Postsecondary education and training 

programs that target local employers’ specific needs have 

had positive results for participants. For example, according to one study, additional education and training at 

community colleges that led to degrees or certificates 

contributed to economic gains for displaced workers who 

were unlikely to return to their previous occupations and 

industries.45

Sectoral employment programs have grown in prominence in recent years, and well-run programs have successfully placed participants in jobs and improved both 

wage rates and annual earnings.46 Sectoral employment 

programs work with employers in narrow geographic 

areas (at the county level, for instance) to identify hiring 

needs in specific industries and occupations. The programs then develop training curricula to prepare the 

target population—the unemployed and those who left 

the labor force specifically to pursue training—for the 

jobs available in the area. Examples of successful sectoral 

training programs include those that have focused on:

 Medical and basic office skills and computerized 

accounting;

 Information technology and computer recycling and 

refurbishing; and

 Health care, manufacturing, and certain types of construction jobs (road construction and the abatement 

of lead and other hazardous materials).

Although some sectoral training programs have enjoyed 

success, practitioners are still learning how to best operate 

such programs, and it is unclear whether the programs 

can be applied on a sufficiently comprehensive scale to 

significantly reduce unemployment and aid the longterm unemployed nationwide, particularly in the next 

two years.

Programs Focused on Youth. Special policies may be 

needed to deal with unemployment and long-term 

unemployment among young workers. Overall unemployment rates are highest for the young, especially teenagers (23.2 percent in January 2012, as compared with an 

overall rate of 8.3 percent), and many young people are 

among the long-term unemployed. Policies that improve 

schooling and training options for young people—

particularly those from low-income families—can 

enhance their future employment prospects. Potential 

approaches include the expanded use of career academies 

and programs such as the National Guard Youth 

ChalleNGe for high-school-age youth and Registered 

Apprenticeship programs and Year Up for older youth. 

Career academies are small learning communities of high 

school students that combine academic and technical 

curricula with a focus on specific careers. Career academies were first developed some 35 years ago, and the 

approach is currently used in an estimated 2,500 high 

schools. Evaluations of career academies found lasting 

positive effects on participants admitted to the program 

through a lottery process in comparison with a group of 

equally qualified applicants who were not admitted 

through that same process. For example, one study found 

that, four years after graduation, young men from lowincome families who participated in the academies had 

worked an average of about three months more than their 

nonparticipating peers.47

44. General Accounting Office (now the Government Accountability 

Office), Job Training Partnership Act: Long-term Earnings and 

Employment Outcomes, GAO/HEHS-96-40 (March 1996); and 

Peter R. Mueser, Kenneth R. Troske, and Alexey Gorislavsky, 

“Using State Administrative Data to Measure Program Performance,” Review of Economics and Statistics, vol. 89, no. 4 

(November 2007), pp. 761–783.

45. Louis Jacobson, Robert LaLonde, and Daniel Sullivan. “Estimating the Returns to Community College Schooling for Displaced 

Workers,” Journal of Econometrics, vol. 125, nos. 1-2 (2005), 

pp. 271–304.

46. For a review of successful sectoral training programs, see Sheila 

Maguire and others, Tuning In to Local Labor Markets: Findings 

from the Sectoral Employment Impact Study (Public/Private 

Ventures, July 2010), www.ppv.org/ppv/publication.asp?

section_id=26&search_id=&publication_id=325. 

47. See James J. Kemple, Career Academies: Impacts on Labor Market 

Outcomes and Educational Attainment (New York: MDRC, 

March 2004), www.mdrc.org/publications/366/overview.html.
UNDERSTANDING AND RESPONDING TO PERSISTENTLY HIGH UNEMPLOYMENT 21

CBO

The National Guard Youth ChalleNGe program targets 

high school dropouts between the ages of 16 and 18 who 

are not heavily involved with the justice system and who 

are drug-free. The program provides education and service experience to participants in a residential, quasimilitary setting for 20 weeks, along with a year of mentoring after the residential component has been 

completed. Established in 1993, the program has about 

100,000 graduates. Evaluations of the program indicate 

that participants earned GEDs and high school degrees at 

far higher rates than a similar group of nonparticipants. 

Those who participated in the program were also more 

likely to be employed and have higher earnings than their 

peers who had not participated.48

Registered Apprenticeship programs coordinated by the 

Department of Labor provide specific job and trade 

skills to participants through work-based learning and 

academic instruction. About half a million people participate in Registered Apprenticeship programs in the United 

States, proportionately far less than in other industrialized countries, such as Austria and Germany.49 Some 

research suggests that the employment and earnings gains 

associated with apprenticeship programs exceed those of 

training obtained through community colleges and under 

the Workforce Investment Act.50 Because the federal role 

has been limited to coordination of Registered Apprenticeship programs (federal funding was $28 million in 

2011), a policy that substantially expanded federal 

support might require greater federal involvement and 

oversight. 

Year Up—a private, nonprofit program—targets young 

people ages 18 to 24 and provides six months of technical 

skills training and classes in business writing and communication, followed by a six-month internship with a sponsoring company. Participants are paid a weekly stipend. 

In 2011, the program enrolled about 1,400 students in 

nine cities. An evaluation of the program found that 

although participants were no more likely than their 

peers to be working a year after completing the program, 

when they did work, their earnings were about 30 percent 

higher.51

Modifying Unemployment Insurance

Changes to the unemployment insurance program that 

encourage unemployed people to return to work quickly, 

that keep the unemployed connected to the workplace, 

and that even forestall job loss could reduce persistently 

high unemployment in the future. (Other types of 

changes could have different effects.) Although some 

changes could be implemented quickly, several years 

would probably be needed to fully implement most large 

changes—in part because of the multiple levels of government involved in the program. Possible changes to the 

UI program could include the following:

 Extending the duration of unemployment insurance 

benefits;

 Awarding reemployment bonuses to people who find a 

job quickly; 

 Providing personal reemployment accounts with funds 

for people to purchase services that help them find a 

job;

 Offering wage insurance payments to people who 

accept a job that pays less than their previous job;

 Using UI benefits to temporarily place the unemployed in jobs with private-sector employers;

 Supplementing the earnings of workers who, instead 

of being laid off, are offered reduced hours (commonly 

referred to as short-time compensation, or STC); and

48. See Megan Millenky and others, Staying on Course: Three Year 

Results of the National Guard Youth ChallenNGe Evaluation

(New York: MDRC, June 2011), www.mdrc.org/publications/

599/overview.html.

49. See Robert I. Lerman, Lauren Eyster, and Kate Chambers, The 

Benefits and Challenges of Registered Apprenticeship: The Sponsors’ 

Perspective (report submitted by the Urban Institute to the 

Department of Labor, March 2009), www.urban.org/

publications/411907.html; and Pahl Gunn and Lalith De Silva, 

Registered Apprenticeship: Findings from Site Visits to Five States

(report submitted by Planmatics to the Department of Labor, 

November 2008), http://wdr.doleta.gov/research/keyword

.cfm?fuseaction=dsp_resultDetails&pub_id=2404&mp=y. 

50. See Kevin Hollenbeck, “State Use of Workforce System Net 

Impact Estimates and Rates of Return” (paper presented at 

the Association for Public Policy Analysis and Management 

Conference, Los Angeles, November 7, 2008), http://research

.upjohn.org/confpapers/1.

51. See Anne Roder and Mark Elliott, A Promising Start: Year Up’s 

Initial Impacts on Low-Income Young Adults’ Careers (New York: 

Economic Mobility Corporation, April 2011), www.economic

mobilitycorp.org.
22 UNDERSTANDING AND RESPONDING TO PERSISTENTLY HIGH UNEMPLOYMENT

CBO

 Targeting more services to people projected to have 

difficulty finding a job.

Extending Unemployment Insurance Benefits. Emergency benefits for people unemployed more than 26 

weeks will expire beginning in March 2012. A policy that 

extended those benefits would increase demand for goods 

and services, but it would also tend to discourage some 

people from taking jobs and thereby losing their benefits. 

Hence, it would slow the matching of some people to 

jobs and thus cause further erosion in the skills of some 

people with long spells of unemployment. Such a policy 

would cause some jobless workers to choose to remain in 

the labor force to receive benefits, perhaps turning down 

a job they consider unsuitable (thus tending to increase

unemployment). But it would also result in some other 

jobless workers taking those jobs and, by boosting 

demand for goods and services, increase overall employment (thus tending to reduce unemployment). Because 

of those and other factors discussed above, extending 

unemployment insurance benefits, on net, has boosted 

employment, but its net effect on unemployment is 

unclear. Unlike the other policies considered in this 

section, a large-scale extension of benefits could be implemented quickly.

Reemployment Bonuses. Policies that provide financial 

incentives for the unemployed to accept a job can reduce 

overall unemployment and guard against long-term 

unemployment. Reemployment bonuses are one-time 

payments to the unemployed who find work within a 

specified period of time after losing their job. Experiments with reemployment bonuses in the 1980s and 

1990s provided mixed evidence regarding whether they 

reduced the number of weeks that unemployed workers 

received UI benefits.52 The goal underlying such bonuses 

is to forestall long-term unemployment among the newly 

unemployed rather than to provide inducements for the 

long-term unemployed to go back to work. In fact, if 

reemployment bonuses were offered only to the longterm unemployed, they could paradoxically induce the 

newly jobless to stay unemployed until they qualified for 

bonus payments.

Although not technically reemployment bonuses, 

employment retention bonuses for the long-term unemployed have been used in the United Kingdom with great 

success. Under the U.K. Employment Retention and 

Advancement (ERA) program, the long-term unemployed who found jobs received a retention bonus 

amounting to £400 (approximately $600) every four 

months for up to two years as long as they continued 

working for at least 30 hours a week and for 13 weeks out 

of every 17.53 Participants also received postemployment 

counseling, tuition assistance, and additional bonuses for 

training. The long-term unemployed who participated in 

the program had significantly higher employment rates 

and earnings than nonparticipants over the entire fiveyear study period. Further, the cost to the government of 

providing ERA bonuses to the long-term unemployed 

was less than the projected cost of providing standard 

assistance and services available to those people. 

Personal Reemployment Accounts. Personal reemployment accounts are self-managed accounts, typically 

offered to people who are projected to exhaust their UI 

benefits. In 2004, eight states provided $3,000 to selected 

UI recipients and allowed them to use the funds as a 

reemployment bonus or for other reemployment services.54 In a related initiative in 2006, eight states provided $3,000 per year for two years to fund personal 

reemployment accounts for selected UI recipients. Those 

recipients were encouraged to use those accounts to pursue training.55 Although the effect of those accounts on 

recipients was not formally evaluated, they resemble earlier individual training accounts that were found to have 

little impact either on the amount of training received or 

52. See Bruce D. Meyer, “Lessons from the U.S. Unemployment 

Insurance Experiments,” Journal of Economic Literature, vol. 33, 

no. 1 (March 1995), pp. 91–131. 

53. Other population subgroups such as unemployed single parents 

also participated in the ERA demonstration. The only group that 

experienced sustained positive benefits was the long-term unemployed. See Richard Hendra and others, Breaking the Low-Pay, NoPay Cycle: Final Evidence from the U.K. Employment Retention and 

Advancement (ERA) Demonstration, Research Report 765 (United 

Kingdom Department for Work and Pensions, August 2011), 

http://research.dwp.gov.uk/asd/asd5/report_abstracts/

rr_abstracts/rra_765.asp.

54. See Gretchen Kirby and others, Responses to Personal Reemployment 

Accounts (PRAs): Findings from the Demonstration States (report 

submitted by Mathematica Policy Research, Inc., to the Department of Labor, June 2008), www.mathematica-mpr.com/labor/

pra.asp.

55. See Jeffrey Salzman and others, Evaluation of the Career Advancement Accounts Demonstration Project: An Implementation Study

(report submitted by Social Policy Research Associates to the 

Department of Labor, November 2010), http://wdr.doleta.gov/

research/FullText_Documents/ETAOP_2011-17.pdf.
UNDERSTANDING AND RESPONDING TO PERSISTENTLY HIGH UNEMPLOYMENT 23

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on other outcomes in comparison with typical services 

provided in One-Stop centers that involve some counseling.56 However, the labor market was stronger during that 

demonstration than it is today, and such accounts might 

be more effective in the weak labor market conditions 

projected for the next few years.

Wage Insurance. Unemployed workers may be reluctant 

to take a job paying less than they previously earned. 

Wage insurance provides reemployed workers some or all 

of the difference between their old wages and their new 

wages for a certain period, say two years. In the mid1990s, five Canadian cities tried implementing wage 

insurance programs that offered new UI claimants 

75 percent of the difference in wages for two years if they 

accepted a new job paying less than their previous job. 

However, the wage insurance programs appeared to have 

little effect on the length of time that unemployed workers continued to receive UI benefits in Canada.57

Temporary Unpaid Work for UI Recipients. If unemployment insurance was used to subsidize temporary work, 

the unemployed might be able to better maintain basic 

job skills and, at the same time, gain experience in a new 

industry or occupation. Employers could also benefit 

from the work done by those temporary employees—

whom they would not be paying—and from the opportunity to evaluate prospective employees in the workplace. By maintaining and potentially enhancing the 

skills of the unemployed, and by bringing workers and 

employers together, such programs could reduce unemployment. One example of such a program is Georgia 

Works, which seeks to provide work experience to people 

receiving unemployment compensation. That program 

has not been formally evaluated.

Short-Time Compensation. Short-time compensation 

provides UI benefits to workers who, instead of being laid 

off, are offered the opportunity to work reduced hours by 

their employer. The traditional UI system provides benefits only to workers who have been laid off, thereby creating an incentive for firms to reduce the amount of labor 

they use through layoffs rather than reduced hours. By 

providing UI benefits to those who have their hours cut, 

STC motivates firms to retain more workers at fewer 

average hours per week, potentially reducing layoffs. 

There is evidence suggesting that European nations, such 

as Germany, avoided some of the run-up in unemployment experienced in the United States because of more 

widespread use of STC policies.58

Although 20 states operated STC programs embedded 

within their overall UI programs in 2011, those programs 

are not widely used.59 Potential claimants may be 

unaware of the programs if they are not widely publicized 

by the states. One disadvantage of such programs is that 

short-time work may be uneconomical for workers who 

have lengthy commutes or other fixed costs associated 

with employment and also for employers who may have 

to continue paying full benefits to workers that they otherwise would have laid off. Also, STC is currently 

designed to be an alternative to temporary or seasonal 

layoffs, wherein firms expect to recall laid-off workers 

after several months. However, temporary layoffs are 

increasingly uncommon—in part because of the longterm decline in the share of employment in unionized 

and manufacturing firms, where temporary layoffs have 

been historically common. 

Some potential advantages of STC programs—particularly in a recession when firms are uncertain about 

demand for their services or products—are that firms and 

workers gain time to make adjustments while maintaining valuable human capital. For example, if a firm is not 

able to return to its previous full-time employment level, 

natural attrition may make it possible to increase the 

hours of remaining employees over time, even if the total 

hours needed are permanently lower. For workers, the 

losses caused by reduced work are spread across a larger 

group of people rather than being concentrated on people 

who have been laid off. Further, workers may use the 

56. See Sheena McConnell and others, Managing Customers’ Training 

Choices: Findings from the Individual Training Account Experiment

(report submitted by Mathematica Policy Research, Inc., to the 

Department of Labor, December 2006), www.mathematicampr.com/labor/ita.asp.

57. See Howard S. Bloom and others, “Testing a Financial Incentive 

to Promote Re-employment Among Displaced Workers: The 

Canadian Earnings Supplement Program (ESP),” Journal of Policy 

Analysis and Management, vol. 20, no. 3 (Summer 2001), 

pp. 505–523.

58. See Pierre Cahuc and Stephane Carcillo, “Is Short-Time Work a 

Good Method to Keep Unemployment Down?” Nordic Economic 

Policy Review, vol. 1, pp. 133–164, www.norden.org/en/

publications/publikationer/2011-544.

59. See Alison M. Shelton, Compensated Work Sharing Arrangements 

(Short-Time Compensation) as an Alternative to Layoffs, CRS 

Report for Congress R40689 (Congressional Research Service, 

January 4, 2012); and Wayne Vroman and Vera Brusentsev, 

“Short-Time Compensation as a Policy to Stabilize Employment” 

(Washington, D.C.: Urban Institute, November 2009), 

www.urban.org/publications/411983.html.
24 UNDERSTANDING AND RESPONDING TO PERSISTENTLY HIGH UNEMPLOYMENT

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adjustment time to find new work, avoiding some or all 

of the potential permanent wage losses associated with 

layoffs.60

Targeted Services. Over the past two decades, states have 

experimented with policies that provide extra services to 

those UI recipients projected to be most likely to exhaust 

their benefits. Under such policies, states use statistical 

models to predict who is likely to remain unemployed for 

26 or more weeks, and they then require those workers to 

participate in special job-search assistance programs as a 

condition of receiving UI benefits. Research suggests that 

such a policy, when well-targeted, can reduce the duration of unemployment, reduce UI expenditures, and 

improve the postunemployment earnings of UI recipients.61 However, over the past decade, states have increasingly allowed UI claimants to make initial and continuing claims over the phone and via the Internet, which has 

reduced the chances that those claimants will receive jobsearch assistance and other reemployment services.62

Facilitating Transitions to Employment

Some unemployed people may be unable or unwilling to 

take advantage of available job opportunities, and certain 

policies could facilitate the transition to employment. 

People may not have information about available jobs or 

the skills to search effectively for them. They may also 

have to contend with the stigma resulting from long-term 

unemployment or immobility arising from housing 

constraints.

Job-Search Assistance. Among the services offered by 

One-Stop Career Centers are group workshops that focus 

on job-search techniques and access to computerized job 

listings. For workers who fail to find a job quickly, those 

centers may offer additional higher-cost services that 

include individualized counseling and, if other methods 

fail, vouchers for training programs. Findings from five 

demonstrations indicated that various combinations of 

job-search assistance and increased emphasis on worksearch rules were effective in reducing unemployment.63

Skill Certification Programs. Skill certification programs 

can allay employers’ concerns about whether the longterm unemployed are capable of being productive 

employees. Pure skill certification programs provide the 

unemployed with an opportunity to demonstrate their 

abilities to employers and thereby reduce the stigma of 

long-term unemployment.64 That approach, of course, 

works best if the unemployed have the skills that prospective employers need. One example of a certification 

program for preexisting skills is the WorkKeys Career 

Readiness Certification used by a variety of states, including Indiana, North Carolina, and Virginia. WorkKeys 

offers certification in a variety of areas, including reading, 

applied math, business writing, and applied technology. 

Such programs allow the unemployed to obtain skill 

certification without going through lengthy training 

programs.

Housing Mobility Assistance. Helping the unemployed 

relocate might also reduce unemployment. However, 

recent federal housing policies aimed at helping people 

stay in their homes, while having various beneficial effects 

on people’s lives, could result in fewer people moving to 

areas where jobs might be more plentiful. Numerous 

efforts have been undertaken since 2008 to assist homeowners who are underwater on their mortgages (that is, 

60. For discussion of those wage losses, see Congressional Budget 

Office, Losing a Job During a Recession.

61. See Dan A. Black, Jose C. Galdo, and Jeffrey A. Smith, “Evaluating the Worker Profiling and Reemployment Services System 

Using a Regression Discontinuity Approach,” American Economic 

Review, vol. 97, no. 2 (May 2007), pp.104–107; and Paul T. 

Decker and others, Assisting Unemployment Insurance Claimants: 

The Long-Term Impacts of the Job Search Assistance Demonstration

(report submitted by Mathematica Policy Research, Inc., to the 

Department of Labor, February 2000), www.upjohninst.org/erdc/

auic.html.

62. See Christopher J. O’Leary, “State UI Job Search Rules and Reemployment Services,” Monthly Labor Review, vol. 129, no. 6 (June 

2006), pp. 27–37, www.bls.gov/opub/mlr/2006/06/art3abs.htm.

63. Meyer, “Lessons from the U.S. Unemployment Insurance Experiments”; and Louis S. Jacobson, “Strengthening One-Stop Career 

Centers: Helping More Unemployed Workers Find Jobs and 

Build Skills,” Brookings Hamilton Project Discussion Paper 2009-01

(April 2009), www.brookings.edu/papers/2009/

0402_jobs_skills_jacobson.aspx.

64. Many states and localities offer some form of skill or work readiness certification. Those programs are generally aimed at lessskilled workers and may require some form of training before clients can take certification exams. Examples include the Workforce 

Alliance for Growth in the Economy (WAGE) certificate program, which is conducted by the Arkansas Department of Career 

Education, and the Workforce Skills Certification System, which 

was developed by Comprehensive Adult Student Assessment Systems and is used in California, Connecticut, Oregon, and Washington. See Norma Rey-Alicea and Geri Scott, A Survey of Selected 

Work Readiness Certificates (prepared by Jobs for the Future for 

Skill Up Rhode Island, January 2007), www.jff.org/publications/

workforce/survey-selected-work-readiness-certifica/364.
UNDERSTANDING AND RESPONDING TO PERSISTENTLY HIGH UNEMPLOYMENT 25

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who owe more on their mortgages than their homes are 

currently worth); those efforts have occurred largely 

through the auspices of the Making Home Affordable 

(MHA) program. The Emergency Homeowners’ Loan 

Program provided further loan relief specifically targeted 

to the unemployed. Those programs have been varied in 

their goals and, in the case of the largest (the $8 billion 

Hardest Hit Fund), have varied from state to state in 

their implementation. But their general goal has been to 

keep homeowners in their houses through mortgage 

modifications or assistance rather than to facilitate their 

move to a new location. MHA programs designed to 

facilitate short sales (when a homeowner sells his or her 

house for less than the mortgage amount owed) probably 

do make it easier for people to relocate, but those programs are small in relation to the majority of MHA programs that seek to keep homeowners in their homes.