Not all unemployment is equal

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An article by Catherine Rampell in the New York Times on Monday raises the point that it can be difficult for people who have been unemployed for some time to find a job.

She notes that:

Idle workers' skills may atrophy, particularly in dynamic industries like technology. They may lose touch with their network of contacts, which is important for people in sales. Beaten down by months of rejection and idleness, they may not interview well or easily return to a 9-to-5 schedule.

And this does not just apply to the US. Long-term unemployment remains elevated in the UK. Aside from the obvious social implications of long-term unemployment, it could have serious economic implications too.

Non-inflationary sustainable growth requires a certain amount of spare capacity in the economy. Unemployment will typically bear down on inflation, but when people are out of work for a long time, their ability to re-enter the labour market is diminished. This has the potential to reduce spare capacity and therefore the non-inflationary rate at which the economy is able to grow. And this is not just academic: skills shortages are already limiting companies' ability to expand.

Thankfully long-term unemployment is no longer at the heights it reached during the recession, but the number of people claiming for 6-12 months (the group that have the potential to become long-term unemployed) has ticked up in the last few months. This will be a measure to watch to give an indication of the health of the labour market and the sustainability of the recovery.

Fig 1: Long term unemploymentNumber of Job Seekers' Allowance claimants (000s)

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