Understanding the COVID-19 Rise in Long-Term Unemployment

Early on, pandemic-related shutdowns of economic activity led to millions of people rapidly losing their jobs with few options to return to work. Although the economic contraction was brief, serious restrictions on business operations remained for well over a year, contributing to a marked rise in long-term unemployment.

The number of Americans unemployed for at least 27 weeks rose from 1.1 million (19% of unemployed workers) in February 2020 to 4.2 million (43% of unemployed workers) in March 2021. Long-term unemployment has since declined to 4 million in June 2021, corresponding with the rise in vaccination rates and the loosening of social distancing requirements.

The relatively rapid rise in long-term unemployment over just one year is unique, in comparison to prior downturns. Typically, long-term unemployment rises in response to deep and sustained recessions that result in slow labor market recoveries. During the Great Recession, for instance, long-term unemployment rose from 1.3 million (17% of unemployed workers) in December 2007 to 6.8 million (44% of unemployed workers) in April 2010. Of note, the labor market recovery from the Great Recession was much slower than the recovery from the pandemic. After the end of the Great Recession in June 2009, the unemployment rate took five years to reach 6.1%. By comparison, the unemployment rate stood at 6.1% in April 2021, just one year after reaching a historic high of 14.8% in April 2020.

Today’s situation is even more troubling than the long-term unemployment figures indicate. Labor force participation is notably lower than it was pre-crisis, as many workers opted to leave the workforce all together instead of continuing to seek employment.

Specifically, the labor force participation rate sharply declined by 3.1 percentage points in just two months (from 63.3% in February to 60.2% in April 2020). Although the participation rate partially rebounded during the summer of 2020, it has since stagnated and, as of June 2021, remains 1.7 percentage points below the pre-pandemic rate. While not technically classified as unemployed, these are largely people who would otherwise be working (absent the events of the past 15 months), and public policy should be crafted with them in mind, as well.

A spell of long-term unemployment can financially scar a worker for the rest of their career. The Congressional Budget Office notes that long-term unemployment is associated with losing skills, such as those related to technical aspects of an occupation. It can also harm a worker’s productive value in other ways by, for example, cutting them off from their professional networks.

Making matters worse, employers are less likely to hire individuals with long spells of unemployment, due to a stigma that workers who have been jobless for long periods are poor performing. One study found that the chances a worker receives a callback for a job interview declines with the duration of the period of unemployment, with most of that decline occurring during the first eight months of unemployment.  As a result, the stigma associated with long-term unemployment is itself a barrier to finding a new job, further extending spells of unemployment.

The combination of these factors harms workers in several ways, starting with lower wages at their next job. In Germany, for instance, the duration of unemployment was found to reduce wage offers by 0.8% per month of unemployment, on average. The wage implications of long-term unemployment can extend for decades: One study found that long-term unemployment is associated with lower earnings 20 years after the job loss.

Moreover, long-term unemployment likely compounds the numerous health and social consequences of job loss. Evidence shows that unemployment increases mortality rates among men by 50% to 100% the year after job loss and by 10% to 15% over the following 20 years. This implies that a 40-year-old male experiences a 1-to-1.5-year reduction in life expectancy after losing his job. Long-term unemployed workers are also more likely to claim Social Security disability benefits and exit the labor market permanently. Job loss can also result in family stress that negatively impacts school performance and the emotional well-being of children.

The COVID-19 economic shutdown in the spring of 2020, ongoing public health concerns, and continued social distancing orders that required in-person service businesses to operate at reduced capacity led long-term unemployment to rapidly rise over the past year. Today, however, a record-high 9.3 million job openings exist in the labor market, so what could be keeping long-term unemployment elevated?

To start, public health concerns continue to keep workers home. The latest results from the Census Bureau’s Household Pulse Survey indicate that about 3 million adults are not working because they are “concerned about getting or spreading the coronavirus.” Although this figure has steadily declined in recent months and will likely continue to decline as vaccination rates rise, fear of COVID-19 is still depressing labor supply.

Enhanced unemployment insurance (UI) benefits may also be deterring many from returning to work. When the unemployment rate was skyrocketing to historic levels at the beginning of the pandemic, Congress expanded UI by extending the duration of benefits, adding a weekly benefit supplement, and expanding eligibility. While these expansions protected tens of millions of Americans from severe financial distress, they may also be a barrier to economic recovery as the pandemic recedes. Extending the maximum number of weeks workers can receive UI benefits has been linked to longer periods of unemployment. Complicating this further is the flat weekly supplement—now at $300—means that 37% of the workforce can earn more on UI than from working.

As the economy stabilizes, lawmakers should be mindful of UI’s potential role in today’s labor market shortages. Several states are already discontinuing pandemic UI benefits in June and July, ahead of the federal emergency program’s expiration in September. Comparing upcoming employment figures in these states to those that are continuing pandemic UI benefits could provide insight into how the program’s expansions are impacting the labor market.

Separately, the rise in caregiving responsibilities due to school closures and widespread illness may also be impeding reemployment for many families. Last year, a BPC-Morning Consult poll found that more than a quarter of UI recipients primarily spent their time caregiving rather than looking for a new job. More recently, another BPC-Morning Consult poll suggested that 10.6 million people stopped working during the pandemic due to caregiving responsibilities. However, recent research suggests that—although a major toll on working-age parents—child care and school closures account for only a small portion of today’s labor shortage.

Looking forward, researchers anticipate that workplace automation will accelerate following COVID-19. Workplace automation tends to increase faster following recessions, as many employers choose to invest in new technology rather than hire new workers. Prior to the pandemic, a McKinsey Global Institute study calculated that 73% of activities in the accommodation and food service industry could potentially be automated. If this trend accelerates in the aftermath of COVID-19, many displaced workers may have to transition to new industries and occupations, potentially extending their unemployment.

The dramatic economic contraction in spring 2020 threw millions of Americans out of work. Many of them have struggled to return to work, posing a major challenge to household finances. As the pandemic recedes, it is vital that lawmakers consider policies to foster reemployment—particularly among the long-term unemployed—to support the economic recovery.

Note: This blog was updated on July 2, 2021 to incorporate both the BLS’s June employment report and the Census Bureau’s June 9 – June 21 Household Pulse Survey.