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updated: 7/21/2014 7:58 AM

The U.S. Needs fresh ideas for a new kind of unemployment

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Bloomberg News

The U.S. labor market is still a long way from healed. The unemployment rate of 6.1 percent, down from 10 percent in 2009, is misleading: Long-term unemployment accounts for a much bigger share of the total than usual. Millions who would like full-time jobs are having to work part time. And millions more have given up looking for work and are no longer part of the count.

That's an awful toll of disappointment and distress. What can be done?

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Lack of demand remains the chief problem. The Federal Reserve's power to make up the shortfall seems to have reached its limit -- politically, even if not for economic reasons -- and a paralyzed Washington has said no to further fiscal stimulus. One neglected avenue remains, however: helping to connect the unemployed to companies that are doing well and looking to hire.

Those firms do exist, despite flagging overall demand. The unemployment rate varies widely from state to state -- from 7.9 percent in Mississippi to 2.7 percent in North Dakota to 3.5 percent in Nebraska, Utah and Vermont. This shows what's possible, but at the same time, it's a puzzle: If labor markets are tight in some places and slack in others, why don't the unemployed move? This is where policy could usefully focus.

High mobility of labor was always seen as a particular strength of the U.S. economy, but lately it has been more myth than reality. Even before the recession, the U.S.'s advantage had been fading. Recently, labor mobility has fallen to its lowest since records began in the 1940s. Removing some of the obstacles that the government has put in the way of people looking for work would help a lot.

People can't or won't move for various reasons. The unemployed in Michigan may be unaware of openings in Utah. They may lack the needed skills. Plus, moving is expensive: For people with a house to sell, mortgaged for more than it's worth, moving may be unaffordable. And for families that rely on state-specific government assistance (as many of the unemployed do), moving is complicated. At modest cost, some of these problems can be addressed.

First, the government should do more to help unemployed workers search for new jobs -- and not just in the places where they already happen to live. Studies comparing policies in a range of industrialized countries find that job-search assistance -- in the form of job-brokerage services, referrals to training programs and help with the costs of relocating -- is good value for money. It makes a difference and it's cheap.

Subsidies for training or retraining also make sense, so long as they're carefully designed. This involves bigger outlays, but good training programs can pass the cost-effectiveness test.

Granted, the record of the existing federal Trade Adjustment Assistance program is discouraging. Created in the 1960s and changed many times, the TAA was intended to help with job searches and relocation, as well as pay training subsidies to a narrow group of eligible candidates. Periodic evaluations have typically found poor results.

The TAA program was slow and complex to administer -- partly because it was meant to help only workers whose jobs were lost to competition from imports. Recently it's been pruned and may soon disappear altogether. Instead, it should be simplified and then enlarged. The Barack Obama administration has suggested merging it into a new streamlined scheme with wider eligibility -- the New Career Pathways program. That's a good idea. So far, support in Congress is lacking.

U.S. tax and welfare policies need to be streamlined, too. As things stand, both make it much harder for people to move.

The tax system is extremely skewed to favor homeownership over renting. That's not just unfair (renters tend to be poorer), but it's also inefficient. Mortgage interest is tax-deductible, but rent isn't. In addition, owning a home, like owning any asset, generates income -- but if you live in your home, the income is implicit and goes untaxed. Trimming the tax advantages of homeownership would encourage more people to rent, and that would make them more mobile.

The welfare system adds to the problem because of its insane complexity. There are multiple federal programs for help with food costs, housing, health care, child care and other outlays -- and countless state and local initiatives as well. For many beneficiaries, managing eligibility for these ever-evolving, ever-proliferating programs is a job in itself. Move to another city or state, and you have to start all over. Simplifying and coordinating this array of initiatives should be a much higher priority for government at every level.

In many other ways, city, state and federal regulations make it harder for the long-term unemployed to get back to work. Rent controls and zoning rules inhibit the supply of affordable housing in places where demand is high. Occupational licensing, sometimes taken to ludicrous extremes, makes it harder to switch jobs. Relying on tougher minimum-wage rules to reduce poverty in work, rather than using employment subsidies such as the earned income tax credit, hurts the prospects of workers with few or no skills.

Putting all this right won't be easy. The first step is to acknowledge that the U.S. has a new kind of unemployment problem, and that solving it will demand new thinking.

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