Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Long-Term Unemployment's Hidden Cost in Stagflation
Transcript
- Lucas: The May jobs report is out Friday, and we already know one ugly number: long-term unemployment is surging. Luna: The data crossed my desk this week too. The share of people out of work for 27 weeks or more is climbing steadily. Lucas: Yeah, and that's the hidden scar of stagflation. The headline unemployment rate is 4.3 percent — flat, even healthy by historical standards. But beneath that, the composition is rotting. Luna: So the aggregate number masks a shift toward longer spells of joblessness. What's driving that? Lucas: Two forces, really. First, when growth is anemic — real GDP growth just 1.6 percent annualized — employers hire cautiously. They prefer short-term, part-time, or gig workers they can drop fast. Second, inflation eats away at the purchasing power of wages, so even if you get a new job, you may earn less in real terms than before. Luna: And that makes people stay in unemployment longer, hoping for a better match, but the odds worsen the longer you wait. Lucas: Exactly. There's a well-documented dynamic called 'duration dependence.' The longer you're out, the harder it is to get back in. Skills atrophy, networks shrink, and employers treat a resume gap like a red flag. Luna: The JOLTS data for April showed 7.6 million job openings, which sounds like plenty. But those openings are concentrated in sectors like health care and hospitality, which may not match the skills of someone who lost a manufacturing or office job. Lucas: Right. And initial jobless claims just rose to 225,000 — up from 212,000 the prior week. That's not a crisis, but it's a signal that layoffs are ticking up. The flow into unemployment is increasing while the flow out is slowing. Luna: So we have both more people coming in and fewer leaving. That's the recipe for a growing stock of long-term unemployed. Lucas: Exactly. And the policy response is complicated. Extended unemployment benefits were scaled back after the pandemic, but some states still offer up to 26 weeks. There's a debate — do these benefits reduce the urgency to find work, or do they provide necessary support in a weak labor market? Luna: Stagflation makes that trade-off sharper. With inflation high, benefits lose real value fast. But cutting them forces people into jobs that may not cover rent. Lucas: There's also a hidden fiscal cost. When people stay unemployed longer, they pay less in taxes and consume more in safety-net programs. The Congressional Budget Office estimated that each percentage point of sustained long-term unemployment adds roughly $30 billion to the federal deficit over a decade. Luna: That's a lot of money that could go to retraining or infrastructure. Lucas: And that's the real tragedy. We spend on the symptoms — benefits — instead of investing in the cure. Retraining programs have mixed results. The most effective ones tie training to specific employer needs, but they're small-scale. Luna: If this conversation has helped you see the labor market a little differently, honestly, if today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. Lucas: Yeah, listener support keeps this show ad-free and independent. No pressure, but it matters. Luna: So back to the structural issue — one thing that makes stagflation unique is that it erodes the effectiveness of traditional monetary policy. The Fed can't cut rates to boost hiring without fueling inflation. Lucas: Right. And fiscal stimulus is politically fraught. So the long-term unemployed become a kind of forgotten cohort. They're not counted in the headline unemployment rate after a year, because the Bureau of Labor Statistics reclassifies them as 'discouraged workers' — they stop looking. Luna: That's a huge statistical hole. The true underutilization of labor is much higher than 4.3 percent. Lucas: The U-6 rate, which includes discouraged workers and those working part-time for economic reasons, is the better measure. It's probably around 8 percent, maybe higher. But even that doesn't capture the quality of jobs people settle for. Luna: Average hourly earnings rose to $37.50 in May, up from $37.41. That's a 0.2 percent monthly gain — barely keeping pace with inflation. Lucas: So even the people who find work are treading water. The long-term unemployed, when they finally get a job, often take a pay cut of 20 percent or more. That's a lifetime earnings hit. Luna: And that feeds back into slower consumption, which feeds back into slower growth. It's a vicious cycle. Lucas: Exactly. That's why stagflation is so insidious. It's not just a bad quarter — it creates structural scars that persist for years. The labor force participation rate for prime-age workers has never fully recovered from the pandemic recessions. Luna: So what can actually be done? Targeted job creation? Wage subsidies? Lucas: Germany's Kurzarbeit model — short-time work subsidies — kept people attached to their employers during the 2008 crisis. The US tried something similar with the Paycheck Protection Program, but that was temporary. A permanent, counter-cyclical wage subsidy could prevent long-term unemployment from building up in the first place. Luna: But that requires political will and fiscal space, both scarce in a stagflation environment. Lucas: Right. So the most realistic near-term fix is better matching. Online platforms, community college partnerships, apprenticeship programs that train specifically for local in-demand jobs. It's not glamorous, but it works. Luna: We saw a big jump in two-year college enrollment during the pandemic. That's a positive sign. Lucas: It is. But those students need to graduate and find jobs that pay enough to justify the time. If the economy stays sluggish, even degrees won't guarantee a foothold. Luna: So the long-term unemployed are stuck between a weak labor market and a safety net that's fraying. It's a tough spot. Lucas: It is. And it's one that the headline numbers simply don't capture. When the May jobs report drops Friday, I'll be watching the long-term unemployed share more than the overall rate.