economic recovery

Long-term unemployment: What the U.S. can learn from Sweden

April 14, 2014: 5:00 AM ET

The U.S. can learn from other countries who have had to battle the most stubborn problem in the job market today.

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FORTUNE -- It's doubtful most Americans had any idea how good they'd had it.

The scourge of widespread, long-term unemployment was a problem the U.S. hasn't really had to deal with since The Great Depression. For instance, in 2002, the U.S. had the fourth-lowest rate of long-term unemployment -- when taken as a share of the overall unemployment rate -- among all OECD countries. Back then, less than 10% of Americans who were unemployed had been so for more than 27 weeks. Now, 35.8% of unemployed Americans fit into this category.

Long-term unemployment is a particularly pernicious problem because of its compounding nature -- long stretches of unemployment erode workers' skills, while employers have an irrational bias against the long-term unemployed. Employers refuse to hire the long-term unemployed on account of the very fact that these workers have been unemployed for a long time, and so these workers find it harder and harder to find a job.

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But there's a kind of silver lining. The fact that many other rich nations have dealt with the problem means policy makers here can learn from others' experiences.

Take Sweden. After suffering from a financial crisis and high levels of long-term unemployment, the government there tried a variety of measures, creating a pretty good natural experiment for what works best. One 2007 study showed that out of six different Swedish programs, whose purposes ranged from worker retraining, helping workers maintain contact with former colleagues, temporary government employment, and employment subsidies, only the latter was effective at bringing down long-term unemployment.

A wage subsidy is a program where the government pays part of a worker's check, thus raising the worker's income and inducing firms to hire more workers. Wage subsidy programs have been proposed by economists and commentators in the U.S. before, usually as a replacement for the Earned Income Tax Credit. As economist and blogger Noah Smith argues, the Earned Income Tax Credit is a better way to help low-income Americans than raising the minimum wage mostly because it's better at targeting aid for those who need it without reducing overall employment. But the EITC simply comes in the form of a per-year tax refund that divorces the recipient from the work that went into earning that money.

Wage subsidies aren't just a potential solution to the debate over the minimum wage. They could also help bring down U.S long-term unemployment as well. Indeed, if Congress does decide to phase out the EITC in favor of wage subsidies, as Smith argues, it would be a perfect time to experiment with added incentives for hiring the long-term unemployed, too. Sweden's program promised to pay half of a worker's wages for the first six months of work -- a powerful incentive for employers taking a risk when hiring a new worker. If it doesn't work out after six months, the company only paid half of what it would normally have had to during a similar trial.

Wage subsidies haven't taken off in the U.S., primarily for political reasons. Raising the minimum wage is a popular issue for Democrats, who don't want to eliminate the issue's electoral potency by instituting a more effective policy that's harder to explain to the public. Furthermore, wage subsidies have the whiff of corporate welfare, as it's a program that relieves some companies from what could be seen as their responsibility to pay a fair wage.

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But every program to help poor and unemployed workers comes with drawbacks, and the economic literature clearly supports wage subsidies as a program with the fewest negative consequences. The experience in Sweden shows that this policy can help the long-term unemployed find gainful employment.

Much of the U.S. is still grappling with the aftermath of the financial crisis. Long-term unemployment has been one of the most painful aftershocks. It's time to try something new.

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