Source: Viking Books
Source: Viking Books

So you’ve been fired. Or they just laid off half the department, including you. Maybe you saw this coming, or maybe you should have, but didn’t. Either way, it’s pretty clear at this point: Something has gone terribly wrong.

The good news is that you know you have a problem, which is, as the 12-steppers say, the first step to finding a solution. The bad news is, you still have to figure out what to do next. How you answer this question matters a lot.

The people who keep moving -- sometimes literally -- may ultimately find that a job loss is “the best thing that ever happened to me.” (You’d be surprised how many people eventually say this about getting fired.) The people who get stuck, however, will experience some of the worst misery that a rich democracy has to offer.

As of last week, the number of long-term unemployed in the U.S. (those jobless for 27 weeks or more) stood at 3.6 million, or about 36 percent of all unemployed Americans. So if you’re out of work, you’re definitely not alone. On the other hand, you probably don’t want to continue to be one of that crowd.

At the individual level, many factors determine who will turn the sour lemons of a job loss into the tasty lemonade of a new career opportunity -- whether you're willing to move, for instance, or to work for lower pay. Yet lately, Republicans and Democrats have been fighting over one institutional factor that has risen to the fore: the duration of unemployment benefits. Put simply, how much help do the unemployed need to get unstuck, and when does that help start to hurt?

Shortly after the financial crisis, two economists, Alan Krueger of Princeton University and Andreas Mueller of the University of Stockholm, commissioned a survey of recently unemployed people in New Jersey. They found what other economists have found before them: Most unemployed people quickly slack off on their job search. There’s a burst of activity right after they lose their job, and during that period many people find a new job. But when they exhaust their contacts and the companies they know well, they tend to hunker down and wait for something to happen.

Much research shows that they eventually do get a second wind -- right before their unemployment benefits run out. This may seem like common sense, but it’s actually somewhat surprising. In theory, one’s job search should increase over time, as it becomes more imperative to make money. In practice, we see the reverse -- why?

For liberals, it’s evidence that workers are reacting rationally to a bad job market, withdrawing rather than wasting time looking for jobs that don’t exist. For conservatives, it’s evidence that unemployment benefits are encouraging people to sit at home collecting checks until their benefits run out. Pay people not to work, and that’s what they’ll do.

Conservatives aren't all wrong about the moral hazard of generous unemployment benefits. Certainly in Europe, where unemployment benefits run longer and replace more of your income, we see people taking much longer to find another job. In general the more generous the unemployment benefits, the longer it takes. But even though Congress increased benefits somewhat during the recession, American unemployment benefits aren’t a great substitute for a full-time job. Unless you make very little money, they won’t replace your income, and they are cut off after a couple of years. Are people really choosing a few hundred dollars a week over finding a job?

Krueger and Mueller’s survey showed that after just 12 weeks, the average amount of time people spent looking for a job every day declined by 30 minutes -- a huge drop, given that workers reported spending at best 70 to 100 minutes a day on their job search. Why?

Liberals tend to emphasize a rational decision to step back as you exhaust your most obvious leads, and conservatives blame bad incentives. But Krueger and Mueller came up with a third explanation: People stop looking for a job because it’s so unpleasant. They asked respondents to provide detailed information about what they’d done over the course of the previous week, and how their various activities had affected their mood. Most ranked their job search highest on stress and anxiety, and lowest on happiness.

A job search gets more unpleasant as time goes by. The longer you spend looking, the more unhappy it makes you, and the more anxious you become about being unemployed. This should make you try harder to find a job. But Krueger and Mueller suggest that heightened anxiety actually had the opposite effect. People tend to want to minimize the amount of time they spend feeling miserable. So they try not to think about it, which isn’t a great recipe for finding a job.

America has generally experienced much less long-term unemployment than most rich countries. In a country like Greece, even before the financial crisis, almost half of the people who were out of work reported being that way for more than 12 months. The Organization for Economic Cooperation and Development average hovered around 30 percent. In the U.S., it was more like 5 to 10 percent. And yet, Americans weren’t less likely to lose their job; in fact, in America, it is easier to fire workers than almost anywhere else. And that, as it turns out, is why the U.S. has so few unemployed people.

In most of Europe, in the postwar era, governments viewed unemployment as a terrible failure, and did their best to keep it from happening. Even in a relatively business-friendly place like Denmark, letting an employee go means coming up with at least three months’ worth of wages for severance pay. In France and Italy it was functionally almost impossible to fire permanent staff -- even layoffs during a downturn faced legal action, and possible reversal by a judge.

Yet instead of preventing unemployment, the European laws ended up entrenching it. In the aggregate, what you see in countries that make it difficult to fire is that you’ve also made it difficult to hire. Taking on a new employee means an open-ended commitment to a person you don’t know very well (and who may decide to slack off once they’ve become unfireable). So companies go to great lengths to avoid it. Instead they rely on things like temporary contracts to round out their workforce. The people on those temporary contracts can’t advance internally, and it’s risky to invest in improving your skills for a job you might not have in six months. Those workers are more likely to stay on the margins of the workforce, poorly paid, with no benefits and always at risk of unemployment.

Unemployment benefits may ease the pain of unemployment, but they also seem to ensure that we have more unemployment. The generosity of European systems in the 1980s and 1990s meant that people could -- and did -- linger on the unemployment rolls for years, even decades. Conservatives may be right that employment insurance disincentivizes people from looking for a job, but for the wrong reason. With rent covered, you don’t have to be quite so frantic about finding work.

Over the years, Europe has gotten better about not paying workers to stay in place; Germany, for example, pushed through a huge labor market deregulation known as the Hartz IV reforms, and now has an unemployment rate lower than that of the U.S. And over the same years, America’s unemployment policy has become a bit more European.

Discouraged U.S. workers, particularly lower-skilled ones, are turning in greater numbers to the Social Security disability insurance system when work dries up in their geographic area. Disability benefits are hardly lavish, but they allow you to stay in place. And once you’re on it, there is virtually no chance that you will ever get off. Someone on disability who makes more than a nominal amount risks losing not only their benefit but also their health insurance for a job that might not pan out. Unsurprisingly, almost no one takes that risk.

We should worry about moral hazard, but we should understand how it really operates. Instead of imagining that people are taking advantage of their unemployment benefits, we should understand that they are often seeking shelter from emotional pain. So the best way to shorten unemployment is to make job-seeking less emotionally painful.

Families are best equipped to ease that pain by providing a combination of unconditional support and strategically applied tough love. But governments can try to shape policy so that looking for a job is as painless as possible, and not looking comes at a cost. Denmark, for instance, combines a generous system with an extremely aggressive job-retraining program. They will not let you sit on the dole indefinitely. But they will relieve you of financial worry, and give you something concrete you can do to make yourself more employable. Judging from their employment figures, this works very well.

If you don’t like the Danish program, there are other things we could do. We could create a temporary hiring program, along the lines of the Works Progress Administration, to be activated during periods of long-term unemployment, with a mandate to hire as many people as necessary to keep the unemployment rate down. These jobs would be time-limited, ending when the unemployment rate dropped below its target for several months running, and they’d pay less than normal jobs -- just enough to keep the lights on and prevent labor scarring. We could waive the payroll tax on new hires -- one month’s rebate for every month that the new hire has been unemployed. And if all else fails, we could offer people grants to move from places like Buffalo, New York, where there are no jobs, to North Dakota, where the oil industry has pushed unemployment below 3 percent.

We’re too afraid of being taken advantage of. But it helps no one to fixate on mythical villains. And when politics get involved, that is often what we most like to do.

Income Inequality

(Megan McArdle writes about economics, business and public policy for Bloomberg View, and is the author of "The Up Side of Down: Why Failing Well Is the Key to Success" (Viking), from which this article is adapted. Follow her on Twitter at @asymmetricinfo.)

To contact the writer of this article: Megan McArdle at mmcardle3@bloomberg.net.

To contact the editor responsible for this article: James Gibney at +1-202-624-1863 or jgibney5@bloomberg.net.