Hydroquinone's chemical structure is similar to benzene which is used as a chemical detergent and bleaching agent in detergents you buy at the grocery store. The chemical is harsh on the skin and can cause redness, irritation and itching in some patients. It works by blocking the production of melanin, but with long-term use can cause other adverse effects such as a "halo" effect around a dark spot that you treat or uncommonly darkening in an area that has been treated long-term. Since the chemical does decrease the melanin (pigment) stores in your skin it has been extrapolated that it increases your skin's susceptibility to UV rays and to skin damage. Hydroquinone is also often combined with Retin-A which works in a different way to inhibit melanin production and sensitizes your skin to the sun's rays. Thus, they work together and hydroquinone alone has little effect compared with in combination with retin-A.
Hydroquinone has been studied in mice and shown to be a carcinogen but it was given by mouth and not applied topically as we use it currently. The FDA is currently considering a ban on the product based on these study results. Unfortunately, no study will ever be allowed in humans to test the potential carcinogenic ability in humans. It would be unethical... so we may never have an answer to that question but I would be cautious with long term use based on what I have mentioned so far.