Mystery of long-term unemployment

[The Joseon Dynasty]

Over the last 6 months or so, I've been doing academic research on the determinants of long-term unemployment in the United States and, as a little celebration of my first academic publication (keep an eye on the Journal of Labour Economics), I thought I'd make a thread about it. Not just that, but also because it's been a tough question for U.S. policymakers in recent years, and I thought the economics nerds on NSG might like to weigh in. I ask some questions at the bottom.

During the Great Recession, the unemployment rate increased from just over 5% in 2008 to 10% at the beginning of 2010. By the beginning of 2015, it had almost returned to the 2001 - 2007 average ¹. Good news, right? However, most of this decline in the unemployment rate can be accounted for by the normalisation of short-term unemployment rates (i.e. people who have been unemployed for less than 26 weeks). By 2014, the short-term unemployment rate had returned to the 2001 - 2007 average ². The long-term unemployment rate (i.e. people who have been unemployed for more than 26 weeks), on the other hand, remains just less than double the pre-recession level ³. On current projections, it will end up taking a decade or so from the beginning of the Great Recession before long-term unemployment returns to the pre-recession average. For policymakers, that's not good. It represents roughly 2.7 million people in the United States who are chronically out of work. If we're faced with another unemployment shock like the Great Recession, we want to know in advance why long-term unemployment is so sticky, so that we can implement the appropriate policies to get people back into work.

One of the theories why this is happening is that recessions induce a compositional shift in the demographics, occupations and regional distribution of the unemployed. The idea is that the type of person who is unemployed during a recession is different from the type of person who is unemployed during an expansion. Darby, Haltiwanger, and Plant (1985) argue that the people who end up unemployed during a recession are people who would have a low probability of finding a job no matter when they were unemployed, such that much of the increased unemployment rate can be explained by an influx of people who deflate the average job-finding probability. This theory doesn't have very much empirical support. This paper proposes a model of labour market dynamics (movements among employment, unemployment and non-participation) and for each demographic-occupation-region group, they calculate from Bureau of Labour Statistics data the pre-recession long-term unemployment rate. Holding those within-group unemployment rates fixed at pre-recession levels, they then allow the composition of the labour market to evolve over the Great Recession and find almost no evidence that compositional shifts can explain why long-term unemployment rose so high, nor why it's taking so long to come down.

With that theory not holding water, another one is becoming popular (and this is my personal favourite), which says that there is a form of duration dependence in labour markets. That's econo-jargon for saying that unemployment is somewhat self-fulfilling. The longer you are unemployed, the more your skills atrophy, the more your professional networks erode, and the more that employers look disfavourably at your resume for those reasons, and so you stay unemployed. Under this theory, the long-term unemployed are basically 'unlucky', and get left behind as job vacancies go to the short-term unemployed and new entrants to the labour force. There is some good evidence to support this.

This paper is a very interesting experiment. The authors sent fictitious resumes to actual job postings in 100 U.S. cities, taking care that the randomly-generated names were not racially-informative (since we have a whole body of research on racial discrimination in labour markets). For each job applied to, except for administrative / clerical jobs, 2 male and 2 female resumes were sent and 2 of those were 'low quality' while 2 were 'high quality'. For each resume, employment status and the length of current unemployment spell was randomised. The results show that job-finding probabilities attenuate really quicky as the duration of unemployment goes up. It drops from almost 30% for a duration of 0 months to 8% for a duration of 8 months. Another paper by the same authors takes a more structural approach to this same question. It introduces a model of labour market dynamics. Within that model, it replaces the observed job-finding probability (calculated again from Bureau of Labour Statistics data) with a job-matching function, calibrated in the pre-recession period, that depends on the duration of unemployment. The idea is to test whether a model that holds fixed the structure of job-matching and only allows variation by duration of unemployment can explain what happened to long-term unemployment in the Great Recession. The answer? Kinda. It explains a good chunk of what happened (see Figure 9). So did the other component of their paper, which is to allow movement in and out of the labour force itself. There's still a part of the increased long-term unemployment rate that can't be explained by anything described above. The mystery of long-term unemployment continues, although we know much more now than we used to.

Questions: Why do you think the long-term unemployment rate is so high? Do you think there's merit to the idea that unemployment is self-fulfilling? Any thoughts about what policies should be implemented to prevent long-term unemployment from becoming such an issue in the first place?

[1]

Source: BLS

[2] [3]

Source: BLS

[Geilinor]

On current projections, it will end up taking a decade or so from the beginning of the Great Recession before long-term unemployment returns to the pre-recession average.

It's been almost 9 years since the beginning of the Great Recession, shouldn't long-term unemployment be close to the average by now?

[Alistan]

Don't you mean structural unemployment?

[Staythefout]

The economy is shit and it's hard to get a wellpaying job but If you can't find something good after a year or 2 either move or reconsider your personal values like work ethic. Too many people are picky or weak.

[The 93rd Coalition]

My two cents:

1. Why do you think the long-term unemployment rate is so high? 2. Do you think there's merit to the idea that unemployment is self-fulfilling? 3. Any thoughts about what policies should be implemented to prevent long-term unemployment from becoming such an issue in the first place?

1. A growing likelihood of short-term unemployment giving way to the latter? I'm not really sure. I don't economic.

2. What you posted was a pretty convincing argument, so yeah, I do.

3. Maybe some FDR-style programs in which the government sponsors unskilled laborers, giving them the credentials and economic stability to find a permanent post on their own, or something. Then again, much has changed, and even then the New Deal was only very partially successful in rejuvenating the economy. Unsure on this one too.

[Grave_n_idle]

The economy is shit and it's hard to get a wellpaying job but If you can't find something good after a year or 2 either move or reconsider your personal values like work ethic. Too many people are picky or weak.

Here's an explanation for half the problem - the unemployed being blamed for the lack of employment opportunity.

The other half of the problem is that the paradigm has fundamentally changed - chronic unemployment is the new normal. This simple fact is hidden, because we're lying to ourselves about it - not because it's changed.

[Atlanticatia]

I think that the economy simply hasn't created enough jobs to fix the problem (while federal+state govt has not replaced the many public sector jobs lost), and like you said, your skills atrophy and it gets harder and harder to find work.

Either way, this looks like a long-term problem. For this reason we really need a new income support system that provides indefinite means-tested unemployment benefits to people who have trouble finding work (along with job training and other active labour market policies). Once you hit 26 weeks, you lose any source of income, especially if you're childless. Long term unemployment is becoming a structural issue, and it's not an individual problem -- for this reason, we desperately need that indefinite means-tested income support.

Also, the Fed should do more to promote full employment so we can get as tight a labour market as possible, in conjunction with all levels of government expanding hiring of public sector employees (teachers, etc), tax credits for business that hire long-term unemployed workers, and a large infrastructure programme to create jobs for the long-term unemployed.

[Saiwania]

There isn't much mystery behind it, either someone is able to find and land a job they can do or they can't. 5 homeless people have died where I live this month. Which means that other people who wind up in the same situation can or will be next. It is a cruel world out there that will never change. Granted, they were in their 50s and 60s. Poor health is what gradually killed them.

[Rencini]

I think that the economy simply hasn't created enough jobs to fix the problem (while federal+state govt has not replaced the many public sector jobs lost), and like you said, your skills atrophy and it gets harder and harder to find work.

Either way, this looks like a long-term problem. For this reason we really need a new income support system that provides indefinite means-tested unemployment benefits to people who have trouble finding work (along with job training and other active labour market policies). Once you hit 26 weeks, you lose any source of income, especially if you're childless. Long term unemployment is becoming a structural issue, and it's not an individual problem -- for this reason, we desperately need that indefinite means-tested income support.

Also, the Fed should do more to promote full employment so we can get as tight a labour market as possible, in conjunction with all levels of government expanding hiring of public sector employees (teachers, etc), tax credits for business that hire long-term unemployed workers, and a large infrastructure programme to create jobs for the long-term unemployed.

This plus immigration and graduating rates, we get new grads doing more or less the same work fresh from school, whom command lesser rates than their experienced (but unemployed) counter-parts. Today we graduate more students with degrees than there are jobs, so the relevant job fields are over-saturated with professionals who refuse to emigrate, because they believe the US is the best place in the world. Of course, of those who refuse to enroll in collage classes to prevent skills from rusting, they also deal with anxiety and possible advancement of technology in their fields, so that unemployment also leaves them at another disadvantage vs. recent graduates & short-term unemployed.

Personal anecdotal: A few days ago I talked with a History major... her job was standing on a warship and educating the public on how a room worked. You technically don't need to go to collage to learn how to inform guests about the room, nor do you need to come from a Naval family either to explain the room's functions. But apparently that is how high competition was for that specific position.

Oh, and congrats bro! Will be looking forward to read that article

[Atlanticatia]

I think that the economy simply hasn't created enough jobs to fix the problem (while federal+state govt has not replaced the many public sector jobs lost), and like you said, your skills atrophy and it gets harder and harder to find work.

Either way, this looks like a long-term problem. For this reason we really need a new income support system that provides indefinite means-tested unemployment benefits to people who have trouble finding work (along with job training and other active labour market policies). Once you hit 26 weeks, you lose any source of income, especially if you're childless. Long term unemployment is becoming a structural issue, and it's not an individual problem -- for this reason, we desperately need that indefinite means-tested income support.

Also, the Fed should do more to promote full employment so we can get as tight a labour market as possible, in conjunction with all levels of government expanding hiring of public sector employees (teachers, etc), tax credits for business that hire long-term unemployed workers, and a large infrastructure programme to create jobs for the long-term unemployed.

This plus immigration and graduating rates, we get new grads doing more or less the same work fresh from school, whom command lesser rates than their experienced (but unemployed) counter-parts. Today we graduate more students with degrees than there are jobs, so the relevant job fields are over-saturated with professionals who refuse to emigrate, because they believe the US is the best place in the world. Of course, of those who refuse to enroll in collage classes to prevent skills from rusting, they also deal with anxiety and possible advancement of technology in their fields, so that unemployment also leaves them at another disadvantage vs. recent graduates & short-term unemployed.

Yeah, and it leads to age discrimination. Workers in their 50s and 60s get replaced by cheaper college graduates.

One way to fix this would be first and foremost a tighter labour market, along with stronger labour market regulation/unions too.

[The Joseon Dynasty]

On current projections, it will end up taking a decade or so from the beginning of the Great Recession before long-term unemployment returns to the pre-recession average.

It's been almost 9 years since the beginning of the Great Recession, shouldn't long-term unemployment be close to the average by now?

If we say the recession started roughly at the beginning of 2008, then it should return to pre-recession levels around the beginning of 2018. It takes some time for a newly unemployed person to become long-term unemployed, as the definition suggests, so it took until the beginning of 2010 for long-term unemployment stocks to reach their peak. The first 2 years of the recession basically involved the accumulation of people who were unable to exit unemployment, and the past 6 years have involved a slow decrease in the long-term unemployment rate. This, however, doesn't necessarily mean that those people have been finding jobs. It's equally possible that many people are becoming discouraged and just exiting the labour force altogether (becoming non-participants).

[Trollgaard]

It's been almost 9 years since the beginning of the Great Recession, shouldn't long-term unemployment be close to the average by now?

If we say the recession started roughly at the beginning of 2008, then it should return to pre-recession levels around the beginning of 2018. It takes some time for a newly unemployed person to become long-term unemployed, as the definition suggests, so it took until the beginning of 2010 for long-term unemployment stocks to reach their peak. The first 2 years of the recession basically involved the accumulation of people who were unable to exit unemployment, and the past 6 years have involved a slow decrease in the long-term unemployment rate. This, however, doesn't necessarily mean that those people have been finding jobs. It's equally possible that many people are becoming discouraged and just exiting the labour force altogether (becoming non-participants).

How does one just become a nonparticipant?

How do the bills get paid?

[Annorax]

Questions: Why do you think the long-term unemployment rate is so high? Do you think there's merit to the idea that unemployment is self-fulfilling? Any thoughts about what policies should be implemented to prevent long-term unemployment from becoming such an issue in the first place?

1. It is high for several reasons. I think you got close in your analysis that is is somewhat self fulfilling. The longer you are out of work the harder it is to find a job. Luck has some factor I think we cannot deny that but I don't think it is what can tip the scales one way or another. Some of it is structural and some of it is because people simply do not want to work. There are jobs, the real problem is that there are not that many well paying jobs or if you will, livable wage jobs.

2. There is merit in unemployment being self-fulfilling I just don't think it can explain all or most of it just a part of it.

3. Look to what has brought employment in the past we need either A) a new market or B) some new technology that can shift the economic paradigm. Since we are a "global" economy now finding a new market somewhere seems unlikely.That leaves us with the other options of some kind of new technology (ie. the automobile, steam engine, etc.) with the caveat that it has to be tangible. Something like Facebook, Google, and the like provide no net new jobs. I would say whoever the next Tesla or Edison is needs to get to work.

[Conserative Morality]

3. Look to what has brought employment in the past we need either A) a new market or B) some new technology that can shift the economic paradigm. Since we are a "global" economy now finding a new market somewhere seems unlikely.That leaves us with the other options of some kind of new technology (ie. the automobile, steam engine, etc.) with the caveat that it has to be tangible. Something like Facebook, Google, and the like provide no net new jobs.

I'm not sure you understand employment if that's what you think.

[Kelinfort]

If we say the recession started roughly at the beginning of 2008, then it should return to pre-recession levels around the beginning of 2018. It takes some time for a newly unemployed person to become long-term unemployed, as the definition suggests, so it took until the beginning of 2010 for long-term unemployment stocks to reach their peak. The first 2 years of the recession basically involved the accumulation of people who were unable to exit unemployment, and the past 6 years have involved a slow decrease in the long-term unemployment rate. This, however, doesn't necessarily mean that those people have been finding jobs. It's equally possible that many people are becoming discouraged and just exiting the labour force altogether (becoming non-participants).

How does one just become a nonparticipant?

How do the bills get paid?

Social welfare, odd jobs, parents, etc.

I think a lot of these people aren't employed in the classic sense. I do think they're still working, but not in the white market.

[East Catalina]

How does one just become a nonparticipant?

How do the bills get paid?

Social welfare, odd jobs, parents, etc.

I think a lot of these people aren't employed in the classic sense. I do think they're still working, but not in the white market.

Like my brother who sells candy he buys at the store...outside a store...claiming it's for a school fundraiser when he's not even in school.

[Kelinfort]

Social welfare, odd jobs, parents, etc.

I think a lot of these people aren't employed in the classic sense. I do think they're still working, but not in the white market.

Like my brother who sells candy he buys at the store...outside a store...claiming it's for a school fundraiser when he's not even in school.

That's certainly...interesting.

[Saiwania]

I plan to try to learn to live off of the land just in case I can never get formally employed. Yes, it is by and large illegal and this often can't be done or isn't practical- but I will retreat to the safety of a commune if I can. I could always become Amish perhaps. I figure it is better than staying where I'm at but eventually living on the streets.

It would be life changing and permanent, my old life would be left behind. A very steep learning curve but it can be done. Whatever it takes to keep surviving. I have enough resources to travel for 3 months at least.

[Kelinfort]

I plan to try to learn to live off of the land just in case I can never get formally employed. Yes, it is by and large illegal and this often can't be done or isn't practical- but I will retreat to the safety of a commune if I can. I could always become Amish perhaps. I figure it is better than staying where I'm at but eventually living on the streets.

It would be life changing and permanent, my old life would be left behind. A very steep learning curve but it can be done. Whatever it takes to keep surviving.

Wait I thought you worked in IT

[East Catalina]

Like my brother who sells candy he buys at the store...outside a store...claiming it's for a school fundraiser when he's not even in school.

That's certainly...interesting.

My sister thought it was illegal or something. If it is I'm not sure what kind of crime that would be.
Embezzlement?

I plan to try to learn to live off of the land just in case I can never get formally employed. Yes, it is by and large illegal and this often can't be done or isn't practical- but I will retreat to the safety of a commune if I can. I could always become Amish perhaps. I figure it is better than staying where I'm at but eventually living on the streets.

It would be life changing and permanent, my old life would be left behind. A very steep learning curve but it can be done. Whatever it takes to keep surviving. I have enough resources to travel for 3 months at least.

...

[Annorax]

3. Look to what has brought employment in the past we need either A) a new market or B) some new technology that can shift the economic paradigm. Since we are a "global" economy now finding a new market somewhere seems unlikely.That leaves us with the other options of some kind of new technology (ie. the automobile, steam engine, etc.) with the caveat that it has to be tangible. Something like Facebook, Google, and the like provide no net new jobs.

I'm not sure you understand employment if that's what you think.

I'm coming at it from a very capitalist ideology I admit.

[Maurepas]

I think the answers to your questions are: 1) Because it's the new norm, and there aren't enough jobs to go around that are worth having for a lot of people.

and 2) There really isn't anything the Government is going to do to change that. Market forces are causing that, and really other than opening up more avenues of trade, and lowering barriers to entry, there's not a whole lot the Government is going to do that isn't going to make things worse, or provide only temporary benefit at best.

Ultimately what we should be doing is working to make people better able to withstand market trends via better social safety nets and welfare, and like I said above, lowering barriers of entry so people are have a better chance at not needing them.

[Conserative Morality]

I'm coming at it from a very capitalist ideology I admit.

Got nothing to do with capitalism v. anticapitalism. IT is like any other tertiary industry.

[Annorax]

I'm coming at it from a very capitalist ideology I admit.

Got nothing to do with capitalism v. anticapitalism. IT is like any other tertiary industry.

I don't think IT creates more jobs than it takes away, I don't have any hard data on that. Do you or anyone else?

I guess it would be difficult to quantify in the over all schema of things.

[Saiwania]

Wait I thought you worked in IT

It is hard for me to break into it. Where I live is mainly military or tourism. If I moved to a bigger city, I think I can find opportunity. I'd be a lot more valuable if I were a developer, if I could learn programming. But computer code I just don't have an affinity for, unfortunately I have a mental block with regards to it. So I consider myself more suited to either a technician or an admin role. What I want to do is pretty much work for an ISP and set up or troubleshoot network connections for commercial or residential locations.