Sunday 3 March 2013

Unemployment is bad for employment

No really!

The following is a summary by Lester Picker, from the latest (March 2013) NBER Digest, of the findings of the paper, Duration Dependence and Labor Market Conditions: Theory and Evidence from a Field Experiment (NBER Working Paper No. 18387) by Kory Kroft, Fabian Lange and Matthew J. Notowidigdo. Lester writes,
According to a recent report by the Congressional Budget Office, long-term unemployment may "produce a self-perpetuating cycle wherein protracted spells of unemployment heighten employers' reluctance to hire those individuals, which in turn leads to even longer spells of joblessness." Policymakers and researchers alike tend to believe that this adverse effect of a long spell of unemployment undermines the smooth functioning of the labor market and entails large social costs. Economists refer to the phenomenon as "negative duration dependence."

In Duration Dependence and Labor Market Conditions: Theory and Evidence from a Field Experiment (NBER Working Paper No. 18387), authors Kory Kroft, Fabian Lange, and Matthew Notowidigdo confirm that the likelihood of receiving a callback for a job interview sharply declines with unemployment duration. This effect is especially pronounced during the first eight months after becoming unemployed. Their estimates suggest that this effect is quantitatively important, and that duration dependence is stronger when jobs are relatively abundant. These results imply that employers statistically discriminate against workers with longer unemployment durations and that employer screening plays an important role in generating duration dependence.

To study duration dependence, the authors submitted fictitious resumes to real, online job postings in each of the 100 largest metropolitan areas in the United States, and then tracked "callbacks" from employers for each submission. In total, they "applied" to roughly 3,000 job postings in Sales, Customer Service, Administrative Support, and Clerical job categories, submitting roughly 12,000 resumes. The resumes they created characterized the "applicant's" employment status and, if unemployed, the length of the current unemployment spell, which ranged from 1 to 36 months and was randomly assigned. As a result, this experiment directly uncovered duration dependence arising through employers' beliefs about unemployed workers.
In short, the longer you are unemployment the less likely it is that you will become employed.

3 comments:

Tim Worstall said...

Richard Layard has been banging on about this since the 1980s. He uses it as the justification for "welfare to work" programs.

Noe, whether one agrees with the solution or not, it does stem directly from his analysis that the longer you are unemployed the more likely you are to remain so.

Thus, in his thinking, when people have been unemployed for (say) two years then Something Must Be Done. Some combination of forced work in return for benefits, lower benefits, work retraining, just something.

Paul Walker said...

It depend on whether teh unemployment is cause by the supply side or the demand side. Note the point made in the article

"this experiment directly uncovered duration dependence arising through employers' beliefs about unemployed workers."

If the problem is on the demand, ie. employers expectations, then picking on the unemployed will not help. Better to do something to affect the expectations of employers. Or just free up the labour market so more people can get a job more quickly.

Robert Vienneau said...

No reason, either empirical or theoretical, exists for thinking that "free[ing] up the labour market" will decrease unemployment and help "more people get a job more quickly." See here, for example.