The effects of long-term unemployment

Does the duration of unemployment have an adverse impact on the job market prospects of those exiting the workforce (voluntarily or by lay-off)? A recent post in the Economix examined the evidence and finds conclusive evidence in the affirmative. This assumes greater significance in view of the trends, as indicated in the November US jobs report, that unemployment rates may remain high for a long period.

There is strong evidence from history and from the Great Recession that "the longer people stay out of work, the more trouble they have finding new work". After examining the job-finding data (for unemployed people) from the Bureau of Labor Statistics from January 1976 to October 2007, University of Chicago’s Robert Shimer "found that 51 percent of workers who had been unemployed for one week obtained work in the following month, but the share declined sharply after that".



Statistics from the recent recession too points to much the same trends.



In other words, even cyclical unemployment has the potential to become structural (skills mis-match etc). This can be attributed to broadly two reasons. One, the "better workers are more likely to get hired faster, leaving a pool of less qualified workers as the ones who disproportionately make it to long-term unemployment in the first place". Second, "the experience of unemployment itself also seems to damage workers’ prospects". Disentangling their relative contributions is not easy.

Such long-term unemployed face formidable obstacles in the job markets. Employers (who are in any case more discriminating in their choices in recessions) will see long-term unemployment as a "signal that something is defective" and see them as job market "lemons". There is also the likelihood that the long period out of work would have lowered their working-habit (or made them lazier) and even eroded their skills (especially if they were in dynamic industries). It can also adversely impact the psychology of the individuals - lower self-respect, mental depression, etc. All of this in turn has a negative effect on the person's productivity.

The policy responses to address this are mainly three-fold. One direct employment generation by way of government spending programs. Second, incentives to promote job-creating investments by the private sector. Third, re-training and skill upgradation programs for the long-term unemployed. But the relative impacts of each is debatable, though the Europeans, Germans in particular, had considerable success with their "short-work" scheme that kept people from being laid-off.

In any case, the costs of not doing anything in the face of persistent high unemployment rates may have deep and bitter long-term labor market consequences for the US economy.

Update 1 (8/5/2011)

The Economix reports that though older workers are much less likely to be unemployed than their younger counterparts (the unemployment rate for people over age 65 is about 6.5%), they are more likely to stay out of work. If older workers do lose their jobs, their chances of finding another job are extraordinarily low. Here’s a look at the average duration of unemployment (on a 12-month moving average), broken down by age of the unemployed



The fact that younger workers are more likely to go back to college and re-skill after being laid off and also the fact that older people are more likely to have been laid off from industries in structural decline — like manufacturing and newspapers — partially explains this trend.

Update 2 (20/2/2012)

Chris Dillow has a nice post on the long-term impact of youth unemployment. He points to a study that "found that men who had been unemployed for more than six months before the age of 23 earned an average of 7% less than others even at the age of 42; this controls for educational qualifications". It raises the probability of being unemployed in later years and has a wage penalty.

Another study by Ulrike Malmendier and Stefan Negel finds that "economic events experienced over the course of one’s life have a more significant impact on individuals’ risk taking than historical facts learned from summary information in books and other sources." So, for example, people who had seen bad equity returns in their youth own fewer equities than others even decades later.