Friday, June 13, 2014

On the Margins of the Labor Market

In “Are the Long-Term Unemployed on the Margins of the Labor Market?” Alan B. Krueger, Judd Cramer, and David Cho of Princeton University find that even after finding another job, reemployment does not fully reset the clock for the long-term unemployed, who are frequently jobless again soon after they gain reemployment. Even in good times, the long-term unemployed are on the margins of the labor market, with diminished job prospects and high labor force withdrawal rates, and as a result they exert little pressure on wage growth or inflation.

Justin Wolfers, a Senior Fellow, Economic Studies at Brookings Institution, the publisher of the paper, discusses the findings of the research paper in the video below:

Transitioning from Unemployment to Employment

The graphic below displays annual averages of monthly transition rates from unemployment to employment each year since 1994 for five duration of unemployment categories:
  1. Unemployed less than 5 weeks
  2. Unemployed for 5 to 14 weeks
  3. Unemployed for 15 to 26 weeks
  4. Unemployed for 27 to 52 weeks
  5. Unemployed for 52 weeks and over

Probability of Transitioning from Unemployment to Employment by Duration of Unemployment
A few patterns are clear. First, the job-finding rate is lower for those with a longer duration of unemployment, with the long-term unemployed finding jobs at less than half the rate of those very short-term unemployed. Second, the cyclicality of job finding is clear in these data, with all rates declining during the recession of the early 2000s, and declining more dramatically during the Great Recession. Third, job finding rates for all groups remain well below their pre-Great Recession averages. Fourth, the job finding rate has risen for each group in the last four years, although it has barely increased for those unemployed longer than a year.
In 2013, just under 10 percent of those who had been unemployed for more than one year transitioned into employment in the average month. This rate, though higher than in many European countries, might overstate how well the long-term unemployed are faring due to measurement error and the fact that the long-term unemployed are more likely to take low-paying, part-time jobs and temporary jobs

On the Margins

The total unemployment rate (short-term and long-term unemployed) is currently at 6.3%, but an unusually large one-third of those who are counted as unemployed have been out of work for more than six months. The research paper indicates that the longer workers are unemployed the less they become tied to the job market, either because, on the supply side, they grow discouraged and search for a job less intensively or because, on the demand side, employers discriminate against the long-term unemployed, based on the (rational or irrational) expectation that there is a productivity-related reason that accounts for their long jobless spell.

The demand-side and supply-side effects of long-term unemployment can be viewed as complementary and reinforcing of each other as opposed to competing explanations, as statistical discrimination against the long-term unemployed could lead to discouragement, and skill erosion that accompanies long-term unemployment could induce employers to discriminate against the long-term unemployed.

As shown in the graphic below, even after finding another job, reemployment does not fully reset the clock for the long-term unemployed, who are frequently jobless again soon after they gain reemployment: only 11 percent of those who were long-term unemployed in a given month returned to steady, full-time employment a year later.
Comparing the Unemployed and Employed

If the long-term unemployed are compared to the short-term unemployed, a larger proportion of the long-term unemployed are over age 50.
African Americans and Hispanics are also over represented among the ranks of the unemployed compared with the employed. For example, African Americans comprise 22 percent of the long-term unemployed, compared with just 10 percent of the employed population.
If the unemployed as a whole are compared to the employed, notably larger shares of the unemployed are less well educated. For example, although about one third of employed workers have earned a bachelor’s degree, less than 20 percent of the unemployed have done so. By contrast, nearly 20 percent of the unemployed lack a high school diploma, which is twice the rate for the employed.
The long-term unemployed have problems finding work wherever they are, even in states with the lowest unemployment – Hawaii, Iowa, Kansas, Minnesota, Montana, Nebraska, New Hampshire, North Dakota, Oklahoma, South Dakota, Utah, Vermont, Virginia, and Wyoming – where the average unemployment rate was 4.4 percent (compared to 7.0 elsewhere). Even in those 14 states, long-term unemployment grew dramatically during the recession, reaching 4.5 times its historical average, suggesting that long-term unemployment will be a lingering problem even if the unemployment rate returns to normal.

Overall, there is little evidence to suggest that the long-term unemployed fare substantially better in the states with the lowest unemployment rates, consistent with the idea that the long-term unemployed are on the margins of the labor force, even where the economy is stronger.

Unlucky Subset 

The portrait of the long-term unemployed in the U.S. that emerges here suggests that, to a
considerable extent, they are an unlucky subset of the unemployed. Their diverse and varied set
of characteristics implies that a broad array of policies will be needed to substantially lower the
long-term unemployment rate and stem labor force withdrawal, as concentrating on any single
occupation, industry, demographic group or region is unlikely to have a substantial impact reducing long-term unemployment by itself. Understanding the labor market and personal hurdles faced by the long-term unemployed should be a priority for future research in order to craft solutions to reduce long-term unemployment.

To the authors of the paper, the most important policy challenges involve designing effective interventions to prevent the long-term unemployed from receding into the margins of the labor market or withdrawing from the labor force altogether, and supporting those who have left the labor force to engage in productive activities. Overcoming the obstacles that prevent many of the long-term unemployed from finding gainful employment, even in good times, will require a concerted effort.

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