Problems of the long-term unemployed

The New York Times recently ran a very interesting article on the long-term unemployed. Economists and politicians have been debating whether the problems in the job market are primarily cyclical – influenced by the business cycle or structural – the decline of a certain occupations. What they seem to miss is the fact that cyclical can be structural as workers become less employable the longer they are out of work

It is acknowledged that the likelihood of finding a job falls considerably the longe the person has been out of work. Research by Robert Shimer from the University of Chicago averaged job-finding data from the Bureau of Labour Statistics from January 1976 to October 2007, looking at only people who either lost or left jobs before becoming unemployed (that is, excluding people who were new entrants or re-entrants to the labor force).

The horizontal axis shows how long someone has been unemployed, and the vertical axis shows the likelihood that the person will find a job in the next month. 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.

Over recent decades, a person out of work for a week was nearly four times as likely to find a job the next month as a counterpart who’d been out of work for a year.

Furthermore, the re-employment data by week shows the same trend in that the longer you are unemployed the less likely you are to get back into the labour force – see graph below:

But the experience of unemployment itself also seems to damage workers’ prospects.

1. Employers will look at a yawning gap in a worker’s resume and wonder why no one else would take this applicant. It’s the “lemon” issue that also applies to housing and used cars: The fact that a person has been unemployed for so long (or that, say, a house has been on the market so long) is a signal that something is defective, even if the defect is not obvious to the naked eye.
2. Employers may also worry that jobless people have gotten out of the habit of working, which appears to be a valid concern.

But the other effects of long-term unemployment may be more permanently scarring. This is a phenomenon Europe appeared to go through starting in the 1980s, as an entire class of workers became very difficult to put back to gainful employment.

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