From Kory Kroft, Fabian Lange, Larry Katz, and Matt Notowidigdo:
We explore the extent to which composition, duration dependence, and non-participation can account for the sharp increase in long-term unemployment (LTU) during the Great Recession. We first show that compositional shifts in demographics, occupation, industry, region, and the reason for unemployment jointly explain very little of the observed increase in LTU. Next, using panel data from the Current Population Survey for 2002-2007, we calibrate a matching model that allows for duration dependence in unemployment and for transitions between employment (E), unemployment (U), and non-participation (N). We model the job-finding rates for the unemployed and non-participants, and we use observed vacancy rates and the transition rates from E-to-U, E-to-N, N-to-U, and U-to-N as the “forcing variables” of the model. The calibrated model can account for almost all of the increase in LTU and much of the observed outward shift in the Beveridge curve between 2008 and 2013. Both negative duration dependence in the job-finding rate for the unemployed and transitions to and from non-participation contribute significantly to the ability of the model to match the data after 2008.
Both short-term and long-term unemployment increased sharply in 2008-9 during the Great Recession. But while short-term unemployment returned to normal levels by 2012, long-term unemployment has remained at historically high levels in the aftermath of the Great Recession. We showed that compositional effects have a negligible role in accounting for the increase in long-term unemployment. Specifically, we showed that long-term unemployment increased for all groups defined on the basis of demographics, occupation and industry, region, and reason for unemployment. Shifts in the observables of the unemployed simply do not go very far in explaining the rise in long-term unemployment; however, we caution that we cannot account for shifts in the unobservable characteristics of the unemployed.
By contrast, when we calibrate a matching model that allows for transitions between employment (E), unemployment (U), and non-participation/inactivity (N), as well as duration dependence in unemployment, we find that the calibrated model driven by changes in labor demand (vacancies and job losses) can account for almost all of the increase in LTU and much of the observed outward shift in the Beveridge curve between 2008 and 2013. These results suggest that both negative duration dependence in the job-finding rate out of unemployment and transitions to (and from) inactivity may play an important part in understanding both the rise in LTU and the observed outward shift in the Beveridge curve.
Much evidence suggests that there is sizeable causal negative duration dependence in the escape rate from unemployment. The longer one has been unemployed, the less likely one is to get a callback from an employer and job search effort also is likely to decline. A strong negative labor demand shock like from a major financial crisis and persistence from consumer, firm, and lender behaviors can build up the stock of the long-term unemployed. Negative duration dependence means the long-term unemployed are less effective job seekers than the short-term unemployed. Thus, the rise in long-term unemployment itself can help explain much of the outward shift in the traditional Beveridge curve following the Great Recession. Firms continued worries about demand conditions and lower recruiting intensity for posted vacancies (as documented by Davis, Faberman, and Haltiwanger 2013) further exacerbated the outward Beveridge Curve shift and persistence of the low flows from unemployment to employment.