The Scourge of Long-Term Unemployment

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1 The Scourge of Long-Term Unemployment (La piaga della disoccupazione di lunga durata) Alan B. Krueger Bocconi-Boroli Lecture May 29, 2014

2 Definition scourge skərj/ noun: scourge 1.1. historical a whip used as an instrument of punishment a person or thing that causes great trouble or suffering. the scourge of mass unemployment Synonyms: affliction, bane, curse, plague, menace, evil, misfortune, burden, cross to bear, blight, cancer inflation was the scourge of the mid-1970s 1

3 Motivation Motivation: Short-term unemployment rate predicts price inflation, wage growth and vacancies much better than long-term unemployment rate in U.S. Hypothesis: Long-term unemployed are on the margins of the labor market, exerting little pressure on wages and prices, because of both supply-side (e.g., discouragement, skill obsolescence) and demand-side (e.g., statistical discrimination) factors. Evidence: Long-term unemployment is devastating to individuals Employers discriminate against the long-term unemployed Long-term unemployed rarely return to consistent, full-time employment, even in strong economy Reservation wages don t fall over unemployment spell Calibrated model with labor force withdrawal returning to historical average fits data well i.e., the long-term unemployed are increasingly likely to exit the labor force Even in states with relatively low unemployment rate, the long-term unemployed are struggling Policies should be tailored to the long-term unemployed. 2

4 Outline Trends in U.S. Unemployment Three Puzzles: Price Inflation, Wage Inflation, Vacancies Duration Dependence Characteristics of the Long-Term Unemployed in U.S. and Italy Transition Rates: Short-term and Long-Term Regional U.S. Evidence Calibrated Model to Explore Role of Labor Force Exits Conclusions 3

6 Long Term Unemployment Share US (All Ages) Unemployed 27 Weeks & Over as Share of Total Percent of Total Unemployed (Seasonally Adjusted) Apr Jan-48 Jan-58 Jan-68 Jan-78 Jan-88 Jan-98 Jan-08 Note: Shading denotes recession. Source: Bureau of Labor Statistics (Current Population Survey); National Bureau of Economic Research. 5

7 Unemployed Relative to Labor Force By Duration 7 Unemployment Rates by Duration Percent of Civilian Labor Force (Seasonally Adjusted) 6 Unemployed for 14 Weeks & Less Historical Average 3 Unemployed for 27 Weeks & Over Historical Average Unemployed for Weeks Historical Average Apr Jan-48 Jan-58 Jan-68 Jan-78 Jan-88 Jan-98 Jan-08 Note: Shading denotes recession. Source: Bureau of Labor Statistics (Current Population Survey); National Bureau of Economic Research. 6

8 Price Phillips Curve in the United States Using Overall and Short-Term Unemployment Rate 7

9 Real Wage Phillips Curve in the United States Using Overall and Short-Term Unemployment Rate 8

10 Beveridge Curve in the United States Using Overall and Short-Term Unemployment Rate 9

11 Others Have Reached Similar Conclusion Long-term Unemployed Matter Less: Ricardo Llaudes (2005) James Stock (2011) Robert Gordon (2013) Mark Watson (2014) 2014 Economic Report of the President Rand Ghayad and William Dickens (2012) Pat Higgins (Atlanta Fed) Alternatives: Ben Bernanke: inflation expectations anchored Laurence Ball and Sandeep Mazumder: distribution of price changes Fed minutes: Nominal wage rigidities 10

12 Long-Term Unemployment Takes a Toll Mental Health and Self-Esteem (e.g., Clark and Oswald, Krueger and Mueller, 2011) Also, unlike other stressful events, little psychological adaptation to unemployment (e.g., Clark and Oswald). Physical Health and Mortality (e.g., Sullivan and von Wachter, 2009) Social Isolation (e.g., Krueger and Mueller, 2012) Family Dissolution and Stress (e.g., Lindner and Peters, 2013) 15-30% Lower Re-employment Earnings (e.g., Farber) Scarring effect probably bigger in Europe, and bigger for youth. Erosion of Human Capital and Discouragement 11

13 Long-Term Unemployment Takes a Toll Source: Pew Research Center, The Impact of Long-Term Unemployment: Lost Income, Lost Friends and Loss of Self-Respect (July 22, 2010). 12

14 Reservation Wages Barely Fall Over the Spell of Unemployment, Exerting Little Downward Wage Pressure 13

15 Job Search Intensity Declines as the Duration of Unemployment Rises Job Search Hours per Week Source: Wanberg, Connie R., Jing Zhu, Ruth Kanfer, and Zhen Zhang After the Pink Slip: Applying Dynamic Motivation Frameworks to the Job Search Experience. Organizational Psychology Review 3 no. 1:

16 The Probability of Receiving a Callback Declines as the Duration of Unemployment Rises Source: Kroft, Lange, and Notowidigdo, Duration Dependence and Labor Market Conditions: Evidence From a Field Experiment, Quarterly Journal of Economics, 128(3): , August Source: Ghayad, The Jobless Trap (2013). 15

17 The Severity of Long-Term Unemployment Differs Across Countries and Jumped in U.S. 16

18 Characteristics of Employed and Short- and Long-Term Unemployed By Age By Gender and Marital Status By Race and Ethnicity By Education By Industry By Occupation By Region By Urban/Rural 17

19 Age Distribution of the Employed and Unemployed, U.S.A. Percent Pct. of Employed 57% Pct. of Short-Term Unemployed Pct. of Long-Term Unemployed 40 40% % 33% 33% 29% 23% 19% 31% Employed Short-Term Unemp. (0-14 Wks) Long-Term Unemp. (27+ Wks) Note: Bars represent the percent of the total population of employed or unemployed that is in each age group. Source: 2012 Current Population Survey. 18

20 Age Distribution of the Employed and Unemployed, Italy Italian Long-Term Unemployed are Younger Percent Pct. of Short-Term Unemployed Pct. of Long-Term Unemployed % 49% 47% Pct. of Employed 30 35% 36% 29% 20 24% 10 13% 15% Source: 2012 ISTA RCFL (Labor Force Survey) courtesy of Tito Boeri. 19

21 Youth UR vs. Adult UR, 2006 Ratio of 2.6 to 1 70% 60% 50% Youth UR 40% 30% 20% 10% U.S. Italy Greece Spain Turkey 0% 0% 5% 10% 15% 20% 25% Adult UR Source: OECD data. 20

22 Youth UR vs. Adult UR, 2006 and 2012 Ratio of 2.6 to 1 70% 60% 50% Spain Greece Youth UR 40% 30% 20% 10% US Italy Italy Greece Turkey US Turkey Spain % 0% 5% 10% 15% 20% 25% Adult UR Source: OECD data. 21

23 Gender and Marital Status of the Employed and Unemployed in the United States Distribution of Each Employment Status Category by Gender Percent Employed Short-Term Unemp. (0-14 Wks) Long-Term Unemp. (27+ Wks) Distribution of Each Employment Status Category by Marital Status Percent Employed Short-Term Unemp. (0-14 Wks) Long-Term Unemp. (27+ Wks) % 54% Male 55% Note: Bars represent the share of each employment status category that is of each gender. Source: Estimates from the 2012 Current Population Survey. 47% 46% Female 45% % 33% Married 37% 15% 15% 19% Widowed/Divorced/ Separated 29% 52% 44% Never Married Note: Bars represent the share of each employment status category that is of each marital status. Source: Estimates from the 2012 Current Population Survey. 22

24 Race/Ethnicity of the Employed and Unemployed in the United States (2012) 80 Distribution of Each Employment Status Category by Race/Ethnicity Percent % 55% 51% Employed Short-Term Unemp. (0-14 Wks) Long-Term Unemp. (27+ Wks) White 10% 16% 22% African American 15% Note: Bars represent the share of each employment status category that is of each rate or ethnicity. The Hispanic category includes Hispanic individuals of all racial groups. All other categories only include non-hispanics. Source: Estimates from the 2012 Current Population Survey. 22% Hispanic 19% 6% 4% 5% 2% 3% Asian/Pacific Islander Other 3% 23

25 Educational Attainment of the Employed and Unemployed in the United States (2013) Distribution of Each Employment Status Category by Educational Attainment (US) Employed Short-Term Unemp. (0-14 Wks) Long-Term Unemp. (27+ Wks) 40% 35% 33% 36% 34% 30% 27% 25% 20% 22% 18% 19% 21% 19% 17% 19% 15% 10% 9% 11% 8% 9% 5% 0% Less than High School High School Some College Associate Degree Bachelor Degree or Higher Note: Bars represent the share of each employment status category that has attained precisely each level of education. Source: Estimates from the 2012 Current Population Survey. 24

26 Education Matters in Italy too, but Italian Lower Secondary Looks Like U.S. High School Graduates 25

27 Employment and Unemployment are Mostly Evenly Spread Throughout the United States Distribution of Each Employment Status Category by Region Percent Employed Short-Term Unemp. (0-14 Wks) Long-Term Unemp. (27+ Wks) 19% 18% 22% 19% 21% 15 15% 16% 15% 15% 13% 13% 12% 11% 16% % 4% 5% 7% 6% 4% 6% 6% 5% 8% 8% 7% 6% 0 New England Middle Atlantic East North Central West North Central South Atlantic East South Central West South Central Note: Bars represent the share of each employment status category that lives in each region of the United States. Source: Estimates from the 2012 Current Population Survey. Mountain Pacific 26

28 Italian Workers are in the North and Unemployed are in the South and Islands 60% Distribution of Each Employment Status Category by Area Employed Short-Term Unemp. (< 3 Months) Long-Term Unemp. (> 6 Months) 50% 52% 50% 42% 40% 33% 37% 30% 27% 20% 21% 21% 17% 10% 0% North Center South and Islands 27

29 Industry Distribution of the Employed and Unemployed in the United States Distribution of Each Employment Status Category by Industry Employed Short-Term Unemp. (0-14 Wks) Long-Term Unemp. (27+ Wks) 25% 23% 20% 19% 15% 10% 5% 6% 12% 10% 10% 9% 11% 14% 14% 16% 7% 4% 5% 12% 14% 14% 15% 15% 9% 16% 16% 12% 16% 0% Construction Manufacturing Wholesale and Retail Trade Finance and Real Estate Prof. and Business Services Education and Health Care Leisure and Hospitality All Other Note: Bars represent the share of each employment status category that either is or was most recently employed in each industry. Source: Estimates from the 2012 Current Population Survey. 28

30 Industry Distribution of the Employed and Unemployed in Italy 25% Distribution of Each Employment Status Category by Industry Employed Short-Term Unemp. (< 3 Months) Long-Term Unemp. (> 6 Months) 20% 20% 19% 19% 15% 10% 5% 3% 8% 3% 14% 7% 16% 16% 15% 15% 12% 10% 6% 5% 5% 4% 3% 2% 2% 1% 1% 1% 11% 10% 9% 6% 2% 2% 15% 4% 6% 8% 11% 10% 0% 29

31 Average Monthly Job Finding Rate 30

32 Average Monthly Labor Force Withdrawal Rate in the United States 31

33 Small Effect of Composition Changes on Labor Force Withdrawal Rate Over Business Cycle 32

34 How Do the Long-Term Unemployed Fare a 15 Months Later? 33

35 Even in Good Times, the Long-Term Unemployed are Unlikely to Hold Steady, Full-Time Jobs a Year Later Short-Term Long-Term 34

36 The Long-Term Unemployed Generally Have High Labor Force Exit Rates After 15 Months Long-Term Short-Term 35

37 Regional Analysis within U.S. 36

38 Even in Low Unemployment States, Long-Term Unemployment Remains Elevated 37

39 Calibration Model Allow differential effect (and matching efficiency) of short-term and long-term unemployed, and NILF. Focus on prime-age workers to avoid issues of demographic changes and increased schooling, following Kroft et al., 2013 Fit matching function from , using flow rates from U L -E, U S -E, and N-E. 38

40 Calibration Model, Ctd. Using these matching function parameters simulate forward from January Forcing variables are actual job finding rates, layoff rates and labor force exit rates, and Vacancies. Investigate whether matching function with lower weight on the long-term unemployed and differential labor force withdrawal predict loops around the Beveridge Curve. 39

41 Beveridge Curve Vacancy Rate (As a share of year old Labor Force) 6% 5% 4% Dec % 2% Actual Data 1% 0% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% Unemployment Rate for year olds 40

42 Actual and Calibrated Beveridge Curve Dec

43 Predicted Sharp Run-Up in Long-term Unemployment and Gradual Future Decline 42

44 Counterfactual Calibration Exercise Imposing Labor Force Withdrawal Rates Used calibrated model to investigate the effect on unemployment of labor force exits by duration of unemployment. Labor force exits fell for the long-term unemployed during the Great Recession and in the ensuing few years, before rising toward their historical average. What impact did this pattern have on the unemployment rate and shift in the Beveridge Curve? Counterfactual: Imposed the labor-force withdrawal rates for the long-term and short-term unemployed from , just before the recession, each year going forward. The unemployment rate would have been under predicted by 3 percentage points under this scenario. This change generates a smaller and shorter lived loop around Beveridge Curve. 43

45 Counterfactual Calibration Exercise based on Oct Labor Force Withdrawal Rates To explore the role of the gradual rise in labor force withdrawal by the unemployed since the unemployment rate peaked October 2009, conducted a counterfactual exercise in which maintained the labor force withdrawal rates at their October 2009 levels and projected the unemployment rate through December 2013 using the estimated matching function and all of the other realized flow data. Compared to the calibrated model the unemployment rate was 1.3 percentage point higher in this counterfactual projection. Thus, the increase in labor force withdrawal rates from October 2009 through December 2013 appears to account for a little over one percentage point of the 3.2 percentage point drop in the unemployment rate for prime age workers since the peak. 44

46 Simulation: Dec Forward Assuming U to N Returns to Pre-Recession Average 45

47 Conclusions The Great Recession and Moderate Recovery were exceptional because of the high-rate of long-term unemployment, which resulted from collapse of vacancies and labor force withdrawal rates Even in good times, the long-term unemployed have great difficulty finding steady, full-time employment Job finding rates for the long-term unemployed are less responsive to the strength of the economy than they are for the short-term unemployed The long-term unemployed are increasingly dropping out of the labor force Suggestive evidence that the long-term unemployed exert little pressure on the economy Would expect pick up in inflation and real wages as short-term unemployment falls, but confidence band is wide Key Policy Challenge: What interventions can keep the long-term unemployed in the labor force and raise their prospects of finding an acceptable job? Stronger macro-economy probably necessary but not sufficient. 46

How Tight is the Labor Market?

How Tight is the Labor Market? Alan B. Krueger November 19, 2015 Federal Reserve Bank of Chicago Outline U.S. unemployment rate is down from 10% in October 2009 to 5.0% in October 2015 that represents