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Institute for Workplace Studies----------------- Professor Samuel B. Bacharach

School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies

Cornell University

16 East 34th Street, 4th floor---------------------- Stuart Basefsky

New York, NY 10016 -------------------------------Director, IWS News Bureau

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Brookings

Brookings Panel on Economic Activity

March 20–21, 2014

 

Are the Long-Term Unemployed on the Margins of the Labor Market? 

Alan B. Krueger, Princeton University & NBER

Judd Cramer, Princeton University

David Cho, Princeton University

http://www.brookings.edu/~/media/projects/bpea/spring%202014/2014a_krueger.pdf

[full-text, 59 pages]

 

[excerpt]

This paper explores the plausibility of a unified explanation for the recent shifts in the

price and real wage Phillips Curves and Beveridge Curve in the U.S.: namely, that the long-term

unemployed, whose share of overall unemployment rose to an unprecedented level after the

Great Recession, are on the margins of the labor force and therefore exert very little pressure on

the job market and economy. The hypothesis we seek to test is 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 (e.g., Krueger and Mueller, 2011) 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 (e.g., Kroft, Lange and Notowidigdo, 2013 and Ghayad, 2013). Either

of these explanations would imply that the long-term unemployed are on the margins of the labor

market, and have a different effect on the macroeconomy than the short-term unemployed.

Moreover, 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.

 

Motivated by the apparent stability of the Phillips and Beveridge Curves when the shortterm

unemployment rate is used to measure labor market slack, we assemble varied evidence to

assess the hypothesis that the long-term unemployed are on the margins of the labor market. To

preview our main findings, we tentatively conclude that the long-term unemployed exert

relatively little pressure on the economy, although the international evidence that we have been

able to assemble to this point is more mixed than the evidence for the U.S., and suggests that

long-term unemployment means different things in different countries and contexts.

 

 

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