The Long Reach of Long-Term Unemployment

 | Nov 09, 2012 | 3:00 PM EST
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Long-term unemployment is, of course, a big concern. The longer someone is out of work, the lower the chance that person regains employment. And when that person does regain work, the greater the odds that he or she will take a (perhaps large) pay cut. This can limit the economic growth potential of the country, as it may mean permanently reduced incomes both for individuals and for the economy as a whole. I do not even need to mention how great the personal hardship is for these individuals.

There is research that quantifies the relationship between re-employment probabilities, as well as income changes when re-employed. First is a report from the Cleveland Fed that examines displaced workers (e.g., workers displaced due to business or economic conditions affecting an entire firm or department, rather than individual terminations). These data are from a biannual survey of individual workers. In the 2008 survey, there were 3.6 million displaced workers. By 2010, the number jumped to 6.9 million. The 2012 survey showed about 6.1 million workers were displaced from January 2009 through December 2011.

Not surprisingly, as we see in the in the 2010 survey, those who were displaced between January 2007 and December 2009 were the least likely of the three survey groups to regain employment by the following January. Only 48.8% were rehired by the following January. Fifty-six percent of displaced individuals were re-employed in the 2012 survey, an improvement from the 2010 survey, but still lower than the 67% rate prior to the recession, in the 2008 survey.

Those who were re-employed took a big pay cut. Prior to the recession, 25% of those re-employed took a 20% or more pay cut, while 20% took a smaller pay cut. By contrast, 56% increased their pay, including 21% who received a 20% or more pay raise. In the 2010 survey, though, the results are much worse, with 36% taking a 20% or more pay cut and 19% taking a lesser pay cut. Forty-five percent were able to maintain or increase their pay. The 2012 survey shows a similar story as the 2010 survey.

These workers may be glad to be working, however. In data from the Bureau of Labor Statistics, we see that 40.6% of the unemployed, or a bit more than 5 million people, were out of work for six months or longer. Those workers may find it difficult to regain employment, as employers discriminate against the long-term unemployed.

While we have known this to be conceptually true, the National Bureau of Economic Research (the same organization that is charged with dating the beginning and end of recessions) researched the subject to quantify the difficulty of regaining employment. In this study, researchers sent 12,000 fictitious resumes to 3,000 job openings in each of the 100 largest metropolitan areas. The difference between the resumes was the length of unemployment; all other factors were substantially equivalent for education, experience and skill level. The length of unemployment ranged from one to 36 months. The researchers measured the callbacks to each of the resumes.

The number of callbacks drops significantly as the length of unemployment on the submitted resumes increases. In fact, the resumes with eight months of unemployment received 45% fewer callbacks than the resumes for the fictitious individuals who were unemployed for only one month. The callback rate fell to 4% from 7% over this range. After eight months, the callback rate leveled off at the lower level. The researchers conclude, "As the model makes clear, these results are consistent with employers using unemployment spell length as a signal of unobserved productivity."

In other words, the researchers were able to quantify the challenges the long-term unemployed face in being rehired. We also know that those who are  rehired are more likely to take a pay cut -- a marked reversal from patterns observed prior to the recession. More competition for jobs may suppress wage gains for those with jobs. The implications are that there will be a quasi-permanent problem with long-term unemployment, even as the economy improves.

Long-term unemployment and a lack of wage gains may restrain economic activity, even as those consumers who do have jobs and pay raises might now be more confident and spend more, seemingly setting aside concerns about their neighbors who may lack work. Hopefully, the problem doesn't become so invisible that potential solutions aren't explored.

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