Why long-term unemployment matters

Previously I have noted papers that deal with the effects of long-term unemployment, see here, here, here and here. Now Tim Harford is writing about it at the Financial Times.

Harford says,

A recent Brookings Institution research paper by Alan Krueger (a senior adviser to Barack Obama during the recession), Judd Cramer and David Cho examines this discomfiting thesis in greater depth. The researchers conclude that people who have been out of work for more than six months are indeed marginalised: employers ignore them, bidding up wages if necessary to attract workers from the ranks of the short-term unemployed.

I’ve written before about an experiment conducted by a young economist, Rand Ghayad. He mailed out nearly 5,000 carefully calibrated job applications, using a computer to tweak key parameters. He found that employers were three times more likely to call an applicant with irrelevant but recent employment experience, than someone who had relevant experience but had been out of work for more than six months. Long-term unemployment had become a trap.

In Ghayad’s experiment, the long-term unemployed were identical in every other way to other applicants. In reality, of course, it may be that people also become demotivated after a long spell of looking for work. The “benefits culture” at work? It seems not. Earlier research by Krueger and Andreas Mueller tracked job hunters over time and showed them becoming ever less active in the job market – and ever more depressed. They could not rouse themselves, even when unemployment insurance payments were about to expire. It wasn’t that the people joined the ranks of the long-term unemployed because they were demotivated to start with: the long-term unemployment came first, and the unhappiness and the lack of drive came later.

The important question, not answered above, is Why do employers ignor the long-term unemployed? Loss of human capital? Do employers see long spells of unemployment as a signal of some bad characteristic about the person? Or something else? Or, as Harford puts it, are

the long-term unemployed [...] people who are not very different to the rest of us – merely unluckier.

Without this question being answered its not clear how to deal with the problem.