A recent paper by Alan B. Krueger, Judd Cramer and David Cho presented at the Brookings Panel on Economic Activity poses that the long-term unemployed “are on the margins of the labor force,” which is to say, the long-term unemployed do not affect the labor market in the macro sense, because they are different.
How are they different? Beyond their observable differences (such as the fact that they are disproportionately over 50), the long-term unemployed find jobs at a slower rate than the short-term unemployed. This accounts for a large amount of the long-term unemployed. Put another way, if everyone has the same probability of a job arriving and the long-term unemployed were just the unlucky ones for whom nothing arrived, this would predict far fewer long-term unemployed than we actually observe. The simplest, workhorse theory of unemployment—the Diamond-Mortensen-Pissarides framework—has all workers finding jobs in the same labor market and at the same rate, at odds with the magnitude of long-term unemployment. Instead, there has to be some heterogeneity, or something that distinguishes the long-term unemployed, and the labor market has to discriminate between them and the short-term unemployed to some degree.
This brings us to the larger, macroeconomic question: How “marginal” are the long-term unemployed? That is, how different is their experience in the labor market, and how much do they affect the rest of the labor market? One’s answer depends on why we think they are different. In particular, we also need to then reconcile this theory with how atypical the Great Recession was, with far more long-term unemployed and for a longer time than in any other recession prior.
One common theory is that unemployment fundamentally changes workers, depreciating their skills. If we accept this skill depreciation story, will the long-term unemployed now compete against similar low-skilled workers and new entrants? But unemployment among the young never rose as much as long-term unemployment, and although both remain elevated, long-term unemployment is still almost twice its average incidence. Unemployment among the young is only about 50 percent higher than its average for the 10 years prior.
Generally speaking, it is difficult to support a theory in which skills depreciate so quickly in unemployment as to make the long-term unemployed so difficult to hire. They have about the same average college completion rate as the short-term unemployed and more labor market experience, so the skill depreciation rate in unemployment would have to be quite fast to support a skill-loss story.
Instead, Krueger, Cramer and Cho suggest that the long-term unemployed are affected more permanently than just losing skills, which is why they have trouble holding on to jobs even after they are finally re-employed. It remains a difficult problem for policy makers to help the long-term unemployed: The labor market clearly treats them differently, but the underlying reason is difficult to diagnose.