Much of the concern over the productivity of people who have been out of work for a long time appears to take this form:
Admittedly, that’s a little absurd (and is perhaps why I do work on the couch), but this one isn’t nearly as much so:
Given this, it’s not surprising that the hiring (and not hiring) of workers who have been unemployed for long stretches of time is of concern to economists. Of particular interest is whether human capital actually depreciates in the way that these cartoons would suggest- if it does, then it could be reasonable (read, efficient) for employers to be more hesitant to hire workers who had been out of work for longer stretches of time. Similarly, it would be reasonable for employers to behave in this way if workers who are unemployed for longer periods of time are somehow less motivated in ways that also affect job performance. This approach to hiring is problematic, however, both because it’s unclear whether the conventional wisdom regarding worker quality and length of unemployment actually holds in practice and because, even if the wisdom is true on average, decisions based on group characteristics are a form of statistical discrimination, which has inefficient consequances.
Issues such as these are of paramount interest to one of my TAs from last semester, who is also a visiting scholar at the Boston Federal Reserve. (I’d promised to write about his work a while ago when other blogs were covering it, but, to be completely honest, I didn’t come across appropriate comic relief until now.) Rand Ghayad, a graduate student at Northeastern University, his adviser Bill Dickens, and his team at the Boston Fed performed a number of analyses that shed some light on what exactly is going on with the long-term unemployed. Ghayad started by looking at the Beveridge curve, which shows the relationship between job vacancies and unemployment, for different segments of the population. What he found was that the relationship looked different for the long-term unemployed than it did for other groups:
The plots presented here reveal a similar pattern of increasing vacancies with little or no change in unemployment in the recovery from the most recent recession across all categories except one: short-term unemployment. The relationship between short-term unemployment and vacancies is unchanged. Thus, all of the increase in vacancies relative to unemployment has taken place among the long-term unemployed.
In other words, more jobs becoming available in the recovery has lowered the unemployment rate for people who have only been out of work a little while but not for the long-term unemployed. This suggests that workers who have been out of work for a while are being viewed with a degree of skepticism. In order to investigate this hypothesis and potentially begin to understand the drivers of this skepticism, Rand did what any totally insane researcher would do:
Ghayad pursued his hypothesis, mailing employers nearly 5,000 fictitious resumes that differed only in experience levels and duration of unemployment.
What he found was an “unemployment cliff”; after six months of unemployment, people experienced a dramatic drop-off in phone calls from prospective employers even if they had more work experience and better qualifications than candidates out of work for six months or less.
In other words, the longer people are unemployed, the worse their job prospects become because employers discriminate against them.
In conversations with Rand, he mentioned that the length of unemployment seemed to be an even bigger factor than the amount of industry experience a job candidate had. Not surprisingly, his findings have gotten a lot of attention.
Apparently I know a lot of insane people, since Matt Notowidigdo, another friend/colleague/haver of awkward Valentine’s Day non-date of mine (Did you know that it is impossible to not share chocolate fondue on Feb. 14?), conducted a remarkably similar experiment with frustratingly similar conclusions:
To find out, Kory Kroft of the University of Toronto, Fabian Lange of McGill University and Matthew Notowidigdo of the University of Chicago devised an experiment in which they applied for 3,000 clerical, administrative, sales and customer-service jobs advertised online by submitting 12,000 fictitious cvs. The submissions were designed so that applicants with similar backgrounds, education and experience went for the same job. The only difference was how long the applicant had been jobless, a period that ranged from no time at all to as much as 36 months.
Creating cover identities worthy of the CIA, the researchers assigned the fictitious applicants local phone numbers bought for the experiment, as well as e-mail addresses. They found that the odds of an applicant being called back by an employer declined steadily as the duration of unemployment rose, from 7.4% after one month without work down to 4-5% at the eight-month mark, where the call-back rate stabilised (see right-hand chart above).
These results, the authors say, cannot be because employers found some qualitative flaw in the longer-term unemployed that was hidden from outsiders, since the applicants were similar in other respects. Another explanation for long-term unemployment—that people make less effort to find work as their time out of the labour force lengthens—is also not applicable here.
These controlled experiments are important in that they rule out the possibility that employers are not explicitly discriminating against the long-term unemployed but are instead rejecting applicants based on other observable factors that happen to correlate with long-term unemployment. On the other hand, the experiments still leave open the possibility that the discrimination is due to presumed depreciation of human capital or negative unobservable characteristics.
Regarding human capital depreciation, it seems unreasonable that these effects would be so strong that they would trump significant additional experience, which is what Ghayad finds in his research. Furthermore, the authors of the latter study argue that, if the human capital depreciation story is correct, the difficulties that the long-term unemployed are having finding jobs should be reasonably insensitive to economic conditions. Their data, on the other hand, shows that potential workers are given more benefit of the doubt when the unemployment rate around them is higher. This is good news, except for the fact that it suggests that employers are seeing being out of a job for while as a proxy for negative unobservable characteristics. In fact, Ghayad is careful to point out that the effects of long-term unemployment are similar for people who voluntarily left and reentered the labor force as they are for people who were laid off from jobs (and receiving unemployment benefits as a result), which further suggests some form of statistical discrimination (i.e. stereotyping based on length of unemployment) on the part of employers.
To see why this is not only unfair but also unwise, let’s do a little thought experiment. Consider the following scenarios and think carefully about whether the individual described really has some otherwise unobservable characteristic that makes the worker a “bad” employee and that the long-term unemployment signal brings to light:
- An employee gets laid off and has been going on job interviews. Employers have liked her, but, due to bad luck/timing, she’s repeatedly been the second choice (out of a large field) for a job opening.
- A woman takes time off to care for a child and then decides to go back to work when her child starts school.
- An employee gets laid off but has enough spousal income, savings, or severance pay to just relax for a while and undertake travel, hobbies, etc. in order to recharge before looking for a new job.
- An individual gets injured and is unable to work for a while.
- An individual takes some time to think about what jobs or locations they want to pursue, and is able to do so because of unemployment benefits. The individual starts looking for work when she is genuinely excited about re-entering the working world.
I don’t think that any of these things signal a bad employee- in fact, I would be so bold as to guess that even whether a worker waits until unemployment benefits run out to get a new job doesn’t correlate with bad job performance nearly as much as people would like to think. (I could even picture myself doing this if I didn’t have a job that I would basically do for free.) What appears to be happening, however, is that employers see the resume of a worker who has been out of work for a while and assumes that other companies went to the trouble of checking the person out and decided against the worker, when that is in no way guaranteed to be the case.
I know a lot of people who are frustrated by the degree of path dependency that success in life seems to exhibit, and these findings certainly aren’t going to make them less cranky. Fortunately, even though there is no clear policy solution here, is is entirely possible that highlighting the problem of discrimination against the long-term unemployed (and explaining how it’s not based on legitimate concerns for the most part) could make employers think twice about acting as another part of the herd.*
* In reference to the “herding behavior” phenomenon that describes this sort of market behavior. Also explains why people like popular music and dislike empty restaurants.