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An Analysis Of Long-Term Unemployment, With Some Help From Dilbert…

July 23rd, 2013 · 19 Comments
Discrimination · Policy

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.

Tags: Discrimination · Policy

19 responses so far ↓

  • 1 Jeff // Jul 23, 2013 at 5:38 pm

    Interesting article. Also of interest is the idea that policy intervention to avoid long-term unemployment can be a good thing.

    My expectation was that a tight labor market would make employers more forgiving. It is not clear whether this contradicts the article saying “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.”… It could be that I am thinking of time during hire and the article is referring to time during unemployment.

  • 2 Marc // Jul 23, 2013 at 5:43 pm

    I believe it. I have been unemployed, or underemployed, more than once for longer than 6 months. The stigma attached to long-term unemployment is sometimes visible because people think you just want to be lazy.
    Who wants to try living on less money than what you were making while employed (which is what unemployment checks are). Living on unemployment checks, when available, is no cakewalk. I would like to hear some speculation or outcomes that might occur should the long-term unemployed get an extra boost similar to stating that you were in the military or that you are a minority. I don’t mean to disrespect those that have served, but supposedly those citizens receive an extra boost in consideration when it comes to government jobs and some civilian jobs.

  • 3 Seth Cronin // Jul 23, 2013 at 7:18 pm

    Particularly tragic because in a perfect world, we’d want to see the opposite result. All things held equal (especially commitment to Job Search) we’d want those experience a longer duration of unemployment to be the first picks for the proverbial kickball team, since they have been “waiting in line” longer. It might also be safe to assume that the long-term unemployed would be willing to accept lower-wages, because, hey, it’s better then asking mom for extra money. The lesson here I think is spend unemployment productively, working on professional projects and increasing human capital, so that a potential employer doesn’t think you’ve just been out on the lake, fishing for dinner.

  • 4 Rich // Jul 24, 2013 at 12:30 am

    @Marc: I have been unemployed for nearly 9 months. I am also a veteran of the US Marine Corps. My veterans status has gotten me any “front-of-the-line” privileges.

    Actually, I think it is a handicap. Employers see that I was not a commissioned officer, so all I must be good for is a worker drone performing mundane tasks. However, as a Corporal of Marines I can assure you that I did more hands-on, active personnel management than the Supply Officer did; and, I can assure that I had some pretty weighty responsibilities involved with my MOS — I won’t lie, I was in Supply. However, when asked about it at an interview for a job I applied to as an Operations Manager for a logistics company, they told me that I didn’t have the management skills they were looking for and would instead like to offer me a part-time position to cover the lunch shift of the full-timers, putting boxes on pallets and loading them into trailers. That, at a rate of $7.25 per hour at 3 to 4 hours per day per week, would actually lose me money.

    I thanked them for their consideration, declined their “gracious” offer, and went home.

    Worse than that, I’ve had people ask me if I deployed to Afghanistan or Iraq. When I tell them that I did not; that I was discharged in 2003 and went on to put myself through college, I was asked, “Oh. So you never killed anyone?”

    Slightly turned off for working at the company by the interview, that question killed my desire to work there. My response: “Is that a serious question, or are you truly that ignorant?”

    So, here I am, a decently educated and experienced individual with military service to bolster his resume… unemployed.

    I prefer my current job title on my resume:
    Part-time graduate student / stay-at-home Dad

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  • 9 Rich // Jul 24, 2013 at 5:44 pm

    Typographical correction:

    That should be: My veterans status has *not* gotten me any “front-of-the-line” privileges.

    Sorry.

  • 10 Alex Bollinger // Jul 24, 2013 at 6:03 pm

    Interesting post.

    I’d add that statistical discrimination doesn’t necessarily have to be irrational on the part of employers.

    HR departments get lots of resumes when they announce a job because people are told to spend all day sending out resumes when they’re unemployed. It would be a waste of resources to read each one. So they use software to scan for key information and eliminate a large percentage. Sure, they might miss a great candidate that way, but if the probability that the best candidate isn’t rejected is high enough and/or the candidate chosen isn’t expected to be much worse than one rejected by the software (where “high enough” and “much worse” mean that the efficiency lost by picking/risking an inferior candidate isn’t greater than the efficiency gained by not reading every resume), then it’s completely rational for employers to behave this way.

    In that sense, it’s not that employers are more “forgiving” in economies of high unemployment, just that if they eliminate people who have been jobless for a certain period of time when unemployment is high then the probability that they’ll miss a great candidate gets bigger, perhaps big enough to justify reading more resumes.

    While you can think of lots of reasons why these workers are just fine even if they’ve been out of work for a while, there are plenty of reasons why they might be bad (besides losing skills):

    1. Maybe they were in prison
    2. Maybe other employers liked their resumes but didn’t like them after an interview
    3. Maybe they’re lazy job hunters
    4. Maybe they have too high of expectations for a new job and reject offers
    5. Maybe their references say terrible things about them
    6. Maybe they don’t really have the degrees or experience they say they do, and other employers have already found out

    What’s the probability that an employee has a bad reason to be out of work vs. a good reason? I don’t know, but perhaps this is something B-schools have studied and the evidence tips in the wrong direction.

    And of course this is a terrible trend, I’m not trying to justify discrimination. I also think there is a role for policy here: just have the government hire the long-term unemployed and, bam, they’ll at least have some kind of job. They can parlay this into a private sector job since now they haven’t been out of work for a long time, or they can just stay there. It’s not like the government is competing with the private sector if the latter is refusing to hire the long-term unemployed.

  • 11 Jeff // Jul 24, 2013 at 6:13 pm

    Alex’s post got me thinking. The old rule of thumb is that even if you have statistical evidence that someone’s category is inferior to or less suitable than another person’s category, you are still better off looking at someone as an individual and preferring their individual characteristics than you are making decisions based on broad category.

    However this doesn’t seem to necessarily be the path employers take. First, there is the observation that many people in HR pride themselves on spending less than a minute per resume, and second, there are companies that just hire broad groups and then fire 50% or more of those in the first year (I have seen them first hand).

    People like to say that if you made it harder to hire and fire lots of people (brought back the concept of “career” – when did “career” turn into “careen”?) then a lot of these discriminated individuals would not get a chance. I wonder if it would actually help employers to see past categories and look for actual skills in more cases.

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  • 14 Harriet // Jul 25, 2013 at 10:17 am

    Thanks, I really enjoyed reading this. Personally I am most interested in the case where someone takes time out of the labour market to look after children.

    There’s also the problem with people leaving education with no work experience finding themselves stuck getting into employment because employers want experience. This is becoming a huge issue in Europe and several economists are warning there could be serious long run repercussions for the cohorts leaving education during the recession.

  • 15 Wells Fargo Must Die // Jul 25, 2013 at 1:31 pm

    I think the issue with the unemployed is quite simple and has nothing to do with loss of skills. It’s simply that employers view those individuals as failures. After all, if they were worth having, they wouldn’t be unemployed now would they?

    That’s why you employers specifying beforehand that the unemployed need not apply. They want the best for the job and being unemployed obviously means you aren’t that person.

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  • 17 Bill Pennock // Oct 12, 2013 at 11:47 am

    I like Alex’s remarks up to the point where he says I’m not trying to justify discrimination. There is only one way to get through many resumes in a reasonable amount of time and that is to discriminate based on the facts present in the resume. There will ALWAYS be exceptions. So in this case, which he really does argue, that this may be a valid discriminator it is rational. What would be the economic reason to spend the extra time to find the exceptions, which will be harder, rather than simply find the best candidate in the most target rich group. It would be interesting to know if, in the studies, the out of work false CV’s also had a cover letter stating they knew this could be a problem, an explanation of why they were out of work (which for good reason will be taken as sales spin at best by the prospective employer) and an offer to prove themselves at a lower rate for a period of time. Now the employer has an incentive.

  • 18 Bill Pennock // Oct 12, 2013 at 11:48 am

    Whoops sorry I forgot to add my apologies to Alex if it’s short for Alexis, if so please replace “he” with “she” in the previous post. :)

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