NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Long-Term Unemployment and the Great Recession: The Role of Composition, Duration Dependence, and Non-Participation

Kory Kroft, Fabian Lange, Matthew J. Notowidigdo, Lawrence F. Katz

NBER Working Paper No. 20273
Issued in July 2014
NBER Program(s):   EFG   LS

We explore the extent to which composition, duration dependence, and labor force non-participation can account for the sharp increase in the incidence of long-term unemployment (LTU) during the Great Recession. We first show that compositional shifts in demographics, occupation, industry, region, and the reason for unemployment jointly account for very little of the observed increase in LTU. Next, using panel data from the Current Population Survey for 2002-2007, we calibrate a matching model that allows for duration dependence in the exit rate from unemployment and for transitions between employment (E), unemployment (U), and non-participation (N). We model the job-finding rates for the unemployed and non-participants, and we use observed vacancy rates and the transition rates from E-to-U, E-to-N, N-to-U, and U-to-N as the exogenous "forcing variables'' of the model. The calibrated model can account for almost all of the increase in the incidence of LTU and much of the observed outward shift in the Beveridge curve between 2008 and 2013. Both negative duration dependence in the job-finding rate for the unemployed and transitions to and from non-participation contribute significantly to the ability of the model to match the data after 2008.

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Document Object Identifier (DOI): 10.3386/w20273

Published: Kory Kroft & Fabian Lange & Matthew J. Notowidigdo & Lawrence F. Katz, 2016. "Long-Term Unemployment and the Great Recession: The Role of Composition, Duration Dependence, and Nonparticipation," Journal of Labor Economics, University of Chicago Press, vol. 34(S1), pages S7 - S54. citation courtesy of

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