Long-Term Unemployment and the Great Recession: The Role of Composition, Duration Dependence, and Non-Participation
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.
We thank Barbara Petrongolo for extremely useful and thoughtful comments as a discussant and David Card, Alex Mas, and Jim Poterba for helpful feedback, and we thank Mark He for excellent research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Lawrence F. Katz
I am a member of the Board of Trustees of the Russell Sage Foundation, the Board of Directors of the Manpower Demonstration Research Corporation, and the Panel of Economic Advisors of the Congressional Budget Office.
Over the past three years our research team has received at least $10,000 in support from two organizations that might be viewed as having some stake in the results of this paper – the U.S. Department of Housing and Urban Development, or HUD (the sponsor of the Moving to Opportunity experiment that we study in our paper), and the MacArthur Foundation.
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