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Prepared by Eric Le Borgne.
Unless otherwise specified, the use of “long-term unemployment, (LTU)” refers to persons unemployed for 27 weeks or more, as currently used in the United States (internationally, LTU is associated with a duration of 52 weeks or more).
The LTU share was on a secular upward trend prior to the financial crisis but remained low for OECD countries. Both the rate and share of individuals unemployed for 52 weeks or more were low in the United States. compared to the OECD average (0.5 percent versus 1.7 percent, and 10 percent versus 29 percent, respectively, OECD, 2011).
Three years into the recovery the LTU rate has receded by ¼ of its pre-recession surge against ⅔ for the STU.
LTU rates by a given occupation and industry are calculated as the ratio of the long-term unemployed workers who were previously employed in a given occupation or industry, divided by the sum of those that are currently employed in that occupation or industry and the unemployed workers that were previously employed in that occupation or industry.
Unobserved heterogeneity (e.g., the quality of a worker not captured through education), could be an issue in analyzing the impact of unemployment duration on exit rates. The negative correlation between unemployment duration and the probability that a worker finds a job due to unobserved quality becomes more acute when the overall exit rate from unemployment is high (Machin and Manning, 1999). Thus, unobserved heterogeneity is less of a concern when unemployment is mostly cyclical, as is currently the case.
That unemployment to employment exit rates increase as unemployment benefits near exhaustion has also been found in Aaronson et al. (2010) using older data.
Should the LTU exit probability remain at its March 2012 level, it would take an additional 15 months for half (of the current LTU to find a job. By contrast, it would take 2.5 years for ¾ of the current LTU to find a job.
Unemployment hysteresis embodies the idea that the equilibrium unemployment rate depends on the history of the actual unemployment rate (Blanchard and Summers, 1987).
Aaronson et al. (2012) and Van Zandweghe (2012) find similar magnitudes of the impact of cyclical versus structural factors in the decline of the labor force participation rate since 2007.
Rothstein (2011) also finds that the extended unemployment insurance significantly affects the probabilities that the long-term unemployed leave the labor force, but that the aggregate impact on labor force participation is minimal.
Sectoral Beveridge curves assume that the unemployed are searching for jobs in their previous industry of employment; such an assumption would likely not hold in sectors that experienced large and protracted shocks.
For example, in the President’s FY2013 budget proposal, the allocation to the Universal Displaced Worker Program can finance up to one million workers per year to receive job assistance and training. This can provide re-employment services to 19 percent of the long-term unemployed. The budget allocation in 2007 would have been able to provide these services to about 40 percent of the long-term unemployed.