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

46 Pages Posted: 8 Jul 2014

See all articles by Kory Kroft

Kory Kroft

University of Toronto

Fabian Lange

McGill University

Matthew Notowidigdo

University of Chicago - Booth School of Business

Lawrence F. Katz

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: July 2014

Abstract

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.

Suggested Citation

Kroft, Kory and Lange, Fabian and Notowidigdo, Matthew and Katz, Lawrence F., Long-Term Unemployment and the Great Recession: The Role of Composition, Duration Dependence, and Non-Participation (July 2014). NBER Working Paper No. w20273. Available at SSRN: https://ssrn.com/abstract=2463388

Kory Kroft (Contact Author)

University of Toronto ( email )

Toronto, Ontario M5S 3G8
Canada

Fabian Lange

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

Matthew Notowidigdo

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Lawrence F. Katz

Harvard University - Department of Economics ( email )

Littauer Center
Room 215
Cambridge, MA 02138
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617-868-2742 (Fax)

HOME PAGE: http://www.economics.harvard.edu/faculty/katz/katz

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

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