Wednesday, April 9, 2014

The Long-Term Unemployment Trap

As has become apparent, the recovery in the American job market since the end of the Great Recession has been much different than in the past.  One of the key differences this time has been the elevated numbers of Americans that have been unemployed for the long-term (over six months) as shown on this graph:

The economy is nearly five years out of the last recession and the number of long-term unemployed workers is still nearly twice the level seen after the end of the 1991 and 2001 recessions.  The continuing level of high long-term unemployment is puzzling, particularly given that, as shown here, the number of job openings has increased substantially and is nearly at the same level that it was at before the glutinous brown matter hit the rotating cooling device:

Obviously, the elevated level of long-term unemployment has long outlived its original causes.

A paper, "The JoblessTrap" by Rand Ghayad examines what it is like to be one of America's long-term unemployed undertaking a job search.  The author uses a resume audit study in which he explores the extent to which employers forgive long periods of unemployment even when the applicant's merits appear to be strong because they've worked in the same type of firm as the prospective employer according to their resume.   The resumes were constructed to represent young applicants with six years of work experience after college.  By manipulating the length of time spent out-of-work and the relevancy of prior industry experience, the author is able to test the response of potential employers.  To complete his research, the author sent out 3360 fictitious resumes to 600 job ads in the financial activities, wholesale and retail trade, professional and business services and education and health services industries. 

Here are the findings of his study.  The number of interview requests per month drops as the months of unemployment pass, particularly sharply after six months of non-employment for both matching and non-relevant experience as shown on this graph:

Here is a graph showing the interview request rate for workers with matching and non-matching experience over time:

Note that the non-employed applicants with relevant industry experience have a substantially higher interview request rate for the first six months of unemployment.  You'll also notice that the candidates with matching experience see a drop off in the rate of interview requests after 6 months of unemployment and that by 7 months of unemployment (i.e. as the unemployed worker is officially long-term unemployed), the interview rate for both qualified and less qualified types of candidates are virtually identical, suggesting that the experience premium has completely dissipated.

In the case where the applicant has matching experience and is employed, on average, 14.66 percent of employed applicants received an interview request.  By comparison, on average, 10.09 percent of non employed applicants received an interview request.  In the case where there was no relevant experience, an average of only 5.83 percent of employed workers received an interview request compared to an average of only 4.35 percent of unemployed workers.  Short-term unemployed workers with same industry experience had a 16.11 percent interview request rate compared to 8.33 percent for those applicants with different industry experience.  The situation for long-term unemployed workers was far different; long-term unemployed workers with same industry experience had only a 1.94 percent interview request rate compared to a measly 0.56 precent rate for those applicants with different industry experience.

This analysis shows that employers strongly discriminate against long-term unemployed workers with related industry experience far more than their apparently less qualified peers as time passes.  Once six months of unemployment passes and workers officially become long-term unemployed, the chances of getting an interview is essentially the same for candidates with both relevant experience and those with no relevant experience.   It appears that firms adjust their screening thresholds to avoid the chances of hiring what they believe to be a low productivity worker, even though that worker has relevant experience and is less likely to use company resources for training.

America's long-term unemployed are caught in a trap.  The longer that they are unemployed, the more likely it is that they will remain unemployed for even longer since the odds that they will get an interview request decline to near zero as the months pass even if they have relevant experience that might benefit a potential employer.  Even as the economy creates a growing number of job openings, America's long-term unemployed are unlikely to benefit. 

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