Posted by: Josh Lehner | September 25, 2013

What Happens to the Unemployed?

Welcome to Part 3 of the 3 part series on unemployment in Oregon. Part 1 provided a brief overview of unemployment in Oregon, at least by the numbers. Part 2 covered Oregon’s Beveridge Curve and in particular the divergence in labor markets for the short-term and the long-term unemployed. Today in Part 3 I will discuss job prospects for the unemployed and whether they are finding jobs or dropping out of the labor force.

What Happens?

Prior to the Great Recession about 40 percent of the unemployed in Oregon actually received unemployment benefits. This runs contrary to the incorrect claim one hears from time to time that you have to receive UI benefits to be counted as unemployed, but that is false as not all unemployed Oregonians have been laid off or qualify for benefits, see footnote for more. The U.S. Department of Labor calculates the recipiency rate — the share of the unemployed who receive benefits — shown below (data here).

UIRecShare

With the various federal extensions and programs, the recipiency rate across all programs rose to nearly 90 percent in Oregon at the worst of the Great Recession and the U.S. overall peaked at about 70 percent. This indicates that most of the unemployed were individuals who recently lost their job as opposed to new entrants in the labor market, or those who voluntarily left their jobs, which obviously makes sense given the severity of the cycle and lack of opportunities for most workers in 2009. However, eventually these benefits do run out and the extension programs are eliminated along with an improving economy, albeit very slow improvement in the past few years. Today in Oregon only about one-half of the unemployed are receiving benefits while at the U.S. level it is 41 percent. Along these same lines, these programs do run out for individuals if they are unable to find a job as one can receive benefits for only a certain period of time. As seen below the exhaustion rate of the regular program in Oregon has come down since 2011 but remains above pre-recession levels. Furthermore, the total dollar figures paid out in payments is nearly back to pre-recession levels even if the labor market is not.

UIBenefits

Where do the Unemployed Go?

So we know all these labor market indicators are improving: the unemployment rate is falling, the outright number of unemployed is decreasing, UI benefit payments are almost back to pre-recession levels, etc. So everything is getting better, right? Well, yes and no. Overall most unemployed individuals in any given month remain unemployed the following month, however, historically the probability of finding a job was a bit higher than the probability of dropping out of the labor force. The Great Recession changed this relationship and the lackluster growth in recent years hasn’t improved the picture much either. Yes, extended unemployment benefits seem to have kept more people in the labor force than in previous recessions, which raises the probability of remaining unemployed (the blue line), but this is a better alternative than simply dropping out the labor force immediately as it keeps individuals attached to the labor market and looking for work. But the slow job growth we’ve experienced since early 2010 is not strong enough to accommodate both population growth and the large pool of unemployed due to the recession. The end result is that an unemployed individual has a higher probability of dropping out of the labor force today than of finding a job.

UnempTransitions

Job Prospects for the Unemployed

With that being said, the relative probability of finding a job is directly related to how long one has been unemployed. The probability of dropping out of the labor force is pretty consistent across all unemployed individuals, regardless of unemployment duration. However, just as seen yesterday, job prospects are better for the short-term unemployed and worse for the long-term unemployed. If one has been unemployed less than 3 months, he/she has a higher probability of finding a job than dropping out of the labor force, however if one has been unemployed more than 6 months, he/she will more likely drop out of the labor force than find a job in any given month by about a 2-1 margin.

USTransitionsbyDuration

Exactly why this is the case has been the focus of a few recent field experiments. First Ghayed sent out 4,800 resumes for job openings and varied how long the fake applicant had been out of work and their industry experience. He then was able to calculate the callback rate for various types of job applicants and found that, as The Atlantic article summarizes:

Employers prefer applicants who haven’t been out of work for very long, applicants who have industry experience, and applicants who haven’t moved between jobs that much. But how long you’ve been out of work trumps those other factors.

In a similar experiment Kroft et al. sent 12,000 resumes to 3,000 job openings (academic paper here, The Economist article here). As seen below, the callback rate declined fairly rapidly for the first 6-8 months, before plateauing at about 4-5 percent.

CallBackRates

As The Economist writes:

These results strongly suggest that long-term unemployment is at least partly self-fulfilling. Like patrons who avoid restaurants purely because they are empty, employers were reluctant to hire someone other employers didn’t want…

…Imagine a newly unemployed worker who narrowly misses out on the first job he applies for. That initial failure reduces his odds of landing the second job he applies for, and so on, until he ends up as one of the long-term unemployed… One near miss can increase the odds of protracted failure.

What can Help?

First and foremost, a stronger economy and stronger job growth. Let’s return to a graph from the first post in the series. Here one can see that as the labor market begins to tighten for the short-term unemployed, it then begins to improve for the long-term unemployed. As our office wrote back in the May forecast document:

During the early stages of recovery when businesses begin to hire, they are able to draw from a larger pool of potential candidates given the elevated unemployment rate. These businesses can be pickier and choose the best candidate given the overall lack of competing employment opportunities. As the labor market tightens, businesses have a smaller pool of candidates from which to choose and begin to hire workers that may have originally been further down the list.

StrongerEconomy

Another factor that can help is to make sure a worker maintains skills during periods of unemployment, be it a training opportunity, internship or taking some sort of work as it is better than none in terms of job prospects and as The Economist says “once the bandwagon starts to roll, it is hard to stop.” Obviously this is easier said than done because if there were enough job opportunities there in the first place, we would not be having this problem or discussion. What the public sector and educators, both private and public, can do to help is provide training opportunities for skills and occupations that are in demand from businesses (think job polarization as well), thus better matching the unemployed with job openings. Many of the safety net programs are designed to provide at least some financial assistance in times of need, which theoretically and hopefully, can also help individuals during the transition period from unemployed to employed.

Summary

Overall, the Oregon labor market is recovering but has considerable room for improvement. The just-strong-enough job growth plus low levels of layoffs have resulted so far in a return to normalcy for the short-term unemployed (albeit without real wage gains) but only slight improvement for those unemployed an extended period. Unfortunately it is also quite possible that the improvement seen in the long-term unemployed data is more a result of these individuals giving up their job search and dropping out of the labor force entirely and not due to finding a job. However, not all is lost. As discussed in part two of the series, the fact that these labor market issues cut across all ages, races, industries and regions is a silver living. A general malaise is easier to fix from an economic perspective with supportive fiscal and monetary policies that result in stronger growth, than any specific and structural problem. With that being said, even if the initial cause of unemployment was largely cyclical, the longer this lackluster recovery continues and job prospects do not brighten for the whole labor force, the more structural the labor market issues become.

Footnote:

  • The reason is one usually has to be laid off from a job he or she worked at long enough to qualify for benefits (or have his/her hours cut enough), but to be counted as unemployed by BLS in the household survey that produces the unemployment rate estimates you simply need to say you do not have a job and are looking for work. One can be jobless due to a layoff but one could also be unemployed if one left their job willingly or are a new entrant into the labor market, etc.

Additional:

  • In our office’s May forecast document we wrote a a general audience summary on the long-term unemployed. Relevant pages available here (PDF): LongTerm_May2013

Responses

  1. […] to illustrate the divergence in labor markets for the short-term and the long-term unemployed. Part 3 will discuss job prospects and what happens to the […]

  2. […] particularly the divergence in labor markets for the short-term and the long-term unemployed. Part 3 will discuss job prospects and what happens to the […]

  3. […] to an “improving” unemployment rate. However we also know that the unemployment rate is improving, at least a good portion of it, for bad reasons, not good reasons. This makes it a deceiving variable to use and overstates the improvement in the […]

  4. […] much more thoroughly in the previous three part series on unemployment in Oregon (Part 1, Part 2, Part 3) the divergence in outcomes for the short-term and long-term unemployed is particularly pronounced. […]


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