A new theory on long-term unemployment

December 14th, 2012 in Other Sciences / Economics & Business
In a new paper published by the Federal Reserve Bank of Boston, economics doctoral student Rand Ghayad offers a fresh take on why long-term unemployment remains stagnant. Credit: Brooks Canaday


In a new paper published by the Federal Reserve Bank of Boston, economics doctoral student Rand Ghayad offers a fresh take on why long-term unemployment remains stagnant. Credit: Brooks Canaday

(Phys.org)—Com­pa­nies rank more recently unem­ployed job can­di­dates much higher than they would rank oth­er­wise qual­i­fied appli­cants who have been out of work for more than six months, cre­ating an "unem­ploy­ment cliff" that puts the long-​​term unem­ployed at a severe dis­ad­van­tage in the job market.

The analysis is the result of a new paper that was penned by Rand Ghayad, a North­eastern Uni­ver­sity doc­toral stu­dent in eco­nomics, and pub­lished this month by the Fed­eral Reserve Bank of Boston.

Ghavad's work focused on the Bev­eridge curve, which, up until 2009, showed that unem­ploy­ment decreased when job open­ings increased. But he found that the existing "one size fits all" eco­nomic analysis did not hold up when smaller sub­sets of the curve were ana­lyzed indi­vid­u­ally, such as a job candidate's field of employ­ment or length of .

Those who had been out of work for more than six months had been faring sig­nif­i­cantly worse in finding a new job than those who had been unem­ployed for a brief period of time, according to Ghayad's analysis.

"At the end of the 2007 reces­sion, vacan­cies started increasing without any change in unem­ploy­ment, which led many econ­o­mists to blame the slack in the labor market on 'struc­tural fac­tors,' meaning the people out of work were not qual­i­fied for the jobs that were avail­able," Ghayad said.

But Ghayad and his doc­toral adviser William Dickens, Uni­ver­sity Dis­tin­guished Pro­fessor of Eco­nomics and Social Policy and the paper's co-​​author, exam­ined the problem from a dif­ferent angle. They found that the long-​​term unem­ployed were qual­i­fied for jobs but were ranking lower than other poten­tial can­di­dates because of the length of time they had been out of the workforce.

Starting last spring, Ghayad sent out approx­i­mately 4,800 fic­ti­tious, computer-​​generated resumes that rep­re­sented appli­cants with iden­tical cre­den­tials except for unem­ploy­ment dura­tion and industry expe­ri­ence. He found that appli­cants who had been out of work for more than six months were almost never con­tacted for an inter­view. That, Ghayad explained, served as a proxy for whether a com­pany would even con­sider hiring an applicant.

The exper­i­ment also showed that appli­cants who had pre­vi­ously worked in the same industry as that of the hiring firm had a sig­nif­i­cant advan­tage over those who had worked in a dif­ferent industry, even one that closely related to the new posi­tion they were pursuing.

"It isn't that firms aren't finding the right workers," Ghayad said, "but that employers are screening out the long-​​term unemployed."

The bias against the long-​​term unem­ployed means that those who are newly out of work are able to recover more quickly from job loss, but also it sig­nals a long-​​term problem for the nation's economy.

The Atlantic called the paper "pio­neering" and noted eco­nomics blogger Brad DeLong described the work as "a major empir­ical win" for Dickens and Ghayad. In his New York Times blog, Nobel Prize-​​winning econ­o­mist Paul Krugman wrote that Ghayad's work high­lights "exactly the kind of thing we should fear, because it means that failure to address the slump is dam­aging the economy's long-​​run prospects."

Ghayad noted that this view on long-​​term unem­ploy­ment shows that the Fed­eral Reserve's ongoing policy of quan­ti­ta­tive easing, which pumps cash into the economy at extremely low interest rates, is the best way to combat long-​​term unem­ploy­ment. With more access to cash, firms can hire more employees, including those long-​​overlooked unem­ployed applicants.

"With more jobs, you can move fur­ther back in the queue, hiring people who are still qual­i­fied but simply hadn't been con­sid­ered before," Ghayad said. "The con­tinued poor per­for­mance of the labor market is pri­marily attrib­ut­able to short­falls in the aggre­gate demand of labor. If we can create more job open­ings, we can allow the long-​​term unem­ployed to get back to work."

Ghayad, who studied eco­nomics in his home country of Lebanon and com­pleted his MBA at Boston Uni­ver­sity, is set to earn his doc­toral degree next year. He is cur­rently a vis­iting scholar at the Boston Fed and has served as a research assis­tant at the Brook­ings Insti­tu­tion, where he worked to sup­port Dickens' work.

"Research is a col­lec­tive endeavor, requiring the par­tic­i­pa­tion of many if any one person is to suc­ceed," Ghayad said. "This achieve­ment would not have been pos­sible without the intel­lec­tual sup­port and guid­ance of Pro­fessor Dickens."

Provided by Northeastern University

"A new theory on long-term unemployment." December 14th, 2012. http://phys.org/news/2012-12-theory-long-term-unemployment.html