Addressing long-term unemployment in the aftermath of the fantastic Recession
Lawrence Katz, Kory Kroft, Fabian Lange, Matthew Notowidigdo 03 December 2014
In the aftermath of the fantastic Recession, there remains numerous long-term unemployed across countries. This column argues that policies targeting the long-term unemployed, if effective, may have substantial benefits for the aggregate labour markets. However, proof the potency of active labour market policies varies across policies and populations. It really is, therefore, imperative to add an evaluative element of new and existing labour market policies.
As 2014 draws to a finish, the united states labour market finds itself within an unusual situation. The unemployment rate has fallen from its peak of 10% in October 2009 to under 6%, but an unusually large share of the unemployed has been unemployed for some time. In October 2014, the share of long-term unemployed (unemployed for a lot more than 26 weeks) among the unemployed remains above 30%, down from its peak around 50% this year 2010, but nonetheless well above 17% seen in 2007 before the Great Recession. EUROPEAN economies have either experienced similar run-ups in long-term unemployment rates recently (the united kingdom) or have observed high long-term unemployment rates for most decades already (Germany, Italy, France). The current presence of many long-term unemployed represents a simple challenge to policymakers in designing labour market institutions that help reintegrate the long-term unemployment in to the labour market.
Long-term unemployment, the long slump and the fantastic Recession
In a recently available paper, Krueger et al. (2014) remember that the relationships between unemployment and inflation and vacancies summarised by the Philipps and Beveridge curves, respectively, have divided because the end of the fantastic Recession. In comparison, the relation between short-unemployment, vacancies (Ghayad and Dickens 2012), and inflation (Gordon 2013, Watson 2014) remains stable. It thus seems as though the break down of the Philipps curve and the Beveridge curve is from the rise in the long-term unemployment.
In a recently available paper, we show how central the knowledge of the long-term unemployed is for explaining the long malaise in the labour market starting in 2007 and – according for some measures – persisting until today (Kroft et al. 2014). Crucial elements here and in Krueger et al. (2014) will be the low job finding rates among the long-term unemployed and the higher rate of which they leave the labour force. Interestingly, as Krueger et al. (2014) demonstrate, even though the long-term unemployed find jobs, these jobs have a tendency to be unstable, low-paid, and frequently part-time.
It follows that labour market policies targeting long-term unemployment may have substantial beneficial consequences for the performance of the aggregate labour market, if they’re able to reconnecting the long-term unemployed with the labour market. The differential connection with the long-term unemployed when compared to short-term unemployed also shows that labour market policies effective among the short-term unemployed is probably not effective among the long-term ones. So, what’s known about how exactly effective active labour market policies are in reconnecting the long-term unemployed to the labour market?
Active labour market policies and the long-term unemployed
Developed economies expend significant resources on active labour market policies, such as for example training or wage subsidies targeting the unemployed. Kluve (2010) reports that in 2002 the united states and the united kingdom expended relatively modest amounts (0.13 and 0.4% of GDP), whereas the large continental European and the Scandinavian countries spent between 0.5 and 2% of GDP on labour market policies. What do we realize about the entire effectiveness of such policies and particularly about policies that target the long-term unemployed?
Two meta-analyses summarise findings from a great number of studies. Card et al. (2010) analysed 199 estimates from 97 studies of active labour market policies within the years 1997-2007. Kluve (2010) examined 137 evaluations from 19 EUROPE. 1
Both of these studies emphasise the heterogeneity in results connected with different interventions and study populations. The data does not support a straightforward conclusion regarding the potency of active labour market policies. Kluve (2010) reports that of the 137 studies reviewed, 75 look for a significantly positive effect, 29 a significantly negative effect, and 33 report no statistically significant effect. On balance, active labour market policies generally have positive effect, but you will find a large amount of variation across programmes. Card et al. (2010) report similar results of significant negative and positive short-run effects in about 1/3 of studies each. In addition they find that job search assistance policies generally have positive short-run impacts in assisting reemployment, but that training programmes show more positive medium-term impacts. However, many active labour market policies usually do not generate positive outcomes and even appear to harm the treated.
Card et al. (2010) and Kluve (2010) also examine whether programme effectiveness varies with the look of the policy. They compare programmes with training components, programmes that focus primarily on job search assistance, and programmes that emphasise employment subsidies. Kluve (2010) reports results for 38 out of 70 training programmes. Interestingly, subsidies to private sector employment tend to be found to have results (17 out of 23), while public employment subsidies have a tendency to be ineffective (7 positive out of 26 evaluations). Card et al. (2010) report that training or job search assistance tend to be effective than private or public employment subsidies.
Our reading of the data in Card et al. (2010) and Kluve (2010) is that programme effectiveness varies a whole lot across active labour market policies and that relatively little is well known in what generates this heterogeneity. Specifically, little is known if the heterogeneity is from the design of the policy or even to the treated populations. This reading of the data is reinforced by the experimental proof the UK’s Employment Retention and Advancement demonstration (ERA).
The Employment Retention experiment covered three different populations, including several long-term unemployed. 2 Over the medium term, the procedure was only effective for the long-term unemployed. For them, the procedure consisted primarily of financial rewards for looking for jobs and for maintaining employment once employment was found. This treatment was found to create fairly large effects on employment and earnings over the five-year study period and was found to be cost-effective.
The data of the Employment Retention and Advancement demonstration thus shows that financial incentives might help reintegrate the long-term unemployed in to the labour market. The Retention, however, also provides evidence that programme effectiveness varies substantially with the treated population.
Displacement ramifications of policies
So far, we’ve summarised studies that examine the direct ramifications of active labour market policies on treated individuals. From a macroeconomic perspective, a significant question is whether such policies help some job hunters at the trouble of others that aren’t treated? Such displacement effects are plausible at least in the short run, when fixed inputs generate diseconomies of scale in order that the marginal product of labour declines in aggregate with the amount of workers hired. Crepon et al. (2013) investigate this question for employment search assistance programme utilizing a two-stage clustered randomised experimental design. They find that those people that received job search assistance were indeed much more likely to find jobs. By varying the fraction treated experimentally across regions, Crepon et al. (2013) may possibly also investigate whether there are displacement effects in more heavily treated regions. Although their reported findings listed below are imprecise, the idea estimates do claim that such displacement effects exist and they may be greater in weak labour markets. Overall, such displacement effects will lower the social advantages from active labour market policies and claim that it could not be possible to stimulate labour markets using policies during recessions.
Overall, we find that the literature will not provide strong conclusions on what the potency of active labour market policies varies across subgroups of the jobless, nor specifically on effectiveness of active labour market policies geared to the long-term unemployed. There is some evidence that job search assistance along with financial incentives can effectively help treated groups, nonetheless it can be done that displacement effects can considerably decrease the reap the benefits of these programmes from a societal perspective, particularly during weak labour markets. One speculative possibility predicated on the (weak) existing evidence is to spotlight providing unemployment assistance and long-term training to the long-term unemployed in the depths of a downturn but moving toward more aggressive usage of active labour market policies, such as for example job search assistance and hiring subsidies to try reemploy the long-term unemployed as the labour market tightens in a recovery.
More questions than answers
The existing state of the literature is thus unsatisfying from the perspective of designing active labour market policies, especially the ones that target the long-term unemployed. We have no idea with much certitude which groups benefit most from these policies. Similarly, we have no idea enough about if they should emphasise training, employment subsidies, or job search assistance. Crucially for considering how to react to business cycles, we’ve too little here is how active labour market policies perform over the cycle or whether displacement effects are essential. Thus, policymakers need more reliable evidence to greatly help design far better active labour market policies to reintegrate the long-term unemployed in to the labour market throughout a recession and its own aftermath.
The significant resources expended on these policies in a variety of countries, however, suggest large social advantages from answering these questions. We ask policymakers to add an assessment element of any new or existing policy, preferably predicated on a randomised design. We encourage those evaluating these randomised experiments to embed their evaluations in behavioural, structural models that incorporate contextual information on the social systems, aswell as on the challenges facing particular populations. Combining the experimental evidence with such behavioural models using contextual information can help synthesising results from various settings and designing future active labour market policies to attain better labour market outcomes for groups at the margin of the labour market, including the long-term unemployed.
Card D, J Kluve, and A Weber (2010), “Active Labor Market Policy Evaluations: A Meta-Analysis”, The Economic Journal, Vol.120 November, pp. 452-477.
Crepon B, E Duflo, M Gurgand, R Rathelot and P Zamora (2013), “Do Labor Market Policies Have Displacement Effects? Evidence from a Clustered Randomized Experiment”, The Quarterly Journal of Economics, Vol. 128, No. 2, pp.531-580.
Ghayad R and W Dickens (2012), “What can we learn by disaggregating the unemployment-vacancy relationship?” Federal Reserve working paper, Public Policy Briefs.
Gordon R J (2013), “The Phillips curve is alive and well: Inflation and the NAIRU through the slow recovery”, NBER working paper, No. 19390.
Hendra, R, J A Riccio, R Dorsett, D Greenberg, G Knight, J Phillips, P K Robins, S Vegeris, and J Walter (2011), “Breaking the low-pay, no-pay cycle: Final evidence from the united kingdom Employment Retention and Advancement (ERA) demonstration”, Department for Work and Pensions, UK, Experiment on job search assistance and incentive for work programs. Low effectiveness on single parents. Effective on LTU, No. 765.
Kluve J (2010), “The potency of European active labor market programs”, Labor Economics, Vol.17, Issue 6, p 904-917.
Kroft K, F Lange, M Notowidigdo and L Katz (2014), “Long-Term Unemployment and the fantastic Recession: The Role of Composition, Duration Dependence, and Non-Participation”, The Journal of Labor Economics, forthcoming.
Krueger A, J Cramer, and D Cho (2014), “Will be the long-term unemployed on the margins of the labor market?”, Brookings Papers on Economic Activity, Spring.
Watson M W (2014), “Inflation Persistence, the NAIRU, and the fantastic Recession”, The American Economic Review, Vol.104, No.5, pp. 31-36.
 In Card (2013), David Card presents his view of what we realize about the potency of active labour market policies and what the most urgent challenges to analyze in this area are.
 The other two groups were two sets of lone parents, one unemployed and the other working part-time. For both of these groups treatment included a significant job coaching and training components. The ERA found some proof treatment heterogeneity within these groups. Specifically, the ERA found results on earnings among the unemployed parents who were better educated.