Does Long-Term Unemployment Reduce a Person's Chance of a Job? A Time-Series Test

Abstract

Long-term unemployed are less likely to leave unemployment than short-term unemployed. To what extent is this due to an effect of duration and to what extent to heterogeneity? On reasonable assumptions, heterogeneity on its own (with no duration-dependence) would imply that, if over time the exit rate of new entrants fell by a given multiple, the overall exit rate from unemployment should fall by the same multiple. However, over the last twenty years in the UK the overall exit rate has fallen by 60 per cent more than the fall in the exit rate of new entrants. Another test of 'pure heterogeneity', based on more general assumptions, also fails. Hence we explain the overall fall in exit rates from unemployment by the combined effect of (1) a fall in the ratio of vacancies to unemployed, and (2) a higher proportion of the unemployed being long-term unemployed, and hence demoralized and stigmatized in the eyes of employers.