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Long-Term Unemployment and the Great Recession: The Role of Composition, Duration Dependence, and Non-Participation (WP-14-25)

Kory Kroft, Fabian Lange, Matthew Notowidigdo, and Lawrence Katz

The researchers explore the extent to which composition, duration dependence, and labor force non-participation can account for the sharp increase in the incidence of long-term unemployment (LTU) during the Great Recession. They first show that compositional shifts in demographics, occupation, industry, region, and the reason for unemployment jointly account for very little of the observed increase in LTU. Next, using panel data from the Current Population Survey for 2002–07, they calibrate a matching model that allows for duration dependence in the exit rate from unemployment and for transitions between employment (E), unemployment (U), and non-participation (N). They model the job-finding rates for the unemployed and non-participants, and they use observed vacancy rates and the transition rates from E-to-U, E-to-N, N-to-U, and U-to-N as the exogenous "forcing variables'' of the model. The calibrated model can account for almost all of the increase in the incidence of LTU and much of the observed outward shift in the Beveridge curve between 2008 and 2013. Both negative duration dependence in the job-finding rate for the unemployed and transitions to and from non-participation contribute significantly to the ability of the model to match the data after 2008.

Kory Kroft, Assistant Professor of Economics and Public Policy, University of Toronto

Fabian Lange, Associate Professor of Economics, McGill University

Matthew Notowidigdo, Associate Professor of Economics and Faculty Fellow, Institute for Policy Research, Northwestern University

Lawrence Katz, Elisabeth Allison Professor of Economics, Harvard University

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