Here is a good WSJ piece on labor market hysteresis, a topic also of recent interest to Bernanke, Summers, DeLong, and others. I’ve been trying to learn more about that literature, and here is what I came up with.
Pissarides has a seminal 1992 paper on the loss of skill during unemployment.
This very good paper (pdf) looks at women who take time off to care for their elderly parents, though there is an endogeneity problem. Arguably it is the workers on a lower earnings trajectory who will take the time off. Here is a much earlier 1980s paper on how intermittent labor force attachment lowers women’s wages.
Holocaust survivors seem to have earned lower rates of return on human capital (though interestingly their children do better on average).
This German paper (pdf) shows that state dependence of earnings is, and should be, much lower when the unemployment has been generally high for the labor force as a whole. This paper finds there is not much “scarring effect’ in southern Italy, where unemployment perhaps is less socially shameful, but there is a significant scarring effect in northern Italy; social norms may matter.
This paper on Sweden suggests that one year out of work leads to a depreciation of skills — the skill of reading in their sample — is equal to losing five percentage points in the broader distribution of that skill.
Here is one paper from the psychology literature (with good cites); there are adverse psychological effects for the lower net worth unemployed but not necessarily for the higher net worth individuals.
Here is a whole host of papers on “unemployment scarring.” This one, on the UK, gives a concrete number: “Our results suggest a scar from early unemployment in the magnitude of 13–21% at age 42. However, this penalty is lower, at 9–11%, if individuals avoid repeat exposure to unemployment.” There are some reasonable controls for education and the like, though none for conscientiousness.
I was surprised to learn that “unemployment scarring” is a much more effective search term than is “labor hysteresis.”
Is there any good paper which seriously takes endogeneity of separation into account?