The hysteresis effect on unemployed labor, and unemployment scarring

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?


You may want to see the Job Market Paper by Victor Ortego-Marti, from the LSE:

The abstract:

"This paper studies wage dispersion among identical workers in a random matching search model where workers gradually lose human capital during unemployment. Unemployed workers accept lower wages to avoid long unemployment spells, so wage dispersion increases among identical workers. Using estimates from micro data, I show that the increase is an important improvement over baseline search models. When workers can also search on the job, the model accounts for all of the observed residual wage dispersion. Even for high values of the replacement ratio the model generates large amounts of wage dispersion. The paper thus addresses the trade-off between explaining frictional wage dispersion and the cyclical behavior of unemployment and vacancies. The results suggest that the welfare costs of recessions may be larger once we take into account the loss of human capital during unemployment."

This is drifting back to an older and sloppier literature, but the idea was much discussed in the 1980s prior to Pissarides, usually within the rubric of "labor market hysteresis," One can find the basic argument in Phelps's first formulation of why the Phillips curve might be vertical, recognizing that its position may in fact be endogenous to the actual unemployment rate due to what is now being called "unemployment scarring." John Elster wrote on hysteresis more broadly in the social sciences in 1976 in Synthese.

In 1986 Blanchard and Summers published "Hysteresis and the European Unemployment Problem" in the NBER Macroeconomics Annual. Rod Cross began publishing extensivly on it in 1987, with quite a few others following in the next few years, all prior to 1992.

While he did not use the term "hysteresis," Ed Phelps described how extended unemployment could damage labor skills and thus shift the expectations-augmented Phillips Curve first in 1967 in Economica in "Phillips Curves, Expectations of Inflation, and Optimal Unemployment over Time."

Their children likely do better because survivors are more likely hardier and more clever than average. When you combine that advantage with a lack of camp life and the ravages that will do to the body and mind, it makes sense that they'll do better, on average.

It's good that we can use science-y terms like "hysteresis" to describe our catastrophic unemployment situation. It makes it seem natural, and inevitable, as opposed to a direct and obvious consequence of what the Obama Administration has chosen to do. And not do.

Why wouldn't one choose "unemployment scarring" over "labor hysteresis.”

There is a dark side to jargon: 83% of the readers who saw the word hysteresis skipped to the next post.

What is the theory for why unemployed workers would lose skills? Lack of practice? Or is it that their new jobs are inevitably different from their old jobs, so they lose their job-specific skills? If it's the second, then the policy implication is very different, since creative destruction (efficiency) requires that some jobs be destroyed.

Re: "What is the theory for why unemployed workers would lose skills?"

Or, they never acquire them as an intern because they can't get a job after college. IE, a young college graduates who have initial scholastic preparation , but no job experience. They take a job (Starbucks anyone?) waiting for an opportunity or some training. Two years later that person is really behind graduating students who are more likely to get a job in the field.

Business cycles that come back are not necessarily the type of creative destruction I think that Schumpeter was talking about. He didn't have in mind a graduating student in year 1 not getting a job, and a graduating student in the same field getting a job in year 3.

Our destruction of youthful talent wasn't so creative.

Get rid of minimum wage?

I really don't think that the employment of graduate students (implying they graduate from university) should depend on the minimum wage.

Lack of practice. Also, loss of ability to search for jobs.


You mean the failure to maintain assistance to state and local governments? That is the sector in which we were continuing to have job losses last year. That was a matter of Congress not being willing to continue that portion of the fiscal stimulus. Oh, but I suspect that you meant something else entirely when you referred to "What the Obama administration has chosen to do. And not to do." Although I guess we can hold them at least partly responsible for this failure to provide funds to the state and local governments to avoid all those layoffs.

Barkley, You made a good point. In the past, graduating students could usually find jobs in government, even in their fields. But, with cuts in local, state and federal employment (contrary to what happened in 2001-2004!), I think new entrants to the job market have lost out on that first job experience.

"I was surprised to learn that “unemployment scarring” is a much more effective search term than is “labor hysteresis.”"

I am surprised at your surprise, the first phrase is vastly more powerful and thus communicates (a mistaken notion of?) the idea more clearly.

Indeed. Everybody knows what "scarring" is, while "hysteresis" is a technical term originally from physics that is not widely known and sounds like something silly, like "hysteria."

Thnaks for the link:

That makea a good storie...........

Assume that even similar jobs all have slightly different requirements in a multidimensional space, and that workers abilities are normally distributed along each of those dimensions. Also assume that job search is a repeated series of tests where the most qualified person among the set of applicants gets the job. There isn't a single, linear ordering of candidates overall, but for any given job there is. Assume there are always new people entering job searches, and a steady supply of similar, but not exactly equivalent job openings.

I don't think any of those assumptions are too wild. I think they do justify the assessment that someone who has been unemployed a relatively long time (say longer than the mean time in a simulation) has relatively inferior skills compared to the mean skills of the newly unemployed. So, knowing nothing else, we would predict that because they have been unemployed longer, they will be less likely to be hired for any given position.

I can imagine there are psychological scarring effects. that there are skill loss effects, that there are social attitude effects, and that there are structural effects as well, but it seems like we can get a fair amount of unemployment hysteresis just from filtering alone if we are willing to assume that for many jobs there is not much non-firm-specific skill increase over time.

re: "Is there any good paper which seriously takes endogeneity of separation into account?"

Heh. Such an innocent-sounding little query. So devastating.

I think the essay, "Does Unemployment Cause Future Unemployment" from James Heckman and George Borjas clears up the issue very well. In it they write, "past unemployment (including previous time spent in a current unemployment spell) alters preferences, prices or constraints that determine, in part, future unemployment. For example, unemployment may lead to a loss of work experience, which will alter future prospects of employability. As another example, if workers are heterogeneous in unobserved components of ability, firms may use unemployment records in their hiring decisions if the knowledge that a worker has been unemployed is useful in sorting out the worker's position in the population distribution of heterogeneity and if firms place sufficient value on such information in making worker hiring and investment decisions. In both cases, prior unemployment experience has a genuine behavioural effect in the sense that an otherwise identical individual who did not experience unemployment would behave differently in the future than an individual who experienced unemployment," the essay was published in Economica, August 1980 issue.

It would be a mistake to assume a _direct_ causal link between long-term unemployment and unemployability, even if the link is causal. The loss of income in itself is a major factor.

We should expect loss of income per se to result in depreciation of skills, for example. (For myriad reasons, but including the resulting decline in physical health, increase in psychological stress, social isolation, and decline in living circumstances.)

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