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A new theory on long-term unemployment

Companies rank more recently unemployed job candidates much higher than they would rank otherwise qualified applicants who have been out of work for more than six months, creating an “unemployment cliff” that puts the long-term unemployed at a severe disadvantage in the job market.

The analysis is the result of a new paper that was penned by Rand Ghayad, a Northeastern University doctoral student in economics, and published this month by the Federal Reserve Bank of Boston.

Ghavad’s work focused on the Beveridge curve, which, up until 2009, showed that unemployment decreased when job openings increased. But he found that the existing “one size fits all” economic analysis did not hold up when smaller subsets of the curve were analyzed individually, such as a job candidate’s field of employment or length of unemployment.

Those who had been out of work for more than six months had been faring significantly worse in finding a new job than those who had been unemployed for a brief period of time, according to Ghayad’s analysis.

“At the end of the 2007 recession, vacancies started increasing without any change in unemployment, which led many economists to blame the slack in the labor market on ‘structural factors,’ meaning the people out of work were not qualified for the jobs that were available,” Ghayad said.

But Ghayad and his doctoral adviser William Dickens, University Distinguished Professor of Economics and Social Policy and the paper’s co-author, examined the problem from a different angle. They found that the long-term unemployed were qualified for jobs but were ranking lower than other potential candidates because of the length of time they had been out of the workforce.

Starting last spring, Ghayad sent out approximately 4,800 fictitious, computer-generated resumes that represented applicants with identical credentials except for unemployment duration and industry experience. He found that applicants who had been out of work for more than six months were almost never contacted for an interview. That, Ghayad explained, served as a proxy for whether a company would even consider hiring an applicant.

The experiment also showed that applicants who had previously worked in the same industry as that of the hiring firm had a significant advantage over those who had worked in a different industry, even one that closely related to the new position they were pursuing.

“It isn’t that firms aren’t finding the right workers,” Ghayad said, “but that employers are screening out the long-term unemployed.”

The bias against the long-term unemployed means that those who are newly out of work are able to recover more quickly from job loss, but also it signals a long-term problem for the nation’s economy.

The Atlantic called the paper “pioneering” and noted economics blogger Brad DeLong described the work as “a major empirical win” for Dickens and Ghayad. In his New York Times blog, Nobel Prize-winning economist Paul Krugman wrote that Ghayad’s work highlights “exactly the kind of thing we should fear, because it means that failure to address the slump is damaging the economy’s long-run prospects.”

Ghayad noted that this view on long-term unemployment shows that the Federal Reserve’s ongoing policy of quantitative easing, which pumps cash into the economy at extremely low interest rates, is the best way to combat long-term unemployment. With more access to cash, firms can hire more employees, including those long-overlooked unemployed applicants.

“With more jobs, you can move further back in the queue, hiring people who are still qualified but simply hadn’t been considered before,” Ghayad said. “The continued poor performance of the labor market is primarily attributable to shortfalls in the aggregate demand of labor. If we can create more job openings, we can allow the long-term unemployed to get back to work.”

Ghayad, who studied economics in his home country of Lebanon and completed his MBA at Boston University, is set to earn his doctoral degree next year. He is currently a visiting scholar at the Boston Fed and has served as a research assistant at the Brookings Institution, where he worked to support Dickens’ work.

“Research work is a collective endeavor, requiring the participation of many if any one person is to succeed,” Ghayad said. “This achievement would not have been possible without the intellectual support and guidance of Professor Dickens.”