Rob Dent, Samuel Kapon, Fatih Karahan, Benjamin W. Pugsley, and Ayşegül Sahin  – Second in a three-part series – New York Fed

“In this second post in our series on measuring labor market slack, we analyze the labor market outcomes of long-term unemployed workers to assess their employability and labor force attachment. If long-term unemployed workers are essentially nonparticipants, their job-finding prospects and attachment to the labor force should resemble those of nonparticipants who are not looking for a job and should differ considerably from those of short-term unemployed workers. Using data that allow us to follow workers over longer time periods, we find that differences in labor market outcomes between short- and long-term unemployed workers exist, but these differences narrow at longer horizons. In contrast, labor market outcomes for the long-term unemployed are substantially different from those of nonparticipants who do not want a job.  We use longitudinally linked micro data on workers from the Current Population Survey (CPS) to compute transition rates for four different labor market statuses into employment and nonparticipation. The CPS, produced by the Census Bureau and the Bureau of Labor Statistics, is the U.S. government’s monthly survey used to estimate unemployment and labor force participation. Respondents participate for two four-month periods exactly one year apart. The probability that a short-term unemployed worker finds a job and is employed one month later can be computed simply as the fraction of the short-term unemployed in a given month who, in the next month’s survey, report that they are employed. Using this method, one can compute monthly and annual flow transition probabilities for the short- and long-term unemployed as well as for those in two categories of nonparticipation: those who report they want a job and those who report they do not want a job (whom we refer to as “other nonparticipants”) for each month.  Job-Finding Prospects of the Long-Term Unemployed  – The first margin that might make the long-term unemployed less relevant for wage pressures is their job-finding prospects relative to the short-term unemployed. The chart below shows that the short-term unemployed have the highest transition rate into employment; around 26 percent of short-term unemployed workers in August 2014 report finding a job in September 2014. The long-term unemployed have lower job-finding rates, with only 12 percent finding a job from August 2014 to September 2014. The transition rate into employment is similar for the long-term unemployed and nonparticipants who want a job but it is considerably lower for other nonparticipants. Interestingly, while the transition rate into employment responds to labor market conditions for the first three groups—declining notably during the recession and rebounding slowly in the recovery—it is essentially unresponsive to labor market conditions for other nonparticipants. In terms of employment outcomes, the long-term unemployed seem to be somewhere between the short-term unemployed and other nonparticipants and very similar to nonparticipants who want a job.”