Are the Long-Term Unemployed on the Margins of the Labor Market? Alan B. Krueger, Princeton University & NBER; Judd Cramer, Princeton University; David Cho, Princeton University. March 2014.

“This paper explores the plausibility of a unified explanation for the recent shifts in the price and real wage Phillips Curves and Beveridge Curve in the U.S.: namely, that the long-term unemployed, whose share of overall unemployment rose to an unprecedented level after the Great Recession, are on the margins of the labor force and therefore exert very little pressure on the job market and economy. The hypothesis we seek to test is that the longer workers are unemployed the less they become tied to the job market, either because, on the supply side, they grow discouraged and search for a job less intensively (e.g., Krueger and Mueller, 2011) or because, on the demand side, employers discriminate against the long-term unemployed, based on the (rational or irrational) expectation that there is a productivity-related reason that accounts for their long jobless spell (e.g., Kroft, Lange and Notowidigdo, 2013 and Ghayad, 2013). Either of these explanations would imply that the long-term unemployed are on the margins of the labor market, and have a different effect on the macroeconomy than the short-term unemployed. Moreover, the demand-side and supply-side effects of long-term unemployment can be viewed as complementary and reinforcing of each other as opposed to competing explanations, as statistical discrimination against the long-term unemployed could lead to discouragement, and skill erosion that accompanies long-term unemployment could induce employers to discriminate against the long-term unemployed.”