The_Plight_of_the_Long_Term_Unemployed

Olivier Blanchard *
February 1996
The long term unemployed have a harder time finding jobs than the short term
unemployed: their exit rate to employment is lower than that of the short term
unemployed. And their plight appears to get worse in depressed labor markets
(the opposite of what we might expect if the difference reflected unobserved heterogeneity.
In bad times, more of the long term unemployed are there because of
bad luck rather than poor characteristics.)
A natural first answer is that the long term unemployed lose skills and require
training costs, making employers more reluctant to hire them. However, if firms
prefer to hire the short term unemployed, the long term unemployed, who face
worse labor markets, will be willing to work for less. Other things equal, this will
make firms want to hire them. This paper explores the equilibrium balancing of
these two factors. We find that, in tight labor markets, firms will not discriminate
against the long term unemployed. But in more depressed labor markets, they
wil.
1 Assumptions
1.1 Flows
Employment is given by N, unemployment by U, and N + U = 1. The separation
rate from employment is given by X, so that the flow into unemployment is given
by XN.
All unemployed are identical when they start unemployment. The short-term unemployed
do not require training before beginning work. The long-term unemployed
do require training, with cost equal to C. The conversion from short-term
to long term unemployed is governed by a Poisson process, with parameter y. Let
Us and UL denote the pools of short and long term unemployed, Us + UL = U.
New jobs are created at rate 8, and need to be filled. The number of jobs needing
to be filled, vacancies, is equal to V. Meetings between the unemployed and
vacancies are given by a constant returns meeting function M(U, V). I shall often
use below the special case J4 = dm. All unemployed search with the
same intensity, so that firms will meet short term and long term unemployed with
probabilities equal to their respective proportions in the unemployment pool.