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Long Has Become Too Long: A Close Look at Unemployment Transition

Rates in the 2007-2009 Recession

Elizabeth SundheimDecember 2012

Advisor: Professor Bryan Engelhardt

Abstract

Since the trough of our most recent recession, the unemployment rate has began to decline slowly. However, unlike any other recession, the average number of weeks the unemployed remain without a job continues to increase. The lack of correlation has left many perplexed as to how the 2007-2009 recession differs from previous recessions. This paper investigates how unemployment transition rates during the 2007-2009 recession changed in the presence of observable and unobservable heterogeneity compared to previous recessions. Using data from the Current Population Survey and a separated markets approach, the hazard rate for various types of people is estimated using maximum likelihood estimation. Furthermore, I estimate the average lengths of unemployment for various groups of people and the proportion of people falling into these groups to see if the lengths and proportions have changed. Results show that for some types of people the hazard rate has considerably changed compared to previous recessions. Additionally, the findings suggest that while lengths of unemployment for various groups of people have remained unchanged, the proportions of people falling into these groups have changed during our most recent recession.

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Introduction

During the 2007-2009 recession, leading news outlets published and broadcasted

frightening headlines, portraying the 2007-2009 recession as the worst recession the United

States has ever experienced. While many individuals may find this to be true, the 2007-2009

recession is both comparable and contrastable to previous recessions. Similar to previous

recessions, the unemployment rate rose drastically during the 2007-2009 recession.1 However,

unlike previous recessions, the duration of unemployment for the average unemployed individual

during the 2007-2009 recession increased substantially. Ben Bernanke, Federal Reserve

Chairman, has referred to this rise as a “national crisis” (Crutsinger 2011). While the duration of

unemployment for the average unemployed person did increase during previous recessions, it

never increased as high as it did during the 2007-2009 recession. These similarities and

differences between recessions are most clearly depicted in Figure 1 and Figure 2. For example,

looking at the trends in Figure 1, the average individual in the labor force during the early 1980s

and 2007-2009 recessions experienced similar unemployment rates. Looking at the trends in

Figure 2, the average individual in the labor force during the early 1980s and 2007-2009

recessions experienced very different unemployment durations.

After closely comparing a previous recession with our most recent one, it is evident that

the unemployment rate does not always play a direct role in determining the spike in average

duration of unemployment during a particular time period. The rapid increase in unemployment

duration during the 2007-2009 recession left many distressed and confused. Understanding labor

market cycles and fluctuations, many government officials and economists thought that even

though this duration rose significantly, it would slowly decrease during the economic recovery.

1 According to the Bureau of Labor Statistics, an unemployed person is one who does not have a job, has actively looked for work in the prior 4 weeks, and is currently available for work (Bureau of Labor Statistics 2011c).

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Now three and a half years after the trough of the recession, what was expected to happen has

hardly begun to occur. Throughout the economic recovery of this most recent recession, the

average duration of unemployment continued to rise, leaving many still concerned and

perplexed. Figure 2 clearly depicts this. From June 2009, the trough of the recession, until

October 2012, the average length of unemployment for an individual increased by 16.3 weeks.

Figure 1: Unemployment Rate

Source: Bureau of Labor Statistics

Figure 2: Average Weeks Unemployed

Source: Bureau of Labor Statistics

In order to better understand the substantial rise in the duration of unemployment, this

paper examines how unemployment transition rates have changed throughout the past 4

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recessions in the presence of observable and unobservable heterogeneity. To determine whether

previous recessions were different, I estimate the hazard rate using maximum likelihood

estimation for a variety of types of people. Furthermore, I estimate the average lengths of

unemployment for various groups of people and the proportion of people falling into these

groups to see if the lengths and proportions have changed. All estimations use data from the

Current Population Survey.

To prevent long unemployment spells from occurring in the future, understanding long

term unemployment during the 2007-2009 recession is extremely important for both our

economy and the labor market. People who are unemployed for extended periods of time are

likely to experience financial hardship (Kaiser Family Foundation 2011). Additionally, as

duration of unemployment increases, the unemployed are found to devote less time to job search

(Krueger and Mueller 2011). Furthermore, it is probable that the longer a person is unemployed,

the less employable they become. It has been found that long unemployment spells lead to a

depreciation of a worker’s human capital (Pollak 2012). While not in the labor market,

unemployed persons are not always able to keep up with the advancements in their industry and

subsequently their skill sets deteriorate. Many policy implications and structural changes to job

search programs could possibly result from a better understanding of the hazard rates in the

2007-2009 recession.

Background Literature

Economists have speculated potential economic and societal factors that have lead to the

sharp increase in the duration of unemployment. While testing these factors has certainly helped

us begin to comprehend why the 2007-2009 recession experienced unemployment spells unlike

any other recession, it has not helped us understand how unemployment duration during the

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2007-2009 recession structurally differed from previous recessions. For both the 2007-2009

recession and previous recessions, examining changes in population parameters and transition

rates in the presence of observable and unobservable heterogeneity can potentially aid in the

understanding of the increase in the duration of unemployment during our most recent recession.

A common misconception is that the unemployed all face a similar situation during a recession,

that is being unemployed for a long period of time. Calculating population parameters in the

presence of unobservable and observable heterogeneity assists in distinguishing between the

varying lengths of unemployment during a recession and the proportion of unemployed persons

experiencing these lengths. Calculating transition rates helps explain how the probability of

finding a job varies over the duration of unemployment for various unemployed persons.

While this paper will explain how transition rates and population parameters in the

presence of observable and unobservable heterogeneity have changed throughout several

recessions, it will not pinpoint a reason why they have changed. Nevertheless labor economic

theory provides potential explanations for these changes. Two theoretical models that very likely

may explain these changes are job search intensity and directed search. Economists such as

Eckstein, Wolpin, and Moen have greatly explored these theories empirically and theoretically.

Search intensity can be defined as the time and effort put into searching for a job or the

number of “units of search” supplied by a given individual. Search units are increasing in cost

and are chosen optimally to maximize the net returns from job search. Various types of people

choose a different number of search units, depending on their search costs, the cost of

unemployment, and their expected returns from employment (Petrongolo and Pissarides 2001).

During economic downturns, it has been found that the marginal product of search intensity falls

both because of a decline in the probability of obtaining a job conditional on a given search

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intensity and because of a decline in the expected present value of income from a job (Shimer

2004). As a result of much discouragement, it is possible that there was a greater decline in

search intensity during the 2007-2009 recession compared to previous recessions, causing the

unemployed to spend an extended period of time searching for a job.

Directed search can best be understood in terms of the decision process that occurs when

deciding which job openings to apply to. Assuming a distribution of wage offers, the

unemployed can decide between jobs that offer high wages and those that offer low wages. The

varying wage offers may be a result of identical firms offering different wages (Burdett and

Mortensen 1998) or match heterogeneity (Jovanovic 1979). When appplying to jobs, individuals

choose a reservation wage and reject all wage offers below the reservation wage (Petrongolo and

Pissarides 2001). An increase in the percentage of the unemployed having a high reservation

wage could have greatly increased the duration of unemployment during the 2007-2009

recession. The unemployed may have been more likely to apply to the jobs with higher wages,

neglecting the jobs with lower wages. This phenomenon may have created a more competitive

labor market for high paying jobs and as a result extending unemployment duration and the job

search process for many.

Even though economists have not thoroughly examined structural changes in the duration

of unemployment during our most recent recession, economists, using a wide variety of methods,

have empirically tested possible factors that have lead to the sharp increase in unemployment

duration. Such factors include changing characteristics of the labor force, extension of

Unemployment Insurance benefits, and weak labor demand. Aaronson, Mazumder, Schechter

(2009) investigate the effect of changes in age and other workforce characteristics on the rise in

the duration of unemployment. In order to complete their study, they utilize individual-level data

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from the U.S. Bureau of Labor Statistics’ Current Population Survey and an approach called a

Blinder/Oaxaca decomposition. Their analysis begins by showing that the significant rise in the

average duration of unemployment between the mid-1980s and the mid-2000s can best be

attributed to demographic changes in the labor force. In comparison to the early 1980s, Aaronson

et al. (2009) find that at the end of 2009 only half of the increase in the average duration of

unemployment can be explained by demographic factors that were present much before the

recession began, leading them to believe there are new recent factors contributing to the rise.

Thus, to further this empirical study, they examine how much of the remaining increase can be

attributed to weak labor demand and extensions of unemployment insurance benefits. Their

results show that the remaining unexplained increase is due mainly to weak labor demand, which

is reflected by low levels of hiring. Only about 10-25% of the increase in the duration of

unemployment from mid 2008 to the end of 2009 is associated with extensions of unemployment

insurance benefits. One drawback of this study is that Aaronson et al. (2009) do not provide

sufficient statistics on how demand is getting distributed.

Another economist has also assessed whether the recent surge in unemployment duration

can be explained by the extension of Unemployment Insurance (UI) benefits from the normal 26

weeks to a maximum of 99 weeks for most eligible workers. Using the haphazard roll-out of the

Emergency Unemployment Compensation and Extended Benefits programs during the 2007-

2009 recession, Rothstein (2011) explores the impact of the recent UI extensions on job search

and reemployment. Employing the longitudinal structure of the Current Population Survey

(CPS), Rothstein (2011) develops hazards rates for unemployment exit, reemployment, and labor

force exit that differ between states, over time, and among individuals with different

unemployment durations. Calculating these hazard rates helps Rothstein (2011) distinguish the

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effects of UI extensions from other factors on employment and unemployment outcomes. The

results of his study show that extensions of UI benefits had significant but small negative effects

on the likelihood that the unemployed, most of which were long-term unemployed, would

reenter employment.

Because workforce characteristics and extended UI benefits have been found to impact

only slightly the substantial rise in the duration of unemployment, Valletta and Kuang (2012)

proposed that other factors must hold primary responsibility for the recent rise in unemployment

duration and empirically tested these proposed factors. Of these, they believe that the most

apparent is the severity and persistence of job losses in comparison to previous recessions. In

order to empirically test this, Valletta and Kuang (2012) both follow and add to the approach

used by Aaronson et al. (2010) by including measures of cumulative employment losses. The

data used in their study comes from the CPS; it includes the most recent recession and its

aftermath and the early 1980s recession and its aftermath. Using monthly CPS data on individual

unemployment duration for these time periods, they calculate the percentage change in payroll

employment relative to the pre-recession peak. They then use this percentage as an explanatory

variable in a statistical exercise. Completing this exercise, Valletta and Kuang (2012) find that

changes in workforce characteristics and cumulative employment losses explicate much of the

increase in the unemployment duration of the recent recession compared to the early 1980s

recession. For example, unemployment duration was 15.7 weeks longer for the 12 months

leading up to August 2011 than for the 12 months leading up to January 1985. Of those weeks,

4.1 can be explained by changes in workforce characteristics and 7.5 can be explained by the

longer length and persistence of employment losses during the most recent recession. Therefore,

there are still 4.1 weeks that remain unexplained. They find that this number of weeks is only

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slightly larger than the estimated 3.5-week effect of extended UI benefits discussed in Daly et al.

(2011). In conclusion, they find that weak labor demand is the primary explanation for the

increase in the duration of unemployment. Nonetheless, Valletta and Kuang (2012) do not

provide us with enough insight as to how this weak labor demand is getting distributed. While

each of these factors that the economists have researched has affected the rise in unemployment

duration in some way, they all cannot fully explain the increase. The question as to why there has

been an increase in the duration of unemployment still remains unanswered.

Data

Individual level CPS data from the Integrated Public Use Microdata Series (IPUMS-

USA) was used to examine maximum likelihood estimators and hazard rates in the presence of

observable and unobservable heterogeneity. The individual level CPS data set captures duration

of unemployment, for the CPS has been asking participating respondents their duration of

unemployment since 1948. The question about unemployment duration is asked to a specific

group of respondents, including unemployed people who were not interviewed in the prior month

and newly unemployed people. The length of unemployment duration for an unemployed person

is automatically updated for those who continue to be unemployed in the following month

(Bureau of Labor Statistics 2011a). Duration of unemployment represents the length of time

(through the current survey week) during which unemployed persons are continuously looking

for work. For persons on layoff, the duration of unemployment differs. It represents the number

of full weeks since the end of the person’s most recent layoff (Bureau of Labor Statistics

2011b).2 2 The CPS duration measure has not remained consistent since it was first recorded. A few changes with regards to maximum recorded value have been made. The first change occurred in January 1994 when the maximum was increased from 99 weeks to 117 weeks. Also, in 1994 there was a questionnaire adjustment. This adjustment slightly increased the duration of unemployment for people who are unemployed in consecutive survey months (Valletta and Kuang 2012).The second change, a notable one, occurred in January 2011. Up until January 2011, the CPS allowed unemployed survey respondents to report unemployment durations of up to 2 years. If a person reported as being unemployed for longer than 2 years, his/her unemployment duration was entered in the data set as 2 years. However, starting in January 2011, there was a large increase in the maximum duration of

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To account for observable heterogeneity, a few individual level CPS descriptive variables

were chosen to divide the numerous observations into four specific groups. A separated markets

approach is preferred due to its flexibility over a proportional hazards model. This approach is

similar to that used in Flinn (1986) and Eckstein and Wolpin (1995). The individual level CPS

data was broken down into the following groups: 16-34 year olds who have less than a high

school diploma and those who have a high school diploma (or the equivalent) but no further

education, 16-34 year olds who have completed some college but no degree and those who have

received an Associate’s Degree, Bachelor’s Degree, Master’s Degree, Professional Degree, or

Doctorate Degree, 35-54 year olds who have less than a high school diploma and those who have

received a high school diploma (or the equivalent) but no further education, 35-54 year olds who

have completed some college but no degree and those who received an Associate’s Degree,

Bachelor’s Degree, Master’s Degree, Professional Degree, or Doctorate Degree. A further

breakdown than that mentioned above would have resulted in too few observations to be in each

group. For instance, an additional breakdown by occupation would cause group totals to fall far

below 300 observations.

Understanding the structure of the duration of unemployment during the 2007-2009

recession required comparing the 2007-2009 recession to previous recessions. To remain

consistent when comparing recessions, the data used to compare recessions came from the March

data set following the trough of each recession. Specifically, the March CPS data set was chosen

due to the fact that it is known to have a key supplement and is the standard month to use. The

trough of each recession was determined by the National Bureau of Economic Research, the

official attributor of US business cycle expansions and contractions. For the early 1980s

unemployment that could be reported by a participant; the CPS allowed unemployed survey respondents to now report unemployment durations of up to 5 years. Because the data used in my empirical analysis does not include the year 2011, this drastic increase in the average length of unemployment will not affect my results.

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recession, the trough occurred in November 1982 and therefore March 1983 data was used. For

the early 1990s recession, the trough occurred in March 1991 and therefore March 1992 data was

used. For the early 2000s recession, the trough occurred in November 2001 and therefore March

2002 data was used. For the 2007-2009 recession, the trough occurred in November 1982 and

therefore March 1983 data was used.

Method and Estimation

Flinn (1986) explores whether an unemployed person’s probability of finding a job

decreases the longer he or she is unemployed. In doing this, the work provides a method to

estimate parameters of alternating renewal process models of labor market attachment in the

presence of observable and unobservable heterogeneity. Assuming a Weibull distribution, he

used maximum likelihood estimation to estimate the distribution parameters (Flinn 1986). While

employing Flinn’s methodology and framework, my goal is to compare and contrast hazard rates

across time for various demographic groups to determine how the transition rates have changed.

The Weibull distribution has a simple distributional form. Despite this simplicity,

changes in the Weibull distribution’s two parameters (alpha and lambda) allow the distribution to

take a variety of shapes. However, the Weibull distribution was not used in my empirical

analysis due to its lack of sufficient flexibility. Because it allowed for relatively more flexibility

and is non-monotonic, the Lognormal distribution was used. Like the Weibull distribution, the

Lognormal is most commonly used to model failure times. Changes in the two parameters of the

Lognormal distribution (mu and sigma) allow for much more flexibility than changes in the

Weibull distribution’s two parameters. After graphing the Probability Density Function and

Cumulative Distribution Function of both the Weibull and Lognormal, this difference in

flexibility can most clearly be seen Figure 3.

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Figure 3:

Similar to Flinn (1986), this analysis investigated observable and unobservable

heterogeneity. As mentioned earlier, observable heterogeneity was controlled for based on a

separated markets approach. After separating the data into four different groups, preliminary

work relayed not controlling for unobservable heterogeneity for each group does not generate

Cumulative Distributive Function Probability Density Function

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nearly as good a fit as accounting for unobservable heterogeneity within each group. Focusing on

the conditional distribution of unemployment spells in the presence of unobservable

heterogeneity, I considered characteristics of a group of people that are unobservable to a

researcher (i.e. characteristics of people that are not available in a data set). By controlling for

unobservable heterogeneity, I was able to determine whether within one group of people there

are many different types of people. This further breakdown of a group is not initially possible

when only looking at observable characteristics available in a data set. While accounting for

unobservable heterogeneity does not reveal what exact characteristics further separate a group of

a people, it allows for inferences to be made about how and when different types of people

‘match’ in the labor market. Accounting for unobservable heterogeneity, each of the four

demographic groups was broken down into two further groups. Further breakdowns did not

cause the log likelihood value to increase substantially, indicating that two unobservable groups

were sufficient. Estimates of the population parameters in the presence of unobservable

heterogeneity were determined where the population distribution was assumed to be Lognormal.

Assuming a Lognormal distribution, it was important to correct for the length-biased sampling

problem due to the possibility that the data sample is dominated by people who are unemployed

for extended periods of time.

Adjusting for length biasness, the following equation was used to solve for the population

parameters and log likelihood value in the presence of unobservable heterogeneity:

L=∑ log(p1(1−F1 ( t )µ1 )+ p2( 1−F2 ( t )

µ2 ))Where F i (t )=∫ 1

t σ i √2 πe−( 1

2σ i2) (ln t−µi )2

dt , µi ¿eµi +

σi2

2 .

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The log likelihood value, or the maximum likelihood estimator, found above can be defined as

the most likely values of distribution parameters for a set of data. It is found by maximizing the

value of the likelihood function. Not only was the maximum likelihood estimator calculated for

the unrestricted case for each recession, but also for several restricted cases (all population

parameters for each recession were set equal to the 2007-2009 populations parameters, the

unobservable heterogeneity parameter, p, for each recession was set equal to the 2007-2009

population parameter, p, and the hazard parameters,µ1,σ 1, µ2 , σ2 , for each recession were set

equal to the 2007-2009 hazard parameters,µ1,σ 1, µ2 , σ2). The likelihood ratio test allowed me to

determine how the 2007-2009 recession, if at all, differed from the three previous recessions.

Without calculating the mean and median, it is initially difficult to determine the length

of unemployment exhibited by the population parameters, µand σ . Knowing the mean and

median associated with a particular µand σ assists in comparing two different groups and

different recessions to one another.

The equation to determine the mean of the Lognormal distribution is

x=eµ+σ2 /2 .

The equation used to determine the median of the Lognormal distribution is

x̂=eµ .

After calculating the population parameters and the log likelihood value in the presence

of unobservable heterogeneity, the hazard rate was calculated. The hazard rate is the

instantaneous rate of an individual leaving a state given that the individual has not left the state

as of a certain time (Flinn 1986). Namely, it is the probability that an individual transitions at a

particular time. For the Lognormal distribution, the hazard rate is not constant over the time

interval¿ ∞).

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The following equations were used to solve for the hazard rate:

Hazard Rate=f (t )/ [1−F ( t ) ],

w h ere f ( t )=ProbabilityDensity Function= 1t σ √2π

e−( 1

2 σ2 ) (ln t−µ)2

,∧¿

F ( t )=Cummulative Denisty Function=∫0

∞ 1t σ √2 π

e−( 1

2 σ 2 )( lnt−µ)2

dt .

When differentiating between homogenous groups of people within different recessions,

the likelihood ratio test was utilized to test for statistical significance. The likelihood ratio test

tests for homogeneity of parameters and thus helps indicate the homogeneity of a distribution

function across groups (Flinn 1986). The likelihood ratio test was used in this empirical analysis

to determine how the 2007-2009 recession differed from the three previous recessions, thus the

reason for re-estimating the likelihood function. Nevertheless, the test was also employed to

determine the homogeneity among other recession groupings (1.1983, 1992 and 2002; 2.1992

and 2002; 3. 1983 and 2010). The first grouping was chosen to determine whether the early

1980s, early 1990s, and 2002 recessions were at all similar if the primary likelihood ratio test

indicated that the 2007-2009 recession differed from them. The second and third were chosen

conditional on the similar unemployment rates during those recessions.

The likelihood ratio test provides the means for comparing the maximum likelihood

estimator under one hypothesis, termed the alternate hypothesis, against the maximum likelihood

estimator under another more restricted hypothesis, termed the null hypothesis. For example, the

null and alternate hypotheses shown below were used to determine whether the 2007-2009

differed from previous recessions.

H0: µ183=µ1

92=µ102¿µ1

10

σ 183=σ1

92=σ102¿ σ1

10

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HA: Not all population parameters are equal

In order to fail to reject the alternate hypothesis, the null hypothesis must be rejected. We can

define L1 as the maximum log likelihood estimator when parameters are not restricted, and we

can define L0 as the maximum log likelihood estimator when parameters are restricted. The

difference between the two log likelihoods is calculated and then multiplied by two, known to be

a Chi squared statistic. To then compute a p value, the likelihood ratio must be evaluated

assuming a Chi Distribution with the necessary degrees of freedom. The degrees of freedom are

equal to the difference between the number of parameters being evaluated in the alternate

hypothesis compared to the null hypothesis. This p value is compared to a critical value to

determine whether or not you reject or fail to reject your null hypothesis. The results of the

likelihood ratio test were evaluated at a 5% significance level.

Results

16-34 Year Olds with a High School Diploma

After controlling for unobservable heterogeneity during the four recessions, those in the

16-34 year old age group who have received a high school diploma or less were broken down

into two distinct groups. While in some respect these groups remained similar throughout the

different recessions, they become increasingly different. They remained the same such that there

was one group during each recession that remained unemployed for a much longer period of time

compared to the other group. Referencing Table 2, the group that remained unemployed for a

longer length of time will be referred to as Group #1, while the group that experienced a shorter

duration of unemployment will be referred to as Group #2. Differentiating between which group

of the two remained unemployed for a longer period of time and which was unemployed for a

shorter period of time requires comparing the µ(s) of both groups. The group with the larger µ

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signifies the group that was unemployed for a greater length of time. For example, Group #1 for

the early 1980s recessions has a µ=2.7951 and a σ =0.3186, and Group #1 for the early 1990s

recession has a µ=2.8291 and a σ =0.2827. Therefore, Group #2 for the early 1980s recession

has a µ=.9045 and σ =0.7518, and Group #2 for the early 1990s recession has a µ=0.7712 and σ

=0.7170.

The average duration of unemployment for Group #2 remained relatively the same

throughout the four recessions. During the early 1980s, early 1990s, 2002, and 2007-2009

recession, the average duration of unemployment was 4, 3, 2, and 4 weeks respectively.

However, the proportion of the people in that group was by far the smallest during the 2007-

2009 recession. Unlike Group #2, the average duration of unemployment for Group #1 fluctuated

throughout the four recessions. The average duration of unemployment during the four

recessions was 15, 18, 9, and 18 weeks, respectively. The proportion of people in this group was

the largest during the 2007-2009 recession. Even though the early 1990s and 2007-2009

recession had a similar average length of unemployment, the proportion of people who

experienced this length greatly differed. About 14% of the unemployed fell in this group in the

early 1990s recession and about 45% of the unemployed fell in this group in the 2007-2009

recession.

The graphed hazard rates for both Group #1 and Group #2 clearly depict the differences

between the four recessions. As can be seen from the graphed hazard rates for Group #1, the

probability of finding a job during the early 1980s, early 1990s, and 2007-2009 recessions

followed the same pattern, the probability of finding a job steadily increased during the first 25

weeks of unemployment but then slowly leveled off for the remaining weeks of unemployment.

However, during the 2002 recession, the probability of leaving unemployment increased rapidly

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during the first five weeks but then slowly dropped as the length of unemployment increased.

Group #2 experienced a similar hazard rate during the four recessions. During about the first 10

weeks, the probability of finding a job quickly increased. As time progressed, the probability of

finding a job slowly dropped. One notable difference is that unemployed in the 2007-2009

recession were least likely to find a job during the first 10 weeks of unemployment compared to

the three previous recessions.

As can be seen from the results of the Likelihood Ratio test in Table 2, the early 1980s

recession, the early 1990s recession, and the 2002 recession are statistically different from the

2007-2009 recession. In addition to the 2007-2009 recession statistically differing from the three

previous recessions in the completely constrained case, the small p values in the other

constrained cases exemplify that neither the size of the groups nor the lengths of unemployment

are statistically similar throughout the four recessions. Knowing that the 2007-2009 recession

differed from the previous three recessions, the similarity between other recessions was tested in

Table 3. First, the likeness of the 2002 recession to the early 1990s and early 1980s recession

was investigated. The small p value indicates that the 2002 recession statistically differs from the

1992 and 1983 recessions. Second, the likeness of the 2002 recession to the 1992 recession was

investigated. The magnitude of the p value indicates that the 2002 recession is not statistically

similar to the 1992 recession. Finally, the likeness of the 2010 recession to the early 1980s

recession was investigated. Again the small p value indicates that the 2010 recession statistically

differs from the early 1980s recession. In conclusion, 16-34 year olds with a high school diploma

or less in the 2007-2009 recession experienced a unique unemployment situation compared to

the three previous recessions.

16-34 Year Olds with at Least Some College

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Similar to the previous demographic group, those in the 16-34 year old age group who

have at least completed some college can be broken down into two distinct groups. Again, the

group that remained unemployed for a longer period of time will be referred to as Group #1,

while the group that experienced a shorter duration of unemployment will be referred to as

Group #2. Group #2 experienced a very similar average duration of unemployment throughout

the four recessions, with durations of 4, 3, 3, and 3 weeks. Comparable to those with a high

school diploma or less, this group is by far the smallest during the 2007-2009 recession. Only

48% of people fell into this group during the 2007-2009 recession compared to 80% during the

early 1980s recession, 84% during the early 1990s recession, and 84% during the 2002 recession.

Compared to Group #2, the average duration of unemployment for Group #1 did not remain as

consistent during the past four recessions. The average duration of unemployment was 15 weeks

during the early 1980s recessions, 17 weeks during the early 1990s recession, 12 weeks during

the 2002 recession, and 17 weeks during the 2007-2009 recession. 52% of 16-34 year olds who

have at least completed some college wound up in Group #1, clearly the largest percentage in

this group compared to previous recessions. Even though the early 1990s and 2007-2009

recession had a similar average length of unemployment for Group #1, the proportion of people

who experienced this length greatly differed. About 16% of the people fell in this group in the

early 1990s recession and about 52% fell in this group in the 2007-2009 recession.

Over the duration of unemployment, the hazard rates for 16-34 year olds who have

completed at least some college follow similar patterns to those of 16-34 year olds with a high

school diploma or less. As can be seen from the graphed hazard rate for Group #1, the

probability of finding a job during the early 1980s and 2002 recession steadily increased during

the first five weeks of unemployment. However, after about 15 weeks, the probability of finding

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a job slowly decreased. Unlike the early 1980s recession and 2002 recession, the probability of

leaving unemployment did not start to spike until about 15 weeks for the early 1990s recession

and 2007-2009 recession. Not until about 25 weeks did the probability of leaving unemployment

begin to level off. Within the first few weeks of unemployment, the unemployed in Group #2 had

a relatively high probability of receiving a job. However, over time the probability of finding a

job slowly decreased. Compared to the other recessions, the unemployed during the 2007-2009

recession had difficulty finding a job in the first weeks of unemployment. However, after about 3

weeks, they fared the best in receiving a job.

Referencing the results of the Likelihood Ratio test, the early 1980s recession, the early

1990s recession, and the 2002 recession are statistically different from the 2007-2009 recession.

Despite the 4 recessions differing from each other, the relatively large p value for length

exemplifies the lengths of unemployment are statistically similar at a 95% confidence interval.

Knowing that the 2010 recession differed from the previous three recessions, the similarity

between other recessions was tested in Table 5. First, the likeness of the 2002 recession to the

early 1990s and early 1980s recession was investigated. The small p value indicates that the 2002

recession statistically differed from the 1992 and 1983 recession. Second, the likeness of the

2002 recession to the 1992 recession was investigated. Assuming a 95% confidence interval, it

can be seen the magnitude of the p values indicates that the 2002 recession is statistically similar

to the 1992 recession. Finally, the likeness of the 2010 recession to the early 1980s recession was

investigated. Again the small p value indicates that the 2010 recession statistically differs from

the early 1980s recession.

35-54 Year Olds with a High School Diploma or Less

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Those who are 35-54 years old and have received a high school diploma or less can be

broken down into two distinct groups. Group #1, representing those unemployed for a long

period of time, experienced almost the same length of unemployment throughout the four

recessions. During each recession, the unemployed remained unemployed for an average of

about 23 weeks. Knowing that unemployment insurance exhausts at 26 weeks, it is likely that the

unemployed waited until right before their unemployment insurance expired before finding a job.

Seeing the consistency of this number throughout the recessions, it is apparent that most people

in this group received unemployment insurance. Even though the unemployment duration for

Group #1 remained consistent throughout the four recessions, the probability of the unemployed

falling into this group fluctuated. The probability of an unemployed person falling into this group

during the early 1980s recession and the early 1990s recession was 25%. However, during the

2002 recession, the probability was about 13%. The largest percentage (50%) of the unemployed

in Group #1 was seen in the 2007-2009 recession. In comparison to Group #1, those in Group #2

experienced a very short duration of unemployment throughout the four recessions, with average

durations of 4, 5, 4, and 5 weeks. Because the probability of being in Group #1 was relatively

low during the 1990s, 1980s, and 2002 recession, the probability of falling in Group #2 was

much higher during these recessions. Thus, the probability of the unemployed in the 2007-2009

recession falling in this group was comparatively low.

For Group #1, unlike previous demographic groups, the probability of finding a job did

not fluctuate throughout unemployment. As can be seen from the graphed hazard rate, the

probability of finding a job right around 23 weeks was very high. Group #2 followed a similar

pattern to the previously discussed demographic groups. During about the first 10 weeks of

unemployment, the probability of finding a job quickly increased in all four recessions. Over

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time, though, the probability slowly decreased. However, in the initial weeks of unemployment,

the unemployed suffered more in the 2007-2009 recession than the three previous recessions.

Referencing the results of the Likelihood Ratio test, the 2007-2009 recession statistically

differed from the early 1980s recession, the early 1990s recession, and the 2002 recession.

Additionally, the small p values found for the less constrained cases indicate that the size of the

groups and lengths of unemployment statistically differ throughout the four recessions. However,

the magnitude of the p value associated with lengths being equal was much greater than the p

value associated with the size of the groups being equal. Thus, throughout the four recessions,

the lengths of unemployment were far more similar than the proportional size of Group #1 and

Group #2. As with the other demographic groups, the similarity between other recessions was

tested in Table 7 using the likelihood ratio test. In the first case, the small p value exemplifies

that the 2002 recession differed from the early 1990s and early 1980s recessions. In the second

case, the early 1990s recession and 2002 recession statistically differed. Finally, in the third case,

it can be seen that the 2007-2009 recession statistically differed from the early 1980s recession.

As is evidenced from these further tests, this demographic group experienced a unique

unemployment situation compared to previous recessions.

35-54 Year Olds with at Least Some College

The results for Group #1 in this demographic group are almost identical to those of 35-54

year olds with a high school diploma or less. Again, this could be the result of the unemployed

finding a job right before their unemployment insurance expires. The probability of an

unemployed individual falling in this group is also very similar. During the early 1980s, early

1990s, 2002, and 2007-2009 recessions, the percentages amounted to 27%, 23%, 13%, and 54%,

respectively. Those in Group #2 experienced a very short duration of unemployment throughout

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the four recessions, with average durations of 5, 4, 4, and 6 weeks. Because the probability of

being in Group #1 was relatively low during the 1990s, 1980s, and 2002 recession, the

probability of falling in Group #2 was much higher during these recessions. Unlike the previous

three recessions, the probability of falling into Group #2 during the 2007-2009 recession was

similar to falling into Group #1.

Similar to Group #1 for the previous demographic group, the probability of finding a job

did not fluctuate throughout the duration of unemployment. The probability of finding a job

hovered around 23 weeks. Group #2 followed a pattern similar to the previously discussed

demographic groups. During the first eight weeks of unemployment, the unemployed

experienced a high probability of receiving a job in all four recessions. As time progressed, the

probability slowly decreased. The probability of finding a job in about the first eight weeks of

unemployment was by far the lowest in the 2007-2009 recession. However, the unemployed in

this recession had the highest probability of leaving unemployment as unemployment duration

increased.

Evidenced by the results of the Likelihood Ratio test, the 2007-2009 recession

statistically differed from the early 1980s recession, the early 1990s recession, and the 2002

recession. Additionally, the small p values found for the less constrained case, size of the groups,

indicates that the size of the groups statistically differed throughout the four recessions.

However, the relatively large p value associated with the other less constrained case exemplifies

that the unemployment lengths are statistically similar at a 95% confidence interval. Testing for

similarity between recessions in Table 9 showed results similar to the previous demographic

group. Like 35-54 year olds with a high school diploma or less, not one of the three tests

indicates statistical likeness between recessions. Despite the lack of statistical significance, the p

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values for this demographic group were larger compared to the previous demographic group.

Furthermore, despite not finding statistical significance after conducting the additional

Likelihood Ratio tests for the different demographic groups, it is important to note that the p

values for these additional tests were much larger than those found in the tests examining the

likeness of the 2007-2009 recession to the previous 3 recessions.

Conclusion

According to my findings, an important dimension of the severe unemployment situation

has been ignored. During the 2007-2009 recession and aftermath, there was great focus on the

long unemployment spells of the unemployed. As a result, the fact that a proportion of the

unemployed experienced a bearable unemployment situation was often overlooked. A proportion

that my results indicate has been present during the past four recessions. Controlling for

unobservable heterogeneity, I was able to differentiate between those who were unemployed for

a long period of time and also those unemployed for a short period of time. Using a separated

markets approach while accounting for unobservable heterogeneity provided me with a more

detailed explanation of the unemployment situation for different demographic groups. In most

cases, the results indicate that the lengths of unemployment of those unemployed for long

periods of time and short periods of time has remained relatively the same throughout the past

four recessions. However, the results show that the proportion of people in these groups greatly

differs. For most demographic groups, the proportion of people unemployed for a long period of

time increased substantially during the 2007-2009 recession. Also, many of the unemployed had

greater difficulty securing a job during the initial weeks of unemployment compared to previous

Sundheim 25

recessions. Some noteworthy conclusions can also be made from making comparisons between

demographic groups across both age and education groups. My results suggest that age rather

than education has a greater effect on an individual’s unemployment situation. Despite splitting

35-54 year olds into two different groups based on their education, it was found that the two

groups were unemployed for similar lengths of time throughout the four recessions. This holds

true for the 16-34 year old age group as well. It is difficult to draw any conclusions of this sort

when comparing education groups rather than age groups.

Only providing descriptive results, this analysis does not provide exact reasons as to why

the lengths of unemployment remained relatively the same but the probability of falling into a

particular group differed between the 2007-2009 recession and the three previous recessions. A

discussion of various labor economic theories can assist in better understanding this phenomenon

and as a result propose further research questions. Firstly, many economists have suggested that

the unemployment situation in the 2007-2009 recession could be attributed to cyclicality.

Considering the results of my analysis, I cannot conclude that this phenomenon is a result of

cyclicality. For cyclical unemployment to have been a possibility, the demand for unemployed

labor would need to have been greater than the supply of unemployed workers. Because the

durations of unemployment did not drastically change during the 2007-2009 recession, this fails

to be a possibility. Furthermore, economists have discussed structural unemployment as a cause

of the unemployment situation during the 2007-2009 recession. Unlike cyclicality, structural

unemployment offers a possible explanation of my results. During the 2007-2009 recession,

structural changes in the economy may have negatively impacted a large number of people,

causing the proportion of those unemployed for a long period of time to substantially increase.

As mentioned in the literature review, search frictions, such as search intensity and directed

Sundheim 26

search, may also provide an interpretation of my results. Even though search frictions have not

been frequently speculated as a possible explanation of the unemployment situation, the results

appear to fit the theories. A greater proportion of those unemployed for a long period of time

may have needed to exert greater search intensity or instead had a higher reservation wage in the

job search process.

Bibliography

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Table 1: Current Population Survey Summary Statistics

Demographic Group Year Number of Observations Mean Unemployment Length

16-34: High School

1983 4293 18.44

1992 2495 14.45

2002 2548 13.71

2010 3226 26.75

16-34: College

1983 1092 17.91

1992 896 15.78

2002 913 13.86

2010 1579 26.09

35-54: High School

1983 1644 22.81

1992 1238 22.19

2002 1339 17.13

2010 2256 32.22

35-54: College 1983 470 24.40

1992 738 21.91

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2002 1059 18.33

2010 1786 34.20

Table 2: 16-34 Year Olds with a High School Diploma or Less

Unconstrained Mean Number of Weeks

Median Number of

WeeksPs Equal Lengths

Equal Constrained

1983:Mu1 2.7951 15.11 14.21 2.3601Sigma1 0.3186 0.4803Mu2 0.9045 3.77 2.93 0.7625Sigma2 0.7518 0.6507P1 0.2124 0.26891991:Mu1 2.8291 17.62 16.93 1.9146Sigma1 0.2827 0.6080Mu2 0.7712 2.76 2.16 0.6089Sigma2 0.7170 0.5935P1 0.1402 0.13132002:Mu1 2.0277 8.79 7.60 1.9434Sigma1 0.5406 0.5634Mu2 0.6325 2.22 1.88 0.6137Sigma2 0.5713 0.5490P1 0.3774 0.10792010:Mu1 2.8726 18.38 17.68 2.9039 2.7287 2.8201

Sigma1 0.2796 0.2665 0.3413 0.3021Mu2 1.1722 4.04 3.23 1.2016 0.8250 0.8624Sigma2 0.6694 0.6928 0.7245 0.7404P1 0.4528 0.4149 0.5608 0.2433Likelihood 3.03E+04 3.04E+04 3.04E+04 3.07E+04Likelihood Ratio 24 48 756p value 2.49E-05 3.13E-06 2.12E-151

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Table 3: Likelihood Ratio Tests between Recessions

1983, 1992, and 2002 Recessions Unconstrained ConstrainedLikelihood 2.13E+04 2.13E+04Likelihood Ratio 146p value 2.48E-26

1992 and 2002 Recessions Unconstrained ConstrainedLikelihood 1.08E+04 1.08E+04Likelihood Ratio 12p value 3.48E-2

1983 and 2010 Recessions

Unconstrained ConstrainedLikelihood 1.95E+04 1.96E+04Likelihood Ratio 260p value 3.93E-54

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Hazard Rates for 16-34 Year Olds with a High School Diploma or Less

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Table 4: 16- 34 Year Olds with at Least Some College

Unconstrained Mean Number

of Weeks

Median Number of

WeeksPs Equal Lengths Equal Constrained

1983:Mu1 2.6537 15.11 14.21 2.1353Sigma1 0.3519 0.5183Mu2 1.0767 3.77 2.93 0.8452Sigma2 0.7065 0.6137P1 0.1953 0.19991991:Mu1 2.7892 16.87 16.27 1.9651Sigma1 0.2685 0.5713Mu2 0.9171 3.18 2.50 0.7149Sigma2 0.6943 0.5417P1 0.1647 0.13302002:Mu1 2.3987 11.98 11.01 1.7292Sigma1 0.4120 0.6015Mu2 0.7949 2.91 2.21 0.5639Sigma2 0.7390 0.6446P1 0.1550 0.06792010:Mu1 2.8198 17.45 16.77 2.8406 2.8162 2.7942Sigma1 0.2817 0.2737 0.2817 0.2900Mu2 1.0734 3.46 2.93 1.0763 0.9824 0.9765Sigma2 0.5781 0.6154 0.7081 0.6954

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P1 0.5188 0.4934 0.4853 0.2758Likelihood 1.10E+04 1.10E+04 1.10E+04 1.12E+04Likelihood Ratio 8.6 14.6 265p value 3.51E-02 2.64E-01 1.21E-47

Table 5: Likelihood Ratio Tests between Recessions

1983, 1992 and 2002 Recessions Unconstrained ConstrainedLikelihood 6.64E+03 6.66E+03Likelihood Ratio 32.4p value 3.43E-04

1992 and 2002 Recessions Unconstrained ConstrainedLikelihood 4.00E+03 4.01E+03Likelihood Ratio 7.2p value 2.06E-1

1983 and 2010 Recessions

Unconstrained ConstrainedLikelihood 7.03E+03 7.07E+03Likelihood Ratio 91p value 4.14E-18

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Hazard Rates for 16-34 Year Olds with at Least Some College

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Table 6: 35-54 Year Olds with a High School Diploma or Less

Unconstrained Mean Number of Weeks

Median Number of

WeeksPs Equal Lengths Equal Constrained

1983:Mu1 3.1267 22.79 22.79 0.9332Sigma1 0.0001 0.6167Mu2 1.1981 4.19 3.31 2.5784Sigma2 0.6858 0.4164P1 0.2462 0.26621991:Mu1 3.1268 22.80 22.80 2.4182Sigma1 0.0001 0.5130Mu2 1.3572 4.49 3.89 1.2471Sigma2 0.5379 0.3903P1 0.2459 0.23212002:Mu1 3.1267 22.79 22.79 0.8316Sigma1 0.0001 0.6262Mu2 1.1364 3.81 3.12 1.7608Sigma2 0.6351 0.6912P1 0.1266 0.11172010:Mu1 3.1267 22.79 22.79 1.5357 3.1293 1.3002Sigma1 0.0001 0.5445 0.0010 0.6171Mu2 1.5338 5.37 4.64 3.1292 1.2845 3.1293

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Sigma2 0.5433 0.0010 0.6047 0.0010P1 0.4994 0.5021 0.5358 0.6941Likelihood 1.72E+04 1.74E+04 1.72E+04 1.74E+04Likelihood Ratio 3.62E+02 4.60E+01 4.16E+02p value 3.76E-78 6.94E-06 2.99E-79

Table 7: Likelihood Ratio Tests between Recessions

1983, 1992 and 2002 Recessions

Unconstrained Constrained

Likelihood 1.06E+04 1.06E+04Likelihood Ratio 68p value 1.08E-10

1992 and 2002 Recessions Unconstrained ConstrainedLikelihood 6.29E+03 6.34E+03Likelihood Ratio 98p value 1.40E-19

1983 and 2010 Recessions

Unconstrained ConstrainedLikelihood 1.09E+04 1.10E+04Likelihood Ratio 136p value 1.27E-27

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Hazard Rates for 35-54 Year Olds with a High School Diploma or Less

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Table 8: 35- 54 Year Olds with at Least Some College

Unconstrained Mean Number

of Weeks

Median Number of

WeeksPs Equal Lengths Equal Constrained

1983:Mu1 1.3648 4.76 3.91 2.7505Sigma1 0.625 0.3495Mu2 3.129 22.85 22.85 1.1962Sigma2 0.0010 0.5560P1 0.7278 0.71241991:Mu1 1.1736 4.08 3.23 0.7924Sigma1 0.6818 0.6420Mu2 3.1293 22.86 22.86 2.3344Sigma2 0.0010 0.5215P1 0.7745 0.78082002:Mu1 1.1472 3.96 3.15 1.1681Sigma1 0.6784 0.5505Mu2 3.1293 22.86 22.86 0.8731Sigma2 0.0010 0.5982P1 0.8660 0.8755

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2010:Mu1 1.5711 5.68 4.81 1.5756 1.2634 1.2980Sigma1 0.5766 0.5758 .6490 0.6540Mu2 3.1292 22.86 22.86 3.1292 3.1292 3.1292Sigma2 0.0010 0.0010 0.0010 0.0010P1 0.4612 0.4592 0.4108 0.6539Likelihood 1.10E+04 1.11E+04 1.10E+04 1.12E+04Likelihood Ratio 1.56E+02 1.80E+01 3.32E+02p value 1.34E-33 0.116 1.21E-61

Table 9: Likelihood Ratio Tests between Recessions

1983, 1992 and 2002 Recessions Unconstrained ConstrainedLikelihood 5.71E+03 5.72E+03Likelihood Ratio 29p value 1.25E-03

1992 and 2002 Recessions Unconstrained ConstrainedLikelihood 4.45E+03 4.46E+03Likelihood Ratio 28.6p value 2.78E-05

1983 and 2010 Recessions

Unconstrained ConstrainedLikelihood 6.57E+03 6.60E+03Likelihood Ratio 55.8

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p value 8.93E-11

Hazard Rates for 35-54 Year Olds with at Least Some College

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