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The effect of unemployment duration on future earnings and other outcomes

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  • Daniel H. Cooper

Abstract

One of the distinguishing features of the Great Recession and its aftermath has been the spike in the number of individuals experiencing long-duration unemployment spells, defined as lasting more than 26 weeks. This paper analyzes the effect of unemployment duration on individual's future earnings and other outcomes, such as homeownership and wealth, using data from the Panel Study of Income Dynamics (PSID). The results show a negative relationship between a worker's most recent unemployment spell and his or her current earnings. The earnings of displaced workers do not catch up to those of their nondisplaced counterparts for nearly 20 years. The effect of unemployment on earnings is even more substantial for workers unemployed 26 weeks or more. Unemployment spells also negatively impact future homeownership?this finding suggests that the consequences of the recent spike in unemployment duration could affect more than individuals' expected lifetime earnings. Given the costs of long-term unemployment, policies aimed at reducing the unemployment rate?such as the Federal Reserve's quantitative easing program?could have the added benefit of limiting the negative consequences of long-duration unemployment through fostering faster re-employment.

Suggested Citation

  • Daniel H. Cooper, 2014. "The effect of unemployment duration on future earnings and other outcomes," Working Papers 13-8, Federal Reserve Bank of Boston.
    • Handle: RePEc:fip:fedbwp:13-8
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    Citations

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    Cited by:

    1. William J. Carrington, 2015. "Do We Know Why Earnings Fall with Job Displacement? Working Paper: 2015-01," Working Papers 49908, Congressional Budget Office.
    2. Marjan Petreski & Nikica Mojsoska-Blazevski & Marcelo Bergolo, 2017. "Labor-Market Scars When Youth Unemployment is Extremely High: Evidence from Macedonia," Eastern European Economics, Taylor & Francis Journals, vol. 55(2), pages 168-196, March.
    3. Lei Fang & Jun Nie, 2014. "Human Capital Dynamics and the U.S. Labor Market," FRB Atlanta Working Paper 2014-2, Federal Reserve Bank of Atlanta.
    4. Gyu‐Jin Hwang, 2019. "How fair are unemployment benefits? The experience of East Asia," International Social Security Review, John Wiley & Sons, vol. 72(2), pages 49-73, April.
    5. Pritadrajati, Dyah S. & Kusuma, Anggita C.M. & Saxena, Sweta C., 2021. "Scarred for life: Lasting consequences of unemployment and informal self-employment," Economic Analysis and Policy, Elsevier, vol. 70(C), pages 206-219.
    6. Krzysztof Bartosik & Jerzy Mycielski, 2016. "Dynamika płac a długotrwałe bezrobocie w polskiej gospodarce," Bank i Kredyt, Narodowy Bank Polski, vol. 47(5), pages 435-462.
    7. William J. Carrington & Bruce Fallick, 2017. "Why Do Earnings Fall with Job Displacement?," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 56(4), pages 688-722, October.
    8. William J. Carrington & Bruce Fallick, 2014. "Why Do Earnings Fall with Job Displacement?," Working Papers (Old Series) 1405, Federal Reserve Bank of Cleveland.
    9. Dyah S. Pritadrajati & Anggita C. M. Kusuma & Sweta C. Saxena, 2020. "A Non-Healing Wound: Lasting Consequences Of Unemployment And Informal Self-Employment: An Empirical Evidence From Indonesia," Working Papers WP/09/2020, Bank Indonesia.

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    More about this item

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J68 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Public Policy

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