Unemployment persistence: Is there evidence for stigma effects?

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp08057.pdf The hypothesis underlying our empirical approach is that the stigma of unemployment is low when aggregate unemployment is high, as in this case, individual unemployment is not a strong signal for lower individual productivity. We use data from the German SocioEconomic Panel (GSOEP) to estimate the probability of being unemployed conditional on the employment state of the previous period (the state dependence effect) and other covariates using a dynamic, correlated random effects model.Our results show that positive deviations of the unemployment rate from its trend are indeed associated with a significantly lower level of state dependence. Overall, we conclude that stigmatization is one explanation for state dependence in individual's employment histories and thus contributes to the explanation of high and persistent rates of long-term unemployment in Germany. Das Wichtigste in KürzeIn Abstract. We present evidence for a highly significant interaction between state dependence in individual unemployment risk and the business cycle. The disadvantage from having been unemployed in the previous period is smaller in times of relatively high unemployment and larger in times of low unemployment. This is consistent with the existence of stigma effects in the sense that unemployed individuals face difficulties finding a new job because employers interpret unemployment as a negative signal and do so especially when it is easier to find jobs, i.e. when unemployment is low.JEL-Classification: J64, J65, C23

Scars of recessions in a rigid labor market

“…Gaini et al (2012) report in this country lower employment rates for cohorts graduating in a recession only during the first two years and no wage penalty. The authors advance two potential explanations: (1) a high minimum wage dampens the effect on wages and (2) a persistently high unemployment rate, such that employers use unemployment less as a negative signal in the hiring process (Biewen and Steffes, 2010;Kroft et al, 2013).…”

Wage effects of non-wage labour costs

“…We thus assume that the number of previous unemployment spells affects the probability of getting a permanent job from unemployment but that conditional on selection it does not affect wages. There is a substantial amount of evidence of state dependence scarring effects in individual unemployment histories (see Arulampalam et al, 2000;Biewen and Steffes, 2010;Rebollo-Sanz, 2011;Ayllón, 2013 for recent studies for Spain), which should explain a negative effect of the number of unemployment spells on the probability of finding permanent employment. It may be argued that our exclusion restriction captures in part unobserved productivity and it is thus correlated with wages.…”

Vacancy chains and the business cycle. Stringing together job-to-job transitions in micro data

“…Hiring from the employed pool is considered less risky, but most likely requires higher wage offers, because employed workers change firms only if they are better off in the new job than are in their current one (Russo et al, 2001;Hassink and Russo, 2008). To hire from the pool of unemployed is less costly, but it can be considered more risky because unemployment signals a possible negative pre-selection by the employer that formerly dismissed the worker, and by other employers that have already declined to hire him (Vishwanath, 1989;Gibbons and Katz, 1991;Biewen and Steffes, 2010).…”