Monday, April 22, 2013

Krugman on Duration Dependence and Unemployment Probabilities

Ph.D. economists could distinguish themselves from other bloggers if we could concisely explain (using plain language) how academic economists test hard "real world" relevant policy questions.  Paul Krugman achieves this ideal today in his column focused on his belief that there is a causal relationship between being unemployed now and the probability that you are unemployed later.  He is agnostic about whether this effect is due to the perception among firms seeking workers that the unemployed suffer from skill atrophy or whether an unemployed person's skills actually do decline when they have nothing to do.  His evidence for his claim is based on the following field experiment; (here is quote)

"But as William Dickens and Rand Ghayad of Northeastern University recently showed, the relationship has broken down for the long-term unemployed: a rising number of job openings doesn’t seem to do much to reduce their numbers. It’s as if employers don’t even bother looking at anyone who has been out of work for a long time.
To test this hypothesis, Mr. Ghayad then did an experiment, sending out résumés describing the qualifications and employment history of 4,800 fictitious workers. Who got called back? The answer was that workers who reported having been unemployed for six months or more got very few callbacks, even when all their other qualifications were better than those of workers who did attract employer interest.
So we are indeed creating a permanent class of jobless Americans."

Permit me to crack a half joke.  I would say that the rise of field experiments as a research methodology is another reason that there is high unemployment in the U.S!   In the past, labor and environmental economists argued that high union wages and environmental regulations caused firms to move abroad to cheaper pollution havens. In this age of field experiments, another reason for firms to move abroad is to avoid applied researchers!   It would interest me if the IRB at Universities consider the value of a firm's lost time dealing with deception when it approves a study such as this one.