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Long-term unemployment can turn into structural unemployment via the following channels: workers lose skills with time, they acquire the stigma of unemployability and may even quit looking for work.

OECD found that the rise in long-term unemployment, given the behaviour of total unemployment, was two and a half times higher than previous experience implied.

Several studies suggest that the longer a person remains unemployed, the less likely they are to re-enter employment, be it due to loss of human capital, reduced job search intensity or employers preference for those from shorter terms of unemployment. Aaronson et al (2010) take this a step further by showing that the probability of entering employment declines as the duration of unemployment increases. Another way to test for hysteresis is to analyze whether the long-term unemployed are less relevant to wage formation. Llaudes does so within a Phillips Curve framework, adjusting the unemployment rate to reflect different durations. The study finds that for a range of countries, the long-term unemployed exert less pressure on wages than the short-term unemployed. The result is less clear cut for the US than Europe the long term unemployed are found to have some impact on wages in the US but this may partly be a function of the sample period, which excludes the recent episode of exceptionally high long-term unemployment.

Cleveland Fed found that the effect of the EUC is relatively minimal, accounting for about 0.6 to 0.8 percentage points of the unemployment rate by the end of 2010.

Last Updated:30-Sep-12
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