Recall and waiting unemployment

Time use surveys in a range of countries show that the unemployed spend maybe a few hours per week looking for a new job. Krueger and Mueller (2008) found that:

…average search time is highest in the U.S.A., at 32.3 minutes per day, closely followed by Canada.

Europeans search much less, but there is considerable variation across countries.

In France the unemployed search around 21 minutes a day compared with 3 minutes in Finland

A small amount of job search per week is rational for many of the unemployed because a major form of job search doesn’t involve any job search any time soon. Instead, they are waiting for a call.

Also, Anglo-Saxon labour market are  much more dynamic with many more vacancies opening every month  as compared with the Eurosclerosis dual labour markets. In the European Union’s dual labour markets, it is not rational to search for vacancies that will never be there.

Job searches is an entrepreneurial venture that can involve a considerable amount of biding your time. Job seekers must choose between wider job search that may involve switching to a new industry or new occupation and investing in availability for suitable vacancies in their local labour markets or a recall to employment by old employers.

A spell of unemployment followed by a rehire by an old employer is known as recall unemployment or a temporary layoff.

Demand is less stable and more seasonal in industries such as construction, manufacturing and agriculture. When demand rebounds, recalling an old employee is a faster and cheaper hiring process than screening unfamiliar applicants of uncertain quality and training recruits.

Recall is not certain. Temporary layoffs will forecast their chances of recall and review these forecasts as they discover more about the length of drop in local labour demand and the general state of the rest of the labour market.  the majority of unemployed who  regard themselves as temporary layoffs are indeed recalled  to their old job by their old employer after most downturns.

Better prospects of recall by old employers will reduce the intensity of job searches of temporary layoffs and increase their asking wages for other jobs. Workers with considerable industry and firm-specific human capital are likely to risk waiting longer for recall. Workers will search more intensively for other jobs as their forecasts of their chances of recall to old jobs become less encouraging.

There are more temporary layoffs in milder recessions because the lull in demand is expected to be short and there are fewer business closures. The higher levels of recall unemployment will reduce downward pressure on asking wages and slow the filling of vacancies because many well qualified job applicants are waiting for recall to their old jobs rather than applying more widely for new jobs.

Dixon and Crichton (2006) found that 58% of New Zealand benefit-to-work transitions involved starting with a new employer, 30% continued with an employer for whom they worked part-time in the benefit spell and 12% returned to an employer they had worked for in the past 2 years. The prospect of a recall by an old employer has been important for unemployed workers in countries such as the US, Canada, Demark, Sweden, Austria and Norway.

In the context of work-for-the-dole schemes and activation programmes that involve intensive monitoring of job search by the unemployed on unemployment benefits, requiring  workers who are temporarily laid off to search for jobs is in many ways counter-productive.

Developing a screening mechanism to find these temporary layoffs and distinguishing them from permanent layoffs would be quite challenging. Countries which have unemployment insurance premiums spend a lot of try trying to adjust those premiums for temporary layoffs. This is so employers and employees do not take advantage of unemployment insurance to have a week or two off work in slack periods at the expense of the unemployment insurance system and top up their wages in the interim.

A cousin of recall unemployment is  rest unemployment or waiting unemployment – job seekers who are waiting for conditions in a depressed sector to improve (Hamilton 1988; Alvarez and Shimer 2008).

Some job seekers may wait for local labour market conditions to improve, rather than search for jobs in other industries and new occupations. A job seeker’s old industry may offer better wage and job finding prospects than other industries If the  newly unemployed worker waits a while. 

Rest unemployment or waiting unemployment strives to salvage as much of the occupation and industry-specific human capital  of the  newly unemployed worker as possible.

A significant share of job seekers have been found to be waiting for local labour market conditions to improve rather than searching further afield  in different industries or new occupations (Alvarez and Shimer 2008).

Again, rest unemployment or waiting unemployment is a type of job search that cannot be well handled by work-for-the-dole schemes and intensive monitoring of the job search of unemployed workers.

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Job finding rates under work for the dole when there is involuntary unemployment

Jeff Borland is a critic of work for the dole. He points out that they do not improve the job finding rates of participants and in fact reduce the amount of job search because work for the Dole participants are busy undertaking work for the dole requirements:

The main reason is that participation in the program diverts participants from job seeking activity towards Work for the Dole activity. Research on similar programs internationally has come up with comparable findings.

This made me wonder. If unemployment is caused by deficient aggregate demand, and otherwise is involuntary, how can work for the dole increase unemployment or reduce the rate at which people exit unemployment?

‘Involuntary’ unemployment occurs when all those willing and able to work at the given real wage but no job is available, i.e. the economy is below full employment. A worker is ‘involuntary’ unemployment if he or she would accept a job at the given real wage. Keynesians believe money wages are slow to adjust (e.g. due to money illusion, fixed contracts or because employers and employees want long run money wage stability), and so the real wage may no adjust to clear the labour market: there can be ‘involuntary’ unemployment.

Under the deficient aggregate demand theory of unemployment, people have no control over why they are unemployed – that’s why their unemployment is involuntary.

Sticky wages are no less sticky when work for the dole is introduced and people search more intensively for jobs. Deficient demand unemployment is no less deficient when there is an increase in job search intensity.

Work for the dole must be carefully defined, of course, to differentiate it from the failed active labour market programs of the past that attempted to improve the employability of the unemployed. By work for the dole, I simply mean mandatory work requirements simply make it more of an ordeal to be on unemployment and thereby encourage people to find a job.

Mandatory work requirements simply tax leisure. By taxing leisure,  mandatory work requirements  change the work leisure trade-off between unemployment and seeking a job with greater zeal and a lower asking wage more attractive option. More applicants asking for lower wages will mean employers can fill jobs faster and at lower wages, which means our create more jobs in the first place.

The probability of finding a job for an unemployed worker depends on how hard this individual searches and how many jobs are available: Chance of Finding Job = Search Effort x Job Availability

Both the search effort of the unemployed and job creation decisions by employers are potentially affected by unemployment benefit generosity and mandatory work for welfare benefits requirements.

Modern theory of the labour market, based on Mortensen and Pissarides provides that more generous unemployment benefits put upward pressure on wages the unemployed seek. If wages go up, holding worker productivity constant, the amount left to cover the cost of job creation by firms declines, leading to a decline in job creation.

Everything else equal under the labour macroeconomics workhorse search and matching model of the labour market, reducing the rewards of being unemployed exerts downward pressure on the equilibrium wage. This fall in asking wages increases the profits employers receive from filled jobs, leading to more vacancy creation. More vacancies imply a higher finding rate for workers, which leads to less unemployment.  The vacancy creation decision is based on comparing the cost of creating a job to the profits the firm expects to obtain from hiring the worker.

When unemployment benefits are less generous or more onerous work requirements are attached, some of the unemployed will become less choosey about the jobs they seek in the wages they will accept.  a number of people at the margin between working or not. An example is commuting distance  to jobs. A number of people turn down a job  because is just that little too far to commute. A small change in the cost of  accepting that job would have resulted in them moving from being unemployed to fully employed.

Unemployment is easy to explain in modern labour macroeconomics: it takes time for a job seeker to find a suitable job with a firm that wishes to hire him or her; it takes time for a firm to fill a vacancy. Search is required on both sides of the labour market  –  there are always would-be workers searching for jobs, and firms searching for workers to fill vacancies.

In a recession, a large number of jobs are destroyed at the same time. It takes time for these unemployed workers to be reallocated new jobs.  It takes time for firms to find where it is profitable to create new jobs and find workers suitable to fill these new jobs.

Recessions are reorganisations. Unemployed workers look for jobs, and firms open vacancies to maximize their profits. Matching  unemployed workers with  new firms firms is a time-consuming and costly process.

Calmfor’s Iron Law of Active Labour Market Policy.

Lars Calmfors is a Swedish economist whose main interest is labour makets.

His iron law of Active Labour Market Policy (ALMP) refers to a characteristic of make work schemes, like the WPA that operated in the United States in the 1930s.

The characteristic or problem with these schemes is that if people are attracted to these schemes by generous pay or conditions, their motive to search for regular work is necessarily reduced.

Assuming unemployment is anywhere near NAIRU, the effect of this reduced aggregate labour supply will be inflationary, which means that demand will have to be reduced, which in turn means that the jobs created by the make work scheme will be, at least to some extent, at the expense of regular jobs.

Alternatively, if people are coerced into joining make work schemes because of what might be called a “workfare” sanction, their job search efforts are not reduced, thus the jobs created by the make work scheme have a better chance of not being at the expense of normal jobs.

via RALPHONOMICS: Calmfor’s Iron Law of Active Labour Market Policy..

Lessons from field trials with work mandates

Table1_RANDRevRevised_1202

One of the most controversial aspect of the U.S. program changes are the negative incentives – time limits, sanctions, and diversion – that are built into their structure.

All of these policies limit the entitlement to cash public assistance, by either enforcing behavioural requirements (such as work search) or limiting the availability of assistance.

As Besley and Coate (1992) pointed out, linking such requirements with public assistance payments can help deter welfare participation among those who could find a job on their own.

The majority of evaluations of mandatory welfare-to-work programs show significant increases in labour supply and reduced welfare dependency. The drawback is the increase in wage income is greatly offset by the decline in benefit income. In–work tax credits played a major role in making work pay in 1996 U.S. welfare reform

The Minnesota Family Investment Program (MFIP) was implemented in 1994 and provided a strong earnings threshold, allowing women to receive some cash assistance until their earnings reached about 140 per cent of the U.S. poverty line. It also required participation in mandatory job search programs.

A randomly assigned control group remained in AFDC without work requirements or substantial earnings thresholds. MFIP involved both strong negative and positive work incentives. A subset of the treatment group (also randomly assigned) was provided with the earnings thresholds but not the mandatory work requirements.

The MFIP results allow the separate and joint effects of mandatory job search and earnings thresholds to be explored. When only positive work incentives are provided through an expanded earnings threshold, this has little effect on labour supply, consistent with earlier results. The additional income provided by these higher thresholds had strong income-increasing and poverty-reducing effects. Once mandatory work requirements are added to MFIP, then labour supply increases as well, but there is little further effect on income or poverty.

The evaluations of MFIP suggest that the stick of work requirements increases labour supply, but has little effect on overall income as increases in earnings are offset by reduced benefits.

The carrot of greater earnings thresholds provides an income enhancing effect. When used together, there is increased work and higher earnings, along with reduced poverty.

The relatively strong measures to mandate work participation can be effective. Work mandates with sanctions are more effective at inducing work than are more financial incentives. Strict work requirements by themselves may have little income-enhancing effects if they are not combined with some form of wage support for the low-skilled.

Education and training programs do not seem any more effective in promoting labour force attachment and increased earnings than work experience programs. In various welfare reform experiments in the U.S. during the 1990s, states tested training programs – human capital development programs — against work first programs – labour force attachment programs.

The work-first programs increased earnings and decreased welfare usage faster, while human capital development programs cost more, particularly in the first year when women were training rather than working.

But even three years out, after women from human capital development programs had been in the labour market two years, human capital development participants still did not outperform labour force attachment participants.

This may suggest that the gains to experience among women who have been out of the labour market may be larger than the gains to formal education and training. Employment outcomes did not seem significantly worse among less skilled participants or participants with identifiable barriers to work, such as child care or health problems. Learning by doing and job match and job search capital are major sources of hard-to-measure post-school human capital and wages growth even for less skilled workers. Work-first programmes suggest that the reward from working which is human capital as well as wages are greater than an investment in time away from working to train.

The dual emphasis in the U.S. welfare reforms on positive work incentives and more punitive work mandates seems to have been important.

Work mandates (mandatory welfare-to-work programs, backed by sanctions and time limits) forced more people into work faster than would have naturally left welfare even strong economic environments. With low wages and (often) part-time hours, many welfare leavers would have gained little in income without subsidies to low-wage work. Reduced earnings thresholds, the expanded EITC, and subsidies to assist with child care or other work related expenses, all helped make work pay.

Table4_RANDRevised_1202

Diagrams HT: rand.org Conflicting Benefits Trade-Offs in Welfare Reform by Jeffrey Grogger, Lynn A. Karoly, and Jacob Alex Klerman (2002).