Stigma Effects of Nonemployment

By Omori, Yoshiaki | Economic Inquiry, April 1997 | Go to article overview

Stigma Effects of Nonemployment


Omori, Yoshiaki, Economic Inquiry


I. INTRODUCTION

It is well known that longer durations of past nonemployment are associated with longer durations of future nonemployment.(1) Two explanations have been offered in the literature to interpret this phenomenon: heterogeneity and the effect of workers' employment histories. The heterogeneity explanation argues that individuals differ in certain observed and unobserved characteristics and that these differences affect the duration of their periods of nonemployment. However, these individuals are unaffected by the mere experience of nonemployment. Because individuals with longer spells of nonemployment in the past are more likely to have characteristics that make them remain nonemployed, they are likely to experience longer spells of nonemployment than others in the future.

The "work history explanation" argues that the mere experience of longer spells of nonemployment in the past raises the chance of longer spells of nonemployment in the future. Two theoretical explanations have been offered to explain this structural relationship: human capital decay and stigma. Human capital decay suggests that nonemployed workers lose vital work experience and on-the-job training, or suffer from human capital decay that reduces their future employability. Stigma suggests that potential employers infer the unobserved components of the workers' quality from their history of employment and nonemployment. In particular, past nonemployment sends a negative signal to potential employers that lowers the probability of future reemployment.(2)

The ability to distinguish between heterogeneity and the effect of work history is a crucially important policy issue. If the observed correlation between the duration of successive nonemployment spells reflects heterogeneity across individuals, then a given individual enjoys the same chance of reemployment no matter how long or short his periods of past nonemployment have been. In this case, chronic nonemployment is a problem of a population subgroup and traditional training programs targeted toward the chronically nonemployed would be an appropriate policy tool. Moreover, the programs could be targeted at individuals with the characteristics associated with a high risk of chronic nonemployment. However, if the observed correlation reflects the effect of work history, anyone who happens to have experienced long periods of nonemployment in the past has a high probability of experiencing long periods of nonemployment in the future. Thus, Phelps [1972] argues that short-term macroeconomic policies that alleviate unemployment will also lower aggregate unemployment rates in the long run.(3)

I argue, however, that an appropriate policy depends on the cause of the work history effect. If the effect reflects human capital decay, then short-term macroeconomic policies to alleviate unemployment and traditional government training programs to help the unemployed restore lost skills are appropriate. If the effect reflects stigma, active short-term macroeconomic policies may not be necessary to lower aggregate unemployment rates in the long run because stigma effects are likely to be weaker when nonemployment is experienced during a severe recession than when it is experienced during a moderate recession. An appropriate policy would aim at aiding the flow of accurate information on the quality of stigmatized workers in the private sector. For instance, the government might subsidize potential private-sector employers' costs of screening job applicants who established poor work histories during a period of moderate recession. Alternatively, it might sponsor private-sector internship and training programs for such workers.(4)

Although both the duration and frequency of nonemployment determine the individual's nonemployment rate, the duration is empirically far more important than the frequency.(5) Because an understanding of the determinants of the duration of nonemployment is crucial to both economic theory and policymaking, an enormous number of empirical studies have addressed the issue. …

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