Brookings Papers ON ECONOMIC ACTIVITY

BROOKINGS INSTITUTION PRESS

Copyright © 2011 THE BROOKINGS INSTITUTION
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ISBN: 978-0-8157-2221-2

Contents

Editors' Summary............................................................................................................................................................................viiALAN B. KRUEGER AND ANDREAS MUELLER Job Search, Emotional Well-Being, and Job Finding in a Period of Mass Unemployment: Evidence from High-Frequency Longitudinal Data.....................1ANNAMARIA LUSARDI, DANIEL ScHNEIDER, AND PETER TUFANO Financially Fragile Households: Evidence and Implications............................................................................83ERIC T. SWANSON Let's Twist Again: A High-Frequency Event-Study Analysis of Operation Twist and Its Implications for QE2...................................................................151N. GREGORY MANKIW AND MATTHEW WEINzIERL An Exploration of Optimal Stabilization Policy.....................................................................................................209MICHAEL C. BURDA AND JENNIFER HUNT What Explains the German Labor Market Miracle in the Great Recession?...................................................................................273LAURENCE BALL AND SANDEEP MAZUMDER Inflation Dynamics and the Great Recession..............................................................................................................337

Chapter One

ALAN B. KRUEGER Princeton University

ANDREAS MUELLER Stockholm University

Job Search, Emotional Well-Being, and Job Finding in a Period of Mass Unemployment: Evidence from High-Frequency Longitudinal Data

ABSTRACT This paper presents findings from a survey of 6,025 unemployed workers who were interviewed every week for up to 24 weeks in the fall of 2009 and winter of 2010. We find that the amount of time devoted to job search declines sharply over the spell of unemployment; we do not observe a rise in job search or job finding around the time that extended unemployment insurance (UI) benefits expire. The workers in our survey express much dissatisfaction and unhappiness with their lives, and their unhappiness rises the longer they are unemployed. The unemployed appear to be particularly sad during episodes of job search, and they report feeling more sad during job search the longer they are unemployed. We also find that in the aftermath of the Great Recession the exit rate from unemployment was low at all durations and declined gradually over the spell of unemployment. Both the amount of time devoted to job search and the reservation wage help predict early exit from UI.

For the first time since the early 1980s, mass unemployment is a problem in the United States. The unemployment rate reached 10.1 percent in October 2009, more than double its rate a year and a half earlier. In addition, in early 2011 nearly half of the unemployed had been out of work for 27 weeks or longer, and the mean duration of an ongoing spell of unemployment was around 9 months. Extended unemployment carries with it the risk that many of those out of work will lose relevant skills and become discouraged from looking for work, raising the specter of hysteresis and permanently higher joblessness. This paper provides evidence on the job search process, the effectiveness of job search activities, the emotional well-being of the unemployed, and the likelihood of finding a job and leaving unemployment insurance, using new survey data collected in the fall of 2009 and winter of 2010 from a large sample of unemployed workers. We devote particular attention to measuring how job search activity and emotional well-being evolve over the course of unemployment for a given set of individuals, to assess whether the unemployed become discouraged.

Research has long found that the exit rate from unemployment falls over the spell of unemployment (see, for example, Kaitz 1970). However, it is difficult to infer whether this declining hazard rate is due to changes in the behavior of the unemployed over time (for example, because discouragement leads to less job search and thus a lower exit rate) or to changes in the composition of the sample of unemployed workers (that is, heterogeneity bias, because those who search most intensively are more likely to find a job sooner). In addition, research for the United States has found that part of the reason for the observed declining hazard rate is that some workers are recalled to previous jobs (Katz and Meyer 1990).

Our study is distinguished from past work by the use of high-frequency longitudinal data on search activity. We designed and implemented a large-scale weekly survey of unemployment insurance (UI) benefit recipients in New Jersey. More than 6,000 unemployed workers participated in the survey for up to 12 weeks, and the long-term unemployed (those unemployed 60 weeks or longer at the start of the survey) were surveyed for an additional 12 weeks. A total of 39,201 weekly interviews were completed. We also have restricted access to administrative data from the UI system, which is important given that our survey had a high rate of nonresponse. New Jersey's unemployment rate closely mirrored the national average in 2009 and 2010 (figure 1); thus, the results shed light on job search behavior in the worst labor market environment in decades. Nationwide, the number of workers claiming state and federal UI benefits at the start of our survey in October 2009 was nearly two-thirds as large as the total number of unemployed workers estimated by the Bureau of Labor Statistics (BLS). Thus, the behavior of UI recipients represents that of a large share of the unemployed population.

We focus on individuals' job search activity over the spell of unemployment. We also examine the relationship between job search and the likelihood of receiving a job offer and exiting UI, and subjective well-being over the spell of unemployment. Our main conclusions are the following: first, job search declines steeply over the spell of unemployment for a given set of individuals; second, after a period of rapidly rising unemployment, workers who lost their jobs at different times have strikingly different characteristics, and comparisons across cohorts of workers who lost their jobs at different times are prone to bias (another source of heterogeneity bias); third, unemployed workers express much dissatisfaction with their lives, and their self-reported mood worsens the longer they are unemployed, whereas life satisfaction stays relatively constant; fourth, the unemployed appear to be particularly sad during the hours they spend actually searching for a job, and they find job search more emotionally onerous, if anything, as the duration of unemployment increases; fifth, in the wake of the Great Recession the exit rate from unemployment was low at all durations of unemployment and declined gradually over the spell of unemployment; sixth, the choice of job search activities and the amount of search time do not bear a straightforward relationship with the likelihood of receiving a job offer, but job search time and the reported reservation wage do predict early exit from UI, although unmeasured characteristics of workers could distort the estimated relationships; finally, we find little evidence that exhaustion of extended UI benefits is associated with an increase in job search activity or in job offers.

The next section describes the data used in our study and assesses the effect of survey nonresponse. Section II summarizes relevant features of UI as it was in effect in New...