Brookings Papers ON ECONOMIC ACTIVITY

BROOKINGS INSTITUTION PRESS

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

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 Jersey during the fall of 2009 and the spring of 2010. Section III examines the pattern of job search behavior over the spell of unemployment. Section IV considers the subjective well-being of the unemployed, devoting particular attention to psychological well-being during periods of job search. Section V considers the relationship between job search activity and the incidence of job offers and early exit from UI benefit receipt. Section VI concludes.

I. Description of the Survey

In early October 2009 the Princeton University Survey Research Center (PSRC) obtained a complete list of the roughly 360,000 individuals receiving UI benefits in New Jersey as of September 28, 2009. The data were subjected to a stratified random sampling procedure to obtain a sample of 63,813 UI recipients. The strata consisted of duration-of-unemployment intervals interacted with the availability of an e-mail address. Long-term un employed workers and those with e-mail addresses on file were over-sampled. The sampled individuals were invited to participate in an online survey for a period of 12 weeks, with weekly interviews on their job search activities, time use, reservation wages, job offers, food consumption, and other variables. Participants were paid $20 to $40 for participating in the survey. Weekly interviews of the long-term unemployed in the sample took place for an additional 12 weeks, for a total of 24 weeks.

The questionnaire consisted of two parts: an entry survey, administered in the first week, with demographic, income, and wealth questions, and a shorter follow-up survey, administered in the first and each subsequent week, that focused on job search activities, the reservation wage, and receipt of job offers. The appendix describes the survey and the questionnaire in detail.

One concern is that the response rate was low. Only 10 percent of the sampled individuals who were contacted participated in the entry wave of the survey, and respondents in the entry survey participated in only about 40 percent of the weekly follow-up surveys after the first week. Fortunately, the administrative data file contains a rich set of demographic variables that we could use to create sample weights to adjust for nonresponse, and the characteristics of respondents could be compared with the universe along a number of relevant dimensions, including preunemployment earnings. In addition, we were able to match information on the duration of benefit receipt as of April 2010 for the entire sample frame; thus, we can compare the UI exit rate for the sample frame with that for the respondents.

Table 1 summarizes the characteristics of the universe of New Jersey UI recipients, the sample frame, and the respondents. In addition, the last two columns report estimates that adjust for strata weights and nonresponse weights. Compared with the universe, the (unweighted) respondents were more likely to be college graduates (41 percent versus 19 percent) and female (52 percent versus 45 percent) and to have had higher annual earnings in the base period ($48,994 versus $35,335). The weighted sample and the universe are very similar in terms of demographic characteristics, however, which is not entirely surprising given that demographic variables were used to create nonresponse weights. Weighted-average earnings in the base year, typically defined as the first four of the five quarters before the UI claim, at $37,960 are reasonably close to average base-year earnings in the universe, which is more reassuring because earnings were not used to create weights. In addition, the industry composition of the weighted respondents is similar to that of the universe, although construction workers are somewhat underrepresented among the respondents. Finally, weeks of UI benefits paid are slightly lower for the weighted respondents than for the universe, but similar to those in the weighted stratified sample frame. As a whole, the weighted survey participants and the universe appear to be similar along many dimensions despite the low response rate.

Additional evidence suggesting that the low response rate did not significantly skew the sample is provided in figure 2, which shows the Kaplan-Meier nonparametric UI exit rate by duration of unemployment as measured by weeks of UI benefits paid. The hazard rates are reported separately for the stratified sample frame and for respondents (both weighted). The hazard rate at duration t is defined as the fraction of UI spells ongoing at the start of week t that ended during week t. A spell could end because a worker found a job or because the worker was no longer eligible for benefits. Spells were considered censored if the date of the last UI payment was in the week of April 30, 2010 (the date we received the updated administrative data on weeks of UI benefits paid) or later. Figure 2 shows that the weekly exit rate for the respondents closely tracks that of the sample frame, which is within the 95 percent confidence interval of the exit rate for the respondents at almost all durations. A notable exception, however, occurs in the first couple of weeks, when the hazard rate for the sample frame is around twice that for the respondents. This disparity probably arises because some workers found employment shortly after they filed their UI claim and thus were unlikely to respond to our survey. Over most durations, however, the hazard rates are similar.

Figure 2 displays the typical pattern of a declining hazard rate at the beginning of a spell of unemployment and a flatter rate thereafter. The hazard rate profile is flatter than has been found in other studies (such as Katz and Meyer 1990), however. In addition, the weekly UI exit rate is lower than has been found in previous work. For example, Katz and Meyer (1990), using data for Missouri in 1979–81, report UI exit rates that start at around 10 percent and vary from 4 to 8 percent per week in most subsequent weeks, whereas the hazard rate in figure 2 begins at around 7 percent and quickly falls below 2 percent in most weeks. These differences probably reflect the weak job market in late 2009 and the low incidence of recall to one's previous job.

Figure 2 also shows notable spikes in the hazard rate at week 26 and week 51. The reason for the spike at week 26 is that the eligibility requirements for extended UI benefits are slightly more stringent than the requirements for regular benefits, which for most workers last 26 weeks. Therefore, a small number of recipients exhausted benefits at week 26. The spike at week 51 arises because workers are tested for continued eligibility for extended benefits at the end of each benefit year (52 weeks after the UI claim was filed). We do not see a spike in the job finding rate at either 26 or 51 weeks in our survey data, and so the spikes most likely result from these program requirements. Regardless of the reason for the spikes, the weighted sample appears to have similar prospects of leaving UI as the broader sample frame that we sought to interview, suggesting that nonresponse was fairly random with respect to job market prospects.

II. Unemployment Insurance in New Jersey in 2009–10

New Jersey has one of the more generous UI systems in the United States. The benefit amount in 2009 was 60 percent of previous earnings up to a maximum weekly benefit of $584. The maximum duration of regular UI benefits varies between 1 and 26 weeks, depending on how many weeks the claimant worked in the base year. Most unemployed workers in New Jersey qualify for the maximum duration: in our data, 87 percent qualified for 26 weeks of regular benefits, and only 3 percent qualified for fewer than 20 weeks.

In New Jersey, UI recipients are allowed to work at part-time jobs while receiving benefits. Earnings from part-time jobs are deducted from the benefit amount, with an earnings disregard of 20 percent of the weekly benefit. This implies that UI recipients who work part time can keep weekly earnings of up to 20 percent of the weekly benefit amount; any earnings in excess of that are deducted from the weekly benefit. Thus, those who earn more than 120 percent of their weekly benefit do not qualify for benefits in that week. A worker who works part time during a period of unemployment may draw benefits for a longer period than the maximum duration for an otherwise comparable beneficiary who does not work at all. The reason is that the state specifies a maximum dollar amount that can be received for a given UI claim (the maximum benefit amount), and those who work part time can receive benefits for a longer period of time because their weekly benefit amount is reduced.

The duration of UI benefits is affected by federal extensions as well as by state policy. In June 2008 the federal government established the Emergency Unemployment Compensation (EUC) program, which entitled UI recipients in all states to an additional 13 weeks of extended benefits, and in November 2008 EUC was extended to 33 weeks in high-unemployment states, of which New Jersey was one. The American Recovery and Reinvestment Act, enacted in February 2009, extended the expiration date of EUC to December 31, 2009, and raised weekly benefits by $25. In addition to the federal extension, New Jersey activated the state Extended Benefits (EB) program on March 15, 2009, which initially provided for an additional 13 weeks of UI benefits, and then for 20 weeks on May 3, 2009.

At the time interviewing for our survey commenced on October 13, 2009, UI recipients in New Jersey were eligible for up to 79 weeks of benefits, counting regular benefits, EUC, and EB. On November 6, 2009, the federal government increased EUC benefits by an additional 20 weeks, increasing the maximum duration in New Jersey from 79 to 99 weeks. The increase to 99 weeks probably came as a surprise to many workers. This extension was retroactive in the sense that workers who had exhausted the 79 weeks of benefits for which they were eligible before the extension to 99 weeks became eligible for another 20 weeks of benefits. The extension was effective in New Jersey as of November 8, 2009.

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