Long-Term Unemployment and the Great Recession: The Role of Composition, Duration Dependence, and Nonparticipation

We explore the role of composition, duration dependence, and labor force nonparticipation in accounting for the sharp increase in the incidence of long-term unemployment (LTU) during the Great Recession. We show that compositional shifts account for very little of the observed increase in LTU. Using panel data from the Current Population Survey for 2002-7, we calibrate a matching model that allows for duration dependence in unemployment and transitions between employment, unemployment, and nonparticipation. The calibrated model accounts for almost all of the increase in LTU and much of the observed outward shift in the Beveridge curve between 2008 and 2013.