Time-based Unemployment Cascade Behavior
Nonemployment stigma as rational herding: A field experiment
Article by Felix Oberholzer-Gee
https://doi.org/10.1016/j.jebo.2004.05.008
Time-based Unemployment Cascade Behavior
Long term unemployment has consistently been shown to be self-perpetuating. Those that are unemployed for longer are hired at much lower rates, extending unemployment for the long term unemployed. While several factors have been suggested to explain this phenomenon, including a loss of skills of the long term unemployed, Felix Oberholzer-Gee shows that a significant part of the issue is rational herding from hiring managers. Under the assumption that the long term unemployed have actively been applying for jobs, length of unemployment then is correlated with the amount of times a candidate have not been hired at jobs to which they have applied. While hiring managers have their own private information on a candidate based on their impression of a candidate’s application, if length of unemployment is used as a negative proxy for other manager’s private signals as explained above, then that information can outweigh a single hiring manager’s own private information given the circumstances. All in all, long term unemployment can be viewed as an assumed negative information cascade on the quality of worker that is long term unemployed.
This relates to several of the real world applications of rational herding that we have discussed in class. In addition to more trivial matters such as restaurant popularity, rational herding has significant effects on the livelihood of people who cannot find work. Furthermore, this analysis extends the idea of rational herding to situations where not all participants choose in order, and where the amount of previous decisions is not even known. This shows that herding can occur under a variety of conditions. One key difference of the herding in this case as opposed to the textbook case is that there is no exact threshold past where the cascade is irreversible. Oberholzer-Gee finds thirty months of unemployment makes getting a job extremely unlikely, but because of uncertainty as to the number of previous job applications and confounding factors such as worker skill, there is no exact threshold for the cascade. Instead the probability that the cascade continues simply increases as time goes on.