Unemployment duration and the role of compositional variation: evidence from a period of economic crisis in Finland

Abstract

The recession of the early 1990s caused a serious unemployment problem in Finland. This study investigates the role of compositional variation in unemployment duration using individual data on Finnish workers. The compositional effect is examined by predicting the impact of the observed unemployment inflow heterogeneity on aggregate re-employment rates. Focusing on a recession period provides useful variation for the analysis due to large increase in the unemployment inflow. According to the results, the aggregate outflow effect dominates and the observed compositional variation implies only a small increasing trend in the average duration during the recession period.

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Notes

  1. 1.

    The long-term unemployment rate is the main macroeconomic indicator that is related to unemployment duration. Individuals are defined as long-term unemployed after 12 months of unemployment.

  2. 2.

    The conditions of the earnings-related allowance changed only slightly during the 1990s and the replacement rates remained relatively stable. The required number of months in work was raised from 6 to 10 months in 1997.

  3. 3.

    This rule came into effect first in 1996 for those under 20 years of age but it was extended for those under 25 in 1997.

  4. 4.

    Some individuals have consecutive unemployment spells with short breaks between them. The spells are joined in the analysis data if the breaks are shorter than 20 days.

  5. 5.

    Loess is a local regression method proposed by Cleveland (1979).

  6. 6.

    The exits to unknown state are not strongly related to the duration of spell. The main results of the compositional analysis are robust to treating the exits to unknown state as censored observations.

  7. 7.

    To assess the robustness of the results, a mixed proportional hazard model was estimated. Extending the model up to three mass points for the unobserved heterogeneity changes the parameter estimates. However, the main impact is on the baseline hazard and this extension gives qualitatively similar results for the compositional variation as the main model.

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Acknowledgments

I thank Per Johansson, Roope Uusitalo, Tuomas Pekkarinen and Tomi Kyyrä for their helpful comments. I am also very grateful to Tomi Kyyrä for providing the R routines for the estimation of mixed proportional hazard models. Yrjö Jahnsson Foundation is acknowledged for the financial support.

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Correspondence to Jouko Verho.

Appendix

Appendix

See Tables 1234 and Fig. 5.

Fig. 5
figure5

Seasonally adjusted regional and aggregate (solid line) unemployment rate series (source: Labour Force Survey, adjusted for definition change in 1997 due to EU standards)

Table 1 Descriptive statistics
Table 2 Variable description
Table 3 Description of occupation classification
Table 4 Coefficients

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Verho, J. Unemployment duration and the role of compositional variation: evidence from a period of economic crisis in Finland. Empir Econ 47, 35–56 (2014). https://doi.org/10.1007/s00181-013-0732-3

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Keywords

  • Unemployment duration
  • Unemployment composition
  • Business cycles

JEL Classification

  • E32
  • J64