Duration dependence in Flemish unemployment data

The persistence of unemployment has been a point of concern of the European labour market policy for years. Long-term unemployment has a negative impact on the unemployed individual, the group of unemployed and the society as a whole. A great deal of labour market policy measures are therefore designed to prevent people from becoming longterm unemployed. Often it is assumed that such measures would best be undertaken shortly after the individual has become unemployed. This assumption stems from the assessment that the chances of finding a job fall as the unemployment spell lengthens. European guidelines on this matter place a great emphasis on the timely enhancement of the employability of job-seekers.

In the integrated Employment Guidelines for 2008-2010 the term for offering a new start to young people is reduced to four months. In Flanders these guidelines, which demand a swift intervention, are implemented in the guidance pathways of the Flemish public employment service, Vlaamse Dienst voor Arbeidsbemiddeling (VDAB). The comprehensive approach, which is adopted since the beginning of the 21st century, dictates that every single unemployed individual, so not just those who are difficult to place in work, have to be offered a „new start‟ shortly after becoming unemployed.

However, to evaluate this, or any other active labour market measure, it is important to be able to decompose the unemployment duration into its components. Generally two components or causes for the lower exit rate for long-term unemployed are cited, that is sorting and negative duration dependence. Sorting, also referred to as selection, is of importance when the (initially) most productive unemployed have a higher probability of finding a job. The (initially) least productive thus have a higher probability of becoming long-term unemployed. Conversely in the case of negative duration dependence, the hazard rate is believed to lower precisely because of duration of the unemployment spell. Several grounds for such negative duration dependence can be found. First, long-term unemployed can become discouraged and stop looking intensively for a job. Second, a long period of inactivity can erode skills and attitudes, i.e. productivity could actually lower. Third, employers might view a long unemployment spell as a signal of low productivity and are thus likely to screen the long-term unemployed out. This phenomenon is extensively described in the literature as „statistical discrimination‟.

The distinction is not only a statistical, but also a policy issue. If true negative duration dependence is the main cause of lowering hazard rates, then it is imperative that all entrants into unemployment quickly get supported in their job search process. However, if sorting is more important, the scarce means are better concentrated on unemployed with unfavourable characteristics. From an identification point of view the intervention in the latter case should not be planned too early in the unemployment spell.

The objective of this paper is to investigate whether the duration dependence in the hazard rate is true or rather a side effect of sorting. Therefore we study Flemish unemployment data from 1995 to 2007. The outline of this paper is as follows. The second section gives an overview of previous research which tried to disentangle the influence of duration from other influences on the hazard rate. Section three specifies the model we will use in our estimation. The fourth section describes the data. The estimation results are discussed in the fifth section. The concluding section summarizes the findings and formulates some policy implications.