Employed and unemployed job seekers and the business cycle

a research paper (No 2013-02 (January 2013)) by Simonetta Longhi and Mark Taylor (Institute for Social and Economic Research, University of Essex, UK)

Non-Technical Summary

During periods of low labour demand, competition for jobs is fierce as an unemployed person has to compete not only with a larger pool of other unemployed people but also with the employed who are looking for a better job. Job search theory suggests that employed workers look for jobs that pay a higher wage than their current job, while the unemployed look for jobs that offer wages exceeding their reservation wage (the wage at which the unemployed are indifferent between accepting the job offer and rejecting the offer in favour of continued job search). Most models assume that employed and unemployed job seekers are the same, differing only in their labour force status and in the intensity and effectiveness of their search. Empirically however there is little evidence that employed and unemployed job seekers have similar characteristics. If this is not the case, then it prompts the question of whether they compete for the same jobs. Our focus in this paper is to compare the characteristics and behaviour of employed and unemployed job seekers, and hence the nature of the competition between them, and how these vary over the business cycle.

We combine data from the British Labour Force Survey from 1984 to 2009 and the British Household Panel Survey from 1993 to 2007 to identify: (1) differences in observable characteristics between employed people who search for another job and those who do not; (2) the extent to which employed and unemployed job seekers have similar individual characteristics, work histories, preferences over working hours and job search strategies; and (3) the extent to which this varies over the business cycle. If employed and unemployed job seekers are observationally different, or if they apply to different kinds of jobs, then in contrast to the assumptions made in the theoretical literature we cannot conclude that they are in direct competition for the same vacancies or that the experience and decisions of one group will influence the outcomes of the other.

Our results indicate that employed people who engage in on-the-job search tend to be in worse jobs than employed individuals who are not searching. We find some evidence that unemployed job seekers apply to – or accept – worse jobs than employed job seekers, but continue to search for better opportunities when employed. We also find significant differences in the characteristics of employed and unemployed job seekers, which persist when also taking into account differences in (un)employment histories and unobserved characteristics. Employed and unemployed job seekers differ in their preferences in terms of working hours and search methods used, although differences are larger among the more highly educated. Such differences persist over the business cycle.

Therefore in contrast to what is typically assumed in the literature, our evidence suggests that employed and unemployed job seekers are systematically different and are unlikely to directly compete for the same vacancies. Consequently the job search activities of employed people should not affect the outcomes of unemployed job seekers.

JEL Classification: J29, J60

Full text (PDF 42pp)

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