https://macropaperwarehouse.com/authors/andreas-i.-mueller/Andreas I. MuellerHugo -- gohugo.ioen-ushttps://macropaperwarehouse.com/papers/the-nature-of-long-term-unemployment-predictability-heterogeneity-and-selection/https://macropaperwarehouse.com/papers/the-nature-of-long-term-unemployment-predictability-heterogeneity-and-selection/<p>This paper studies the sources of long-term unemployment (LTU, defined as failing to find a job within six months) using administrative data on the universe of unemployment spells in Sweden from 1992 to 2016, merged with exceptionally rich individual characteristics including income and employment histories, employer records, asset portfolios, and IQ scores. The central question is how much of the observed decline in aggregate job-finding rates with unemployment duration reflects genuine state dependence — structural deterioration of individual prospects from being unemployed — versus dynamic selection, the mechanical compositional shift as higher-job-finding workers exit first. Using machine-learning prediction models and a complementary multiple-spell identification strategy, the paper finds that observable heterogeneity in LTU risk is substantial: the hold-out R-squared of the baseline prediction model is 15%, and rises to more than twice that value when rich administrative variables are added relative to a model using only standard socio-demographics. Applying the prediction model across durations, the paper shows that persistent heterogeneity can account for approximately 49% of the observed decline in aggregate job-finding rates over the spell (from 70% to 55% between 0 and 6 months), and potentially as much as 88% under a proportionality assumption on selection based on unobservables. In contrast, the same rich data reject the hypothesis that compositional changes in the pool of unemployed workers explain the cyclical rise in LTU risk in recessions.</p>