This study analyses the extent to which unemployment experiences negatively affect workers'' re-employability. The phenomenon, also known as the ''scarring effect of unemployment'' or ''true state dependence'', is likely to be caused by factors such as human capital depreciation during unemployment, that is the loss of labour market related skills and knowledge; negative signalling to employer, that is, employer use of unemployment experiences to discriminate between ''good'' and ''bad'' job applicants; and job rationing, that is, during a crisis there is a limited number of jobs available while the number of jobs seeker is relatively high.
The analysis makes use of data from the British Household Panel Survey and Understanding Society and focuses on three periods characterised by very different labour market conditions:
First, similar to Arulampalam et al (2000), the study looks at the scarring effect of unemployment during the early 1990s, a period of declining unemployment rates.
Second, it analyses true state dependence during the early 2000s, a period of low and relatively stable unemployment.
Finally, it studies the extent to which British workers have been scarred by unemployment during the Great Recession.
As well as providing evidence on unemployment scarring in the last two decades, this approach makes it possible to investigate the dynamics of true state dependence across the business cycle.
Taking account of the role of individual''s observed and unobserved characteristics (such as the individual propensity to unemployment), there is evidence in support of the presence of unemployment scarring in all the periods analysed. The estimates also suggest for scarring to increase when unemployment increases, and the finding holds both between and within sub-period.
There is also evidence on youth being more scarred than older workers during the Great Recession, while results are less conclusive for the earlier sub-periods.
The evidence provided hence supports the importance of short-run interventions aimed at reducing unemployment especially in periods of adverse labour market conditions. Tackling unemployment would not only reduce the immediate distress associated with unemployment, but also reduce it in the longer term.