The scarring effect of unemployment from the early ‘90s to the Great Recession

This paper addresses two issues of great importance in the current economic climate. First, it analyses the extent to which unemployment experiences have a scarring effect on British men during the Great Recession. Second, it provides an insight into the relation between true state dependence and the business cycle by investigating the role of local unemployment in affecting the persistence of unemployment incidence and by analysing the dynamics of unemployment scarring in the last two decades. Our results support the presence of true state dependence both during the Great Recession and in the other two sub-periods analysed, the early 90s and early 2000s. Moreover, we find evidence of a negative association between the scarring effect of unemployment and the business cycle. From a policy perspective, our findings imply that public interventions aimed at alleviating unemployment in the short term are also likely to have beneficial effects on longer term unemployment, especially during downturns.