Unemployment Makes You Less Valuable to Future Employers?

A friend of mine showed me this story from the New York Times.  It mentions that employers are now frequently only hiring individuals that are either working or very recently fired.  This makes it very difficult for many of the unemployed because an increasing percentage of them have been unemployed unemployed for a long period of time.

This is a frustrating fact of the labor market, so what does the economic literature have to say about this?  The labor market is a bit like a used car market, or as George Akerlof would call it, a "market for lemons."  Potential employees are not of known quality to prospective employers, and that makes this an asymmetrical information market.

I think this ultimately is a question of worker valuation, which is a human capital issue.  Gary Becker is the original human capital theorist, and he won the Nobel Prize largely for these ideas.  After he came up with that, it sort of transformed labor economics.  The idea with human capital is that our mind is a form of capital that we invest in through education, and see returns on through our wages and productivity.  At this point, economists can treat education and job training as investments and observe it in a similar manner to any other form of investment.  It can be seen as a bit idiosyncratic to the extent that wage elasticities can confuse economist's demand charts both negatively and positively.  Also due to the fact that people treat investments in human capital differently than they treat other investments.  They might major in a degree that does not have a (likely) high return on capital, and of course to the extent that they do this that investment is transformed into consumption.  So that's kind of the very basic premise of human capital theory.

I think the essay, "Does Unemployment Cause Future Unemployment" from James Heckman and George Borjas clears up the issue very well.  In it they write, "past unemployment (including previous time spent in a current unemployment spell) alters preferences, prices or constraints that determine, in part, future unemployment. For example, unemployment may lead to a loss of work experience, which will alter future prospects of employability. As another example, if workers are heterogeneous in unobserved components of ability, firms may use unemployment records in their hiring decisions if the knowledge that a worker has been unemployed is useful in sorting out the worker's position in the population distribution of heterogeneity and if firms place sufficient value on such information in making worker hiring and investment decisions. In both cases, prior unemployment experience has a genuine behavioural effect in the sense that an otherwise identical individual who did not experience unemployment would behave differently in the future than an individual who experienced unemployment,"  the essay was published in Economica, August 1980 issue.