Working Paper Revision

The Role of Observed and Unobserved Heterogeneity in the Duration of Unemployment Spells

Abstract: This paper studies the degree to which observable and unobservable worker characteristics account for the variation in the aggregate duration of unemployment. I model the distribution of unobserved worker heterogeneity as time varying to capture the interaction of latent attributes with changes in labor-market conditions. Unobserved heterogeneity is the main explanation for the duration dependence of unemployment hazards. Both cyclical and low-frequency variations in the mean duration of unemployment are mainly driven by one subgroup: workers who, for unobserved reasons, stay unemployed for a long time. In contrast, changes in the composition of observable characteristics of workers have negligible effects.

Keywords: unemployment duration; disaggregate unemployment; unobserved heterogeneity; genuine duration dependence; nonlinear state space model; extended Kalman filter;

JEL Classification: C41; C53; E24; E27; E32; J21;

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Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2022-03-25

Number: 2016-063r1

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