Heterogeneity in the Dynamics of Disaggregate Unemployment

Ahn, Hie Joo

doi:10.17016/FEDS.2016.063

Working Paper

Heterogeneity in the Dynamics of Disaggregate Unemployment

Abstract: This paper explores the role that unobserved heterogeneity within an observed category plays in the dynamics of disaggregate unemployment and in the cross-sectional differences across individuals of the duration of unemployment spells. The distribution of unobserved heterogeneity is characterized as a mixture of two distributions with each mean and weight determined by the inflows and outflows of workers with unobserved types H and L, which are identified based on the nonlinear state-space model of Ahn and Hamilton (2016). I found that the contribution of each factor to the dynamics of disaggregate unemployment differs by observed category. The inflow of type L workers is the most important factor in the majority of demographic groups in the business-cycle frequency. I identify permanent job loss to be the observable characteristic most closely associated with the type L attribute. A simple model of heterogeneity based on two unobserved types can account for explain more than 50 percent of the cross-sectional dispersion in completed-duration spells after the Great Recession, while observed heterogeneity makes only a minor contribution.

Keywords: Unemployment dynamics; Unobserved heterogeneity; Genuine duration dependence; State space model; Extended Kalman filter; Great Recession;

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

https://doi.org/10.17016/FEDS.2016.063