Working Paper

Unemployment and the durational structure of exit rates

Abstract: This paper presents a simple model of wage bargaining and employment flows designed to address the effects of policies to increase the rate of exit to employment of the long-term unemployed. Exit rates from long- and short-term unemployment have two effects on the unemployment rate: a positive one as high exit rates strengthen current employees' bargaining positions and thus wages and a negative one as faster outflows from unemployment reduce the stock of unemployed. Thus, there is a trade-off between the exit rate from long-term unemployment and the exit rate from short-term unemployment. The paper's principal result is that, in steady-state, increasing the exit rate from long-term unemployment reduces the unemployment rate. Dynamic simulations show that raising the exit rate of the long-term unemployed leads to a decrease in both the mean and variance of the unemployment rate.

Keywords: Unemployment; Wages; Econometric models;

Bibliographic Information

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

Part of Series: Finance and Economics Discussion Series

Publication Date: 1997

Number: 1997-54