Working Paper

Heterogeneity and Unemployment Dynamics

Abstract: This paper develops new estimates of flows into and out of unemployment that allow for unobserved heterogeneity across workers as well as direct effects of unemployment duration on unemployment-exit probabilities. Unlike any previous paper in this literature, we develop a complete dynamic statistical model that allows us to measure the contribution of different shocks to the short-run, medium-run, and long-run variance of unemployment as well as to specific historical episodes. We find that changes in the inflows of newly unemployed are the key driver of economic recessions and identify an increase in permanent job loss as the most important factor.

Keywords: Business cycles; Great Recession; unemployment durations; Unobserved heterogeneity; Duration dependence; State space model; Extended Kalman filter;

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

https://doi.org/10.17016/FEDS.2016.012r1

Bibliographic Information

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

Part of Series: Finance and Economics Discussion Series

Publication Date: 2018-07-10

Number: 2016-12

Pages: 62 pages