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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Unemployment and the durational structure of exit rates
Karl Whelan
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.


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Karl Whelan, Unemployment and the durational structure of exit rates, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 1997-54, 1997.
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Keywords: Unemployment ; Wages ; Econometric models
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