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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Heterogeneity and Unemployment Dynamics
Hie Joo Ahn
James D. Hamilton
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.


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Hie Joo Ahn & James D. Hamilton, Heterogeneity and Unemployment Dynamics, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2016-12, 22 Feb 2016, revised 10 Jul 2018.
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Subject headings:
Keywords: Business cycles; Great Recession; Unemployment duration; Unobserved heterogeneity; Duration dependence; State space model; Extended Kalman filter
DOI: 10.17016/FEDS.2016.012r1
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