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


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Hie Joo Ahn, Heterogeneity in the Dynamics of Disaggregate Unemployment, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2016-063, 29 Jul 2016.
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Keywords: Unemployment dynamics; Unobserved heterogeneity; Genuine duration dependence; State space model; Extended Kalman filter; Great Recession
DOI: 10.17016/FEDS.2016.063
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