Finance and Economics Discussion Series (FEDS)
February 2016 (Revised July 2018)
Heterogeneity and Unemployment Dynamics
Hie Joo Ahn and James D. Hamilton
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: Great Recession, business cycles, duration dependence, extended Kalman filter, state space model, unemployment duration, unobserved heterogeneity
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