August 2016

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 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.

Accessible materials (.zip)

Keywords: Great Recession, extended Kalman filter, genuine duration dependence, state space model, unemployment dynamics, unobserved heterogeneity

DOI: http://dx.doi.org/10.17016/FEDS.2016.063

PDF: Full Paper

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Last Update: June 19, 2020