August 2016 (Revised March 2022)

The Role of Observed and Unobserved Heterogeneity in the Duration of Unemployment Spells

Hie Joo Ahn


This paper studies the degree to which observable and unobservable worker characteristics account for the variation in the aggregate duration of unemployment. I model the distribution of unobserved worker heterogeneity as time varying to capture the interaction of latent attributes with changes in labor-market conditions. Unobserved heterogeneity is the main explanation for the duration dependence of unemployment hazards. Both cyclical and low-frequency variations in the mean duration of unemployment are mainly driven by one subgroup: workers who, for unobserved reasons, stay unemployed for a long time. In contrast, changes in the composition of observable characteristics of workers have negligible effects.
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Keywords: unemployment duration, disaggregate unemployment, unobserved heterogeneity, genuine duration dependence, nonlinear state space model, extended Kalman filter


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Original Paper: PDF | Accessible materials (.zip)

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Last Update: April 05, 2022