Finance and Economics Discussion Series (FEDS)
August 2016 (Revised March 2022)
The Role of Observed and Unobserved Heterogeneity in the Duration of Unemployment Spells
Abstract:
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.
Accessible materials (.zip)
Keywords: unemployment duration, disaggregate unemployment, unobserved heterogeneity, genuine duration dependence, nonlinear state space model, extended Kalman filter
DOI: http://dx.doi.org/10.17016/FEDS.2016.063r1
PDF: Full Paper
Original Paper: PDF | Accessible materials (.zip)