Accounting for unemployment: the long and short of it

Andreas Hornstein

No 12-07, Working Paper from Federal Reserve Bank of Richmond

Abstract: Shimer (2012) accounts for the volatility of unemployment based on a model of homogeneous unemployment. Using data on short-term unemployment he finds that most of unemployment volatility is accounted for by variations in the exit rate from unemployment. The assumption of homogeneous exit rates is inconsistent with the observed negative duration dependence of unemployment exit rates for the U.S. labor market. We construct a simple model of heterogeneous unemployment with short-term and long-term unemployed, and use data on the duration distribution of unemployment to account for entry to and exit from the unemployment pool. This alternative account continues to attribute most of unemployment volatility to variations in exit rates from unemployment, but it also suggests that most of unemployment volatility is due to the volatility of long-term unemployment rather than short-term unemployment. We also show that once one allows for heterogeneous unemployment, the expected value of income losses from unemployment increases substantially, and unemployment volatility implied by a simple matching model increases.

Keywords: Business cycles; Labor market; Unemployment; Economic growth (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-lab and nep-mac
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Citations: View citations in EconPapers (10)

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