The Ins and Outs of Unemployment: the Ins Win
51 Pages Posted: 16 Jul 2004
Date Written: August 1986
This paper develops a framework for analyzing unemployment in terms ofvariations in the nt.imber and distribution of people becoming unemployed and inindividual probabilities of leaving unemployment. Contrary to the emphasis onexit probabilities in the recent macroeconomics literature, we presentempirical evidence in support of the proposition that changes in the size anddistribution of the inflow Into unemployment are the primary determinant ofthe unemployment rate. Instead of falling at the beginning of a recession,the outflow rate rises (with a lag) in response to the increased inflows whichdrive the recession. In contrast to normal unemployment, cyclical unemploymentis concentrated in groups with low normal exit probabilities; so theobserved procyclical variation in the average exit probability may largely heexplained by predictable distributional effects.
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