Unemployment-Rate Dynamics and Persistent Unemployment Under Rational Expectations

57 Pages Posted: 5 Jul 2004

See all articles by Michael R. Darby

Michael R. Darby

University of California, Los Angeles (UCLA) - Global Economics and Management (GEM) Area; National Bureau of Economic Research (NBER)

John Haltiwanger

University of Maryland - Department of Economics; National Bureau of Economic Research (NBER); Institute for the Study of Labor (IZA)

Mark W. Plant

National Bureau of Economic Research (NBER)

Date Written: February 1985

Abstract

This paper develops a model of unemployment rate dynamics that provides an explanation of persistent cyclical unemployment that does not involve persistent expectational errors or other nonoptimizing behavior. Our results are based on the interaction of search dynamics and inventory adjustments. An important element in these dynamics appears to be heterogeneity in the labor force which can be characterized as consisting of a relatively small group of high turnover individuals who comprise the bulk of normal unemployment and a larger group of low turnover individuals who dominate movements in cyclical unemployment. Our empirical results provide support for this theory as we demonstrate that the appropriately measured probability of becoming employed during a recovery falls relative to normal because of the unusually high proportion of low turnover individuals who have lost "permanent" jobs. As aresult, recovery is much slower than is indicated by normal relationships although each individual is searching optimally.

Suggested Citation

Darby, Michael R. and Haltiwanger, John C. and Plant, Mark W., Unemployment-Rate Dynamics and Persistent Unemployment Under Rational Expectations (February 1985). NBER Working Paper No. w1558. Available at SSRN: https://ssrn.com/abstract=336308

Michael R. Darby (Contact Author)

University of California, Los Angeles (UCLA) - Global Economics and Management (GEM) Area ( email )

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John C. Haltiwanger

University of Maryland - Department of Economics ( email )

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Institute for the Study of Labor (IZA) ( email )

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Mark W. Plant

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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