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A Micro Approach to the Issue of Hysteresis in Unemployment: Evidence from the 1988­1990 Labour Market Activity Survey

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  • Gordon Wilkinson
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    Abstract

    This paper uses a rich set of microeconomic labour market data--the 1988­90 Labour Market Activity Survey published by Statistics Canada--to test whether there is negative duration dependence in unemployment spells. It updates and extends similar work carried out by Jones (1995) who used the 1986­87 Labour Market Activity Survey. Applying hazard model estimation, the analysis finds some evidence of negative duration dependence at the microeconomic level, which is consistent with the de-skilling hypothesis of hysteresis. These microeconomic estimates of negative duration dependence are used to compute macroeconomic estimates of hysteresis in unemployment. The results suggest that hysteresis effects from de-skilling are very small at the macro level, contributing less than 0.1 percentage points to the aggregate unemployment rate. The small estimated size of this hysteresis effect may explain why evidence of hysteresis has been so difficult to find at the macroeconomic level. The paper also shows that Unemployment Insurance (UI) benefits reduce the probability of exiting from unemployment and that unemployment duration does not seem to be prolonged by reservation-wage effects.

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    Bibliographic Info

    Paper provided by Bank of Canada in its series Working Papers with number 97-12.

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    Length: 47 pages
    Date of creation: 1997
    Date of revision:
    Handle: RePEc:bca:bocawp:97-12

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    Related research

    Keywords: Labour markets;

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    References

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    1. Jones, Stephen R G & Riddell, W Craig, 1995. "The Measurement of Labor Force Dynamics with Longitudinal Data: The Labour Market Activity Survey Filter," Journal of Labor Economics, University of Chicago Press, vol. 13(2), pages 351-85, April.
    2. Paul Krugman, 1994. "Past and prospective causes of high unemployment," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 23-43.
    3. Kiefer, Nicholas M, 1988. "Economic Duration Data and Hazard Functions," Journal of Economic Literature, American Economic Association, vol. 26(2), pages 646-79, June.
    4. Oliver Jean Blanchard & Peter Diamond, 1989. "The Beveridge Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1), pages 1-76.
    5. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis And The European Unemployment Problem," NBER Chapters, in: NBER Macroeconomics Annual 1986, Volume 1, pages 15-90 National Bureau of Economic Research, Inc.
    6. Belzil, Christian, 1995. "Unemployment Insurance and Unemployment over Time: An Analysis with Event History Data," The Review of Economics and Statistics, MIT Press, vol. 77(1), pages 113-26, February.
    7. Imbens, G W, 1994. "Transition Models in a Non-stationary Environment," The Review of Economics and Statistics, MIT Press, vol. 76(4), pages 703-20, November.
    8. Hujer, Reinhard & Schneider, Hilmar, 1989. "The analysis of labor market mobility using panel data," European Economic Review, Elsevier, vol. 33(2-3), pages 530-536, March.
    9. Groot, Wim, 1990. "Heterogeneous Jobs and Re-employment Probabilities," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(3), pages 253-67, August.
    10. Pierre Fortin, 1991. "The Phillips Curve, Macroeconomic Policy, and the Welfare of Canadians," Canadian Journal of Economics, Canadian Economics Association, vol. 24(4), pages 774-803, November.
    11. Lynch, Lisa M, 1989. "The Youth Labor Market in the Eighties: Determinants of Re-employment Probabilities for Young Men and Women," The Review of Economics and Statistics, MIT Press, vol. 71(1), pages 37-45, February.
    12. Lauzon, D., 1995. "The Duration of Joblessness Following Displacement," Papers w-95-1, Gouvernement du Canada - Human Resources Development.
    13. Narendranathan, W & Stewart, Mark B, 1993. "How Does the Benefit Effect Vary as Unemployment Spells Lengthen?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(4), pages 361-81, Oct.-Dec..
    14. Lindeboom, Maarten & Theeuwes, Jules, 1991. "Job Duration in the Netherlands: The Co-existence of High Turnover and Permanent Job Attachment," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 53(3), pages 243-64, August.
    15. Edin, P.A. & Bergstrom, R., 1991. "Time aggregation and the Distributional Shape of Unemployment Duration," Papers 1991u, Uppsala - Working Paper Series.
    16. Alaouze, Chris M, 1987. "Empirical Evidence on the Sign of the Slope of the Hazard Rate from Unemployment from a Fixed Effects Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 2(2), pages 159-68, April.
    17. Heckman, James J & Borjas, George J, 1980. "Does Unemployment Cause Future Unemployment? Definitions, Questions and Answers from a Continuous Time Model of Heterogeneity and State Dependence," Economica, London School of Economics and Political Science, vol. 47(187), pages 247-83, August.
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