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Unemployment-Rate Dynamics and Persistent Unemployment Under Rational Expectations

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Author Info
Michael R. Darby
John C. Haltiwanger
Mark W. Plant

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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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1558.

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Date of creation: Sep 1985
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Handle: RePEc:nbr:nberwo:1558

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  1. Blanchard, Olivier J, 1983. "The Production and Inventory Behavior of the American Automobile Industry," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 365-400, June. [Downloadable!] (restricted)
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  2. John Haltiwanger & Louis Maccini, 1984. "A Model of Inventory and Layoff Behavior Under Uncertainty," UCLA Economics Working Papers 321, UCLA Department of Economics. [Downloadable!]
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  3. Salant, Stephen W, 1977. "Search Theory and Duration Data: A Theory of Sorts," The Quarterly Journal of Economics, MIT Press, vol. 91(1), pages 39-57, February. [Downloadable!] (restricted)
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  4. Carr, Jack & Darby, Michael R., 1981. "The role of money supply shocks in the short-run demand for money," Journal of Monetary Economics, Elsevier, vol. 8(2), pages 183-199. [Downloadable!] (restricted)
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  5. Darby, Michael R, 1972. "The Allocation of Transitory Income Among Consumers' Assets," American Economic Review, American Economic Association, vol. 62(5), pages 928-41, December. [Downloadable!] (restricted)
  6. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-94, October. [Downloadable!] (restricted)
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  7. McCallum, Bennett T, 1979. "On the Observational Inequivalence of Classical and Keynesian Models," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 395-402, April. [Downloadable!] (restricted)
  8. Michael L. Wachter, 1976. "The Changing Cyclical Responsiveness of Wage Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(1976-1), pages 115-168. [Downloadable!]
  9. Hall, Robert E, 1982. "The Importance of Lifetime Jobs in the U.S. Economy," American Economic Review, American Economic Association, vol. 72(4), pages 716-24, September. [Downloadable!] (restricted)
  10. Barro, Robert J, 1977. "Unanticipated Money Growth and Unemployment in the United States," American Economic Review, American Economic Association, vol. 67(2), pages 101-15, March.
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  11. 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. [Downloadable!] (restricted)
  12. Howitt, Peter, 1985. "Transaction Costs in the Theory of Unemployment," American Economic Review, American Economic Association, vol. 75(1), pages 88-100, March. [Downloadable!] (restricted)
  13. Barron, John M, 1975. "Search in the Labor Market and the Duration of Unemployment: Some Empirical Evidence," American Economic Review, American Economic Association, vol. 65(5), pages 934-42, December. [Downloadable!] (restricted)
  14. Akerlof, George A & Main, Brian G M, 1980. "Unemployment Spells and Unemployment Experience," American Economic Review, American Economic Association, vol. 70(5), pages 885-93, December. [Downloadable!] (restricted)
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  15. Feldstein, Martin S, 1976. "Temporary Layoffs in the Theory of Unemployment," Journal of Political Economy, University of Chicago Press, vol. 84(5), pages 937-57, October. [Downloadable!] (restricted)
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