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Unemployment-Rate Dynamics and Persistent Unemployment Under RAtional Expectations

  • Michael R. Darby

    (UCLA)

  • John Haltiwanger

    (UCLA)

  • Mark Plant

    (UCLA)

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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File URL: http://www.econ.ucla.edu/workingpapers/wp339.pdf
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Paper provided by UCLA Department of Economics in its series UCLA Economics Working Papers with number 339.

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Date of creation: 01 Aug 1984
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Handle: RePEc:cla:uclawp:339
Contact details of provider: Web page: http://www.econ.ucla.edu/

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  1. Haltiwanger, John C & Maccini, Louis J, 1988. "A Model of Inventory and Layoff Behaviour under Uncertainty," Economic Journal, Royal Economic Society, vol. 98(392), pages 731-45, September.
  2. Stephen W. Salant, 1974. "Search theory and duration data: a theory of sorts," Special Studies Papers 42, Board of Governors of the Federal Reserve System (U.S.).
  3. Michael L. Wachter, 1976. "The Changing Cyclical Responsiveness of Wage Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(1), pages 115-168.
  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.
  5. Kim B. Clark & Lawrence H. Summers, 1979. "Labor Market Dynamics and Unemployemnt: A Reconsideration," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 10(1), pages 13-72.
  6. 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.
  7. Robert E. Hall, 1984. "The Importance of Lifetime Jobs in the U.S. Economy," NBER Working Papers 0560, National Bureau of Economic Research, Inc.
  8. Robert J. Barro, 1976. "Unanticipated Money Growth and Unemployment in the United States," Working Papers 234, Queen's University, Department of Economics.
  9. Howitt, Peter, 1985. "Transaction Costs in the Theory of Unemployment," American Economic Review, American Economic Association, vol. 75(1), pages 88-100, March.
  10. P. Diamond, 1980. "Aggregate Demand Management in Search Equilibrium," Working papers 268, Massachusetts Institute of Technology (MIT), Department of Economics.
  11. 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.
  12. 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.
  13. George A. Akerlof & Brian G. M. Main, 1978. "Unemployment spells and unemployment experience," Special Studies Papers 123, Board of Governors of the Federal Reserve System (U.S.).
  14. 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.
  15. 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.
  16. 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.
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