In Discussion Paper No. 1202, Jaap Abbring, Research Fellow Gerard van den Berg and Jan van Ours examine the relationship between individual unemployment duration and incidence on the one hand, and the time-varying macroeconomic conditions in the economy on the other. Aggregate unemployment changes when individual probabilities of exit out of unemployment change or when the size or composition of the inflow into unemployment change. In the model presented, exit probability and inflow composition are allowed to be influenced by calendar time, where business cycle effects and seasonal effects are distinguished. These probabilities also exhibit genuine duration dependence on stigma effects due to long unemployment, and spurious duration dependence owing to unobserved heterogeneity in the composition of the inflow of unemployment.

The model is applied to French aggregate unemployment duration data. The principal results are that the state of the business cycle affects unemployment, mainly by way of individual exit probabilities; while observed negative duration dependence of the exit probabilities is due to unobserved heterogeneity selection in the first year of unemployment, and to individual duration dependence afterwards. Observed duration dependence is weaker in recessions.

The Anatomy of Unemployment Dynamics
Jaap H Abbring, Gerard J. van den Berg and Jan C van Ours

Discussion Paper No. 1202, June 1995 (HR)