Unemployment-Rate Dynamics and Persistent Unemployment Under Rational Expectations

Michael R. Darby, John C. Haltiwanger, Mark W. Plant

NBER Working Paper No. 1558 (Also Reprint No. r0640)
Issued in February 1985
NBER Program(s):Labor Studies

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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Document Object Identifier (DOI): 10.3386/w1558

Published: Darby, Michael R., John C. Haltiwanger and Mark W. Plan. "Unemployment-Rate Dynamics and Persistent Unemployment Under Rational Expectations." American Economic Review, Vol. 75, No. 4, (September 1985), pp. 614-637. citation courtesy of

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