On the Changing Structure of Unemployment Duration

This paper examines the causes of observed increase in the duration of unemployment relative to the unemployment rate in the Post-War United States. First we analyze if changes in the demographic composition of U.S. labor force can explain the change in the structure of unemployment duration. In particular, we examine how much of the observed change can be explained by the aging of the baby boom cohort, increase in women's labor force participation, and change in the educational attainment of the labor force. We then consider institutional changes, such as the change in the generosity and coverage of unemployment insurance and the change in union affiliation. We show that changes in the composition of the labor force and institutional changes can only partially account for the observed increase in the duration of unemployment. We argue that increase in within-group wage inequality can potentially be important in explaining the changing structure of unemployment duration. We examine this hypothesis by setting up a job search model and calibrating it to the U.S. data. The results indicate that 75% of the increase in the duration of unemployment can be explained by the increase in the within-group wage inequality