The Pace of Structural Change, Cyclical Shocks and Unemployment Dynamics

During the last decade The Netherlands witnessed an increase in the pace of job creation and job destruction. A sensitivity analysis using an empirical model of labour market flows shows that <OL> <LI>the congestion in the matching process due to the increase in the pace of job creation and destruction may have substantial effects on employment and unemployment; <LI>the effects depend very much on the initial pace of labour market dynamics and they are larger when the initial pace is low; <LI>the economy may be out of its unemployment equilibrium for quite a long time after a shock occurs. </OL> The novelty of the model is that it takes explicitly account of the propagation of shocks through the various duration classes of unemployment and allows for negative duration dependence. In the case of negative duration dependence caused by depreciation of human capital long-term unemployed become, to a certain extent, 'outsiders'. However, in the model simulations no much unemployment persistence is found as a consequence of cyclical fluctuations in the pace of job creation and destruction. The 'thin' market argument, i.e. the endogenous decrease in job creation in response to the depreci-ation of human capital following an adverse cyclical shock, does not lead to much persistence either according to our model, which assumes homogeneous (and equally productive) jobs and long run equlibrium unemployment.