Unemployment Dynamics: An Unobserved Components Approach

The study uses a bivariate unobserved components model for output and the unemployment rate in order to examine stylised facts of the cyclical behaviour of unemployment and to estimate the size of persistence. The model is applied to the U.S., Canada, and major European economies. Estimates of cyclically adjusted unemployment rates are obtained that account for persistence effects and are subject to considerably smaller confidence bounds compared to approaches based on wage and price setting equations.