DP1176 | A Contribution to Unemployment Dynamics

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This paper views movements in unemployment as the result of the interaction between: (a) lags in labour market decisions; and (b) labour market shocks with temporary and permanent components. Two features of unemployment dynamics are examined: (i) `unemployment persistence', arising when temporary shocks have persistent effects on unemployment; and (ii) `imperfect unemployment responsiveness', arising when the full effects of permanent shocks are delayed. An empirical model of aggregate labour maket activity in Germany, the United Kingdom, and the United States is constructed, and the sources of persistence and imperfect responsiveness are evaluated in this context.