Unemployment and the Durational Structure of Exit Rates

This paper presents a simple model of wage bargaining and employment ows designed to address the e ects of policies to increase the rate of exit to employment of the long-term unemployed. Exit rates from long and short-term unemployment have two e ects on the unemployment rate: a positive one as high exit rates strengthen current employees' bargaining positions and thus wages and a negative one as faster out ows from unemployment reduce the stock of unemployed. Thus, there is a trade-o between the exit rate from long-term unemployment and the exit rate from short-term unemployment. The paper's principal result is that, in steady-state, increasing the exit rate from long-term unemployment reduces the unemployment rate. Dynamic simulations show that raising the exit rate of the long-term unemployed leads to a decrease in both the mean and variance of the unemployment rate. This paper is a revised version of Chapter 2 of my Ph.D. dissertation at MIT. I am very grateful to Daron Acemoglu and Olivier Blanchard for comments. The views expressed in this paper are those of the author and do not necessarily re ect the views of the Board of Governors or the sta of the Federal Reserve System. Email: [email protected].