Labor Market Dynamics over the Business Cycle: Evidence from Markov Switching Models

This paper explores the evolution of the labor market across the business cycle and specifically the relationship between the unemployment rate and the average duration of unemployment. Labor market recoveries have long been thought of as lagging recoveries in broad economic activity. In particular, the unemployment rate peaks several months after the official business cycle trough and the average duration of unemployment lags further behind. Using estimates from Markov Switching Models (MS) of the unemployment rate, average duration of unemployment, jobless claims and the exhaustion rate of regular unemployment insurance, this paper argues that this pattern is a result of the separation rate entering a recovery phase prior to the job finding rate.