Reassessing the heterogeneity hypothesis in unemployment dynamics

Investigation of the sources of unemployment fluctuations has been a longstanding research objective. This line of research has attracted a great attention recently, because, as Shimer (2012) has confirmed that the celebrated Mortensen-Pissarides equilibrium search and matching model fails to explain the observed unemployment fluctuations for the USA. The aim of this study is to reexamine the flows into/out of unemployment by following Sider (1985) and Baker (1992) in order to find out whether Shimer’s results are still valid from a different perspective. Using the 1996–2012 data, we show that the heterogeneity hypothesis is still rejected but the degree of co-movement between the rate of unemployment and the aggregate expected duration is somewhat weaker, which casts doubt on Shimer’s conclusions.