TY - BOOK ID - 133535403 TI - Labor Market Dynamics: A Hidden Markov Approach PY - 2019 PB - Washington, D.C. : International Monetary Fund, DB - UniCat KW - Labor KW - Labor Force and Employment, Size, and Structure KW - Demand and Supply of Labor: General KW - Unemployment: Models, Duration, Incidence, and Job Search KW - Employment KW - Unemployment KW - Wages KW - Intergenerational Income Distribution KW - Aggregate Human Capital KW - Aggregate Labor Productivity KW - Mobility, Unemployment, and Vacancies: General KW - Labour KW - income economics KW - Labor force KW - Labor markets KW - Employment rate KW - Labor market KW - Economic theory KW - United States UR - https://www.unicat.be/uniCat?func=search&query=sysid:133535403 AB - This paper proposes a hidden state Markov model (HMM) that incorporates workers’ unobserved labor market attachment into the analysis of labor market dynamics. Unlike previous literature, which typically assumes that a worker’s observed labor force status follows a first-order Markov process, the proposed HMM allows workers with the same labor force status to have different history-dependent transition probabilities. I show that the estimated HMM generates labor market transition probabilities that match those observed in the data, while the first-order Markov model (FOM) and its many-state extensions cannot. Even compared with the extended FOM, the HMM improves the fit of the empirical transition probabilities by a factor of 30. I apply the HMM to (1) calculate the long-run consequences of separation from stable employment, (2) study evolutions of employment stability across different demographic groups over the past several decades, (3) compare the dynamics of labor market flows during the Great Recession to those during the 1981 recession, and (4) highlight the importance of looking beyond distributions of current labor force status. ER -