The pace of structural change, cyclical shocks and unemployment dynamics : simulations using an empirical flow model

During the last decade The Netherlands witnessed an increase in the pace of job creation and job destruction. A sensitivity analysis using an empirical model of labour market flows shows thatthe congestion in the matching process due to the increase in the pace of job creation and destruction may have substantial effects on employment and unemployment;the effects depend very much on the initial pace of labour market dynamics and they are larger when the initial pace is low;the economy may be out of its unemployment equilibrium for quite a long time after a shock occurs.The novelty of the model is that it takes explicitly account of the propagationof shocks through the various duration classes of unemployment andallows for negative duration dependence. In the case of negativeduration dependence caused by depreciation of human capital long-termunemployed become, to a certain extent, 'outsiders'. However, in themodel simulations no much unemployment persistence is found as aconsequence of cyclical fluctuations in the pace of job creation anddestruction. The 'thin' market argument, i.e. the endogenous decreasein job creation in response to the depreci-ation of human capitalfollowing an adverse cyclical shock, does not lead to much persistenceeither according to our model, which assumes homogeneous (and equallyproductive) jobs and long run equlibrium unemployment.