Prior employment status significantly amplifies unemployment volatility

Using data from the UK Labour Force Survey (LFS), the paper empirically demonstrates that the procyclicality in the rate at which unemployed workers leave the labour force is strongly linked to compositional changes in the unemployment pool.

Workers entering unemployment after job loss are substantially less likely to exit the labour force than those entering from inactivity.

This previous labour force status is identified as the strongest predictor of an unemployed worker's attachment to the labour market, a finding not explained by variations in search effort.

The study highlights that while search effort is higher among the unemployed than the inactive, there are no significant differences in average search effort between those previously employed and those previously inactive.

This suggests a genuine difference in the propensity to reduce search effort during unemployment spells based on prior status.

Motivated by these empirical findings, the authors extend a Diamond-Mortensen-Pissarides (DMP) search-and-matching model to incorporate heterogeneous labour market attachment among the unemployed.

This extended framework allows for differences in search effort and its persistence, where search effort determines labour force status.

The model demonstrates that fluctuations in job separations alter the composition of the unemployment pool, thereby amplifying unemployment fluctuations relative to the standard model.

Quantitatively, this mechanism increases unemployment volatility by approximately 50%.

The model successfully accounts for the sharp rise in unemployment observed at the onset of the Great Recession, providing a more robust explanation for historical labour market dynamics.