Abstract This paper explores the evolution of the U.S. 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 official business cycle troughs and the average duration
of unemployment lags further behind. Using estimates from Markov switching
models of the unemployment rate, average duration of unemployment, jobless claims,
and the exhaustion rate of regular unemployment insurance, this paper dates contractionary
and expansionary phases of various aspects of the labor market and their
relationship to the official phases of the business cycle. Evidence from these models
suggests that inflows into unemployment recover almost contemporaneously with
broad economic activity, while outflows recover almost a year after the end of
official recessions. The differential timing in the recoveries of unemployment inflows
and outflows, which is not a characteristic of most macro models of the labor market,
accounts for the observed pattern between the unemployment rate and average
duration of unemployment. Finally, when comparing the phases of the labor market
to periods where Congress extends unemployment insurance benefits, it appears that
policymakers target periods where the job finding rate is low, rather than periods where
the stock of unemployed workers is high.
Keywords Unemployment · B