Explaining Demographic Heterogeneity in Cyclical Unemployment

In the United States, there is substantial heterogeneity in labor market out-comes across demographic groups. Not only do young workers, non-white workers, and those without any college education have persistently higher unemployment rates than other demographic groups, but these disadvantaged workers also experience substantially larger increases in unemployment rates during recessions. In this paper, we analyze the sources of these disparities by decomposing the unemployment rate for each demographic group into the transition flows between labor market states. We find that increases in unemployment rates during recessions is primarily driven by reductions in the job finding rates, which can explain about half of the cyclical fluctuations in the unemployment rate across all demographic groups. In contrast, we find that the gap in unemployment rates between each disadvantaged group and the respective counterpart demographic group can be primarily be attributed to the disadvantaged groups’ higher rates of inflow to unemployment. We conclude that policies to reduce separation rates for these disadvantaged groups could address both the persistent and cyclical disparities in the unemployment rate across demographic groups.