Unemployment persistence

We estimate dynamic panel data models of unemployment incidence for men using the British Household Panel Survey. Econometric issues concerning unobserved indvidual heterogeneity, genuine state dependence, and the initial conditions problem are addressed in detail. We find strong evidence of state dependence consistent with the scarring theory of unemployment-an individual's previous unemployment experience has implications for his future labour market experience. This suggests that policies reducing short run unemployment incidence will have longer-run effects by reducing the equilibrium or natural rate of unemployment.