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Title: The dual U.S. labor market uncovered Authors:  Hie Joo Ahn - Federal Reserve Board (United States) [presenting]
Abstract: Aggregate U.S. labor market dynamics are well approximated by a dual labor market supplemented with a third home-production segment. We estimate a Hidden Markov Model, a machine-learning method, to uncover this structure. The different market segments are identified through (in-)equality constraints on labor market transition probabilities. This method yields time series of stocks and flows for the three segments for 1980-2021. Primary sector workers, who make up around 55 percent of the population, are almost always employed and rarely experience unemployment. The secondary sector, which constitutes 14 percent of the population absorbs most of the short-run fluctuations in the labor market, both at seasonal and business cycle frequencies. Workers in this segment experience 6 times higher turnover rates than those in the primary tier and are 10 times more likely to be unemployed than their primary counterparts. The tertiary segment consists of workers who infrequently participate in the labor market but nevertheless experience unemployment when they try to enter the labor force. While we find that young workers, racial minorities, and workers with lower educational attainment are more likely to belong to the secondary sector, the bulk of labor market segment variation across individuals cannot be explained by observables. Our findings imply that aggregate stabilization policies, such as monetary policy, predominantly work through the small but turbulent secondary market.