Abstract

The cross-sectional distribution of unemployment rates has been relatively neglected compared to the study of unemployment rate differences across countries over time. This paper helps fill the gap. A drift-diffusion model is proposed to describe the dynamics of the cross-sectional distribution of unemployment rates. The model is fitted to the evolution of unemployment rate distribution across five regions, to estimate the natural rates and speeds of convergence to natural rates once an economy is hit by an exogenous shock. Given the importance of the natural rate for gauging the state of the business cycle, the outlook for future inflation, and the appropriate stance of monetary policy, techniques for its estimation would not be without merit.

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