The purpose of this paper is to investigate the causes of unemployment persistence among the Belgian labour force. The underlying issue is to determine the eventual existence of a true causal relationship between successive unemployment spells.
The model used is a dynamic random effects probit model controlling for unobserved heterogeneity and the initial condition problem. It was applied to the Panel Study on Belgian Households (1994‐2002).
The results suggest that while observed and unobserved heterogeneity explain between 57 per cent and 82 per cent of unemployment persistence, the remainder is induced by the presence of state dependence. All else being equal, an individual unemployed this year will be between 11.4 and 33 percentage points more likely to be unemployed next year as compared with an employed person.
The presence of a stigmatisation effect of unemployment means that the costs of unemployment are much higher than the simple loss of income and human capital associated with the current job loss. The study demonstrates the importance of concentrating efforts on the prevention of unemployment.
The paper's contribution is to test again the hypothesis of the presence of state dependence in unemployment using a different technique, allowing, among other things, to control for exogenous variables. The paper demonstrates its existence and measures its contribution in the explanation of unemployment persistence in Belgium, besides that of observed and unobserved characteristics.