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The Ins and Outs of Forecasting Unemployment: Using Labor Force Flows to Forecast the Labor Market

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Author Info

  • Regis Barnichon
  • Christopher J. Nekarda

Abstract

This paper presents a forecasting model of unemployment based on labor force ows data that, in real time, dramatically outperforms the Survey of Professional Forecasters, historical forecasts from the Federal Reserve Board's Greenbook, and basic time-series models. Our model's forecast has a root-mean-squared error about 30 percent below that of the next-best forecast in the near term and performs especially well surrounding large recessions and cyclical turning points. Further, because our model uses information on labor force ows that is likely not incorporated by other forecasts, a combined forecast including our model's forecast and the SPF forecast yields an improvement over the latter alone of about 35 percent for current-quarter forecasts, and 15 percent for next-quarter forecasts, as well as improvements at longer horizons.

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Bibliographic Info

Article provided by Economic Studies Program, The Brookings Institution in its journal Brookings Papers on Economic Activity.

Volume (Year): 45 (2012)
Issue (Month): 2 (Fall) ()
Pages: 83-131

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Handle: RePEc:bin:bpeajo:v:45:y:2012:i:2012-02:p:83-131

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Keywords: unemployment; labor force; forecasting;

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References

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  1. Charles A. Fleischman & John M. Roberts, 2011. "From many series, one cycle: improved estimates of the business cycle from a multivariate unobserved components model," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2011-46, Board of Governors of the Federal Reserve System (U.S.).
  2. Golan, Amos & Perloff, Jeffrey M., 2002. "Superior Forecasts of the U.S. Unemployment Rate Using a Nonparametric Method," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series, Department of Agricultural & Resource Economics, UC Berkeley qt2bw559zk, Department of Agricultural & Resource Economics, UC Berkeley.
  3. Shigeru Fujita & Garey Ramey, 2009. "The Cyclicality Of Separation And Job Finding Rates," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(2), pages 415-430, 05.
  4. Regis Barnichon, 2009. "Vacancy posting, job separation and unemployment fluctuations," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2009-35, Board of Governors of the Federal Reserve System (U.S.).
  5. Barbara Petrongolo & Christopher A. Pissarides, 2008. "The Ins and Outs of European Unemployment," American Economic Review, American Economic Association, American Economic Association, vol. 98(2), pages 256-62, May.
  6. Rothman, Philip, 1988. "Further Evidence On The Asymmetric Behavior Of Unemployment Rates Over The Business Cycle," Working Papers, C.V. Starr Center for Applied Economics, New York University 88-23, C.V. Starr Center for Applied Economics, New York University.
  7. Wesley Clair Mitchell, 1927. "Introductory pages to "Business Cycles: The Problem and Its Setting"," NBER Chapters, National Bureau of Economic Research, Inc, in: Business Cycles: The Problem and Its Setting, pages -23 National Bureau of Economic Research, Inc.
  8. Milas, Costas & Rothman, Philip, 2008. "Out-of-sample forecasting of unemployment rates with pooled STVECM forecasts," International Journal of Forecasting, Elsevier, Elsevier, vol. 24(1), pages 101-121.
  9. Bruce Fallick & Jonathan Pingle, 2006. "A cohort-based model of labor force participation," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2007-09, Board of Governors of the Federal Reserve System (U.S.).
  10. Baghestani, Hamid, 2008. "Federal Reserve versus private information: Who is the best unemployment rate predictor," Journal of Policy Modeling, Elsevier, Elsevier, vol. 30(1), pages 101-110.
  11. Barnichon, Regis, 2010. "Building a composite Help-Wanted Index," Economics Letters, Elsevier, Elsevier, vol. 109(3), pages 175-178, December.
  12. George L. Perry, 1972. "Unemployment Flows in the U.S. Labor Market," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, Economic Studies Program, The Brookings Institution, vol. 3(2), pages 245-292.
  13. Diebold, Francis X & Mariano, Roberto S, 1995. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 13(3), pages 253-63, July.
  14. Laura Brown & Saeed Moshiri, 2004. "Unemployment variation over the business cycles: a comparison of forecasting models," Journal of Forecasting, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 23(7), pages 497-511.
  15. Stephanie Aaronson & Bruce Fallick & Andrew Figura & Jonathan Pingle & William Wascher, 2006. "The Recent Decline in the Labor Force Participation Rate and Its Implications for Potential Labor Supply," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, Economic Studies Program, The Brookings Institution, vol. 37(1), pages 69-154.
  16. Wesley Clair Mitchell, 1927. "Business Cycles: The Problem and Its Setting," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number mitc27-1.
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Citations

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Cited by:
  1. Davig, Troy A. & Mustre-del-Rio, Jose, 2013. "The shadow labor supply and its implications for the unemployment rate," Macro Bulletin, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 1-2, August.
  2. Murat Tasci, 2012. "The Ins and Outs of Unemployment in the Long Run: Unemployment Flows and the Natural Rate," Koç University-TUSIAD Economic Research Forum Working Papers, Koc University-TUSIAD Economic Research Forum 1233, Koc University-TUSIAD Economic Research Forum.
  3. Christopher L. Smith, 2013. "The dynamics of labor market polarization," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2013-57, Board of Governors of the Federal Reserve System (U.S.).
  4. Henry R. Hyatt & James Spletzer, 2013. "The Recent Decline in Employment Dynamics," Working Papers, Center for Economic Studies, U.S. Census Bureau 13-03, Center for Economic Studies, U.S. Census Bureau.
  5. Francesco D'Amuri & Juri Marcucci, 2012. "The predictive power of Google searches in forecasting unemployment," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 891, Bank of Italy, Economic Research and International Relations Area.

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