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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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Related research

Keywords: unemployment; labor force; forecasting;

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References

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  1. Barbara Petrongolo & Christopher A. Pissarides, 2008. "The Ins and Outs of European Unemployment," CEP Discussion Papers dp0853, Centre for Economic Performance, LSE.
  2. Barnichon, Regis, 2010. "Building a composite Help-Wanted Index," Economics Letters, Elsevier, vol. 109(3), pages 175-178, December.
  3. Wesley Clair Mitchell, 1927. "Business Cycles: The Problem and Its Setting," NBER Books, National Bureau of Economic Research, Inc, number mitc27-1.
  4. 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, vol. 37(1), pages 69-154.
  5. Wesley Clair Mitchell, 1927. "Introductory pages to "Business Cycles: The Problem and Its Setting"," NBER Chapters, in: Business Cycles: The Problem and Its Setting, pages -23 National Bureau of Economic Research, Inc.
  6. 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 qt2bw559zk, Department of Agricultural & Resource Economics, UC Berkeley.
  7. George L. Perry, 1972. "Unemployment Flows in the U.S. Labor Market," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 3(2), pages 245-292.
  8. Laura Brown & Saeed Moshiri, 2004. "Unemployment variation over the business cycles: a comparison of forecasting models," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 23(7), pages 497-511.
  9. Barnichon, Regis, 2012. "Vacancy posting, job separation and unemployment fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 36(3), pages 315-330.
  10. Milas, Costas & Rothman, Philip, 2008. "Out-of-sample forecasting of unemployment rates with pooled STVECM forecasts," International Journal of Forecasting, Elsevier, vol. 24(1), pages 101-121.
  11. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-44, January.
  12. Rothman, Philip, 1991. "Further evidence on the asymmetric behavior of unemployment rates over the business cycle," Journal of Macroeconomics, Elsevier, vol. 13(2), pages 291-298.
  13. 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 2011-46, Board of Governors of the Federal Reserve System (U.S.).
  14. Shigeru Fujita & Garey Ramey, 2007. "The cyclicality of separation and job finding rates," Working Papers 07-19, Federal Reserve Bank of Philadelphia.
  15. Baghestani, Hamid, 2008. "Federal Reserve versus private information: Who is the best unemployment rate predictor," Journal of Policy Modeling, Elsevier, vol. 30(1), pages 101-110.
  16. Bruce Fallick & Jonathan Pingle, 2006. "A cohort-based model of labor force participation," Finance and Economics Discussion Series 2007-09, Board of Governors of the Federal Reserve System (U.S.).
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Citations

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Cited by:
  1. Francesco D'Amuri & Juri Marcucci, 2012. "The predictive power of Google searches in forecasting unemployment," Temi di discussione (Economic working papers) 891, Bank of Italy, Economic Research and International Relations Area.
  2. Christopher L. Smith, 2013. "The dynamics of labor market polarization," Finance and Economics Discussion Series 2013-57, Board of Governors of the Federal Reserve System (U.S.).
  3. 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 1233, Koc University-TUSIAD Economic Research Forum.
  4. Hyatt, Henry R. & Spletzer, James R., 2013. "The Recent Decline in Employment Dynamics," IZA Discussion Papers 7231, Institute for the Study of Labor (IZA).
  5. 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, pages 1-2, August.

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