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Misclassification-Errors-Adjusted Sahm Rule for Early Identification of Economic Recession

Author

Listed:
  • Shuaizhang Feng

    (Jinan University)

  • Jiandong Sun

    (Jinan University)

Abstract

Accurate identification of economic recessions in a timely fashion is a major macroeconomic challenge. The most successful early detector of recessions, the Sahm rule, relies on changes in unemployment rates, and is thus subject to measurement errors in the U.S. labor force statuses based on survey data. We propose a novel misclassification-error-adjusted Sahm recession indicator and provide empirically-based optimal threshold values. Using historical data, we show that the adjusted Sahm rule offers earlier identification of economic recessions. Based on the newly released U.S. unemployment rate in March 2020, our adjusted Sahm rule diagnoses the U.S. economy is already in recession, while the original Sahm rule does not.

Suggested Citation

  • Shuaizhang Feng & Jiandong Sun, 2020. "Misclassification-Errors-Adjusted Sahm Rule for Early Identification of Economic Recession," Working Papers 2020-029, Human Capital and Economic Opportunity Working Group.
    • Handle: RePEc:hka:wpaper:2020-029
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    References listed on IDEAS

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    2. Blanchflower, David G. & Bryson, Alex, 2023. "Labour Market Expectations and Unemployment in Europe," IZA Discussion Papers 15905, Institute of Labor Economics (IZA).

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    More about this item

    Keywords

    economic recession; Sahm rule; misclassification; unemployment rate;
    All these keywords.

    JEL classification:

    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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