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

Author

Listed:
  • Regis Barnichon

    (Centre de Recerca en Economia Internacional, Barcelona)

  • Christopher J. Nekarda

    (Board of Governors of the Federal Reserve System)

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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Regis Barnichon & Christopher J. Nekarda, 2012. "The Ins and Outs of Forecasting Unemployment: Using Labor Force Flows to Forecast the Labor Market," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 43(2 (Fall)), pages 83-131.
  • Handle: RePEc:bin:bpeajo:v:43:y:2012:i:2012-02:p:83-131
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    References listed on IDEAS

    as
    1. Peter Tulip, 2009. "Has the Economy Become More Predictable? Changes in Greenbook Forecast Accuracy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(6), pages 1217-1231, September.
    2. Barnichon, Regis, 2012. "Vacancy posting, job separation and unemployment fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 36(3), pages 315-330.
    3. 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 (US).
    4. Shigeru Fujita, 2011. "Dynamics of worker flows and vacancies: evidence from the sign restriction approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(1), pages 89-121, January/F.
    5. Amos Golan & Jeffrey M. Perloff, 2004. "Superior Forecasts of the U.S. Unemployment Rate Using a Nonparametric Method," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 433-438, February.
    6. repec:rim:rimwps:49-07 is not listed on IDEAS
    7. Shigeru Fujita & Garey Ramey, 2012. "Exogenous vs. endogenous separation," Working Papers 12-2, Federal Reserve Bank of Philadelphia.
    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. Bruce C. Fallick & Jonathan F. 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 (US).
    10. 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.
    11. Barnichon, Regis, 2010. "Building a composite Help-Wanted Index," Economics Letters, Elsevier, vol. 109(3), pages 175-178, December.
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    Citations

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    Cited by:

    1. Henry Hyatt & James Spletzer, 2013. "The recent decline in employment dynamics," IZA Journal of Labor Economics, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 2(1), pages 1-21, December.
    2. Maurizio Baussola & Chiara Mussida, 2014. "Transitions in the Labour Market: Discouragement Effect and Individual Characteristics," LABOUR, CEIS, vol. 28(2), pages 209-232, June.
    3. 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.
    4. 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.
    5. Y. Saks, 2016. "Socio-economic transitions on the labour market : a European benchmarking exercise," Economic Review, National Bank of Belgium, issue iii, pages 41-58, December.
    6. 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 (US).
    7. 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.
    8. repec:eee:intfor:v:33:y:2017:i:4:p:801-816 is not listed on IDEAS
    9. Meyer, Brent & Tasci, Murat, 2015. "Lessons for forecasting unemployment in the United States: use flow rates, mind the trend," FRB Atlanta Working Paper 2015-1, Federal Reserve Bank of Atlanta.
    10. Chiara Mussida & Carlo Lucarelli, 2014. "Dynamics and Performance of the Italian Labour Market," Economia politica, Società editrice il Mulino, issue 1, pages 33-54.
    11. Barnichon, Regis & Garda, Paula, 2016. "Forecasting unemployment across countries: The ins and outs," European Economic Review, Elsevier, vol. 84(C), pages 165-183.
    12. Reuben Ellul, 2018. "Forecasting unemployment rates in Malta: A labour market flows approach," CBM Working Papers WP/03/2018, Central Bank of Malta.
    13. repec:eee:econom:v:199:y:2017:i:2:p:156-172 is not listed on IDEAS
    14. Das, Tirthatanmoy & Polachek, Solomon W., 2017. "Estimating labor force joiners and leavers using a heterogeneity augmented two-tier stochastic frontier," Journal of Econometrics, Elsevier, vol. 199(2), pages 156-172.
    15. repec:bla:obuest:v:79:y:2017:i:1:p:101-123 is not listed on IDEAS
    16. repec:kap:empiri:v:45:y:2018:i:2:d:10.1007_s10663-016-9356-0 is not listed on IDEAS

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    Keywords

    unemployment; labor force; forecasting;

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