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

  • Regis Barnichon
  • Christopher J. Nekarda

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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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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  1. Barbara Petrongolo & Christopher Pissarides, 2008. "The ins and outs of European unemployment," LSE Research Online Documents on Economics 3658, London School of Economics and Political Science, LSE Library.
  2. Regis Barnichon, 2009. "Vacancy posting, job separation and unemployment fluctuations," Finance and Economics Discussion Series 2009-35, Board of Governors of the Federal Reserve System (U.S.).
  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, vol. 50(2), pages 415-430, 05.
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  8. Rothman, Philip, 1988. "Further Evidence On The Asymmetric Behavior Of Unemployment Rates Over The Business Cycle," Working Papers 88-23, C.V. Starr Center for Applied Economics, New York University.
  9. 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.
  10. 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.
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  12. 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.).
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  14. Wesley Clair Mitchell, 1927. "Business Cycles: The Problem and Its Setting," NBER Books, National Bureau of Economic Research, Inc, number mitc27-1, December.
  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. 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.
  17. 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 (U.S.).
  18. Barnichon, Regis, 2010. "Building a composite Help-Wanted Index," Economics Letters, Elsevier, vol. 109(3), pages 175-178, December.
  19. 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.
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