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An Evaluation of Inertia Models of Unemployment

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  • Anh T. Le
  • Paul W. Miller

Abstract

Two approaches have been used to model unemployment. The first, conventional, approach involves linking the unemployment outcome to observed indices of productivity, structural factors and discrimination such as educational attainment, location and birthplace. The second approach, the inertia model, involves using a person's labour market history as a way of including in unemployment models information on the ‘unobservables’ that influence employability. This paper evaluates the performance of both models of unemployment. The results provide unambiguous support for the inertia model when modelling unemployment. The inertia model has higher explanatory power, higher within‐sample prediction rate success and fewer out‐of‐sample forecasting errors than the conventional model. The estimates from the inertia model can be used to provide quite accurate predictions of the risk of becoming unemployed. This is important if individuals at high risk of becoming unemployed are to be targeted for labour market assistance.

Suggested Citation

  • Anh T. Le & Paul W. Miller, 2000. "An Evaluation of Inertia Models of Unemployment," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 33(3), pages 205-220, September.
    • Handle: RePEc:bla:ausecr:v:33:y:2000:i:3:p:205-220
    DOI: 10.1111/1467-8462.00149
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    Cited by:

    1. Matthew Gray & Lixia Qu, 2003. "Determinants of Australian Mothers’ Employment: An Analysis of Lone and Couple Mothers," Australian Journal of Labour Economics (AJLE), Bankwest Curtin Economics Centre (BCEC), Curtin Business School, vol. 6(4), pages 597-617, December.
    2. Boyd Hunter & Matthew Gray, 2012. "Indigenous Labour Supply following a Period of Strong Economic Growth," Australian Journal of Labour Economics (AJLE), Bankwest Curtin Economics Centre (BCEC), Curtin Business School, vol. 15(2), pages 141-159.
    3. Matthew Gray & Lixia Qu, 2006. "Changes in the Labour Force Status of Lone and Couple Australian Mothers, 1983-2005," Australian Journal of Labour Economics (AJLE), Bankwest Curtin Economics Centre (BCEC), Curtin Business School, vol. 9(4), pages 395-416, December.
    4. Matthew Gray & Lixia Qu & Jennifer Renda & David de Vaus, 2004. "Changes in the labour force status of lone and couple Australian mothers, 1983-2002," Labor and Demography 0405004, University Library of Munich, Germany.
    5. Giles, Margaret & Le, Anh T., 2009. "Investment in Human Capital during Incarceration and Employment Prospects of Prisoners," IZA Discussion Papers 4582, Institute of Labor Economics (IZA).
    6. Jeremy Lawson & Crystal Ossolinski, 2010. "Employment Composition: A Study of Australian Employment Growth, 2002–2006," RBA Research Discussion Papers rdp2010-04, Reserve Bank of Australia.

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