The ins and outs of unemployment shocks

This paper quantifies the roles of unemployment inflows and outflows in cyclical unemployment. Motivated by the joint dynamic relationship between worker flows and the unemployment rate, I design a simple identification strategy that accounts for this pattern and use it to empirically isolate changes in job separation and job finding. I find that both margins contribute significantly to unemployment volatility and that their interaction is important for understanding the business-cycle dynamics of the unemployment rate. In particular, an initial spike in job loss leads to a future decline in the job finding rate, supporting mechanisms from a newer class of models that predict this behavior. My results caution against ignoring cyclical variation in job loss and suggest that macroeconomic models of the labor market should aim to explicitly capture the dynamic interaction between the ins and outs of unemployment.