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The Effect of Shocks to Labour Market Flows on Unemployment and Participation Rates

  • Robert Dixon
  • Guay C. Lim
  • Jan C. van Ours

This paper presents an analysis of labour market dynamics, in particular of flows in the labour market and how they interact and affect the evolution of unemployment rates and participation rates, the two main indicators of labour market performance. Our analysis has two special features. First, apart from the two labour market states - employment and unemployment - we consider a third state – out of the labour force. Second, we study net rather than gross flows, where net refers to the balance of flows between any two labour market states. Distinguishing a third state is important because the labour market flows to and from that state are quantitatively important. Focussing on net flows simplifies the complexity of interactions between the flows and allows us to perform a dynamic analysis in a structural vector-autoregression framework. We find that a shock to the net flow from unemployment to employment drive the unemployment rate and the participation rate in opposite directions while a shock to the net flow from not in the labour force to unemployment drives the rates in the same direction.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4826.

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Date of creation: 2014
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Handle: RePEc:ces:ceswps:_4826
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  1. Barbara Petrongolo & Christopher A. Pissarides, 2008. "The Ins and Outs of European Unemployment," CEP Discussion Papers dp0853, Centre for Economic Performance, LSE.
  2. Yashiv, Eran, 2007. "U.S. Labour Market Dynamics Revisited," CEPR Discussion Papers 6481, C.E.P.R. Discussion Papers.
  3. Tommaso Monacelli & Roberto Perotti & Antonella Trigari, 2010. "Unemployment Fiscal Multipliers," NBER Working Papers 15931, National Bureau of Economic Research, Inc.
  4. Gomes, Pedro, 2012. "Labour market flows: Facts from the United Kingdom," Labour Economics, Elsevier, vol. 19(2), pages 165-175.
  5. Robert Dixon & G.C. Lim, 2002. "Australian gross flows data: the labour force survey and the size of the population represented by the matched sample," Australian Journal of Labour Economics (AJLE), Bankwest Curtin Economics Centre (BCEC), Curtin Business School, vol. 5(1), pages 1-21, March.
  6. Michael W.L. Elsby & Bart Hobijn & Aysegul Sahin, 2011. "Unemployment Dynamics in the OECD," Tinbergen Institute Discussion Papers 11-159/3, Tinbergen Institute.
  7. Melvin Stephens, 2002. "Worker Displacement and the Added Worker Effect," Journal of Labor Economics, University of Chicago Press, vol. 20(3), pages 504-537, July.
  8. Jan Boone & Jan Ours, 2009. "Bringing Unemployed Back to Work: Effective Active Labor Market Policies," De Economist, Springer, vol. 157(3), pages 293-313, September.
  9. Lundberg, Shelly, 1985. "The Added Worker Effect," Journal of Labor Economics, University of Chicago Press, vol. 3(1), pages 11-37, January.
  10. William Foster, 1981. "Gross Flows in the Australian Labour Market A First Look," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 14(4), pages 57-64.
  11. Abowd, John M & Zellner, Arnold, 1985. "Estimating Gross Labor-Force Flows," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(3), pages 254-83, June.
  12. Robert Shimer, 2007. "Reassessing the Ins and Outs of Unemployment," NBER Working Papers 13421, National Bureau of Economic Research, Inc.
  13. Brian Krogh Graversen & Jan C. van Ours, 2011. "An Activation Program as a Stick to Job Finding," LABOUR, CEIS, vol. 25(2), pages 167-181, 06.
  14. Jean-Olivier Hairault & François Langot & Thepthida Sopraseuth, 2010. "Distance to Retirement and The Job Search of Older Workers: The Case For Delaying Retirement Age," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00517107, HAL.
  15. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  16. Tito Boeri & Jan van Ours, 2013. "The Economics of Imperfect Labor Markets: Second Edition," Economics Books, Princeton University Press, edition 1, volume 1, number 10142.
  17. Michael W. Elsby & Ryan Michaels & Gary Solon, 2007. "The Ins and Outs of Cyclical Unemployment," NBER Working Papers 12853, National Bureau of Economic Research, Inc.
  18. Oliver Jean Blanchard & Peter Diamond, 1990. "The Cyclical Behovior of the Gross Flows of U.S. Workers," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(2), pages 85-156.
  19. Jean-Olivier Hairault & Francois Langot & Thepthida Sopraseuth, 2010. "Distance to Retirement and Older Workers' Employment: The Case for Delaying the Retirement Age," Journal of the European Economic Association, MIT Press, vol. 8(5), pages 1034-1076, 09.
  20. Dixon, R., 2001. "Australian Labour Force Data: How Representative is the 'Population Represented by the Matched Sample'?," Department of Economics - Working Papers Series 772, The University of Melbourne.
  21. Shigeru Fujita & Garey Ramey, 2007. "The cyclicality of separation and job finding rates," Working Papers 07-19, Federal Reserve Bank of Philadelphia.
  22. Eran Yashiv, 2007. "U.S. labor market dynamics revisited," LSE Research Online Documents on Economics 19665, London School of Economics and Political Science, LSE Library.
  23. Eran Yashiv, 2007. "U.S. Labor Market Dynamics Revisited," CEP Discussion Papers dp0831, Centre for Economic Performance, LSE.
  24. Brian Bell & James Smith, 2002. "On gross worker flows in the United Kingdom: evidence from the Labour Force Survey," Bank of England working papers 160, Bank of England.
  25. Markus Brückner & Evi Pappa, 2012. "Fiscal Expansions, Unemployment, And Labor Force Participation: Theory And Evidence," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(4), pages 1205-1228, November.
  26. Jeff Borland, 1996. "Labour Market Flows Data for Australia," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 29(2), pages 225-235.
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