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Lessons for Forecasting Unemployment in the U.S.: Use Flow Rates, Mind the Trend

Author

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  • Brent Meyer
  • Murat Tasci

Abstract

This paper evaluates the ability of autoregressive models, professional forecasters, and models that leverage unemployment flows to forecast the unemployment rate. We pay particular attention to flows-based approaches?the more reduced form approach of Barnichon and Nekarda (2012) and the more structural method in Tasci (2012)?to generalize whether data on unemployment flows is useful in forecasting the unemployment rate. We find that any approach that leverages unemployment inflow and outflow rates performs well in the near term. Over longer forecast horizons, Tasci (2012) appears to be a useful framework, even though it was designed to be mainly a tool to uncover long-run labor market dynamics such as the ?natural? rate. Its usefulness is amplified at specific points in the business cycle when unemployment rate is away from the longer-run natural rate. Judgmental forecasts from professional economists tend to be the single best predictor of future unemployment rates. However, combining those guesses with flows based approaches yields significant gains in forecasting accuracy.

Suggested Citation

  • Brent Meyer & Murat Tasci, 2015. "Lessons for Forecasting Unemployment in the U.S.: Use Flow Rates, Mind the Trend," Working Papers (Old Series) 1502, Federal Reserve Bank of Cleveland.
  • Handle: RePEc:fip:fedcwp:1502
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    Citations

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    Cited by:

    1. Pawel Krolikowski & Kurt Graden Lunsford, 2020. "Advance Layoff Notices and Labor Market Forecasting," Working Papers 202003, Federal Reserve Bank of Cleveland.
    2. Bruce Fallick & Pawel Krolikowski, 2019. "Excess Persistence in Employment of Disadvantaged Workers," Working Papers 201801R, Federal Reserve Bank of Cleveland.

    More about this item

    Keywords

    Unemployment Forecasting; Natural Rate; Unemployment Flows; Labor Market Search;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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