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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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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2013-19.

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Date of creation: 2013
Date of revision:
Handle: RePEc:fip:fedgfe:2013-19
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  1. Barbara Petrongolo & Christopher A. Pissarides, 2008. "The Ins and Outs of European Unemployment," American Economic Review, American Economic Association, vol. 98(2), pages 256-62, May.
  2. 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.
  3. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-44, January.
  4. 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.
  5. Shigeru Fujita, 2009. "Dynamics of worker flows and vacancies: evidence from the sign restriction approach," Working Papers 07-12, Federal Reserve Bank of Philadelphia.
  6. 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.
  7. 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.
  8. Shigeru Fujita & Garey Ramey, 2012. "Exogenous vs. endogenous separation," Working Papers 12-2, Federal Reserve Bank of Philadelphia.
  9. 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.).
  10. Peter Tulip, 2009. "Has the Economy Become More Predictable? Changes in Greenbook Forecast Accuracy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(6), pages 1217-1231, 09.
  11. Shigeru Fujita & Garey Ramey, 2007. "The cyclicality of separation and job finding rates," Working Papers 07-19, Federal Reserve Bank of Philadelphia.
  12. Golan, Amos & Perloff, Jeffrey M, 2002. "Superior forecasts of the U.S. unemployment rate using a nonparametric method," CUDARE Working Paper Series 956, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
  13. 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.
  14. Laura Brown & Saeed Moshiri, 2004. "Unemployment variation over the business cycles: a comparison of forecasting models," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 23(7), pages 497-511.
  15. 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.).
  16. Barnichon, Regis, 2010. "Building a composite Help-Wanted Index," Economics Letters, Elsevier, vol. 109(3), pages 175-178, December.
  17. repec:rim:rimwps:49-07 is not listed on IDEAS
  18. Wesley Clair Mitchell, 1927. "Business Cycles: The Problem and Its Setting," NBER Books, National Bureau of Economic Research, Inc, number mitc27-1, September.
  19. 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.).
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