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The Ins and Outs of Cyclical Unemployment

  • Michael W. Elsby
  • Ryan Michaels
  • Gary Solon

One of the strongest trends in recent macroeconomic modeling of labor market fluctuations is to treat unemployment inflows as acyclical. This trend stems in large part from an influential paper by Shimer on "Reassessing the Ins and Outs of Unemployment," i.e., the extent to which increased unemployment during a recession arises from an increase in the number of unemployment spells versus an increase in their duration. After broadly reviewing the previous literature, we replicate and extend Shimer's main analysis. Like Shimer, we find an important role for increased duration. But contrary to Shimer's conclusions, we find that even his own methods and data, when viewed in an appropriate metric, reveal an important role for increased inflows to unemployment as well. This finding is further strengthened by our refinements of Shimer's methods of correcting for data problems and by our detailed examination of particular components of the inflow to unemployment. We conclude that a complete understanding of cyclical unemployment requires an explanation of countercyclical inflow rates as well as procyclical outflow rates.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12853.

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Date of creation: Jan 2007
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Publication status: published as Michael W. L. Elsby & Ryan Michaels & Gary Solon, 2009. "The Ins and Outs of Cyclical Unemployment," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 84-110, January.
Handle: RePEc:nbr:nberwo:12853
Note: EFG LS ME
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  1. Mark Gertler & Antonella Trigari, 2006. "Unemployment fluctuations with staggered Nash wage bargaining," Proceedings, Federal Reserve Bank of San Francisco.
  2. Leena Rudanko, 2006. "Labor Market Dynamics under Long Term Wage Contracting," 2006 Meeting Papers 314, Society for Economic Dynamics.
  3. 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.
  4. Julio J. Rotemberg, 2008. "Cyclical Wages in a Search-and-Bargaining Model with Large Firms," NBER Chapters, in: NBER International Seminar on Macroeconomics 2006, pages 65-114 National Bureau of Economic Research, Inc.
  5. George A. Akerlof & Andrew K. Rose & Janet L. Yellen, 1988. "Job Switching and Job Satisfaction in the U.S. Labor Market," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(2), pages 495-594.
  6. Robert Shimer, 2007. "Reassessing the Ins and Outs of Unemployment," NBER Working Papers 13421, National Bureau of Economic Research, Inc.
  7. Stephen T. Marston, 1976. "Employment Instability and High Unemployment Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(1), pages 169-210.
  8. Robert Shimer, 2005. "The cyclicality of hires, separations, and job-to-job transitions," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 493-508.
  9. Robert E. Hall, 2005. "Employment Efficiency and Sticky Wages: Evidence from Flows in the Labor Market," NBER Working Papers 11183, National Bureau of Economic Research, Inc.
  10. Shigeru Fujita & Garey Ramey, 2006. "The cyclicality of job loss and hiring," Working Papers 06-17, Federal Reserve Bank of Philadelphia.
  11. Yashiv, Eran, 2006. "U.S. Labor Market Dynamics Revisited," IZA Discussion Papers 2455, Institute for the Study of Labor (IZA).
  12. Guido Menzio & Espen Moen, 2006. "Incomplete self-enforcing labor contracts," 2006 Meeting Papers 590, Society for Economic Dynamics.
  13. 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.
  14. Cole, Harold L & Rogerson, Richard, 1999. "Can the Mortensen-Pissarides Matching Model Match the Business-Cycle Facts?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 933-59, November.
  15. Blanchard, Olivier & GalĂ­, Jordi, 2006. "A New Keynesian model with unemployment," CFS Working Paper Series 2007/08, Center for Financial Studies (CFS).
  16. Baker, Michael, 1992. "Unemployment Duration: Compositional Effects and Cyclical Variability," American Economic Review, American Economic Association, vol. 82(1), pages 313-21, March.
  17. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
  18. Peter S. Barth, 1971. "A Time Series Analysis of Layoff Rates," Journal of Human Resources, University of Wisconsin Press, vol. 6(4), pages 448-465.
  19. Robert Shimer, 2005. "Discussion of Robert E. Hall's REStat Lecture "Employment Efficiency and Sticky Wages: Evidence from Flows in the Labor Market"," The Review of Economics and Statistics, MIT Press, vol. 87(3), pages 408-410, August.
  20. Sider, Hal, 1985. "Unemployment Duration and Incidence: 1968-82," American Economic Review, American Economic Association, vol. 75(3), pages 461-72, June.
  21. Helge Braun & Reinout De Bock & Riccardo DiCecio, 2006. "Aggregate shocks and labor market fluctuations," Working Papers 2006-004, Federal Reserve Bank of St. Louis.
  22. Hoyt Bleakley & Ann E. Ferris & Jeffrey C. Fuhrer, 1999. "New data on worker flows during business cycles," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 49-76.
  23. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
  24. Katharine G. Abraham & Robert Shimer, 2001. "Changes in Unemployment Duration and Labor Force Attachment," NBER Working Papers 8513, National Bureau of Economic Research, Inc.
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