The Ins and Outs of Cyclical Unemployment

Abstract

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.

The ins and outs of German unemployment: a transatlantic perspective

“…Both time series behave remarkably similar at business cycle frequencies as well as in first differences. In particular, we note that the half life of a deviation from the steady state unemployment rate is only about one month (see also Elsby et al, 2009). In West Germany, by contrast, the steady state unemployment rate does not serve as a good ap proximation, but only as a noisy indicator (see the left panel of Fig.…”

“…We thus ensure best comparability with evidence from the (ILO compatible) CPS for the USA. This is advanta geous, as the USA serves as a well understood benchmark case (Yashiv, 2008;Elsby et al, 2009;Fujita and Ramey, 2009;Fujita, 2011;Shimer, 2012) of a flexible labour market with stable institutions. We therefore offer cross country comparisons throughout this article.…”

Labour market flows: Facts from the United Kingdom

“…Davis, Faberman, and Haltiwanger (2006) provide new empirical evidence in support of the view that a recession starts out with a wave of separations. Fujita and Ramey (2009) and Elsby, Michaels, and Solon (2009) argue that both job-separation and job-finding rates play a significant role in unemployment fluctuations in the United States.…”

The Aggregate Effects of the Hartz Reforms in Germany

“…This is important, as the sum of the two transition rates determines the rate of convergence of the actual unemployment rate to its flow steady state value. As documented by Elsby et al (2009), the U.S. unemployment rate converges very fast -the half-life of a deviation from the flow steady state value is only about one month. In West-Germany, by contrast, our estimates imply that the half-life of a deviation is more than nine months.…”

“…This facilitates comparisons of the situation in West-Germany with evidence from the CPS for the United States. This is advantageous, as the United States serves as a well-understood benchmark case (Yashiv 2008, Elsby et al 2009, Fujita & Ramey 2009, Shimer 2012) of a flexible labor market with stable institutions.…”