...
(National Institute Economic Review, No.214, October 2010)
Michael W. L. Elsby
(Edinburgh, Michigan, NBER)
Jennifer C. Smith
(Warwick)
ONS Labour Market Statistics Conference, 2 March 2011

U.K. and U.S. unemployment
Percent of labour force
15
U.K. unemployment rate (LFS)
12,5
U.S. unemployment rate (CPS)
10
7,5
5
2,5
1970 1975 1980 1985 1990 1995 2000 2010
0
2005
Ages 16 and over. Sources: ONS, BLS.

• Why is looking at unemployment flows useful?
• Law of Motion for Unemployment:
Change in unemployment = inflows – outflows.
• Rearrange:
Change in log unemployment rate
≈ Change in log inflow rate
minus Change in log outflow rate
• So we can tell what drove the recessionary rise in unemployment ...
• And we can see whether flows are moving in an appropriate way to get unemployment back down.

Claimant outflow rate
1,000
Unemployment outflow rates
U to E transition rate
0,500
Claimant outflow rate
0,250
0,125
0,063
1970 1975 1980 1985 1990 1995 2000 2005 2010
Sources: Authors’ calculations using ONS NOMIS, GB (data from Petrongolo and Pissarides (2008) prior to 1983),
LFS microdata, and using Shimer’s (2007) method on BLS CPS duration data.

Claimant outflow rate
1,000
Unemployment outflow rates
U to E transition rate
0,500
0,500
Claimant outflow rate
0,250
0,250 0,125
0,125
U to E transition rate (LFS)
0,063
1970 1975 1980 1985 1990 1995 2000 2005 2010
1,000
0,063
0,031
0,500
Outflow rate
0,250
0,125
1970 1975 1980 1985 1990 1995 2000 2005 2010
Sources: Authors’ calculations using ONS NOMIS, GB (data from Petrongolo and Pissarides (2008) prior to 1983),
LFS microdata, and using Shimer’s (2007) method on BLS CPS duration data.

Claimant inflow rate
0,025
Unemployment inflow rates
Claimant inflow rate
E to U transition rate
0,013
0,006
0,003
1970 1980 1990 2000 2010
Sources: Authors’ calculations using ONS NOMIS, GB (data from Petrongolo and Pissarides (2008) prior to 1983),
LFS microdata, and using Shimer’s (2007) method on BLS CPS duration data.

Claimant inflow rate
0,025
0,013
Unemployment inflow rates
Claimant inflow rate
E to U transition rate
0,013
0,006
0,006
0,003
1970 1980
0,003
1990
E to U transition rate (LFS)
2000 2010
0,002
Sources: Authors’ calculations using ONS NOMIS, GB (data from Petrongolo and Pissarides (2008) prior to 1983),
LFS microdata, and using Shimer’s (2007) method on BLS CPS duration data.

Claimant inflow rate
0,025
0,013
Unemployment inflow rates
Claimant inflow rate
E to U transition rate
0,013
0,006
0,006
0,003
1970
0,100
1980
0,003
1990
E to U transition rate (LFS)
2000 2010
0,002
0,050
Inflow rate
0,025
0,013
1970 1975 1980 1985 1990 1995 2000 2005 2010
Sources: Authors’ calculations using ONS NOMIS, GB (data from Petrongolo and Pissarides (2008) prior to 1983),
LFS microdata, and using Shimer’s (2007) method on BLS CPS duration data.

U.K. unemployment inflow and outflow rates
Claimant inflow rate
0,025
E to U transition rate
0,013
Claimant inflow rate
0,013 0,006
0,006 0,003
0,003
1,000
0,500
0,250
1980 1990
E to U transition rate (LFS)
2000
Claimant outflow rate
0,002
0,500
0,250
0,125
0,125
U to E transition rate (LFS)
0,063
1970 1975 1980 1985 1990 1995 2000 2005 2010
0,063
0,031
Sources: Authors’ calculations using ONS NOMIS, GB (data from Petrongolo and Pissarides (2008) prior to 1983).

Inflow rate
U.S. unemployment inflow and outflow rates
0,100
0,050
0,025
Inflow rate
0,013
1970 1975 1980 1985 1990 1995 2000 2005 2010
1,000
0,500
Outflow rate
0,250
0,125
1970 1975 1980 1985 1990 1995 2000 2005 2010
Sources: Authors’ calculations using Shimer’s (2007) method based on BLS CPS duration data.

Change in log unemployment rate
≈ Change in log inflow rate
minus Change in log outflow rate

Contributions to U.S. and U.K. unemployment ramp-ups
100
U.S.
Decline in outflow rate Rise in inflow rate
80
60
40
20
0
-20
Decline in U to E
Rise in E to U
100
80
60
40
20
0
-20

• The huge decline in the U.S. outflow rate has a corollary in an unprecedented rise in U.S. long-term unemployment.

UK and US long-term unemployment rates
Percent of labour force
10
United Kingdom
8
6
4
2
United States
1975 1980
0
1985 1990 1995 2000 2005 2010
Sources: Authors’ calculations using ONS LFS micro data and BLS CPS duration data.

1. Has the labour market fully adjusted to recession shocks?
2. How efficiently is the labour market matching workers and firms?
3. How likely is it that the U.K. will again experience persistently high long-term unemployment?

• Shocks to inflows or outflows change the unemployment rate at which the economy would settle, in the absence of further shocks. (This is termed the ‘flow steady-state’ unemployment rate.)
• Another rearrangement of the Law of Motion for
Unemployment gives a formula:
Steady state unemployment rate
= inflow rate / (inflow rate + outflow rate)
• Because actual unemployment is always converging towards the moving target of flow steady state unemployment, flow steady state unemployment acts as a leading indicator for actual unemployment.

U.K. actual and steady state unemployment rates
Percent of labour force
15
12,5
Steady-state unemployment
10
7,5
Actual unemployment
5
2,5
1975 2010
0
1980 1985 1990 1995 2000 2005
Sources: ONS LFS and authors’ calculations using Shimer’s (2007) method based on ONS LFS duration data.

A reduction in unemployment is predicated on two conditions:
1. Are job openings being created?
2. How effectively will such job openings be filled?

U.K. and U.S. Beveridge curves
Vacancies / Labour Force
4
3,5
U.S.
4
3,5
3
3
Before recession
2,5
2,5
2008-09 recession
2
After recession
1,5
2
1,5
3 4 5 6 7 8 9 10 11
Unemployment / Labour Force
1
3 4 5 6 7 8 9 10 11
1
Sources: Authors’ calculations using ONS Vacancy Survey and ONS LFS and BLS JOLTS and CPS.

U.K. and U.S. Beveridge curves
Vacancies / Labour Force
Vacancies / Labour Force 1,5
4
After
2008-09 recession
1,4
3
U.S.
4
3,5
3
Before recession
6 7
2,5
8 9
1,3
2,5
2
2008-09 recession
After recession
1,5
1,5
3 4 5 6 7 8 9 10 11
Unemployment / Labour Force
1
3 4 5 6 7 8 9 10 11
1
Sources: Authors’ calculations using ONS Vacancy Survey and ONS LFS and BLS JOLTS and CPS.

• It is possible to predict future long-term unemployment by looking at current unemployment of various durations and how outflow rates vary across durations.

Job finding rates by unemployment duration
U to E monthly transition rate
0,2
0,15
<1
1 to 3
3 to 6
Aggregate
6 to 12
>12
1990 1995
0,1
0,05
2000
0
2005 2010
Sources: Authors’ calculations using ONS LFS micro data.

• This recession, U.K. unemployment was driven by a sharp rise in job loss rates – but the inflow rate peak was lower than in previous recessions, and job losses have slowed more quickly.
• U.K. job finding rates have held up remarkably well.
• Consequences:
– U.K. unemployment rate has risen less than in past recessions, and less than in the U.S.
– U.K. long-term unemployment has not risen as far as in previous recessions, or as far as in the U.S.

• The U.K. labour market seems to have adapted fully to the shocks of the recent recession.
• There are possible signs of lower matching efficiency, but it is difficult to be sure, as vacancy creation has been low.
• Low outflow rates from short-term unemployment give some cause for concern.
However, there has been a substantial recovery in job finding rates by the long-term unemployed. These two constitute a reduction in duration dependence.