Recession and prospects for recovery,
comparing U.K. and U.S.
...
“The Great Recession in the
U.K. Labour Market: A Transatlantic View”
(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)
U.S. unemployment
rate (CPS)
12.5
10
7.5
5
2.5
0
1970
1975
1980
1985
1990
1995
2000
2005
2010
Ages 16 and over. Sources: ONS, BLS.
Unemployment flows
• 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
Claimant
outflow rate
0.500
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
Claimant
outflow rate
0.500
0.250
0.250
0.125
0.125
0.063
Outflow1970
rate
1.000
0.063
U to E transition
rate (LFS)
0.031
1975
1980
1985
1990
1995
2000
2005
2010
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.
Unemployment inflow rates
Claimant inflow rate
0.025
E to U transition rate
Claimant
inflow 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.
Unemployment inflow rates
Claimant inflow rate
0.025
E to U transition rate
0.013
Claimant
inflow rate
0.013
0.006
0.006
0.003
E to U transition
rate (LFS)
0.003
1970
0.002
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.
Unemployment inflow rates
Claimant inflow rate
0.025
E to U transition rate
0.013
Claimant
inflow rate
0.013
0.006
0.006
0.003
E to U transition
rate (LFS)
0.003
1970
0.100
0.002
1980
1990
0.050
2000
2010
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
E to U transition
rate (LFS)
0.003
Claimant
1970
outflow rate
1.000
1980
1990
0.002
U to2010
E transition rate
0.500
2000
Claimant
outflow rate
0.500
0.250
0.250
0.125
0.125
0.063
1970
U to E transition
rate (LFS)
0.063
0.031
1975
1980
1985
1990
1995
2000
2005
2010
Sources: Authors’ calculations using ONS NOMIS, GB (data from Petrongolo and Pissarides (2008) prior to 1983).
U.S. unemployment inflow and outflow rates
Inflow rate
0.100
0.050
Inflow rate
0.025
0.013
Outflow1970
rate
1.000
1975
1980
1985
1990
1995
2000
2005
2010
2005
2010
0.500
Outflow rate
0.250
0.125
1970
1975
1980
1985
1990
1995
2000
Sources: Authors’ calculations using Shimer’s (2007) method based on BLS CPS duration data.
Unemployment decomposition
Change in log unemployment rate
≈ Change in log inflow rate
minus Change in log outflow rate
2007 Q2
2007 Q4
2008 Q2
2008 Q4
2009 Q2
2009 Q4
2010 Q2
2010 Q4
2001 Q1
2001 Q3
2002 Q1
2002 Q3
2003 Q1
2003 Q3
1990 Q3
1991 Q1
1991 Q3
1992 Q1
1992 Q3
1981 Q3
1982 Q1
1982 Q3
1979 Q2
1979 Q4
1980 Q2
1973 Q4
1974 Q2
1974 Q4
1975 Q2
Decline in outflow rate
2008 Q1
2008 Q3
2009 Q1
2009 Q3
2010 Q1
2010 Q3
1990 Q4
1991 Q2
1991 Q4
1992 Q2
1992 Q4
1979 Q4
1980 Q2
1980 Q4
1981 Q2
1981 Q4
1982 Q2
1982 Q4
1983 Q2
1983 Q4
1984 Q2
1974 Q1
1974 Q3
1975 Q1
1975 Q3
1976 Q1
1976 Q3
Contributions to U.S. and U.K. unemployment ramp-ups
100
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
Flow rates: further implications
• 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
8
United Kingdom
6
4
2
United States
0
1975
1980
1985
1990
1995
2000
2005
2010
Sources: Authors’ calculations using ONS LFS micro data and BLS CPS duration data.
Prospects
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?
1. Adjustment to shocks
•
•
•
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
5
Actual unemployment
2.5
0
1975
1980
1985
1990
1995
2000
2005
2010
Sources: ONS LFS and authors’ calculations using Shimer’s (2007) method based on ONS LFS duration data.
2. Matching efficiency
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
Before
recession
Job Openings / Labour Force
4
Before recession
3.5
3.5
3
3
2.5
2.5
After recession
2
2
After recession
2008-09 recession
1.5
2008-09 recession
1.5
1
3
4
5
6
7
8
9
10
Unemployment / Labour Force
11
1
3
4
5
6
7
8
9
10
11
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 Job Openings / Labour Force
4
4
Before recession
After
3.5
3.5
recession
2008-09
1.4
recession
3
Before
recession
3
2.5
6
7
8
Unemployment / Labour Force
2
After recession
9
2
After recession
2008-09 recession
1.5
2008-09 recession
2.5
1.3
1.5
1
3
4
5
6
7
8
9
10
Unemployment / Labour Force
11
1
3
4
5
6
7
8
9
10
11
Sources: Authors’ calculations using ONS Vacancy Survey and ONS LFS and BLS JOLTS and CPS.
3. Long-term unemployment
• 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
0.1
3 to 6
Aggregate
6 to 12
0.05
>12
0
1990
1995
2000
2005
2010
Sources: Authors’ calculations using ONS LFS micro data.
Summary and conclusions
•
•
•
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.
Summary and conclusions
•
•
•
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.