Ins and outs of the long-run unemployment dynamics

Abstract

This article studies the contribution of inflow and outflow rates to the unemployment dynamics in the long-run. I find that both inflow and outflow rates contribute significantly to variation in the long-run trend in the unemployment rate in both the United States and Japan. In the United States, the inflow and outflow rates account for roughly similar proportions of overall unemployment variability in the long run. On the other hand, in Japan, the inflow rate accounts for much of unemployment variation in the long run, and the contribution of the inflow rate to overall unemployment fluctuation is around 62%.

Keywords:

• unemployment dynamics
• job finding rate
• separation rate
• long-run unemployment

JEL Classification:

• E24
• J64

Notes

¹ Search and matching models provide a useful framework to analyse the dynamics of unemployment. Inflow and outflow rates of unemployment lie at the heart of models of equilibrium unemployment. See, for example, Mortensen and Pissarides (1994) and Pissarides (2000).

² When I adopt the definition of the business cycle as the cyclical components between 1.5 years and 8 years following Baxter and King (1999) and Stock and Watson (1999) and use these limits as the definition of business cycles so as to isolate the trend or low frequency of the data, I get similar results.

³ However, it is worth noting that using the HP filter is not suitable for the analysis of the long-run components of an economic series. The HP filter is best interpreted as a high-pass filter isolating frequencies of 8 years and higher in economic data and is not intended for frequencies falling into other bands.

⁴ Rogerson and Shimer (2011) demonstrate that there is a negative correlation between trend changes in the unemployment and trend changes in the job-finding rate in France, Sweden and the United Kingdom, but not in the United States.