Abstract
This paper presents new data on Icelandic labour market flows between employment, unemployment, and inactivity, constructed from the microdata in Statistics Iceland‘s Labour Force Survey (LFS). An analysis of the contribution of the transition rates to the dynamics of unemployment is then performed. Assuming a fixed labour force yields results comparable to previous estimates in Iceland, with a third of the variation in steady-state unemployment explained by the job finding rate, a significant departure from what is found in Anglo-Saxon, continental European, and Nordic economies. Taking account of movements in and out of the labour force has a significant effect on contributions of transition rates to variations in steady-state unemployment, with inactivity transitions accounting for roughly a third of the variability in steady-state unemployment and a dead-even split of the remaining two-thirds between the employment-unemployment and unemployment-employment transition rates. This contribution of inactivity transitions is comparable to that in the UK, US, and Spain. The background information available in the LFS indicates that some heterogeneity exists in the contributions by gender. The participation margin is thus an important source of variation in unemployment and needs to be accounted for to fully understand the drivers of Icelandic labour market fluctuations. Furthermore, ignoring transitions in and out of the labour force generates misleading results on the relative importance of the transition rates between employment and unemployment states in Iceland.
Highlights
The flow of individuals between labour market states – i.e., employment, unemployment, and inactivity – determines the evolution of various aggregate labour market indicators, including employment and unemployment rates
The contribution of the present paper is to present new data on labour market flows using microdata from Statistics Iceland’s Labour Force Survey (LFS)
Making use of the background information available in the LFS, the results indicate some heterogeneity between genders
Summary
The flow of individuals between labour market states – i.e., employment, unemployment, and inactivity – determines the evolution of various aggregate labour market indicators, including employment and unemployment rates. Examining deviations from trend, Sigurdsson (2011) concludes that variations in labour force participation are secondary in explaining labour market fluctuations, and the business cycle analysis in Einarsson et al (2013) finds that the labour force participation rate is only weakly procyclical, or even acyclical These studies, focus on the stocks of workers in each state of the labour market, which can mask transitions between states that offset each other and give the misleading result that the participation margin is not important. Access to the microdata – i.e., individual responses – allows for matching the labour market status of individuals in consecutive quarters and measurement of the flow of individuals between all three labour market statuses, as the LFS covers inactive workers as well as those employed and unemployed Using these new data for Iceland, an analysis of the contribution of the various transition rates to the dynamics of unemployment is conducted.
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