Time Series Evidence of Unemployment Flows: The Sample Period Matters

Abstract

The dynamic behavior of the unemployment rate is determined by the worker flows into and out of unemployment. The literature on the dynamics of unemployment flows typically emphasizes the following features: they simultaneously occur over the business cycle, and their size is positively linked to the unemployment rate. Unemployment flows are highly volatile, persistent and countercyclical. Inflows lead outflows over the business cycle, and inflows are more volatile than outflows. This paper investigates possible changes in the dynamics of net U.S. unemployment flows and the unemployment rate between 1948 and 1996 by subjecting all three series to rigorous diagnostic tests. These tests are designed to discover structural instabilities due to time-varying parameters in projectional relationships, one-time breaks, or shifts in the mean. Also, the variables' volatility, cyclicality, and persistence is reported for subperiods suggested by the test results. Diagnosing and documenting changes in the dynamic behavior of unemployment flows and the unemployment rate is important because it helps discriminate between constant and time-varying features, and also between statistically significant and insignificant features of the data. It is a necessary first step for identifying causes for possible changes. Diagnosing and documenting changes also has important implications for the relevance of forecasts involving the unemployment rate and unemployment flows. The test results indicate that structural breaks in bivariate projectional relationships involving inflows, outflows, and the unemployment rate are likely to have occurred around 1958 and again around 1970. The results also show that breaks are more likely to have occurred in relationships involving outflows and the unemployment rate than in those involving inflows. All variables have become more persistent. The volatility of both flows has decreased, but the reduction in volatility has been relatively larger for inflows than for outflows. Outflows have become more strongly countercyclical over time.