Michael W. L. Elsby (Edinburgh, Michigan, NBER) Jennifer C. Smith (Warwick)

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

1970 1975 1980 1985 1990 1995 2000 2005 20100

2.5

5

7.5

10

12.5

15

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subtitleTitle XlabelYlabelLeft Percent of labour force

U.K. unemployment rate (LFS)

U.S. unemploymentrate (CPS)

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.

1970 1975 1980 1985 1990 1995 2000 2005 2010

0.100

1.000

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subtitleTitle XlabelClaimant outflow rate U to E transition rate

Claimant outflow rate

Series3

Unemployment outflow rates

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.

1970 1975 1980 1985 1990 1995 2000 2005 2010

0.100

1.000

0.200

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U to E transitionrate (LFS)

Series3

1970 1975 1980 1985 1990 1995 2000 2005 20100.100

1.000

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subtitleTitle XlabelOutflow rate

Outflow rateRecession

Unemployment outflow rates


http://www.printourflag.com/images/flag1.pdf

1970 1975 1980 1985 1990 1995 2000 2005 2010contactsource

subtitleTitle XlabelClaimant inflow rate E to U transition rate

Claimant inflow rate

Series3


Unemployment inflow rates

1970 1975 1980 1985 1990 1995 2000 2005 2010contactsource



E to U transition rate (LFS)

Series3




1970 1975 1980 1985 1990 1995 2000 2005 2010

0.100

Inflow rate

1970 1975 1980 1985 1990 1995 2000 2005 2010contactsource




Series3



U.K. unemployment inflow and outflow rates

1970 1975 1980 1985 1990 1995 2000 2005 2010contactsource




Series3

1970 1975 1980 1985 1990 1995 2000 2005 2010

0.100

1.000

0.200

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U to E transitionrate (LFS)

Series3

Sources: Authors’ calculations using ONS NOMIS, GB (data from Petrongolo and Pissarides (2008) prior to 1983).

U.S. unemployment inflow and outflow rates

1970 1975 1980 1985 1990 1995 2000 2005 2010

0.100

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subtitleTitle XlabelInflow rate

Inflow rateRecession

1970 1975 1980 1985 1990 1995 2000 2005 20100.100

1.000

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subtitleTitle XlabelOutflow rate

Outflow rateRecession

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

Contributions to U.S. and U.K. unemployment ramp-ups

-20

0

20

40

60

80

100Decline in outflow rate Rise in inflow rateU.S.

1974

Q1

1974

Q3

1975

Q1

1975

Q3

1976

Q1

1976

Q3

1979

Q4

1980

Q2

1980

Q4

1981

Q2

1981

Q4

1982

Q2

1982

Q4

1983

Q2

1983

Q4

1984

Q2

1990

Q4

1991

Q2

1991

Q4

1992

Q2

1992

Q4

2008

Q1

2008

Q3

2009

Q1

2009

Q3

2010

Q1

2010

Q3

2011

Q1

-20

0

20

40

60

80

100Decline in U t...

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subtitleTitle XlabelYlabelLeft0

Rise in inflow rateDecline in outflow rateRise in E to UDecline in U to E

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

1975 1980 1985 1990 1995 2000 2005 20100

2

4

6

8

10

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United Kingdom

United States

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

1975 1980 1985 1990 1995 2000 2005 20100

2.5

5

7.5

10

12.5

15

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Actual unemployment

Steady-state unemployment

Recession''

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?

3 4 5 6 7 8 9 10 111

1.5

2

2.5

3

3.5

4

U.K. and U.S. Beveridge curves

3 4 5 6 7 8 9 10 111

1.5

2

2.5

3

3.5

4

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subtitleTitleYla-belLeft

Vacancies / Labour Force

2008-09 recession

Before re-cession

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subtitleTitle

Unemployment / Labour Force

Yla-belLeft

After recession

Sources: Authors’ calculations using ONS Vacancy Survey and ONS LFS and BLS JOLTS and CPS.

U.S.

3 4 5 6 7 8 9 10 111

1.5

2

2.5

3

3.5

4

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Vacancies / Labour Force

2008-09 recession

Before re-cession

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subtitleTitle


Yla-belLeft

After recession

3 4 5 6 7 8 9 10 111

1.5

2

2.5

3

3.5

4U.S.

U.K. and U.S. Beveridge curves

Sources: Authors’ calculations using ONS Vacancy Survey and ONS LFS and BLS JOLTS and CPS.

1.3

1.4

1.5

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subtitleTitleYla-belLeft Vacancies / Labour Force

2008-09 re-cession

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Yla-belLeft

After reces-sion

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.

1990 1995 2000 2005 20100

0.05

0.1

0.15

0.2

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subtitleTitle XlabelYlabelLeft U to E monthly transition rate

<1

1 to 3

3 to 6

6 to 12

>12

Aggregate

Job finding rates by unemployment duration

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.

Michael W. L. Elsby (Edinburgh, Michigan, NBER) Jennifer C. Smith (Warwick)

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