The Grea Recession in he U.K. Labour Marke: A Transalanic View Michael W. L. Elsby (Edinburgh, Michigan, NBER) Jennifer C. Smih (Warwick) Bank of England, 25 March 2011
U.K. and U.S. unemploymen U.K. unemploymen rae (LFS) Percen of labour force 15 U.S. unemploymen rae (CPS) 12.5 10 7.5 5 2.5 1970 1975 1980 1985 1990 1995 2000 2005 2010 0 Ages 16 and over. Sources: ONS, BLS.
Unemploymen flows Why is looking a unemploymen flows useful? Law of Moion for Unemploymen: U s E 1 fu 1 Change in unemploymen = inflows ouflows. Rearrange: u s * s f Flow seady sae unemploymen rae The (ime-varying) arge a which acual unemploymen is always aiming.
Unemploymen flows Why is looking a unemploymen flows useful? Law of Moion for Unemploymen: U s E 1 fu 1 Change in unemploymen = inflows ouflows. Rearrange: * ln u ln( s ) ln( f ) where 1 * u 1 Change in log unemploymen rae Change in log inflow rae minus Change in log ouflow rae
Claiman ouflow rae 1.000 Unemploymen ouflow raes U o E ransiion rae 0.500 Claiman ouflow rae 0.250 0.125 0.063 1970 1975 1980 1985 1990 1995 2000 2005 2010 Sources: Auhors calculaions using ONS NOMIS, GB (daa from Perongolo and Pissarides (2008) prior o 1983), LFS microdaa, and using Shimer s (2007) mehod on BLS CPS duraion daa.
Claiman ouflow rae 1.000 Unemploymen ouflow raes U o E ransiion rae 0.500 0.500 0.250 Claiman ouflow rae 0.250 0.125 0.125 U o E ransiion rae (LFS) 0.063 Ouflow1970 rae 1975 1980 1985 1990 1995 2000 2005 2010 1.000 0.063 0.031 0.500 0.250 Ouflow rae 0.125 1970 1975 1980 1985 1990 1995 2000 2005 2010 Sources: Auhors calculaions using ONS NOMIS, GB (daa from Perongolo and Pissarides (2008) prior o 1983), LFS microdaa, and using Shimer s (2007) mehod on BLS CPS duraion daa.
Claiman inflow rae 0.025 0.013 Unemploymen inflow raes Claiman inflow rae E o U ransiion rae 0.006 0.003 1970 1980 1990 2000 2010 Sources: Auhors calculaions using ONS NOMIS, GB (daa from Perongolo and Pissarides (2008) prior o 1983), LFS microdaa, and using Shimer s (2007) mehod on BLS CPS duraion daa.
Claiman inflow rae 0.025 0.013 Unemploymen inflow raes Claiman inflow rae E o U ransiion rae 0.013 0.006 0.006 E o U ransiion rae (LFS) 0.003 1970 1980 1990 2000 2010 0.003 0.002 Sources: Auhors calculaions using ONS NOMIS, GB (daa from Perongolo and Pissarides (2008) prior o 1983), LFS microdaa, and using Shimer s (2007) mehod on BLS CPS duraion daa.
Claiman inflow rae 0.025 0.013 Unemploymen inflow raes Claiman inflow rae E o U ransiion rae 0.013 0.006 0.006 E o U ransiion rae (LFS) 0.003 1970 0.100 1980 1990 2000 2010 0.003 0.002 0.050 Inflow rae 0.025 0.013 1970 1975 1980 1985 1990 1995 2000 2005 2010 Sources: Auhors calculaions using ONS NOMIS, GB (daa from Perongolo and Pissarides (2008) prior o 1983), LFS microdaa, and using Shimer s (2007) mehod on BLS CPS duraion daa.
0.013 U.K. unemploymen inflow and ouflow raes Claiman inflow rae 0.025 Claiman inflow rae E o U ransiion rae 0.013 0.006 0.006 0.003 E o U ransiion rae (LFS) 0.003 0.002 Claiman 1970 ouflow rae 1980 1990 2000 U o2010 E ransiion rae 1.000 0.500 0.500 0.250 Claiman ouflow rae 0.250 0.125 0.125 U o E ransiion rae (LFS) 0.063 1970 1975 1980 1985 1990 1995 2000 2005 2010 0.063 0.031 Sources: Auhors calculaions using ONS NOMIS, GB (daa from Perongolo and Pissarides (2008) prior o 1983).
Inflow rae 0.100 U.S. unemploymen inflow and ouflow raes 0.050 Inflow rae 0.025 0.013 Ouflow1970 rae 1975 1980 1985 1990 1995 2000 2005 2010 1.000 0.500 0.250 Ouflow rae 0.125 1970 1975 1980 1985 1990 1995 2000 2005 2010 Sources: Auhors calculaions using Shimer s (2007) mehod based on BLS CPS duraion daa.
Ins or ous? 2-sae model gives dynamics of seady sae unemploymen u * in erms of conribuions from inflow and ouflow raes: * ln u ln s ln f Inflow rae conribuion C Ouflow rae conribuion C s* f * And conribuions o variance of ln(u * ), bea*: * s cov ln s, ln u * var ln u * * f cov ln f, ln u var * ln u *
Bea* conribuions o u * variance Bea* UK US 1992q3-2010q3 Claiman QLFS BHPS CPS Inflow rae 0.52 0.59 0.57 0.22 Ouflow rae 0.48 0.41 0.44 0.79 Residual 0.00 0.00 0.00 0.00 BHPS: 1988q4-2008q2.
3-sae approach Laws of Moion for U and E: U E N U Rearrange: EU NU UE UN 1 1 1 E U N E u UE NE EU EN 1 1 1 EU ENU UE UNE NU EU EN NU NE * NU NE EU EN UE UN NU NE NU NE EU ENU
3-sae approach Laws of Moion for U and E: U E N U Rearrange: EU NU UE UN 1 1 1 E U N E UE NE EU EN 1 1 1 * s EU s ENU ln u ln 1 ln ln 1 ln ENU EN where UNE UN,, f UE f UNE NU NU NE NE NU NE s EU EU ENU, f UE UE UNE
3-sae model: Ins or ous? * s EU s ENU ln u ln 1 ln Gives bea * conribuions o variance of ln(u * ): job loss ln 1 ln * EU inflows via nonparicipaion * ENU f UE f UNE cov ln, ln u s EU * var ln u and similarly for job finding UE and indirec ouflows UNE. cov 1 ln, ln u var ln u * s ENU * *
Bea* conribuions o u * variance Bea* QLFS BHPS Bea* QLFS BHPS Inflow rae 0.59 0.57 Separaion rae 0.40 0.39 Inflow rae via nonparicipaion 0.19 0.16 Ouflow rae 0.41 0.44 Job finding rae 0.32 0.34 Ouflow rae via nonparicipaion 0.09 0.10 Residual 0.00 0.00 0.00 0.01 QLFS: 1992q3-2010q3. BHPS: 1988q4-2008q2.
Recession-by-recession decomposiion * ln u ln s ln f Inflow rae conribuion C Ouflow rae conribuion C s* f * Change in log unemploymen rae Change in log inflow rae minus Change in log ouflow rae
Conribuions o U.S. and U.K. unemploymen ramp-ups U.S. Decline in ouflow rae Rise in inflow rae 100 80 60 40 20 0-20 Decline in U o E Rise in E o U 100 80 60 40 20 0-20 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
Bea* conribuions o u * variance Bea* UK US 1967q2-2010q4 1970q1-2010q4 Inflow rae 0.32 0.29 Ouflow rae 0.68 0.71 Residual 0.00 0.00 Sources: UK: Claiman Coun. Quarerly averages of monhly adminsraive daa from 1983q2. Prior o hen, quarerly daa from Perongolo and Pissarides (2008), aken from Employmen Gazee. US: Bureau of Labor Saisics aggregae and shor-erm unemploymen daa, derived from he Curren Populaion Survey. Quarerly averages of monhly esimaes.
Non-seady sae decomposiion Wha abou he acual unemploymen rae?
Acual and seady sae unemploymen raes Percen of labour force 15 12.5 Seady-sae unemploymen 10 7.5 5 Acual unemploymen 1975 1980 1985 1990 1995 2000 2005 2010 Seady-sae unemploymen 2.5 0 15 12.5 10 7.5 5 Acual unemploymen 2.5 1975 1980 1985 1990 1995 2000 2005 2010 Sources: ONS LFS, BLS CPS and auhors calculaions using Shimer s (2007) mehod based on duraion daa. 0
Bea* conribuions o u variance Bea* variance conribuions o change in log acual unemploymen 1992q3-2010q3 UK QLFS US CPS Inflow rae 0.80 0.24 Ouflow rae 0.77 0.75 Residual -0.57 0.01
Non-seady sae decomposiion We can allow for he fac ha curren unemploymen is acually influenced by lagged changes in ransiion raes. 1 2 ln u ln s ln f 1 1 conribuions o ss u dynamics 2 ln u 1 due o deviaions from ss caused by pas changes in log s and log f where e s f 1 and 1 u * 1
Non-seady sae decomposiion We can allow for he fac ha curren unemploymen is acually influenced by lagged changes in ransiion raes. C s 1 s* 2 s C 1 C 1 1 conribuion 2 o ss u dynamics deviaions from ss caused by pas changes in log s s s cov C, ln u var ln u and similarly for C f and b f.
Bea conribuions o u variance Bea Bea Inflow rae 0.46 Separaion rae 0.40 Inflow rae via nonparicipaion 0.06 Ouflow rae 0.44 Job finding rae 0.32 Ouflow rae via nonparicipaion 0.11 Iniial condiion 0.01 0.01 Residual 0.08 0.08 Source: QLFS: 1992q3-2010q3.
Conribuion o change in log acual unemploymen rae: seady sae model 0.2 0.15 0.1 0.05 0-0.05-0.1-0.15-0.2 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Residual Ouflow rae conribuion Inflow rae conribuion
Conribuion o change in log acual unemploymen rae: non-seady sae model 0.2 0.15 0.1 0.05 0-0.05-0.1-0.15-0.2 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Residual Ouflow rae conribuion Inflow rae conribuion
Curren versus pas ransiion raes Rearrange expression for change in log acual unemploymen rae o separae influence of curren innovaions in ransiion raes from he auoregressive elemens: cur pas s* f * cov 1 C C, ln u var ln u 1 cov C C, ln u var ln u 2 s f 1 1 1 2
Curren versus pas ransiion raes Proporional (acual u) 1992q3-2010q3 1970q1-2010q4 conribuion of: UK QLFS US Curren ransiion rae changes 0.60 0.89 Pas ransiion rae changes 0.40 0.11
Prospecs 1. Has he labour marke fully adjused o recession shocks? 2. How efficienly is he labour marke maching workers and firms? 3. How likely is i ha he U.K. will again experience persisenly high long-erm unemploymen?
1. Adjusmen o shocks Shocks o inflows or ouflows change he flow seady sae unemploymen rae a which he economy would sele, in he absence of furher shocks. Because acual unemploymen is always converging owards he moving arge of flow seady sae unemploymen, flow seady sae unemploymen acs as a leading indicaor for acual unemploymen.
U.K. acual and seady sae unemploymen raes Percen of labour force 15 12.5 Seady-sae unemploymen 10 7.5 Acual unemploymen 5 2.5 1975 1980 1985 1990 1995 2000 2005 2010 0 Sources: ONS LFS and auhors calculaions using Shimer s (2007) mehod based on ONS LFS duraion daa.
U.K. acual and seady sae unemploymen raes Percen of labour force 14 Percen of labour force 12 12 10 8 6 4 2 LFS duraion daa seady sae unemploymen (LH scale) Acual unemploymen (LH scale) QLFS micro daa seady sae unemploymen (RH scale) 10 8 6 4 2 0 1975 1980 1985 1990 1995 2000 2005 2010 0 Sources: ONS LFS, auhors calculaions using Shimer s (2007) mehod based on LFS duraion daa, and LFS/QLFS micro daa.
U.K. acual and seady sae unemploymen raes Percen of labour force 15 12.5 10 7.5 Seady-sae unemploymen 5 Acual unemploymen 2.5 1975 1980 1985 1990 1995 2000 2005 2010 0 Source: Claiman Coun adminisraive daa on regisered unemploymen, inflows and ouflows.
2. Maching efficiency A reducion in unemploymen is predicaed on wo condiions: 1. Are job openings being creaed? 2. How effecively will such job openings be filled?
U.K. and U.S. Beveridge curves Vacancies / Labour Force 4 Job Openings / Labour Force U.S. 4 3.5 3.5 3 3 Before recession 2.5 2.5 2 2 2008-09 recession Afer recession 1.5 1.5 1 3 4 5 6 7 8 9 10 11 Unemploymen / Labour Force 1 3 4 5 6 7 8 9 10 11 Unemploymen / Labour Force Sources: Auhors calculaions 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 4 2008-09 recession Afer 3.5 recession 3 1.4 Job Openings / Labour Force U.S. 4 3.5 3 Before recession 2.5 6 7 8 9 Unemploymen / Labour Force 2 1.3 2.5 2 2008-09 recession Afer recession 1.5 1.5 1 3 4 5 6 7 8 9 10 11 Unemploymen / Labour Force 3 4 5 6 7 8 9 10 11 Unemploymen / Labour Force Sources: Auhors calculaions using ONS Vacancy Survey and ONS LFS and BLS JOLTS and CPS. 1
3. Long-erm unemploymen The huge decline in he U.S. ouflow rae has a corollary in an unprecedened rise in U.S. long-erm unemploymen.
UK and US long-erm unemploymen raes Percen of labour force 10 8 Unied Kingdom 6 4 Unied Saes 2 1975 1980 1985 1990 1995 2000 2005 2010 0 Sources: Auhors calculaions using ONS LFS micro daa and BLS CPS duraion daa.
3. Long-erm unemploymen The huge decline in he U.S. ouflow rae has a corollary in an unprecedened rise in U.S. long-erm unemploymen. I is possible o predic fuure long-erm unemploymen by looking a curren unemploymen of various duraions and how ouflow raes vary across duraions.
Job finding raes by unemploymen duraion U o E monhly ransiion rae 0.2 <1 0.15 1 o 3 3 o 6 0.1 Aggregae 6 o 12 0.05 >12 1990 1995 2000 2005 2010 0 Sources: Auhors calculaions using ONS LFS micro daa.
Summary and conclusions This recession, U.K. unemploymen was driven by a sharp rise in job loss raes bu he inflow rae peak was lower han in previous recessions, and job losses have slowed more quickly. U.K. job finding raes have held up remarkably well. Consequences: U.K. unemploymen rae has risen less han in pas recessions, and less han in he U.S. U.K. long-erm unemploymen has no risen as far as in previous recessions, or as far as in he U.S.
Summary and conclusions The U.K. labour marke seems o have adaped fully o he shocks of he recen recession. There are possible signs of lower maching efficiency, bu i is difficul o be sure, as vacancy creaion has been low. Low ouflow raes from shor-erm unemploymen give some cause for concern. However, here has been a subsanial recovery in job finding raes by he long-erm unemployed. These wo consiue a reducion in duraion dependence.