Constructing a new leading indicator for unemployment from a survey among German employment agencies

The article investigates the predictive power of a new survey implemented by the Federal Employment Agency (FEA) for forecasting German unemployment in the short run. Every month, the CEOs of the FEA’s regional agencies are asked about their expectations of future labour market developments. We generate an aggregate unemployment leading indicator that exploits serial correlation in response behaviour through identifying and adjusting temporarily unreliable predictions. We use out-of-sample tests suitable in nested model environments to compare forecasting performance of models including the new indicator to that of purely autoregressive benchmarks. For all investigated forecast horizons (1, 2, 3 and 6 months), test results show that models enhanced by the new leading indicator significantly outperform their benchmark counterparts. To compare our indicator to potential competitors, we employ the model confidence set. Results reveal that models including the new indicator perform very well at the 10% level.     

Erratic monetary policy and the dispersion of commodity prices

This paper develops a closed economy macroeconomic model with many goods, where information flows are not instantaneous. Economic agents form rational expectations of future economic variables based on present information, and measure the future price level with a true cost-of-living index that allows for substitutions among commodities as relative prices change. The major inference drawn from our model is that, when information flows are imperfect, an increase in the variance of the money supply injects noise into economic agents forecasts of prices, and increases the equilibrium level of dispersion in commodity prices.     

The pyramid of Okun’s coefficient for Italy

Our aim is to propose a pyramid of Okun’s coefficient by age and gender in the Italian labour force using a varying-coefficient model. The unemployment rate by age and gender—useful information for estimating Okun’s relationship—is not available for Italy from official statistics. Therefore, we provide an estimation of the indicator using microdata for the 2005–2014 period from ISTAT, the Italian labour force survey. Okun’s law is investigated using two measures of the unemployment rate: a traditional measure based on a labour force with and without work experience, and a new measure restricted to the labour force with experience. When Okun’s relationship is estimated using the unemployment rate restricted to the labour force with experience, the young population is less sensitive to business cycles. As the workforce ages, this gap in sensitivity tends to shrink. We also found that there are no significant differences by gender in the magnitude of Okun’s coefficient among the youngest population when considering the unemployment rate restricted to the labour force with experience.     

Macroeconomic shocks and the probability of being employed

Macroeconomic theories take polar views on the importance of choice versus chance. At the micro level, it seems realistic to assume that both dimensions play a role for individual employment outcomes, although it might be difficult to separate these two effects. Nevertheless the choice and chance dimension are seldom treated symmetrically in models that use micro data. We estimate a logistic model of the probability of being employed among married or cohabitating women that are in the labor force. Besides variables that measure individual characteristics (choice), we allow a full set of indicator variables for observation periods that represent potential effects of aggregate shocks (chance) on job probabilities. To reduce the number of redundant indicator variables automatic model selection is used, and we assess the economic interpretation of the statistically significant indicator variables with reference to a theoretical framework that allows for friction in the Norwegian labor market. In addition, we also estimate models that use female and male unemployment rates as ‘sufficient’ variables for the chance element in individual employment outcomes. Data are for Norway for the period 1988q2–2008q4.     

Experts,firms, consumers or even hard data? Forecasting employment in Germany

In this article, we forecast employment growth for Germany with data for the period from November 2008 to November 2015. Hutter and Weber (2015) introduced an innovative unemployment indicator and evaluated the performance of several leading indicators, including the Ifo Employment Barometer (IEB), to predict unemployment changes. Since the IEB focuses on employment growth instead of unemployment developments, we mirror the study by Hutter and Weber (2015). It turns out that in our case, and in contrast to their article, the IEB outperforms their newly developed indicator. Additionally, consumers’ unemployment expectations and hard data such as new orders exhibit a high forecasting accuracy.     

Assessment of the effect of the financial crisis on agents’ expectations through symbolic regression

Agents’ perceptions on the state of the economy can be affected during economic crises. Tendency surveys are the main source of agents’ expectations. The main objective of this study is to assess the impact of the 2008 financial crisis on agents’ expectations. With this aim, we evaluate the capacity of survey-based expectations to anticipate economic growth in the United States, Japan, Germany and the United Kingdom. We propose a symbolic regression (SR) via genetic programming approach to derive mathematical functional forms that link survey-based expectations to GDP growth. By combining the main SR-generated indicators, we generate estimates of the evolution of GDP. Finally, we analyse the effect of the crisis on the formation of expectations, and we find an improvement in the capacity of agents’ expectations to anticipate economic growth after the crisis in all countries except Germany.     

Inflation literacy and inflation expectations: Evidence from Austrian household survey data

Inflation expectations are known to be quite heterogeneous across agents. We investigate whether this heterogeneity is primarily due to differences in people’s understanding of the inflation process and of the goals and intentions of the central bank. Using micro data from a survey conducted among 2000 Austrian households, we construct an indicator of “inflation literacy” from several questions on people’s knowledge about different aspects of inflation. We find that this indicator helps explain both the level and the uncertainty of inflation expectations: Households with relatively higher levels of inflation literacy tend to have lower and more accurate short-term and long-term inflation expectations. Interestingly, however, they are less certain about their inflation expectations than people with lower levels of inflation literacy. We also find that people’s trust in the central bank and in its ability to maintain price stability significantly dampens their inflation expectations.     

Optimal welfare and in-work benefits with search unemployment and observable abilities

This paper explores the optimal interaction between the tax system and social assistance in insuring people against the risks of involuntary unemployment and low ability. To that end, we introduce search unemployment in a model of optimal non-linear income taxation. The relationship between welfare benefits and the optimal level of in-work benefits is U-shaped. This explains why in-work benefits are called for both in countries that grant low welfare benefits and countries that provide high welfare benefits. An earned-income tax credit optimally induces all agents to look for work if job search is cheap and effective, agents are not very risk averse, and the least-skilled agents are relatively productive.     

Unemployment Expectations: The Impact of Private Information on Income Uncertainty

The formation and accuracy of unemployment expectations are investigated in this paper. Unemployment expectations were found to contain predictive information that was not captured by past trends in unemployment and other economic variables. The predictive content of expectations was based on private information about future unemployment and overall economic prospects. The data indicated a greater consistency with the rational expectations hypothesis than with adaptive, extrapolative, and error-learning models, although households did not optimally use all available information. The data indicate that unemployment expectations are to an important extent derived from more general expectations about the future performance of the economy.     

Rational Expectations and the Defris-Williams Inflationary Expectations Series*

This paper evaluates the Defris-Williams inflationary expectations series as a measure of rational expectations for the period 1973(1) to 1980(2). The results show that the series violates the rationality criterion, being an inefficient and biased predictor of inflation. By constructing an ‘information-augmented’ D-W series, the quantitative importance of omitted information available to consumers at the time of making their forecasts is isolated. The key omitted economic variables are found to be lagged monetary growth and unemployment or an indexation dummy which explains 70 percent of the forecast error of the D-W series. These results suggest that a theoretically constructed expectations series may prove to be a superior measure of market expectations of inflation in Australia.     

Rethinking multidimensional poverty through a multi-criteria analysis

The risk of poverty or social exclusion constitutes the pivotal multidimensional indicator of living conditions in the European Union. Nevertheless, it only reports the proportion of individuals at risk and disregards the depth of poverty. The indicator therefore overlooks situations of possible vulnerable groups just above the threshold and is not sensitive to all dimensions in which the individual is at risk. In this paper we propose an alternative multi-criteria based approach that overcomes these problems. Our measure captures information about the level of achievement in each dimension of all persons along the distribution and evaluates to what extent the concurrence of multiple deprivations reinforces their disadvantage. This approach permits diverse ways of aggregation with different degrees of substitutability among the achievements of each dimension according to context-specific social preferences. We illustrate our approach with an empirical analysis of 28 countries using the European Union Statistics on Income and Living Conditions database for 2016. The results reveal that work intensity may be regarded as the most determining factor in analyses of multidimensional poverty across European countries. Our measures unmask how countries with similar proportions of individuals at risk of poverty or social exclusion hide very different conditions of multidimensional poverty and highlight the variety of socioeconomic realities existing behind the dichotomy imposed by the usual ‘at risk of poverty or social exclusion’ rate.     

The impact of trade openness on labour force participation rate

In this article, we investigate the impact of trade openness on labour force participation rate. We use tariff rate as the main indicator of trade openness and we employ the number of regional trade agreements and the average tariff rate in the neighbours’ countries as instrumental variables to diminish the endogeneity problem of the tariff rate. We find that trade openness increases the participation rate which is economically and statistically significant. The results show that this correlation is robust under controlling for different variables and using various specifications. We find that 10 percentage point increase in tariff rate lowers the participation rate by 4–6 percentage point and this relationship is more severe in the long run. Finally, we show that changes in labour force population accounts for about 27% of changes in the unemployment rate following a trade liberalization.     

Unemployment burden and its distribution: Theory and evidence from India

We develop a measure of unemployment that takes into account both the duration and intensity of unemployment. This measure satisfies several desirable properties, including distribution sensitivity, which deals with differences among the unemployed. It is particularly suited to developing countries because individuals in these countries display considerable variation in labor force participation, unemployment duration, and unemployment intensity. It can also be decomposed into mean and variance components and contributions to unemployment by various subgroups of the population. We use this measure and data from National Sample Surveys on employment and unemployment to understand unemployment in India during the period 1993 to 2012. We show that unemployment has generally fallen, although the distribution of unemployment has worsened. Moreover, unemployment is driven to a greater extent by higher educated groups; the unemployment among these groups is also fairly substantial. We explain these findings and suggest some policies.     

Trade and unemployment: What do the data say?

This paper documents a robust empirical regularity: in the long-run, higher trade openness is associated with a lower structural rate of unemployment. We establish this fact using: (i) panel data from 20 OECD countries, (ii) cross-sectional data on a larger set of countries. The time structure of the panel data allows us to control for unobserved heterogeneity, whereas cross-sectional data make it possible to instrument openness by its geographical component. In both setups, we purge the data of business cycle effects, include a host of institutional and geographical variables, and control for within-country trade. Our main finding is robust to various definitions of unemployment rates and openness measures. Our benchmark specification suggests that a 10 percentage point increase in total trade openness reduces aggregate unemployment by about three quarters of one percentage point.     

On the reliability of retrospective unemployment information in European household panel data

The retrospectively recalled calendar of activities in the European Community Household Panel is a prime resource for cross-country analysis of unemployment experience. We investigate the reliability of these data and find that 26 % of unemployed respondents misreported retrospectively their unemployment status in the subsequent interview. We observe large differences across countries: While the conditional probability of consistent information is 96 % in the UK, it is just 51 % in Greece for a comparable individual. By analyzing long-term unemployment and unemployment persistence, we show that the results of cross-country comparisons are strongly affected by these data problems.     

Consumption in the shadow of unemployment

By how much do employed households reduce their consumption when the aggregate unemployment rate rises? In Spain during the Great Recession a one point increase in the unemployment rate was related to a strong reduction in household consumption of more than 0.7% per equivalent adult. This reduction is consistent with forward-looking agents responding to downward revisions of their expectations on future income growth rates: the shadow of unemployment. Using consumption panel data that include information on physical quantities we show that the drop in consumption expenditure was truly a reduction in quantities, and not a switch to cheaper alternatives.     

The portfolio behaviour of pension funds in the US: an econometric analysis of changes since the new regulation of 1974

In most Western countries, the rate of unemployment has shown a rising trend over the last decades. One of the standard explanations for this is that the ‘natural’ rate of unemployment has risen. In order to investigate this hypothesis, a simple demand–supply model of the Finnish labour market was constructed and estimated. It is proposed that if the development of the unemployment rates can be explained is such a traditional model framework, this would suggest that changes in the ‘natural’ rate are not, after all, the crucial reason for the increasing unemployment rates.

According to the results, the simple model was able to account for the changes in the unemployment rate very well. Furthermore, they seem to support a traditional Keynesian view of the problem, emphasizing output level and labour productivity as the main explanatory variables. Indirectly, it can be concluded that there seem to be no clear signs of a rising ‘natural’ rate of unemployment.     

Measuring Structural Unemployment: NAWRU Estimates in the Nordic Countries

The non-accelerating wage rate of unemployment (NAWRU indicator), used by the OECD as a measure of structural unemployment, has risen for the four Nordic countries Denmark, Finland, Norway and Sweden. In this paper we present stable empirical wage equations for the same countries over the period 1964–1994, in sharp contrast to the increased NAWRU estimates. The instability of the NAWRU estimates is an artefact of a misspecified underlying wage equation, and not due to instability in wage setting itself.
JEL classification : E 24; E 31; E 64; J 51     

OECD unemployment: structural breaks and stationarity

The paper is concerned with testing the unemployment rate of twenty two OECD countries for stationarity. A sequential testing procedure was applied where the break data is endogenized. Three different models were tested for unit roots. It was found that the ‘crash’ model, which allows for a shift in the level of the unemployment rate, was most relevant. Furthermore, most breaks were associated with the first oil price shock. Results suggest that in nine countries the unit root can be rejected, in ten countries the null hypothesis cannot be rejected and in three cases the results suggest possible trend stationarity.     

Analysis of wage flexibility across the Euro Area: evidence from the process of convergence of the labour income share ratio

This article analyses wage flexibility as a factor in the unemployment rate across 12 Euro Area countries. We use extensive evidence pertaining to the countercyclical behaviour of the labour income share ratio to estimate its equilibrium value in the long run. This measure is calculated using a hybrid New Keynesian Phillips curve. Additionally, by using spatial econometrics, we can incorporate into the study the interdependence in the inflation among the countries. As a result, we identify countries that might see an improvement in their employment rates by improving their wage flexibility. We also identify countries with high unemployment that is not a consequence of a lack of wage flexibility.