The Ins and Outs of Unemployment in the Long Run: Unemployment Flows and the Natural Rate

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract This paper proposes an empirical method for estimating a long-run trend for the unemployment rate that is grounded in the modern theory of unemployment. I write down an unobserved components model and identify the cyclical and trend components of the underlying unemployment ‡ows, which in turn imply a time varying estimate of the unemployment trend, the natural rate. I identify a sharp decline in the out ‡ow rate -job …nding rate-since 2000, which was partly o¤set by the secular decline in the in ‡ow rate -separation rate -since 1980s, implying a relatively stable natural rate, currently at 6 percent. Numerical examples show that slower labor reallocation along with the weak output growth explains most of the persistence in unemployment since the Great Recession. Contrary to the business-cycle movements of the unemployment rate, a signi…cant fraction of the low-frequency variation can be accounted for by changes in the trend of the in ‡ows, especially prior to 1985. Finally, I highlight several desirable features of this natural rate concept that makes it a better measure than traditional counterparts. These include statistical precision, the signi…cance of required revisions to past estimates with subsequent data additions, policy relevance and its tight link with the theory. Terms of use: Documents in

Unemployment Flows, Participation, and the Natural Rate for Turkey

“…We believe that this exercise not only is valuable in its own right, but also allows us to highlight usefulness of the approach taken by Tasci (2012) in the face of interesting challenges posed by various structural issues experienced by many economies. For instance, many developing countries, Turkey included, have a very limited data span that covers substantial changes in the aggregate economy.…”

“…In an effort to face this challenge, recent studies approached the problem by estimating the unemployment rate trend using the underlying flow rates. For instance, Tasci (2012) uses data on flows between employment and unemployment and, in the context of the U.S. labor markets, argues that this method provides an estimate of the natural rate that has several desirable statistical features while being theoretically very close to the language of the modern theory of unemployment. In this paper, we adopt his methodology to estimate the natural rate of unemployment for Turkey.…”

“…Moreover, our method implies recent values of the natural rate of unemployment that are below the sample period average. Moreover, the method developed by Tasci (2012) is flexible enough to be modified to incorporate different labor market structures of economies. As such, when we implement the same approach for Turkey, we need to take into account the ac-tive role of the participation margin in the labor market.…”

“…Building on Tasci (2012), we estimate the unemployment rate trend for Turkey from 2001 to 2012, extending the methodology to include labor force participation. In doing so, we also exploit the work by Sengul (2014), which estimates monthly flow rates from 2005 to 2012 for Turkey, including the flows from nonparticipation to unemployment.…”

“…We first estimate quarterly flow rates from 2001 to 2012, following Sengul (2014). Then, using a parsimonious unobserved components method as in Tasci (2012), we decompose the flow rates into their trend and cyclical components. Once we infer the trend components, we provide an estimate of the unemployment rate trend, that is the natural rate, implied by the steady state description of the unemployment rate in a standard labor market search model that relies on these flow rates.…”