The Effect of Shocks to Labour Market Flows on Unemployment and Participation Rates

30 Pages Posted: 19 Jun 2014

See all articles by Robert John Dixon

Robert John Dixon

University of Melbourne - Department of Economics

Guay C. Lim

University of Melbourne - Melbourne Institute of Applied Economic and Social Research

Jan C. van Ours

Tilburg University - Department of Economics; University of Melbourne - Department of Economics

Multiple version iconThere are 5 versions of this paper

Date Written: June 2014

Abstract

This paper presents an analysis of labour market dynamics, in particular of flows in the labour market and how they interact and affect the evolution of unemployment rates and participation rates, the two main indicators of labour market performance. Our analysis has two special features. First, apart from the two labour market states – employment and unemployment – we consider a third state – out of the labour force. Second, we study net rather than gross flows, where net refers to the balance of flows between any two labour market states. Distinguishing a third state is important because the labour market flows to and from that state are quantitatively important. Focussing on net flows simplifies the complexity of interactions between the flows and allows us to perform a dynamic analysis in a structural vector-autoregression framework. We find that a shock to the net flow from unemployment to employment drives the unemployment rate and the participation rate in opposite directions while a shock to the net flow from not in the labour force to unemployment drives the rates in the same direction.

Keywords: Net labour market flows, unemployment rate, participation rate

JEL Classification: E17, E24, J21, J64

Suggested Citation

Dixon, Robert John and Lim, Guay C. and van Ours, Jan C., The Effect of Shocks to Labour Market Flows on Unemployment and Participation Rates (June 2014). Melbourne Institute Working Paper No. 13/14. Available at SSRN: https://ssrn.com/abstract=2456118 or http://dx.doi.org/10.2139/ssrn.2456118

Robert John Dixon

University of Melbourne - Department of Economics ( email )

Melbourne, VIC 3010
Australia
61 (0)3 83445352 (Phone)
61 (0)3 83446899 (Fax)

Guay C. Lim (Contact Author)

University of Melbourne - Melbourne Institute of Applied Economic and Social Research ( email )

Level 5, FBE Building, 111 Barry Street
161 Barry Street
Carlton, VIC 3053
Australia

Jan C. Van Ours

Tilburg University - Department of Economics ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2880 (Phone)
+31 13 466 3042 (Fax)

University of Melbourne - Department of Economics ( email )

Melbourne, 3010
Australia

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