The Ins and Outs of Cyclical Unemployment

48 Pages Posted: 24 Jan 2007 Last revised: 16 Aug 2010

See all articles by Michael Elsby

Michael Elsby

School of Economics, University of Edinburgh

Ryan Michaels

University of Michigan at Ann Arbor - Department of Economics

Gary Solon

University of Arizona; National Bureau of Economic Research (NBER)

Date Written: January 2007

Abstract

One of the strongest trends in recent macroeconomic modeling of labor market fluctuations is to treat unemployment inflows as acyclical. This trend stems in large part from an influential paper by Shimer on "Reassessing the Ins and Outs of Unemployment," i.e., the extent to which increased unemployment during a recession arises from an increase in the number of unemployment spells versus an increase in their duration. After broadly reviewing the previous literature, we replicate and extend Shimer's main analysis. Like Shimer, we find an important role for increased duration. But contrary to Shimer's conclusions, we find that even his own methods and data, when viewed in an appropriate metric, reveal an important role for increased inflows to unemployment as well. This finding is further strengthened by our refinements of Shimer's methods of correcting for data problems and by our detailed examination of particular components of the inflow to unemployment. We conclude that a complete understanding of cyclical unemployment requires an explanation of countercyclical inflow rates as well as procyclical outflow rates.

Suggested Citation

Elsby, Michael and Michaels, Ryan F. and Solon, Gary, The Ins and Outs of Cyclical Unemployment (January 2007). NBER Working Paper No. w12853. Available at SSRN: https://ssrn.com/abstract=959129

Michael Elsby (Contact Author)

School of Economics, University of Edinburgh ( email )

31 Buccleuch Place
Edinburgh, EH8 9JT
United Kingdom

Ryan F. Michaels

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States

Gary Solon

University of Arizona ( email )

Department of Economics
Eller College of Management
Tucson, AZ 85719
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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