Lessons for forecasting unemployment in the United States: use flow rates, mind the trend

Brent Meyer and Murat Tasci

No 2015-1, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

Abstract: This paper evaluates the ability of autoregressive models, professional forecasters, and models that incorporate unemployment flows to forecast the unemployment rate. We pay particular attention to flows-based approaches?the more reduced-form approach of Barnichon and Nekarda (2012) and the more structural method in Tasci (2012)?to generalize whether data on unemployment flows are useful in forecasting the unemployment rate. We find that any approach that considers unemployment inflow and outflow rates performs well in the near term. Over longer forecast horizons, Tasci (2012) appears to be a useful framework even though it was designed to be mainly a tool to uncover long-run labor market dynamics such as the \"natural\" rate. Its usefulness is amplified at specific points in the business cycle when the unemployment rate is away from the longer-run natural rate. Judgmental forecasts from professional economists tend to be the single best predictor of future unemployment rates. However, combining those guesses with flows-based approaches yields significant gains in forecasting accuracy.

Keywords: unemployment forecasting; natural rates; unemployment flows; labor market search (search for similar items in EconPapers)
JEL-codes: C53 E24 E32 J64 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2015-02-01
New Economics Papers: this item is included in nep-for, nep-lab and nep-mac
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Citations: View citations in EconPapers (1)

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