Is unemployment a lagging indicator?
Antonio Fatás in this paper argues that an asymmetric view of the business cycles (as in Friedman’s plucking model) leads to expansions that end too early. As the speed of labor market recovery is too slow the economy reaches full employment just as a recession is about to start. As a result, the US has not witnessed a long period of stable and low unemployment. Is this fact useful in predicting recessions?
All cycles display a V-shape evolution for unemployment. Unemployment declines steadily in each of the expansions and it reaches its lowest point around 12-18 months before the recession starts. In most cases, unemployment was already increasing in the months preceding the recession.[…] It seems as if reaching a low level of unemployment is always followed by a recession.
The Elusive State of Full Employment
Author: Antonio Fatás
From: INSEAD
Do people know what is coming?
Blanchflower and Bryson use panel data for 29 European countries over 439 months between January 1985 and July 2021 to predict changes in the unemployment rate 12 months in advance based on individuals’ fears of unemployment, their perceptions of the economic situation and their own household financial situation. They find:
- Attitudes and expectations of economic actors – individuals in the labor market and the suppliers of goods and services – contain information that can help analysts predict economic downturns up to 12 months in advance;
- These data are accurate at the time of data collection and are thus not subject to retrospective revision which plagues most macro-indicators. In addition they appear to be better able to predict economic downturns than standard economic variables like GDP or the unemployment rate;
- Consumers opinions about the economic prospects seem highly correlated across Europe.
The Economics of Walking About and Predicting Unemployment
Authors: David G. Blanchflower, Alex Bryson
From: Dartmouth College, University College London
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