By Arnold Kling
Using United States data from 1948 to 2004, I find that there are substantial fluctuations in unemployed workers’ job finding probability at business cycle frequencies, while employed workers’ separation probability is comparative acyclic. This is particularly true in the last two decades, during which period the separation probability has steadily declined despite two spikes in the unemployment rate. In other words, virtually all of the increase in unemployment and decrease in employment during the 1991 and 2001 recessions was a consequence of a reduction in the job finding probability. If one wants to understand fluctuations in unemployment, one must understand fluctuations in the transition rate from unemployment to employment, the ‘outs of unemployment’. This conclusion is in direct opposition to the conventional wisdom, built around research by Darby, Haltiwanger, and Plant (1985) and (1986), Blanchard and Diamond (1990), and Davis and Haltiwanger (1990) and (1992), that recessions are periods characterized primarily by high job loss rates.
I’ve highlighted Shimer’s work before (Robert Hall is also a player in this). It strikes me as important and probably correct.