How Have Labor Market Flows Changed Since the Great Recession?

Monday, September 08, 2014

By Maria E. Canon, Economist

Labor market gross flows show the net changes across labor market measures (employment [E], unemployment [U] or out of the labor force [N]) across two consecutive months. Gross flows provide useful information to understand labor market dynamics and allow us to understand what is causing changes in the unemployment rate.

Individuals can have one of these nine experiences from the previous month to the current month:

  • Individuals who were employed last month can remain employed (EE), lose their job and start searching for a new one, making them unemployed (EU) or lose their job and exit the labor force (EN).
  • Individuals who were unemployed last month can remain unemployed and continue searching for a job (UU), find a job (UE) or exit the labor force (UN).
  • Inactive individuals (those out of the labor force) might remain out of the labor force (NN), find a job (NE) or start searching for a job without finding one, making them unemployed (NU).

For example, month-to-month changes in the unemployment rate result from people entering unemployment (EU and NU), people leaving unemployment (UE and UN) and employees entering or exiting the labor force (NE and EN). The figure below shows all six flows that imply a change in labor market status (EU, NU, UE, UN, NE, EN) since December 2007, the start of the Great Recession.

We observe that inflows into unemployment from employment (EU [green line]) and out of the labor force (NU, [orange line]) were very similar in size during the recession (Dec 2007-June 2009). Since then, EU inflows (green line) have been smaller than NU inflows (orange line). In other words, there were fewer individuals losing their jobs and relatively more individuals joining the labor force and searching for jobs. This difference implies that the growth in unemployment came from individuals re-entering the labor market without getting a job immediately.

Total outflows from unemployment were lower than total inflows during the Great Recession. After the recession, total outflows and inflows began to alternate months of being larger. It was not until the last quarter of 2011 that we began seeing long stretches of larger outflows than inflows.

Flows into employment (UE and NE) are another big determinant of the unemployment rate. In a joint Regional Economist article with Marianna Kudlyak and Marisa Reed, both with the Federal Reserve Bank of Richmond, we studied trends from individuals out of the labor force and explained the existence of a “waiting” group among those out of the labor force. Members of this group are more likely than other individuals out of the labor force to take a job if its wages and conditions are satisfactory. We observed that the NE/UE ratio decreased during the Great Recession when economic conditions were unsatisfactory. That is, the fraction of inflows into employment coming from nonparticipation to those coming from unemployment decreased. This condition persisted until the beginning of 2012, when the NE/UE ratio started to increase, reaching prerecession levels in early 2014.

Labor market flows still haven’t gone back to prerecession levels, but are significantly closer to the levels observed at the trough of the Great Recession. There were 265,000 more individuals losing their jobs (EU and EN) from November to December 2007 than from June to July 2014. Similarly, there were 400,000 more people losing their jobs from May to June 2009 than from June to July 2014. Inflows into employment (UE and NE) from June to July 2014 were 341,000 higher than December 2007 and 77,000 higher than in June 2009.

Additional Resources

Posted In Labor  |  Tagged laborlabor market flowsmaria canon
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