Labor Force Transitions and Unemployment

This paper challenges conventional views of unemployment. Its results suggest that failure to examine closely labor force transitions has led to a misleading picture of unemployment and the way the labor market functions in general. There are four main conclusions. First, labor force transitions are the principal determinant of fluctuations in employment and unemployment. We find that the vast majority of those newly employed come not from unemployment but from outside the labor force. Likewise, most spells of employment end with labor force withdrawal rather than unemployment. Second, traditional estimates of the duration of unemployment and the ease of job finding are seriously flawed by failure to take account of the 45 percent of all unemployment spells which end in labor force withdrawal. Third, re-entrant unemployment is to a large extent the result of job-ending followed by a brief spell outside the labor force. Many re-entrants would almost certainly be better classified as job losers and leavers completing long spells of unemployment rather than as entrants starting a new spell of unemployment. Fourth, it appears that many of those counted as out of the labor force are functionally indistinguishable from the unemployed.