The Ins and Outs of Forecasting Unemployment: Using Labor Force Flows to Forecast the Labor Market

Christopher J. Nekarda and

CJN

Christopher J. Nekarda Board of Governors of the Federal Reserve System

Regis Barnichon

RB

Regis Barnichon Centre de Recerca en Economia Internacional, Barcelona

Discussants: Jan Hatzius,

Jan Hatzius Goldman Sachs

Barbara Petrongolo, and

BP

Barbara Petrongolo

Sven Jari Stehn

SJS

Sven Jari Stehn

This paper presents a forecasting model of unemployment based
on labor force flows data that, in real time, dramatically outperforms the Survey
of Professional Forecasters, historical forecasts from the Federal Reserve
Board’s Greenbook, and basic time-series models. Our model’s forecast has a
root-mean-squared error about 30 percent below that of the next-best forecast
in the near term and performs especially well surrounding large recessions and
cyclical turning points. Further, because our model uses information on labor
force flows that is likely not incorporated by other forecasts, a combined forecast
including our model’s forecast and the SPF forecast yields an improvement
over the latter alone of about 35 percent for current-quarter forecasts,
and 15 percent for next-quarter forecasts, as well as improvements at longer
horizons.

Note: Monthly forecasts were published between October 2012 and October 2015.