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BPEA Article

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



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



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