Worker Flows, Occupations and the Dynamics of Unemployment and Labor Force Participation

Using Current Population Survey (CPS) data over the period 1976-2010 and the occupation classification of Autor and Dorn (2013) to rank occupations between high, medium and low skill, this paper provides a flow rate analysis of quarterly fluctuations in occupation-specific and aggregate stocks. I apply the variance decomposition developed by Elsby et al. (2015) and find that inflows (the ins) explain a higher share of the variance in the fluctuations of the high skill unemployment rate (around 54%), while outflows (the outs) account for 60% of the variance of the low skill unemployment rate variance. I then show how the variance decomposition for occupation-specific stocks can be used to study fluctuations of aggregate stocks, namely the unemployment and labor force participation rates. This allows to analyze the role of occupation-specific flow rates but also effects of variations in the occupational shares of employment and unemployment. The variance decomposition results indicate that compositional effects do not account for much of the variance in aggregate unemployment rate fluctuations. It is occupation-specific transition rates out and into unemployment that account for most of the variance in these fluctuations. Outflows and inflows explain 60% and 35% of the variance in unemployment fluctuations with flows into and out of middle and low skill unemployment contributing for 80%. I focus on labor force participation fluctuations in the last part of the paper. In addition to the occupation compositional effect, I find that outflows from the labor force are also affected by fluctuations of the unemployment rate: when unemployment increases, the transition rate out of the labor force increases as well given that unemployed have a much higher exit rate compared to employed workers. This compositional effect is also described by Barnichon (2019) and I find that it accounts for 34% of the variance in quarterly fluctuations of labor force participation. The remaining share is explained by inflows to the labor force (65%) with inflows to employment and unemployment contributing for 45% and 20% respectively.