Kopafbeelding publicaties CPB

Labour supply and the business cycle: lessons from labour market flows and international forecasting practices

CPB Background Document, 24 March 2017

This Background Document shows the results of a survey among international experts concerning the forecasting method of labour supply by economic research institutes and an analysis of the relation between labour supply and the business cycle.

Accurate labour supply forecasting is important for the quality of unemployment forecasts. Many research institutes typically first forecast labour supply and employment and subsequently derive their unemployment forecast from these two underlying projections. In addition, our survey of 14 research institutes shows that their labour supply forecasting methods share several other characteristics:

  • Core of the short-to-medium-term labour supply forecasting model usually consists of a multiplication of population projections and projected participation rates.
  • Groups are important; usually the forecasting models are disaggregated into age and gender, and sometimes also according to nationality, education, or region;
  • Nearly all institutes incorporate the influence of business cycle fluctuations and policy measures on labour supply, and manually adjust the results from their models, on the basis of expert opinion.

Analysing differences between labour supply projection methods of the various research institutes shows trade-offs between structure and flexibility and between details and modelling ease.

Our empirical analysis of labour market flows in relation to business cycle movements shows that groups matter: the flows between unemployment and non-participation are relatively more cyclical for women, and young and low-educated individuals. Moreover, using data on labour market flows to construct alternative forecasts in addition to central forecasts may be a promising avenue to pursue. The flows to and from non-participation are about 15 times higher than the resulting average absolute change in participation. Therefore, analysing labour market flow data sheds light on the hidden developments behind stock changes, and helps us to obtain a better understanding of labour market developments.

Practical lessons for CPB’s labour supply forecast are, for example:

  • Using data on labour market flows, for instance, in flow models or BVARs to produce an alternative forecast of labour supply or its components, in addition to central forecasts, is an interesting option to explore;

Groups are important: when modelling labour supply, in addition to age and gender, also other distinctions could be made, such as, country of origin and educational attainment.

Share this page