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Evaluating the impact of the labor market conditions index on labor market forecasts

  • Laura Connolly and Alice Sheehan EMAIL logo

Abstract

This paper examines the usefulness of the labor market conditions index (LMCI) in forecasting key labor market variables, particularly unemployment rates. Using a number of models, we compare out-of-sample forecasts of the unemployment rate with the LMCI to those without the LMCI. We also estimate models of the disaggregated unemployment rates by gender, race, and race by gender, with and without the LMCI, to identify disparities in the predictive power of the LMCI for different subgroups. Last, to determine how the LMCI performs in the presence of labor market shocks, we compare the forecasting performance of the LMCI during recessionary periods and expansionary periods. Our results confirm the potential usefulness of the LMCI as a parsimonious forecasting tool; we find that the LMCI generally improves unemployment forecasts. But, disparities exist in the predictive power of the index across subpopulations and the index forecasts slightly better during recessionary periods than expansionary periods.

Appendix

Table 11:

Results of specification testing.

UnivariateBivariate
SeriesDFGLS test statisticDF test statisticTsay statisticTsay statistic
Total unemployment−1.95−2.833.25***2.34**
Female unemployment0.11−2.911.210.65
Male unemployment−2.97**−3.033.27**19.53***
White unemployment−1.54−3.122.48**0.59
White female unemployment−0.82−0.901.501.05
White male unemployment−0.88−0.803.51***2.00*
Black unemployment−2.70**−2.691.100.20
Black female unemployment−0.29−2.901.150.50
Black male unemployment−0.20−1.813.68**1.61*
Hispanic unemployment0.12−2.432.09*1.78*
Hispanic female unemployment−1.79−1.951.490.72
Hispanic male unemployment−0.51−1.510.270.85
  1. *p < 0.10, **p < 0.05, ***p < 0.01

  2. DF GLS Test represents the t-statistic for the DF-GLS unit root test of Elliott, Rothenberg, and Stock (1996), DF Test represents the t-statistic for the Dickey-Fuller unit root test, and the Tsay test statistic is the F-statistic for the Tsay (1989) arranged autoregression test for threshold behavior.

Table 12:

Labor force characteristics by race, ethnicity, and gender, annual averages 2015.

2015Civilian populationCivilian labor forcePercent of labor rateLabor force participationUnemployment rate
Total250,801157,130100.062.75.3
 Male121,10183,62053.269.15.4
 Female129,70073,51046.856.75.2
White196,868123,60778.762.84.6
 Male96,14767,01842.769.74.7
 Female100,72056,58936.036.04.5
Black31,38619,31812.361.59.6
 Male14,2689,0995.863.810.3
 Female17,11810,2186.559.78.9
Hispanic39,61726,12616.661.66.6
 Male19,74515,0549.676.26.3
 Female19,87211,0727.055.77.1
  1. Source: Current Population Survey, U.S. Bureau of Labor Statistics, 2015 annual averages

  2. Numbers are in thousands for civilian population and civilian labor force.

Table 13:

Cross correlations of the change in the LMCI and the unemployment rate.

SeriesUnemployment rateFirst-difference
−12−0.36−0.09
−11−0.35−0.15
−10−0.34−0.18
−9−0.32−0.22
−8−0.29−0.26
−7−0.26−0.29
−6−0.23−0.32
−5−0.20−0.34
−4−0.16−0.39
−3−0.12−0.43
−2−0.07−0.49
−1−0.01−0.56
00.05−0.58
+10.11−0.49
+20.16−0.44
+30.21−0.36
+40.25−0.28
+50.28−0.21
+60.30−0.17
+70.32−0.15
+80.33−0.15
+90.34−0.12
+100.35−0.07
+110.36−0.03
+120.360.01
  1. Month-to-month changes (up to ±12 months) of the change in the LMCI and the unemployment rate and the first-difference of the unemployment rate.

Figure 6: Cross correlations between the change in the LMCI and the core consumer price index.
Figure 6:

Cross correlations between the change in the LMCI and the core consumer price index.

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Supplemental Material

The online version of this article offers supplementary material (DOI: https://doi.org/10.1515/snde-2016-0102).


Published Online: 2018-2-13

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