The ins and outs of UK unemployment

Abstract

This paper shows that in the UK, increases in unemployment in a recession are driven by rises in the separation rate. A new decomposition of unemployment dynamics is devised that does not require unemployment to be in steady state at all times. This is important because low UK transition rates – one quarter the size of the US –imply substantial deviation of unemployment from steady state near cyclical turning points. In periods of moderation, the job finding rate is shown to have most influence on UK unemployment dynamics. Evidence comes from the first study of monthly data derived from individuals’ labour market spells recorded in the British Household Panel Survey from 1988 to 2008