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Introduction Methodology Hiring expectations Uncertainty Mismatch Results Conclusions
A Quarterly Forecasting Model for Employment
Ekkehard Ernst and Christian Viegelahn
Employment Trends Unit, International Labour Organization
Project LINK Annual Meeting, New York
October 24, 2012
Ekkehard Ernst and Christian Viegelahn Employment Trends Unit, International Labour Organization
A Quarterly Forecasting Model for Employment
Introduction Methodology Hiring expectations Uncertainty Mismatch Results Conclusions
Employment forecasts at the ILO
Annual projections presented in the ILO Global Employment Trends report
Medium-term unemployment/employment outlook by region
Based on GDP forecast of the IMF
Only annual information is available
Country forecasts possible, but updates are done only every 6 months
Increased demands for short-term country-specific forecasts
No quarterly model is currently available
Need for a quarterly model at the ILO
⇒ Start with models for G7 countries, here: USA
⇒ Consider hiring expectations, uncertainty and labour market mismatch
Ekkehard Ernst and Christian Viegelahn Employment Trends Unit, International Labour Organization
A Quarterly Forecasting Model for Employment
Introduction Methodology Hiring expectations Uncertainty Mismatch Results Conclusions
Use of vector autoregressive model
Start from the following benchmark VAR:
dGDPt = α1 +L∑
j=1
β1,j dGDPt−j +L∑
j=1
γ1,j dGCFt−j +L∑
j=1
δ1,j dEMPt−j + ε1,t
dGCFt = α2 +L∑
j=1
β2,j dGDPt−j +L∑
j=1
γ2,j dGCFt−j +L∑
j=1
δ2,j dEMPt−j + ε2,t
dEMPt = α3 +L∑
j=1
β3,j dGDPt−j +L∑
j=1
γ3,j dGCFt−j +L∑
j=1
δ3,j dEMPt−j + ε3,t
dGDP: real GDP growth
dGCF: real investment growth
dEMP: employment growth
L: optimally chosen lag order (AIC)
Extensions of benchmark model
⇒ Add indicators for hiring expectations, uncertainty, labour market mismatch
Ekkehard Ernst and Christian Viegelahn Employment Trends Unit, International Labour Organization
A Quarterly Forecasting Model for Employment
Introduction Methodology Hiring expectations Uncertainty Mismatch Results Conclusions
Indicator for hiring expectations
Manpower hiring index
Temp work agency Manpower undertakes survey among 66,000 hiring managersin 42 different countries
Manpower hiring index is published in the Manpower Employment OutlookSurvey on a quarterly basis
Length of national, sectoral, sub-national time series for G7 countries rangesfrom 1973-2012 to 2003-2012
Survey question: How do you anticipate total employment at your location tochange in the next quarter as compared to the current quarter?
Index takes percentage of employers anticipating an increase in hiring activityand substracts percentage of employers anticipating a decrease in hiring activity
Ekkehard Ernst and Christian Viegelahn Employment Trends Unit, International Labour Organization
A Quarterly Forecasting Model for Employment
Introduction Methodology Hiring expectations Uncertainty Mismatch Results Conclusions
Hiring expectations and employment growth in the US
Manpower hiring index and non-farm employment growth (rescaled), USA
Source: ILO calculations based on ManpowerGroup and U.S. Bureau of Labor Statistics.
Ekkehard Ernst and Christian Viegelahn Employment Trends Unit, International Labour Organization
A Quarterly Forecasting Model for Employment
Introduction Methodology Hiring expectations Uncertainty Mismatch Results Conclusions
Indicator for uncertainty
Economic policy uncertainty index
Index of Baker et al. (2012), based on three components
1 Index of search results on economic policy uncertainty from newspapers
2 Number of tax code provisions set to expire in future years
3 Disagreement of economic forecasters on predictions
Implied volatility indicator
Indicator based on Black and Scholes (1973) option pricing model, applied toemployers and the labour market
Interpretation of the Manpower hiring index as an option price and labourproductivity as the underlying stock
Ekkehard Ernst and Christian Viegelahn Employment Trends Unit, International Labour Organization
A Quarterly Forecasting Model for Employment
Introduction Methodology Hiring expectations Uncertainty Mismatch Results Conclusions
Uncertainty and employment growth in the US
Political uncertainty index, adjusted volatility indicator and non-farmemployment growth (rescaled), USA
Source: ILO calculations based on U.S. Bureau of Labor Statistics, ManpowerGroup, Baker et al. (2012) andOECD.
Ekkehard Ernst and Christian Viegelahn Employment Trends Unit, International Labour Organization
A Quarterly Forecasting Model for Employment
Introduction Methodology Hiring expectations Uncertainty Mismatch Results Conclusions
Indicator for labour market mismatch
There is evidence for an outward shift of the US Beveridge curve in 2009-2011:
Source: ILO calculations based on data from OECD.
Labour market mismatch indicator
Indicator calculated on the basis of data on job openings and layoffs in 16 sectors
Calculated as 1−∑16
i=1 min(sh openingit , sh layoffit )
sh openingit : openings in sector i as share of total openingssh layoffit : layoffs in sector i as share of total layoffs
Illustrates how “well” in terms of sectors laid-off workers fit to open positions
Ekkehard Ernst and Christian Viegelahn Employment Trends Unit, International Labour Organization
A Quarterly Forecasting Model for Employment
Introduction Methodology Hiring expectations Uncertainty Mismatch Results Conclusions
Mismatch and employment growth in the US
Labour market mismatch indicator and non-farm employment growth(rescaled), USA
Source: ILO calculations based on U.S. Bureau of Labor Statistics.
Ekkehard Ernst and Christian Viegelahn Employment Trends Unit, International Labour Organization
A Quarterly Forecasting Model for Employment
Introduction Methodology Hiring expectations Uncertainty Mismatch Results Conclusions
Forecasts of US non-farm employment
Benchmark specification vs. specification with hiring expectations
Source: ILO estimates based on U.S. Bureau of Labor Statistics, ManpowerGroup and OECD.
Ekkehard Ernst and Christian Viegelahn Employment Trends Unit, International Labour Organization
A Quarterly Forecasting Model for Employment
Introduction Methodology Hiring expectations Uncertainty Mismatch Results Conclusions
Forecasts of US employment by sector (2012Q3 = 100)
Specification with hiring expectations by sector
Source: ILO estimates based on U.S. Bureau of Labor Statistics, ManpowerGroup and OECD.
Ekkehard Ernst and Christian Viegelahn Employment Trends Unit, International Labour Organization
A Quarterly Forecasting Model for Employment
Introduction Methodology Hiring expectations Uncertainty Mismatch Results Conclusions
Forecasts of US employment by sector (2012Q3 = 100)
Specification with hiring expectations by sector
Source: ILO estimates based on U.S. Bureau of Labor Statistics, ManpowerGroup and OECD.
Ekkehard Ernst and Christian Viegelahn Employment Trends Unit, International Labour Organization
A Quarterly Forecasting Model for Employment
Introduction Methodology Hiring expectations Uncertainty Mismatch Results Conclusions
Forecasts of US employment by sector (2012Q3 = 100)
Specification with hiring expectations by sector
Source: ILO estimates based on U.S. Bureau of Labor Statistics, ManpowerGroup and OECD.
Ekkehard Ernst and Christian Viegelahn Employment Trends Unit, International Labour Organization
A Quarterly Forecasting Model for Employment
Introduction Methodology Hiring expectations Uncertainty Mismatch Results Conclusions
Forecasts of US non-farm employment
Directly forecasting non-farm employment vs. “bottom-up” approach:benchmark specification and specification with hiring expectations
Source: ILO estimates based on U.S. Bureau of Labor Statistics, ManpowerGroup and OECD.
Ekkehard Ernst and Christian Viegelahn Employment Trends Unit, International Labour Organization
A Quarterly Forecasting Model for Employment
Introduction Methodology Hiring expectations Uncertainty Mismatch Results Conclusions
Gains in forecast precision when including hiringexpectations
Percentage gains in RMSE, non-farm employment growth, USA
Note: Based on pseudo-out-of sample analysis with increasing window.
Gains in forecast precision when forecasting US sectoral employment:
In 12 out of 15 sectors, there are large gains in forecast precision
Only for information services and education and health services, sectoral hiringindices do not work well - likely because in these cases hiring indices that areused do not cover exactly these sectors
For utilies employment, the hiring index is neutral to forecast performance
Ekkehard Ernst and Christian Viegelahn Employment Trends Unit, International Labour Organization
A Quarterly Forecasting Model for Employment
Introduction Methodology Hiring expectations Uncertainty Mismatch Results Conclusions
Forecasts of US non-farm employment
Benchmark specifications vs specification with economic policy uncertainty
Source: ILO estimates based on U.S. Bureau of Labor Statistics, ManpowerGroup, Baker et al. (2012) and OECD.
Ekkehard Ernst and Christian Viegelahn Employment Trends Unit, International Labour Organization
A Quarterly Forecasting Model for Employment
Introduction Methodology Hiring expectations Uncertainty Mismatch Results Conclusions
Forecasts of US non-farm employment
Benchmark specifications vs specification with implied volatility
Source: ILO estimates based on U.S. Bureau of Labor Statistics, ManpowerGroup and OECD.
Ekkehard Ernst and Christian Viegelahn Employment Trends Unit, International Labour Organization
A Quarterly Forecasting Model for Employment
Introduction Methodology Hiring expectations Uncertainty Mismatch Results Conclusions
Forecasts of US non-farm employment
Benchmark specifications vs specification with labour market mismatch
Source: ILO estimates based on U.S. Bureau of Labor Statistics and OECD.
Ekkehard Ernst and Christian Viegelahn Employment Trends Unit, International Labour Organization
A Quarterly Forecasting Model for Employment
Introduction Methodology Hiring expectations Uncertainty Mismatch Results Conclusions
Gains in forecast precision when including uncertaintyindicators or labour market mismatch
For both uncertainty indicators, there are losses in forecast precision whencomparing to the benchmark specification; however, this is only true for USemployment forecasts
Possible reasons:
Uncertainty does not matter for employment decisions of employers
Uncertainty has only started to matter recently and it is therefore difficult tocapture it in a time series model
For labour market mismatch, time series is too short to undertake apseudo-out-of sample analysis
Ekkehard Ernst and Christian Viegelahn Employment Trends Unit, International Labour Organization
A Quarterly Forecasting Model for Employment
Introduction Methodology Hiring expectations Uncertainty Mismatch Results Conclusions
Conclusions
US employment:
Most models predict a continuation of the current upward trends in USemployment
Especially construction and services are driving employment gains, whilemanufacturing employment is stagnating
There are some significant downward risks for US employment due to labourmarket mismatch and uncertainty
Modeling:
The inclusion of hiring expectations considerably improves forecasts ofemployment in the US
Ekkehard Ernst and Christian Viegelahn Employment Trends Unit, International Labour Organization
A Quarterly Forecasting Model for Employment
