A Quarterly Forecasting Model for Employment Ekkehard Ernst and - PowerPoint PPT Presentation

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: L L L � � � dGDP t = α 1 + β 1 , j dGDP t − j + γ 1 , j dGCF t − j + δ 1 , j dEMP t − j + ǫ 1 , t j =1 j =1 j =1 L L L � � � dGCF t = α 2 + β 2 , j dGDP t − j + γ 2 , j dGCF t − j + δ 2 , j dEMP t − j + ǫ 2 , t j =1 j =1 j =1 L L L � � � dEMP t = α 3 + β 3 , j dGDP t − j + γ 3 , j dGCF t − j + δ 3 , j dEMP t − j + ǫ 3 , t j =1 j =1 j =1 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 managers in 42 different countries Manpower hiring index is published in the Manpower Employment Outlook Survey on a quarterly basis Length of national, sectoral, sub-national time series for G7 countries ranges from 1973-2012 to 2003-2012 Survey question: How do you anticipate total employment at your location to change in the next quarter as compared to the current quarter? Index takes percentage of employers anticipating an increase in hiring activity and 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 to employers and the labour market Interpretation of the Manpower hiring index as an option price and labour productivity 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-farm employment growth (rescaled), USA Source: ILO calculations 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 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 opening it , sh layoff it ) sh opening it : openings in sector i as share of total openings sh layoff it : 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 hiring expectations 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 hiring indices do not work well - likely because in these cases hiring indices that are used 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