French Unemployment Dynamics: a Three-State Approach

In this paper, we provide a new assessment of labor market flows in France over the period 2003-2012. By using the French Labour Force Sur-vey and the ILO’s standards, we construct gross worker flows and transition rates between the three main labor market states: employment, unemploy-ment and inactivity. The cyclical properties of the series suggest that flows jointly involving employment and unemployment are the most sensitive to economic conditions. Flows between participation and non-participation exhibit less cyclical patterns over the business cycle. We then decompose unemployment rate fluctuations by applying the steady state and the non-steady state decomposition. With a three state view of labor market, we find that the job finding rate is the first driver of unemployment fluctuations in France, while the job separation rate is the second. This decomposition also demonstrates that the role of inactivity in shaping unemployment is not negligible, justifying a complete analysis with three labor market states. In addition, we also propose an analysis based on three partitions of the overall French population. In this framework, the dynamic decompositions indicate that the sources of unemployment are different among sub-groups, in particular for women, old workers, unskilled and skilled workers