A framework for understanding changes in the unemployment rate in a flows context: an examination net flows in the Australian labour market

RESEARCH PAPER NUMBER 910, ISSN 0819-2642, ISBN 0 7340 2566 1In this paper we develop a framework which is appropriate for the systematic investigation ofthe relationship between net (and gross) flows between different labour market states andmovements in the unemployment rate. We use that framework to investigate the behaviour ofnet flows of persons between employment, unemployment and not in the labour force inAustralia between 1979-2003 and the relationship of these flows to changes in theunemployment rate over that period. We find that: flows from unemployment to employmentexceed flows from employment to unemployment and that this is the case even in recessions;flows from employment to not in the labour force exceed flows from not in the labour force toemployment and that this is the case even in booms, and; flows from not in the labour force tounemployment exceed flows from unemployment to not in the labour force even inrecessions. Another important finding is that the reason why the participation rate isnegatively correlated with the unemployment rate is because net flows from employment toboth unemployment and to not in the labour force are highly correlated. It cannot be explainedby flows occurring between unemployment and not in the labour force