Worker flows and the occurrence of endogenous cycles

Abstract

It has been argued that merely looking at stocks of labor market variables locks away important and illuminating dynamics, because rather stable levels of unemployment can hide tremendous flows from unemployment to employment and vice versa. Should the transitions in both directions cancel out, unemployment would not vary even though it might be the case that the stock of unemployed workers completely changed. Hence, explaining variations in the level of unemployment over time, or differences across countries, may be achieved better by looking at the flows. A flow approach to labor markets (Blanchard and Diamond 1992) might be more adequate to explain the determinants of a ‘natural rate of unemployment’.