The Dynamics of Unemployment: Structural Change and Unemployment Flows

In this paper we attempt to explain the inflows onto and the outflows from the unemployment stock. In spite of great interest in explaining unemployment, very little work has been done using time series data on flows.1 It is useful to think of the labour market as being in a perpetual state of flux with people moving from job to job, from jobs to unemployment and from unemployment to jobs. An analysis of flows allows us to study the dynamics of the labour market and provides us with useful insights which may be clouded by studying unemployment stocks. Our model explaining the flows is based on cost-minimising firms and individuals searching for jobs.2 We postulate an economy consisting of two types of firms: expanding firms that hire and declining firms that fire. Changes in aggregate demand, tastes and technology lead to changes in the distribution of firms and hence to the flows. Section I considers the empirical specification and discusses the results for Great Britain for the period 1967 (III) to 1980(II). To anticipate our results we find that inadequate aggregate demand is a crucial determinant of the growth of unemployment in Britain.