Unemployment remains high in Europe, and this is widely attributed to an insufficient level of economic activity or to the malfunctioning of labour markets. The `persistence', or sluggishness, of the stocks of unemployment and employment in European countries in contrast with those of the US, Canada and Japan is taken as prima-facie evidence of declines in both total hiring and firing and worker mobility.

In Discussion Paper No. 439, Research Fellows Michael Burda and Charles Wyplosz argue that this conventional wisdom is grossly inconsistent with facts. For example, there were 4.1 million reported new cases of unemployment in France in 1987 about 340,000 per month while unemployment averaged only 2.6 million in total. Burda and Wyplosz use data from France, West Germany, the UK and the US to establish some stylized facts on gross labour market flows, and they find that the regularities in gross labour market flows are inconsistent with many theories of labour markets and business cycles. For example, the widespread presumption that the driving force in the upswing of a business cycle is an increasing outflow of workers from unemployment contradicts the data from all the above countries, where expansions are associated with declining outflows. Indeed, for France and West Germany at least, most exits from unemployment represent job findings rather than exits from the labour force.

Burda and Wyplosz find that in Europe flows into and out of unemployment move closely together, both over cycles and along a common trend, but that this does not hold for for flows into employment or out of the labour force. Unemployment inflows and outflows are countercyclical, as are lay-offs, discouraged workers, new entrants and re-entrants (although quits are procyclical). Job losses represent by far the largest component of flows into unemployment, and quits represent only a minor component. In contrast, flows into and out of employment are procyclical, so that the other components of employment flows (i.e. between different employments and between employment and `out-of-the-labour-force') must be and indeed are strongly procyclical. Flows `out of the labour force' exhibit no cyclical pattern, and during recessions entrants into the labour force are more likely to enter via a transitional period of unemployment.

Burda and Wyplosz conclude that these stylized facts not only challenge current theories, but also also suggest promising directions for research. The remarkable contrast between the closeness of unemployment inflows and outflows and the large and persistent deviations between inflows and outflows for the two other states indicates the presence of a powerful mechanism dictating a stable `natural' rate of unemployment. Following this interpretation, the sizes of the employed and out-of-the-labour- force populations may be subject to greater variations around their equilibrium levels than unemployment.