Despite high and persistent unemployment, Europe's labour markets feature large flows between employment, unemployment and non-participation. Recessions also entail increases in gross outflows from unemployment, and most of these represent job findings rather than exits from the labour force. In Discussion Paper No. 868, Research Fellows Michael Burda and Charles Wyplosz argue that this challenges conventional macroeconomics, since most business cycle models assume that flows from unemployment to employment rise (fall) during upturns (downturns). A rise in inflows into unemployment could raise the stock, thus raising outflows for a given job finding rate, but aggregate job finding also falls systematically in downturns. Outflows appear to rise but less than proportionately to the stock, so job finding is procyclical while unemployment outflows are countercyclical.

Burda and Wyplosz estimate `matching functions' for Germany, Spain, France and the UK, which account for the dynamics of worker flows; the destruction of jobs is strongly countercyclical while their creation is mildly procyclical or even acyclical. They develop an equilibrium model which differentiates jobs (which have profitability assigned to them independent of match quality) from employment (which depends on workers' and firms' satisfaction with the match). This also distinguishes unfilled jobs from `planned positions' (those for which a work-place has yet to be created).

Burda and Wyplosz consider the effects of a shock that reduces the value of a job-worker match. The economy adjusts with a combination of cancelling planned positions, closing open jobs, laying off workers while preserving their jobs and destroying filled jobs. In the latter two cases, their model attributes the coherence of worker flows to a jump increase in the unemployment stock while gross measures of job destruction and creation continue to move in opposite directions. This simple model therefore accounts for the stylized facts of Europe's labour markets but also points to the need for further research into the heterogeneity of firms and workers in aggregate models.

Gross Worker and Job Flows in Europe
Michael Burda and Charles Wyplosz

Discussion Paper No. 868, November 1993 (HR/IM)