Using the flow data between the three states of employment, unemployment and not-in-the-labor-force, I undertook a detailed examination of factors contributing to changes in Japan's unemployment rate.
The results of the analysis provide the following explanations for Japan's rising unemployment rate since 1991. First, the transition probability from employment to unemployment has risen, and at the same time the transition rate from unemployment to employment has declined significantly. Second, the transition probability from unemployment to not-in-the-labor-force has declined for both men and women, resulting in the accumulation of unemployment. Third, the results point to the possibility that the unemployment rate was also pushed up by the flow of workers from not-in-the-labor force to unemployment. Parallel to a decline in the transition probability from not-in-the-labor-force to employment, an increased inflow of men from not-in-the-labor-force to unemployment began in the mid-1990s. The same trend is observable for women beginning between the end of the 1990s and 2000.
Next, I estimated the Phillips curve using the flow data as a source of additional information for forecasting price trends. The results indicate that the forecasting performance of the Phillips curve can in fact be improved by using flow data between employment and unemployment that are sensitive to trends in price levels and business conditions.
Keywords: Unemployment rate; Flow data analysis; Discouraged worker effect; Added worker effect; Price-level projections using Phillips curve
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.