Bank of England staff paper finds unemployment composition and labour force attachment can raise unemployment volatility by about 50%

The Bank of England published Staff Working Paper No. 1,178 examining how cyclical movements in UK labour market slack are shaped by who becomes unemployed and how likely different unemployed workers are to remain attached to the labour force. Using UK Labour Force Survey data, the paper links the procyclicality of flows from unemployment to inactivity to compositional shifts in the unemployment pool, rather than to changes in job search effort. Empirically, unemployed workers who enter unemployment after job loss are substantially less likely to leave the labour force than those who enter unemployment from inactivity, and prior labour force status is presented as the strongest predictor of labour market attachment even when controlling for other worker characteristics. Building on these findings, the authors extend a Diamond-Mortensen-Pissarides search-and-matching model to incorporate heterogeneous attachment among unemployed workers; cyclical fluctuations in job separations then change the composition of unemployment and amplify aggregate unemployment fluctuations. In the model calibration, this mechanism increases unemployment volatility by around 50% and helps account for the sharp rise in unemployment at the onset of the Great Recession. As a Bank of England staff working paper, the research is published to elicit comments and debate and does not represent Bank of England policy.