New Evidence on Whether Unemployment and out of the Labor Force are Distinct States

This paper focuses on the question of whether people who are out of the labor force (OLF) should be included in unemployment measures. If people who are OLF can obtain jobs as often as the people who are unemployed, then there is no real distinction between the two states of nonemployment. Surprisingly, there has been very little effort surrounding this issue in the past: Clark and Summers (1982) conclude that for teenagers, unemployment and OLF are not distinct states, while Flinn and Heckman (1982a) find the opposite for white male high school graduates. The methodology adopted in this paper enables one to use incomplete transition data on unemployment and OLF, and to obtain estimates of the full transition matrix between three labor force states that are not possible with standard methods. New evidence for high school graduates is presented by gender, and it is found that, while for young women the two states are distinct, for young men they are not.