Composition of regional unemployment dynamics in Germany

I study the contribution of unemployment inflows and outflows to the dynamics of the unemployment rate for different age groups, skill level, and recipients of benefits in accordance with the Social Code Book III and II at the regional level in Germany. I show that prime age and older workers as well as low and high skilled workers differ significantly in their labor market flow rates using administrative data provided by the German Federal Employment Agency.

With respect to the literature on the relative importance of separation and job finding rates for the dynamics of the unemployment rate, Hall (2005) and Shimer (2005, 2012) conclude for the US labor market that the job finding rate is more relevant, while Fujita and Ramey (2009) and Elsby et al. (2009) come to the opposite conclusion and find evidence for a relative larger contribution of job separation. Smith (2011) finds evidence for the UK that increases in the unemployment rate come along with rising separations. Petrongolo and Pissarides (2008) conclude that both flow rates are of similar importance for the UK labor market.

This study adds to the literature as follows. First, I provide a solution for both the theoretical and empirical analyses of flow contributions on unemployment dynamics in a three-state model (flows between employment, unemployment, and inactivity). Second, I analyze the flow contributions to unemployment fluctuations at the regional level for all unemployed as well as for prime age and older workers, low and high skilled workers, long-term and short-term unemployed, and the groups of unemployment benefit and basic security recipients.

Based on monthly administrative data for the period January 2009 to December 2015 for 402 districts (Kreise) in Germany I receive the following preliminary results: The dynamics that arise from inactivity and activity flows account for about 10% (short-term unemployed) of unemployment dynamics and up to 96% for the long-term unemployed. Separation and job finding flows account for roughly 80% of unemployment fluctuations for prime age and high skilled workers while for older and low skilled workers account for about 60%. Separation and job finding are more important for unemployment dynamics of unemployment benefit recipients compared to those receiving basic security. Older workers unemployment dynamics are more driven by separation than unemployment dynamics of prime age workers. The same applies to low skilled workers compared to the high skilled. In general, in rural areas the unemployment dynamics are lower.