Forecasting unemployment in Portugal: A labour market flows approach

This paper applies a labour market flows approach to forecasting the unemployment rate, initially developed by Barnichon and Nekarda (2012) and subsequently extended by Barnichon and Garda (2016), to the Portuguese labour market. We start by implementing a simple two-state labour market forecasting model and then extend it to a three-state labour market forecasting model which incorporates movements in and out of the labour force. We test the forecasting accuracy of each of these models and find that the two-state flow-based forecasting model performs slightly better than the other tested models. We conclude that worker flow data is a valuable input for forecasting the unemployment in Portugal.