Dice Question Streamline Icon: https://streamlinehq.com

Unclear whether level or relative changes in labor market indicators best signal recessions

Determine whether level changes or relative (percentage) changes in the unemployment and vacancy rates provide the most informative signal of recession onset within the indicator-construction framework, and identify the appropriate curvature parameter governing the scaling of variations in the unemployment and vacancy indicators.

Information Square Streamline Icon: https://streamlinehq.com

Background

The indicator-construction step transforms the increases in unemployment and decreases in vacancies into scaled measures that range from level changes to percentage changes via a curvature parameter. The authors include both possibilities to avoid arbitrarily restricting the indicator space.

They explicitly note uncertainty about which type of change (levels versus percentages) is most relevant for recession detection, motivating the exploration of a continuum of transformations rather than committing to one a priori.

References

It is not entirely clear, however, if what matters are level changes, such as \tilde{u}(t) and \tilde{v}(t), or relative changes. Maybe recessions occur when the unemployment rate increases by 1pp, but it is just as possible that recessions occur when the unemployment rate increases by 10%.

— Early and Accurate Recession Detection Using Classifiers on the Anticipation-Precision Frontier (2506.09664 - Michaillat, 11 Jun 2025) in Subsection 3.3, Construction of the recession indicators: Scaling variations