Probability of moving from employment to unemployment at all-time-low

UK unemployment continues to fall. In the three months to February, there were 45,000 fewer people unable to find a job than was the case in September to November 2016. This is down 141,000 on a year ago.  Those looking at the numbers from a credit risk perspective can take heart: the last time the UK unemployment rate was this low was in the 1970s.  
 
But figures on the number of people unemployed do not tell the whole story. There is a large amount of churn in both employment and unemployment and the headlines mask some interesting detail. That detail will be of interest to risk managers as, we would argue, understanding the probability of a customer moving from employment to unemployment gives a better idea of how their book might be affected than changes in the net stock position.
 
The ONS produce experimental data on labour market flows. These show that if a person was unemployed in Q3 2016, there was a 54.8% chance that they would be unemployed in Q4 2016 and a 29.3% chance that they would be back in employment. So the UK economy is pretty good at getting people back into jobs (although a significant number stopped looking for work altogether, at least temporarily).  
                                                                 
But risk managers are probably more focused on the likelihood that someone employed loses their job and moves to unemployment, increasing the risk of a loss event. The trend here is remarkably positive. Only 0.8% of those employed in Q3 2016 were unemployed a quarter later – the lowest figure since 1997 when the series starts.
 
Conclusion: changes in stock positions might tell most of the story but not all of it. Those building risk models might consider if the flow will be a better predictor of the default rates on their portfolios.

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