Labor Market Indicator for Colombia


  • Mario A. Ramos-Veloza Banco de la República
  • Deicy J. Cristiano-Botia Banco de la República
  • Manuel Dario Hernandez-Bejarano Pennsylvania State University


LMI, Colombian labor market, dynamic factor model, unemployment rate


Although the unemployment rate is traditionally used to diagnose the current state of the labor market, this indicator does not reflect the existence of asymmetries, mobility costs, and rigidities which impede labor to freely flow over the business cycle. Thus, to get a better portrait of the momentum, we construct the Labor Market Indicator (LMI) focusing on the cyclical similarities of eighteen time series from the Colombian household, industrial, and opinion surveys between 2001 and 2019. Our indicator summarizes the growth cycle of the labor market and its evolution is closely related to the output and unemployment GAP. This indicator is useful for policy analysis as it is useful to forecast headline inflation, it also complements the diagnosis of the current momentum of the labor market, the general economic activity, and the characterization of economic phases and turning points.


Alfonso V, Arango L, Arias F, Cangrejo G, Pulido J (2013). Ciclos de negocios en Colombia, 1975-2011. Lecturas de Economía, (78): 115–149.

Anas J, Ferrara L (2004). Detecting Cyclical Turning Points: The ABCD Approach and Two Probabilistic Indicators. Journal of Business Cycle Measurement and Analysis, 2004(2): 193–225.

Arango L (2013). Puestos de trabajo vacantes según anuncios de la prensa escrita de las siete principales ciudades de Colombia. Borradores de Economía 793, Banco de la República de Colombia.

Arango L, Arias F, Flórez, L, Jalil M (2007). Cronología de los ciclos de negocios recientes en Colombia. Borradores de Economía 461, Banco de la República de Colombia.

Arango L, Flórez L (2016). Determinants of structural unemployment in Colombia. A search approach. Borradores de Economía 969, Banco de la República de Colombia.

Arango L, Parra F, Pinzón A (2015). El ciclo económico y el mercado de trabajo en Colombia: 1984-2014. Borradores de Economía 911, Banco de la República de Colombia.

Ball L, Mankiw N (2002). The NAIRU in Theory and Practice. Journal of economic Perspectives, 16(4):115-136.

Banbura M, Modugno M (2012). Maximum likelihood estimation of factor models on datasets with arbitrary pattern of missing data. Journal of Applied Econometrics, 29 (1):133–160.

Banco de la República (2020). Informe de Política Monetaria – Abril de 2020. Technical report. Banco de la República, Bogotá, Colombia. Accessed 18 Dec 2020.

Barnes M, Chahrour R., Olivei, G, Tang G (2007). A principal components approach to estimating labor market pressure and its implications for inflation. Research Department Public Policy Briefs 07-2. Federal Reserve Bank of Boston, Boston, EE.UU.

Boivin J, Ng S (2006). Are more data always better for factor analysis? Journal of Econometrics, 132(1): 169–194.

Bry G, Boschan C (1971). Cyclical Analysis of Time Series: Selected Procedures and Computer Programs. NBER Books. National Bureau of Economic Research, Inc.

Cho J, Cooley T (1994). Employment and hours over the business cycle. Journal of Economic Dynamics and Control, 18(2): 411–432.

Chung H, Fallick B, Nekarda C, Ratner D (2014). Assessing the Change in Labor Market Conditions. Finance and Economics Discussion Series 2014-109, Divisions of Research & Statistics and Monetary Affairs. Federal Reserve Board, Washington, D.C.

Cristiano D, Hernández M, Pulido J (2012). Pronósticos de corto plazo en tiempo real para la actividad económica colombiana. Borradores de Economía 724, Banco de la República de Colombia.

Davis S (1987). Fluctuations in the pace of labor reallocation. Carnegie-Rochester Conference Series on Public Policy, 27:335 – 402.

Flórez L, Morales L, Medina D, Lobo, J. (2017). Labour flows across firm’s size, economic sectors and wages: evidence from employer-employee linked panel. Borradores de Economía 1013, Banco de la República de Colombia.

Forni M, Hallin M, Lippi M, Reichlin L (2005). The generalized dynamic factor model. Journal of the American Statistical Association, 100(471):830–840.

Gómez V, Maravall A (1996). Programs TRAMO and SEATS, Instruction for User (Beta Version: September 1996). Working Papers 9628. Servicio de Estudios - Banco de España. Accessed 30 Aug 2019.

Hakkio C, Willis J (2013). Assessing labor market conditions: the level of activity and the speed of improvement. Macro Bulletin, Federal Reserve Bank of Kansas City, issue July 18: 1-2.

Harvey A (1990). Forecasting, Structural Time Series Models and the Kalman Filter. Cambridge University Press.

Jacob P, Robinson F (2019). Suite as! Augmenting the Reserve Bank’s output gap indicator suite. Reserve bank of New Zealand analytical notes series AN2019/08, Reserve Bank of New Zealand.

Julio J (2001). How Uncertain are NAIRU Estimates in Colombia? Borradores de Economía 184, Banco de la República de Colombia.

Kaiser R, Maravall A (1999). Estimation of the business cycle: A modified Hodrick-Prescott filter. Spanish Economic Review, 1(2): 175–206.

Kamil H, Pulido J, Torres J (2010). El IMACO: un índice mensual líder de la actividad económica en Colombia. Borradores de Economía 609, Banco de la República de Colombia.

King T, Morley J (2007). In search of the natural rate of unemployment. Journal of Monetary Economics, 54(2):550–564.

Koopman S, Harvey A (2003). Computing observation weights for signal extraction and filtering. Journal of Economic Dynamics and Control, 27(7):1317-1333.

Kydland F, Prescott E (1991). Hours and employment variation in business cycle theory. Economic Theory, 1(1):63–81.

Lilien D (1982). Sectoral shifts and cyclical unemployment. Journal of Political Economy, 90(4):777–793.

Loungani P (1986). Oil Price Shocks and the Dispersion Hypothesis. The Review of Economics and Statistics, 68(3):536–539.

Maximo C, Yuliya L, Perez Q (2015). Can we use seasonally adjusted variables in dynamic factor models? Studies in Nonlinear Dynamics & Econometrics, 19(3):377–391.

Mintz I (1972). Dating American Growth Cycles. In Economic Research: Retrospect and Prospect, Volume 1, The Business Cycle Today, NBER Chapters, pages 39–88. National Bureau of Economic Research, Inc.

Mitchell W (1927). Business Cycles: The Problem and Its Setting. NBER Books. National Bureau of Economic Research, Inc.

Mondragón-Vélez C, Na X, Wills D, Kugler A (2010). Labor market rigidities and informality in Colombia [with comment]. Economía, 11(1):65-101.

Morales L, Hermida D, Davalos E (2018). The interaction between formal and informal labor dynamics: Revealing job flows from household surveys. Borradores de Economía 1090, Banco de la República de Colombia.

Morales L, Medina D (2016). Labor Fluidity and Performance of Labor Outcomes in Colombia: Evidence from Employer-Employee Linked Panel. Borradores de Economía 926, Banco de la República de Colombia.

Nieto F, Melo L (2001). About a Coincident Index for the State of the Economy. Borradores de Economía 194, Banco de la República de Colombia.

Perry G (1970). Changing labour markets and inflation. Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 1(3):411-448.

Ruiz E, Poncela P (2012). More is not always better: back to the Kalman filter in dynamic factor models. DES - Working Papers, Statistics and Econometrics, WS 122317, Universidad Carlos III de Madrid, Departamento de Estadística.

Shimer R (2012). Reassessing the Ins and Outs of Unemployment. Review of Economic Dynamics, 15(2):127–148.

Stock J, Watson M (1988). A probability model of the coincident economic indicators. NBER Working Papers 2772, National Bureau of Economic Research, Inc.

Stock J, Watson M (2011). Dynamic factor models. In Oxford Handbook on Economic Forecasting, eds. Michael P. Clements and David F. Hendry. Oxford: Oxford University Press.

Stock J, Watson M (1989). New Indexes of Coincident and Leading Economic Indicator. In NBER Macroeconomics Annual 1989, Volume 4, NBER Chapters, pages 351–409. National Bureau of Economic Research, Inc.

Stock J, Watson M (1993). A Procedure for Predicting Recessions with Leading Indicators: Econometric Issues and Recent Experience. In Business Cycles, Indicators and Forecasting, NBER Chapters, pages 95–156. National Bureau of Economic Research, Inc. Accessed 25 Aug 20.

Zmitrowicz K, Khan M (2014). Beyond the Unemployment Rate: Assessing Canadian and U.S. Labour Markets Since the Great Recession. Bank of Canada Review, 2014 (Spring): 42–53.