Qualitative business surveys and the assessment of employment - A case study for Germany

Business tendency surveys are a commonly accepted instrument for the assessment of the current business cycle course. Most of these surveys rely on qualitative questions about the current situation of the firms and about their expectations for the coming months. This paper analyzes whether qualitative questions about employment expectations are useful to assessing actual employment changes. In Germany the Ifo Institute specialises in business surveys. The German Ifo data are investigated using three different approaches: smoothing techniques are used to help in dating turning points in the course of the series; error correction models are used to analyze the general lead/lag relationships and Probit models are used to estimate a threshold for the survey-based indicator which helps to differentiate between an increase and a decrease in employment. All three methods indicate that the employment expectations are a leading indicator of actual employment changes.