Thursday, August 21, 2014
Tuesday, August 19, 2014
Brad DeLong tries to make sense of the labor market:
Over at Equitable Growth: In Which I Make Myself Very Confused About Cyclical Recovery: Will somebody please tell me that I have made a gross arithmetic error in what is below, and can be much more optimistic? ...
I really do not understand the triumphalism of the very sharp Steve Braun et al. from the CEA...
So the labor market is, they say, 5/6 of the way back to normal--the current unemployment rate of 6.2% is 3.8%-points down from the peak of 10.0%, and has only 0.8%-point left to go before it hits a pre-crisis NAIRU of 5.4%. When it does, we will attain a "cyclically normal" labor market with a participation rate at 63.4%, 0.5%-points higher than today's 62.9%, and an associated employment-to-population ratio of 60.0%.
By that metric, we have done 3/4 of the work of cyclical recovery: from a 5.5%-point gap between employment and participation at the trough to a 3.9%-point gap now and a 3.4%-point gap at NAIRU. We will have made 1.7%-points back from the trough on the employment-to-population ratio when cyclical recovery is complete. The permanent damage to employment from the Great Recession Lesser Depression appears to be less than 0.9%-points of participation because there are also ongoing "cohort effects unrelated to aging" that reduce participation.
Let me stress that this is not senior and not-so-senior White House officials under pressure from political operatives putting as positive a spin on things as they can without actually losing their... No: what I mean to say is this: this is what the CEA's Steven Braun, John Coglianese, Jason Furman, Betsey Stevenson, and Jim Stock actually believe is true about the world--that the labor market is recovering successfully and strongly from the disaster of 2008-9.
But I look at 25-54. The employment rate is down from 79.9% in 2007 to 76.6% in July 2014--3.3%-points less, compared to 4.0%-point a fall from 63% to 59% over the entire population. The participation rate is down from 80.8% in July 2014 compared to 83.1% for 2007--2.3%-points, compared to the 3.1%-point fall from 66.0% to 62.9% over the entire population.
A normal NAIRU spread would put the 25-54 employment-to-population ratio at 78.7%, 2.5%-points below the 81.2% cyclically-adjusted 25-54 participation ratio. When cyclical recovery is complete, we would then expect to make back 3.7%-points back from the trough on the 25-54 employment-to-population ratio. So far we have made back only 1.0%-point.
So which is it? Has hysteresis done 1.8%-points of damage to 25-54 employment or 0.9%-points to total employment? Have we done 3/4 of the work of recovery relative to the proper labor force-trend share benchmark? Or have we done only 1/3 of the work of recovery?
The 25-54 data and the economy-wide aging trend-adjusted data used by the CEA appear to be telling us very different things both about the cyclical state of the labor market and about the damage done by hysteresis. How to reconcile? Which is right?
Monday, August 18, 2014
[Long, long travel day today, so just a few quick ones before hitting the road.]
Steven Braun, John Coglianese, Jason Furman, Betsey Stevenson, and Jim Stock:
Understanding the decline in the labour force participation rate in the United States, by Steven Braun, John Coglianese, Jason Furman, Betsey Stevenson, and Jim Stock, Vox EU: The labour force participation rate in the US has fallen dramatically since 2007. This column traces this decline to three main factors: the ageing of the population, cyclical effects from the Great Recession, and an unexplained portion, which might be due to pre-existing trends unrelated to the first two. Of these three, the ageing of the population plays the largest role since it is responsible for half of the decline. Taken together, these factors suggest a roughly stable participation rate in the short-term, followed by a longer-term decline as the baby boomers continue to age. However, policy can play a meaningful role in mitigating this trend. ...
Saturday, August 16, 2014
About that skills gap -- this is from Dean Baker:
The Skills Gap is Most Evident in Retail Trade and Restaurants: Floyd Norris has an interesting column comparing the numbers of job openings, hirings, and quits from 2007 with the most recent three months in 2014. The most striking part of the story is that reporting openings are up by 2.1 percent from 2007, while hirings are still down by 7.5 percent.
While Norris doesn't make this point, some readers may see this disparity as evidence of a skills gap, where workers simply don't have the skills for the jobs that are available. If this is really a skills gap story then it seems that it is showing up most sharply in the retail and restaurant sectors. (Data are available here.) Job openings in the retail sector are up by 14.6 percent from their 2007 level, but hires are down by 0.7 percent. Job opening in the leisure and hospitality sector are up by 17.0 percent, while hiring is down by 7.4 percent.
If the disparity between patterns in job openings and hires is really evidence that workers lack the skills for available jobs then perhaps we need to train more people to be clerks at convenience stores and to wait tables.
Friday, August 15, 2014
'Persistently Below-Target Inflation Rate is a Signal That the U.S. Economy is Not Taking Advantage of all of its Available Resources'
Narayana Kocherlakota, President of the Minneapolis Fed:
..I’m a member of the Federal Open Market Committee—the FOMC—and, as a monetary policymaker, my discussion will be framed by the goals of monetary policy. Congress has charged the FOMC with making monetary policy so as to promote price stability and maximum employment. I’ll discuss the state of the macroeconomy in terms of these goals.
Let me start with price stability. The FOMC has translated the price stability objective into an inflation rate goal of 2 percent per year. This inflation rate target refers to the personal consumption expenditures, or PCE, price index. ... That rate currently stands at 1.6 percent, which is below the FOMC’s target of 2 percent. In fact, the inflation rate has averaged 1.6 percent since the start of the recession six and a half years ago, and inflation is expected to remain low for some time. For example, the minutes from the June FOMC meeting reveal that the Federal Reserve Board staff outlook is for inflation to remain below 2 percent over the next few years.
In a similar vein, earlier this year, the Congressional Budget Office (CBO) predicted that inflation will not reach 2 percent until 2018—more than 10 years after the beginning of the Great Recession. I agree with this forecast. This means that the FOMC is still a long way from meeting its targeted goal of price stability.
The second FOMC goal is to promote maximum employment. What, then, is the state of U.S. labor markets? The latest unemployment rate was 6.2 percent for July. This number is representative of the significant improvement in labor market conditions that we’ve seen since October 2009, when the unemployment rate was 10 percent. And I expect this number to fall further through the course of this year, to around 5.7 percent. However, this progress in the decline of the unemployment rate masks continued weakness in labor markets.
There are many ways to see this continued weakness. I’ll mention two that I see as especially significant. First, the fraction of people aged 25 to 54—our prime-aged potential workers—who actually have a job is still at a disturbingly low rate. Second, a historically high percentage of workers would like a full-time job, but can only find part-time work. Bottom line: I see labor markets as remaining some way from meeting the FOMC’s goal of full employment.
So I’ve told you that inflation rates will remain low for a number of years and that labor markets are still weak. It is important, I think, to understand the connection between these two phenomena. As I have discussed in greater detail in recent speeches, a persistently below-target inflation rate is a signal that the U.S. economy is not taking advantage of all of its available resources. If demand were sufficiently high to generate 2 percent inflation, the underutilized resources would be put to work. And the most important of those resources is the American people. There are many people in this country who want to work more hours, and our society is deprived of their production. ...
Wednesday, August 13, 2014
It's okay to help people:
EPI and AEI Agree: Cutting Jobless Benefits Did Not Boost Employment, by Joshua Smith, EPI: Perhaps Hell has not frozen over, but it appears that someone down there may have leaned on the thermostat. That’s right, the Economic Policy Institute and the American Enterprise Institute are in lock-step agreement on an important fiscal policy matter.
During the Great Recession and its aftermath, the federal government acted to help victims of the severe downturn by funding programs that extended unemployment benefits—to up to 99 weeks in some cases, up from the standard 26 weeks. As the economic recovery continued, weak as it was for many in the working class, many lawmakers on the right began to believe that these extended benefits were a drag on employment—the theory being that government checks reduced the incentive for recipients to find a job, and that cutting off this lifeline would compel unemployed workers to look harder for work and perhaps take jobs they may not have accepted if the benefits had continued. Relying on this premise, Congress allowed the federally-funded Emergency Unemployment Compensation program to lapse last December.
Now, more than seven months later, data are available to test this idea. Coming from perspectives that diverge greatly along the ideological spectrum, scholars at both AEI and EPI have come to the conclusion that this “bootstraps” theory is incorrect—curtailing jobless benefits did not boost employment. ...
Do the facts have a Keynesian bias?:
Using product- and labour-market tightness to understand unemployment, by Pascal Michaillat and Emmanuel Saez, Vox EU: For the five years from December 2008 to November 2013, the US unemployment rate remained above 7%, peaking at 10% in October 2009. This period of high unemployment is not well understood. Macroeconomists have proposed a number of explanations for the extent and persistence of unemployment during the period, including:
- High mismatch caused by major shocks to the financial and housing sectors,
- Low search effort from unemployed workers triggered by long extensions of unemployment insurance benefits, and
- Low aggregate demand caused by a sudden need to repay debts or pessimism, but no consensus has been reached.
In our opinion this lack of consensus is due to a gap in macroeconomic theory: we do not have a model that is rich enough to account for the many factors driving unemployment – including aggregate demand – and simple enough to lend itself to pencil-and-paper analysis. ...
In Michaillat and Saez (2014), we develop a new model of unemployment fluctuations to inspect the mechanisms behind unemployment fluctuations. The model can be seen as an equilibrium version of the Barro-Grossman model. It retains the architecture of the Barro-Grossman model but replaces the disequilibrium framework on the product and labour markets with an equilibrium matching framework. ...
Through the lens of our simple model, the empirical evidence suggests that price and real wage are somewhat rigid, and that unemployment fluctuations are mainly driven by aggregate demand shocks.
Tuesday, August 12, 2014
Bill McBride at Calculated Risk:
There were 4.7 million job openings on the last business day of June, little changed from 4.6 million in May, the U.S. Bureau of Labor Statistics reported today. ...
Quits are generally voluntary separations initiated by the employee. Therefore, the quits rate can serve as a measure of workers’ willingness or ability to leave jobs. ... The number of quits (not seasonally adjusted) increased over the 12 months ending in June for total nonfarm and total private. The number of quits was little changed for government.
... Jobs openings increased in June to 4.671 million from 4.577 million in May. This is the highest level since February 2001. The number of job openings ... are up 18% year-over-year compared to June 2013. Quits are up 15% year-over-year. These are voluntary separations. ...
It is a good sign that job openings are over 4 million for the fifth consecutive month, and that quits are increasing.
Friday, August 08, 2014
"It just isn't so":
On Reaganolatry, by Paul Krugman: The truly vile attack on Rick Perlstein’s new book has been revealing in a number of ways. ...
And why this determination to quash Perlstein? It’s all about Reaganolatry, the right’s need to see the man as perfect. ... Everyone on the right knows that Reagan presided over job creation on a scale never seen before or since; but it just isn’t so. In fact, if you look at monthly rates of job creation for the past six administrations, it’s actually startling:
You may have known that Clinton was a better “job creator” than Reagan, but did you know that over the course of the Carter administration — January 1977 to January 1981 — the economy actually added jobs faster than it did under Reagan? Maybe you want to claim that the 1981-82 recession was Carter’s fault (although actually it was the Fed’s doing), so that you start counting from almost two years into Reagan’s term; but in that case why not give Obama the same courtesy? The general point is that the supposed awesomeness of Reagan’s economic record just doesn’t pop out of the data.
But don’t expect the Reaganlators to acknowledge that. Their whole sense of identity is bound up with their faith.
Thursday, August 07, 2014
How the incipient inflation freak-out could wreck the recovery, by Dean Baker and Jared Bernstein: As predictable as August vacations, numerous economists and Federal Reserve watchers are arguing that the nation’s central bank must raise interest rates or risk an outbreak of spiraling inflation. Their campaign has heated up a bit in recent months, as one can cherry pick an indicator or two showing slightly faster growth in prices or wages.
But an objective analysis of the recent data, along with longer-term wage trends, reveals that the stakes of premature tightening are unacceptably high. The vast majority of the population depends on their paychecks, not their stock portfolios. If the Fed were to slam on the breaks by raising interest rates as soon as workers started to see some long-awaited real wage gains, it would be acting to prevent most of the country from seeing improvements in living standards.
To understand why continued support from the Fed is unlikely to be inflationary, consider three factors: the current state of key variables, the mechanics of inflationary pressures and the sharp rise in profits as a share of national income in recent years, along with its corollary, the fall in the compensation share. ...
Friday, August 01, 2014
Job Growth Slows in July, by Dean Baker, CEPR Data Bytes: Wage growth slowed slightly in the last quarter to 1.8 percent from 2.0 percent in the last year.
The economy added 209,000 jobs in July, a sharp slowing from its 277,000 average over the prior three months. The slowdown was widely spread across sectors, although temporary help -- which added just 8,500 jobs -- and health care -- which added just 7,000 -- were notably weak. Construction -- which added 22,000 jobs -- and manufacturing -- which added 28,000 jobs -- were surprisingly strong.
The unemployment rate was essentially unchanged at 6.2 percent, as there was little change in either the size of the labor force or the number of unemployed. Involuntary part-time employment edged down slightly, reversing part of a jump in June. It is now 669,000 below its year-ago level. Voluntary part-time employment decreased modestly, but is still 502,000 above its year-ago level. This would be consistent with some workers opting to work part-time now that they no longer need to get health insurance through their job as a result of the Affordable Care Act.
There was little change in employment or unemployment rates for most demographic groups, although the employment-to-population ratio for African Americans edged up to 54.6 percent -- its highest level since January of 2009. Workers over age 55 accounted for all the reported employment growth in July, with an increase in employment of 159,000 compared to 131,000 overall. However, their 43.4 percent share of employment growth over the last year is considerably less than it had been earlier in the recovery.
The duration measures showed little change, with average duration of unemployment falling back 1.1 weeks to 32.4 weeks, while both the median duration and share of long-term unemployed increased slightly. The share of unemployment due to people voluntarily quitting their jobs was essentially unchanged from the prior two months at 8.9 percent. This is up from 8.5 percent last July, but still well below the 11-12 percent shares in the years before the downturn.
In the establishment survey, the goods-producing sector was surprisingly strong, adding 58,000 jobs. However, the pace of growth is likely to slow in the month ahead. The 22,000 job growth reported in construction is likely faster than can be supported by the modest pace of spending growth in the sector. The 28,000 rise in manufacturing employment was driven largely by a 14,600 increase in jobs in the auto industry. This, in turn, was likely due in part to the timing of shutdowns for retooling and will be partially reversed next month. The average workweek actually fell in manufacturing and the one-month diffusion index plunged from 63.0 to 53.7, so we are likely to see weaker growth going forward. Nonetheless, it is worth noting that employment in the auto sector reached its highest level since July, 2008.
In contrast to autos, jobs in the motion picture industry continue to disappear. They fell 3,500 in July and are down by 56,300 (15.7 percent) over the last year. The temp sector also showed weakness, adding just 8,500 jobs, compared to an average of 17,000 over the last year. Similarly, health care added just 7,000 jobs, down from an average of 19,000 over the last year. A high-side anomaly in the July data was a jump in employment in private social assistance of 18,400. This is certain to be reversed, at least partially, in coming months.
This report provides little evidence of any pick-up in wage growth. The average hourly wage rose at a 1.82 percent annual rate over the last three months compared with the prior three months. This compares to a 2.0 percent increase over the last year. While a tightening labor market should eventually allow workers to see some gains in real wages, the economy does not appear to be at this point yet.
Overall, this should be seen as a modestly positive report. The slower pace of job growth is not surprising given how out of line recent job growth has been with the modest GDP growth we have been seeing. (First half growth averaged 1.0 percent.) It is likely that future months will see weaker growth as manufacturing and construction will see slower job gains. We are still far from the point where the labor market is strong enough that workers will be able to get wage gains in line with economic growth.
Thursday, July 31, 2014
Tim Duy (see Dean Baker too):
On That ECI Number: The employment cost index is bearing the blame for today's market sell-off. Sam Ro at Business Insider reports:
...traders agree that today's sell-off is probably due to one stat: the 0.7% jump in the employment cost index (ECI) in the second quarter.
This number, which crossed at 8:30 a.m. ET, was a bit higher than the 0.5% expected by economists. And it represents a year-over-year growth rate of over 2%.
It's a big deal, because it's both a sign of inflation and labor market tightness, two forces that put pressure on the Federal Reserve to tighten monetary policy sooner than later.
The ECI gain was driven by the private sector (compensation for the public sector was up just 0.5%, same as the first quarter), and I would be cautious about reading too much into those numbers. The Fed will take the Q2 reading in context of the low Q1 reading:
The first two quarters averaged a just 0.46% increase, pretty much the same as recent trends of the past five years. And look at the year-over-year-trend:
Nothing to see here, folks. Move along. Benefit costs for private sector workers also accelerated, but I think the Fed will likely interpret this as an anomaly:
Again, not out-of-line with readings both before and after the recession.
Bottom Line: I understand why market participants might be a little hypersensitive to anything related to wages. Indeed, wage growth is the missing link in the tight labor market story. But I don't think the Fed will react much to these numbers; they will place them in context of recent behavior, and in that context they are not much different than current trends. Watch the upcoming employment reports for signs of diminishing underutilization of labor - that is where the Fed will be looking.
Wednesday, July 30, 2014
Unemployment and the “Skills Mismatch” Story: Overblown and Unpersuasive, by Gary Burtless, Brookings: The jobless rate has dipped to 6.1 percent, and businesses are already complaining about a skills shortage. ... To an economist, the most accessible and persuasive evidence demonstrating a skills shortage should be found in wage data. ...
Where is the evidence of soaring pay for workers whose skills are in short supply? We frequently read anecdotal reports informing us some employers find it tough to fill job openings. What is harder to find is support for the skills mismatch hypothesis in the wage data..., there is little evidence wages or compensation are increasing much faster than 2% a year [i.e. outpacing inflation]. Even though unemployment has declined, there are still 2.5 times as many active job seekers as there are job vacancies. At the same time, there are between 3 and 3½ million potential workers outside the labor force who would become job seekers if they believed it were easier to find a job. The excess of job seekers over job openings continues to limit wage gains, notwithstanding the complaints of businesses that cannot fill vacancies. ...
It is cheap for employers to claim qualified workers are in short supply. It is a bit more expensive for them to do something to boost supply. Unless managers have forgotten everything they learned in Econ 101, they should recognize that one way to fill a vacancy is to offer qualified job seekers a compelling reason to take the job. Higher pay, better benefits, and more accommodating work hours are usually good reasons for job applicants to prefer one employment offer over another. When employers are unwilling to offer better compensation to fill their skill needs, it is reasonable to ask how urgently those skills are really needed. ...
Tuesday, July 22, 2014
Running late today -- two very quick ones. First, from Scientific American:
Will Automation Take Our Jobs?: Last fall economist Carl Benedikt Frey and information engineer Michael A. Osborne, both at the University of Oxford, published a study estimating the probability that 702 occupations would soon be computerized out of existence. Their findings were startling. Advances in ... technologies could, they argued, put 47 percent of American jobs at high risk of being automated in the years ahead. Loan officers, tax preparers, cashiers, locomotive engineers, paralegals, roofers, taxi drivers and even animal breeders are all in danger of going the way of the switchboard operator.
Whether or not you buy Frey and Osborne's analysis, it is undeniable that something strange is happening in the U.S. labor market. Since the end of the Great Recession, job creation has not kept up with population growth. Corporate profits have doubled since 2000, yet median household income (adjusted for inflation) dropped from $55,986 to $51,017. ... Erik Brynjolfsson and Andrew McAfee ... call this divergence the “great decoupling.” In their view, presented in their recent book The Second Machine Age, it is a historic shift. ...
The Next Wave of Technology?, by Tim Taylor: Many discussions of "technology" and how it will affect jobs and the economy have a tendency to discuss technology as if it is one-dimensional, which is of course an extreme oversimplification. Erik Brynjolfsson, Andrew McAfee, and Michael Spence offer some informed speculation on how they see the course of technology evolving in "New World Order: Labor, Capital, and Ideas in the Power Law Economy," which appears in the July/August 2014 issue of Foreign Affairs (available free, although you may need to register).
Up until now, they argue, the main force of information and communications technology has been to tie the global economy together, so that production could be moved to where it was most cost-effective. ...
But looking ahead, they argue that the next wave of technology will not be about relocating production around the globe, but changing the nature of production--and in particular, automating more and more of it. If the previous wave of technology made workers in high-income countries like the U.S. feel that their jobs were being outsourced to China, the next wave is going to make those low-skill workers in repetitive jobs--whether in China or anywhere else--feel that their jobs are being outsources to robots. ...
If this prediction holds true, what does this mean for the future of jobs and the economy?
1) Outsourcing would become much less common. ...
2) For low-income and middle-income countries like China..., their jobs and workforce would experience a dislocating wave of change.
3) Some kinds of physical capital are going to plummet in price, like robots, 3D printing, and artificial intelligence...
4) So..., who does well in this future economy? For high-income countries like the United States, Brynjolfsson, McAfee, and Spence emphasize that the greatest rewards will go to "people who create new ideas and innovations," in what they refer to as a wave of "superstar-based technical change." ...
This final forecast seems overly grim to me. While I can easily believe that the new waves of technology will continue to create superstar earners, it seems plausible to me that the spread and prevalence of many different new kinds of technology offers opportunities to the typical worker, too. After all, new ideas and innovations, and the process of bringing them to the market, are often the result of a team process--and even being a mid-level but contributing player on such teams, or a key supplier to such teams, can be well-rewarded in the market. More broadly, the question for the workplace of the future is to think about jobs where labor can be a powerful complement to new technologies, and then for the education and training system, employers, and employees to get the skills they need for such jobs. If you would like a little more speculation, one of my early posts on this blog, back on July 25, 2011, was a discussion of "Where Will America's Future Jobs Come From?"
Sunday, July 20, 2014
This article, by David Cay Johnston, is getting a surprising number of retweets:
State’s job growth defies predictions after tax increases, by David Cay Johnston, The Bee: Dire predictions about jobs being destroyed spread across California in 2012 as voters debated whether to enact the sales and, for those near the top of the income ladder, stiff income tax increases in Proposition 30. Million-dollar-plus earners face a 3 percentage-point increase on each additional dollar.
“It hurts small business and kills jobs,” warned the Sacramento Taxpayers Association, the National Federation of Independent Business/California, and Joel Fox, president of the Small Business Action Committee.
So what happened after voters approved the tax increases, which took effect at the start of 2013?
Last year California added 410,418 jobs, an increase of 2.8 percent over 2012, significantly better than the 1.8 percent national increase in jobs. ...
Tuesday, July 15, 2014
Me, at MoneyWatch:
Can unemployment benefits raise joblessness?: Did the extension of unemployment compensation during the Great Recession cause joblessness to go up? ...
The latest research on this topic from Katharine Bradbury of the Federal Reserve Bank of Boston ... finds that unemployment does go up when unemployment benefits are extended, but the question is why. Does it discourage workers from taking jobs, or discourage them from leaving the labor force?
Bradbury pointed out that the earlier research shows it's mostly the latter, that extending unemployment benefits causes workers to stay in the labor force longer before dropping out. No notable impact was found on their willingness to take available jobs. ...
Monday, July 14, 2014
Via email, a comment on my comments about the difficulty of settling questions about the Phillips curve empirically:
Dear Professor Thoma,
I saw your recent post on the difficulty of empirically testing the Phillips Curve, and I just wanted to alert you to a survey paper on this topic that I wrote with Sophocles Mavroeidis and Jim Stock: "Empirical Evidence on Inflation Expectations in the New Keynesian Phillips Curve". It was published in the Journal of Economic Literature earlier this year (ungated working paper).
In the paper we estimate a vast number of specifications of the New Keynesian Phillips Curve (NKPC) on a common U.S. data set. The specification choices include the data series, inflation lag length, sample period, estimator, and so on. A subset of the specifications amount to traditional backward-looking (adaptive expectation) Phillips Curves. We are particularly interested in two key parameters: the extent to which price expectations are forward-looking, and the slope of the curve (how responsive inflation is to real economic activity).
Our meta-analysis finds that essentially any desired parameter estimates can be generated by some reasonable-sounding specification. That is, estimation of the NKPC is subject to enormous specification uncertainty. This is consistent with the range of estimates reported in the literature. Even if one were to somehow decide on a given specification, the uncertainty surrounding the parameter estimates is typically large. We give theoretical explanations for these empirical findings in the paper. To be clear: Our results do not reject the validity of the NKPC (or more generally, the presence of a short-run inflation/output trade-off), but traditional aggregate time series analysis is just not very informative about the nature of inflation dynamics.
PhD candidate in economics, Harvard University
New Keynesians do stuff like one-period-ahead price setting or Calvo pricing, in which prices are revised randomly. Practicing Keynesians have tended to rely on “accelerationist” Phillips curves in which unemployment determined the rate of change rather than the level of inflation.
So what has happened since 2008 is that both of these approaches have been found wanting: inflation has dropped, but stayed positive despite high unemployment. What the data actually look like is an old-fashioned non-expectations Phillips curve. And there are a couple of popular stories about why: downward wage rigidity even in the long run, anchored expectations.
What the data actually look like is an old-fashioned non-expectations Phillips curve.
OK, here is where we disagree. Certainly this is not true for the data overall. It seems like Paul is thinking that the system governing the relationship between inflation and output changes between something with essentially a vertical slope (a “Classical Phillips curve”) and a nearly flat slope (a “Keynesian Phillips Curve”). I doubt that this will fit the data particularly well and it would still seem to open the door to a large role for “supply shocks” – shocks that neither Paul nor I think play a big role in business cycles.
Simon Wren-Lewis also has something to say about this in his post from earlier today, Has the Great Recession killed the traditional Phillips Curve?:
Before the New Classical revolution there was the Friedman/Phelps Phillips Curve (FPPC), which said that current inflation depended on some measure of the output/unemployment gap and the expected value of current inflation (with a unit coefficient). Expectations of inflation were modelled as some function of past inflation (e.g. adaptive expectations) - at its simplest just one lag in inflation. Therefore in practice inflation depended on lagged inflation and the output gap.
After the New Classical revolution came the New Keynesian Phillips Curve (NKPC), which had current inflation depending on some measure of the output/unemployment gap and the expected value of inflation in the next period. If this was combined with adaptive expectations, it would amount to much the same thing as the FPPC, but instead it was normally combined with rational expectations, where agents made their best guess at what inflation would be next period using all relevant information. This would include past inflation, but it would include other things as well, like prospects for output and any official inflation target.
Which better describes the data? ...
[W]e can see why some ... studies (like this for the US) can claim that recent inflation experience is consistent with the NKPC. It seems much more difficult to square this experience with the traditional adaptive expectations Phillips curve. As I suggested at the beginning, this is really a test of whether rational expectations is a better description of reality than adaptive expectations. But I know the conclusion I draw from the data will upset some people, so I look forward to a more sophisticated empirical analysis showing why I’m wrong.
I don't have much to add, except to say that this is an empirical question that will be difficult to resolve empirically (because there are so many different ways to estimate a Phillips curve, and different specifications give different answers, e.g. which measure of prices to use, which measure of aggregate activity to use, what time period to use and how to handle structural and policy breaks during the period that is chosen, how should natural rates be extracted from the data, how to handle non-stationarities, if we measure aggregate activity with the unemployment rate, do we exclude the long-term unemployed as recent research suggests, how many lags should be included, etc., etc.?).
Thursday, July 10, 2014
In search of search theory: This is going to be a long and wonkish post, so I’ll just give the dot-point summary here, and let those interested read on below the fold, for the explanations and qualifications.
* The dominant model of unemployment, in academic macroeconomics at least, is based on the idea that unemployment can best be modelled in terms of workers searching for jobs, and remaining unemployed until they find a good match with an employer
* The efficiency of job search and matching has been massively increased by the Internet, so, if unemployment is mainly explained by search, it should have fallen steadily over the past 20 years.
* Obviously, this hasn’t happened, but economists seem to have ignored this fact or at least not worried too much about it
* The fact that search models are more popular than ever is yet more evidence that academic macroeconomics is in a bad way ...
Tuesday, July 08, 2014
The Unemployment Cost of Below-Target Inflation: Recently, inflation in the United States has been consistently below its 2% target. The situation in Sweden is similar, but has lasted much longer. The Swedish Riksbank announced a 2% CPI inflation target in 1993, to apply beginning in 1995. By 1997, the target was credible in the sense that inflation expectations were consistently in line with the target. From 1997 to 2011, however, CPI inflation only averaged 1.4%. In a forthcoming paper in the AEJ: Macroeconomics, Lars Svensson uses the Swedish case to estimate the possible unemployment cost of inflation below a credible target...
The unemployment rate would be about 0.8% lower if inflation averaged 2% (and presumable lower still if inflation averaged slightly above 2%). ...
Svensson concludes with policy implications:"I believe the main policy conclusion to be that if one wants to avoid the average unemployment cost, it is important to keep average inflation over a longer period in line with the target, a kind of average inflation targeting (Nessén and Vestin 2005). This could also be seen as an additional argument in favor of price-level targeting...On the other hand, in Australia, Canada, and the U.K., and more recently in the euro area and the U.S., the central banks have managed to keep average inflation on or close to the target (the implicit target when it is not explicit) without an explicit price-level targeting framework.Should the central bank try to exploit the downward-sloping long-run Phillips curve and secretly, by being more expansionary, try to keep average inflation somewhat above the target, so as to induce lower average unemployment than for average inflation on target?...This would be inconsistent with an open and transparent monetary policy."
[See the full post for more details.]
Thursday, July 03, 2014
June Employment Report, by Tim Duy: The BLS reported solid numbers for the labor market in June, although there may be somewhat less acceleration than meets the eye. On net, the ongoing rapid fall in the unemployment rate nudges forward my expectation of when the Fed makes history and begins to lift rates from the zero bound. Still, there does not appear to be sufficient reason yet to believe the Fed will steepen the pace of increases.
Nonfarm payrolls rose by 288k, ahead of expectations for 211k. Job growth was broad-based and earlier months were revised higher. The three-month average for job growth is at its highest since 2011 while the 12-month average is slowly crawling up and now stands above 200k:
It is worth remembering that in order to maintain constant percentage changes over time, the absolute change has to increase. Indeed, the acceleration in percentage terms over the past year looks less than impressive:
Still somewhat below that experienced at the height of the housing bubble, clearly weaker then the late 1990s, and note in particular the acceleration in the early 1990's. It was that kind of acceleration that caught the Fed's attention. We are not seeing anything like that yet.
Also note that while hours worked has recovered from the winter doldrums, it too is not growing at some blockbuster pace:
In short, in some sense the excitement over the recent improvement in absolute job growth says less about an acceleration in actual activty and more about our diminished expectations for this recovery.
The persistent decline in the unemployment rate will undoubtedly cause consternation among the more hawkish FOMC members:
Recall St. Louis Federal Reserve President James Bullard recent warning:
The Federal Open Market Committee is closer to its goals for full employment and low and stable inflation than many investors realize, Bullard said. He predicted the pace of economic growth will accelerate to 3 percent this year after an unexpectedly deep first-quarter contraction.“Inflation is picking up now. It is still below target but it has been moving up in recent months,” he said in response to a question at a forum organized by the Council on Foreign Relations. “I don’t think financial markets have internalized how close we are to our ultimate goals, and I don’t think the FOMC has internalized how close we are.”
Bullard's story in a picture:
As the Fed closes in on its traditional policy goals, the pressure from the hawks, and even the center, for a rate increase will increase. Still, the doves are not without a defence. Federal Reserve Chair Janet Yellen's measures of underemployment are still underwhelming:
In particular, wage growth has stalled, adding additional credence to the argument that substantial labor market slack remains despite the decline in the unemployment rate:
Also note that there is nothing here yet to challenge the more general consensus among policymakers that equilibrium interest rates are lower than in past cycles.
Bottom Line: The jobs report is generally good news, albeit I would argue there remains room for substantial improvement. That room for improvement continues to restrain the Fed from dramatically tighter policy. My expectations for the first rate hike center around the middle of next year. On net, this report drags my expectations forward somewhat and suggests a higher probability of a hike before June than after June. Score one for the FOMC hawks. But I also see little here yet to suggest the need for any dramatic tightening; I doubt FOMC's expectation of a long, gradual tightening cycle is much altered. That's one for the doves.
Jobs Report, First Impressions: A Strong June for the Job Market: Payrolls were up 288,000 and the unemployment rate ticked down to a near six-year low of 6.1% last month, according to today’s employment report from the BLS (a rare Thursday edition due to the holiday weekend). It’s an unquestionably strong report, with industries across the economy posting job gains. Adding to the positive news, job growth estimates for the prior two reports were revised up by 29,000, implying an underlying average growth pace of 272,000 for payrolls in the second quarter of the year.
Unlike some prior months when the jobless rate came down, June’s unemployment rate fell for the “right reasons:” not more people leaving the labor force, but more people getting jobs.
The only negative I’m seeing at first glance is the 275,000 increase in the number of involuntary part-timers (part-time workers who’d rather have full-time jobs). But this is a volatile monthly number and is down 650,000 over the past year. ...
Comments on Employment Report: [Earlier: June Employment Report: 288,000 Jobs, 6.1% Unemployment Rate] Total employment increased 288,000 from May to June, and is now 415,000 above the previous peak. Private payroll employment increased 262,000 from May to June, and private employment is now 895,000 above the previous peak (the unprecedented large number of government layoffs has held back total employment). Through the first half of 2014, the economy has added 1,385,000 payroll jobs - up from 1,221,000 added during the same period in 2013 - even with the severe weather early this year. My expectation at the beginning of the year was the economy would add between 2.4 and 2.7 million payroll jobs this year, and that still looks about right. Hopefully - now that the unemployment rate has fallen to 6.1% - wage growth will start to pick up. Overall this was another solid employment report. ...
Real Time Economics:
In an Overall Sunny Jobs Report, Here Are the Few Clouds, by Ben Leubsdorf: The June U.S. jobs report was broadly positive. Payrolls rose strongly, the unemployment rate fell and the number of Americans who have been out of work for more than six months continued to decline.
But there were a few upbeat ingredients still missing from the brew: accelerating wage growth, rising labor-force participation and more Americans finding full-time work instead of settling for a part-time job. ...
Thursday, June 26, 2014
Even after years of "recovery" it's not too late t help those struggling to find employment, and to improve our future potential for growth at the same time. Of course, that would require Congress -- particularly those on the political right -- to actually care about the unemployed, and to recognize the critical role that government (and taxes) must play in meeting our infrastructure needs:
The Enormous Wage Potential of Infrastructure Jobs, by Joseph Kane and Robert Puentes, Brookings: This month marks five years since the U.S. economic recovery began, but we clearly have a long way to go to address our nation’s jobs deficit. Even though more workers are gradually finding employment, their wages continue to stagnate and hold back widespread economic growth. ...
Cutting across multiple industries and geographies, infrastructure jobs offer needed stability. Since these jobs also typically require less formal education and pay competitive wages across a variety of occupations, they give workers from all backgrounds a chance to make a decent living in today’s unforgiving economy.
As our recent report reveals, infrastructure jobs tend to pay 30 percent more to lower income workers—wage earners at the 10th and 25th percentile—relative to all jobs nationally...
Infrastructure occupations not only employ thousands of workers with a high school diploma or less, but they also frequently offer higher wages compared to many other jobs, particularly those involved in sales, maintenance, production, and other support activities. ...
Over time, by forging stronger connections between our infrastructure investments and workforce needs, we can help boost the long-term opportunity available to American workers.
Wednesday, June 18, 2014
Dear FOMC: Please be patient:
How close are we to full employment?, by Mark Thoma: How far is the economy from a full recovery? When should Federal Reserve policymakers, who are finishing their two-day meeting today, begin raising interest rates? Should the Fed speed the pace of its tapering of quantitative easing?
All of these questions depend critically on a piece of data economists call the output gap...
Tuesday, June 17, 2014
This is a good follow-up to my column (linked in the post below this one):
The Economy May Be improving. Worker Pay Isn’t, by Neil Irwin, Washington Post: The latest economic data out Tuesday morning was generally good. Home building activity rebounded nicely in May after weak results in April. Consumer prices rose 0.4 percent in May, such that inflation over the last year is now 2.1 percent, about in line with what the Federal Reserve aims for.
But that inflation news carried with it a depressing side note. ... Average hourly earnings for private-sector American workers rose about 49 cents an hour over the last year... But that wasn’t enough to cover inflation over the year, so in “real” or inflation adjusted terms, hourly worker pay fell 0.1 percent over the last 12 months. Weekly pay shows the same story...
Pause for just a second to consider that. Five years after the economic recovery began, American workers have gone the last 12 months without any real increase in what they are paid. ...
There had been some hints here and there that worker pay was starting to rise in the last few months... But it wasn’t sustained. ...
The latest numbers should give pause to any Federal Reserve officials ... who see wage pressures as evidence that the economy is overheating..., the evidence points to more of what we’ve seen for most of the last six years: Employees have little negotiating power to demand higher pay.
I have a new column:
The Latest Inflation Worry Is, As Usual, Overblown, by Mark Thoma: Worries about inflation have been pervasive ever since the Fed began trying to lift the economy out of recession. If the Fed does not tighten policy very soon we have been told repeatedly, an outbreak of inflation is inevitable. But so far, those worries have been unfounded.
The latest round of worries is tied to the belief that labor markets are tighter than it appears from standard statistics such as the unemployment rate. ...
Tuesday, June 10, 2014
Bill McBride, aka Calculated Risk:
BLS: Jobs Openings increase sharply to 4.5 million in April: From the BLS: Job Openings and Labor Turnover Summary ...
Jobs openings increased in April to 4.455 million from 4.166 million in March.
The number of job openings ... are up 17% year-over-year compared to April 2013.
Quits are up 11% year-over-year. These are voluntary separations. ...
It is a good sign that job openings are over 4 million for the third consecutive month, and that quits are increasing.
Wednesday, June 04, 2014
How Discouraged Are the Marginally Attached?: Of the many statistical barometers of the U.S. economy that we monitor here at the Atlanta Fed, there are few that we await more eagerly than the monthly report on employment conditions. The May 2014 edition arrives this week and, like many others, we will be more interested in the underlying details than in the headline job growth or unemployment numbers.
One of those underlying details—the state of the pool of “discouraged” workers (or, maybe more precisely, potential workers)—garnered special attention lately in the wake of the relatively dramatic decline in the ranks of the official labor force, a decline depicted in the April employment survey from the U.S. Bureau of Labor Statistics. That attention included some notable commentary from Federal Reserve officials.
Federal Reserve Bank of New York President William Dudley, for example, recently suggested that a sizeable part of the decline in labor force participation since 2007 can be tied to discouraged workers exiting the workforce. This suggestion follows related comments from Federal Reserve Chair Janet Yellen in her press conference following the March meeting of the Federal Open Market Committee:
So I have talked in the past about indicators I like to watch or I think that are relevant in assessing the labor market. In addition to the standard unemployment rate, I certainly look at broader measures of unemployment… Of course, I watch discouraged and marginally attached workers… it may be that as the economy begins to strengthen, we could see labor force participation flatten out for a time as discouraged workers start moving back into the labor market. And so that's something I'm watching closely.
What may not be fully appreciated by those not steeped in the details of the employment statistics is that discouraged workers are actually a subset of “marginally attached” workers. Among the marginally attached—individuals who have actively sought employment within the most recent 12-month period but not during the most recent month—are indeed those who report that they are out of the labor force because they are discouraged. But the marginally attached also include those who have not recently sought work because of family responsibilities, school attendance, poor health, or other reasons.
In fact, most of the marginally attached are not classified (via self-reporting) as discouraged (see the chart):
At the St. Louis Fed, B. Ravikumar and Lin Shao recently published a report containing some detailed analysis of discouraged workers and their relationship to the labor force and the unemployment rate. As Ravikumar and Shao note,
Since discouraged workers are not actively searching for a job, they are considered nonparticipants in the labor market—that is, they are neither counted as unemployed nor included in the labor force.
More importantly, the authors point out that they tend to reenter the labor force at relatively high rates:
Since December 2007, on average, roughly 40 percent of discouraged workers reenter the labor force every month.
Therefore, it seems appropriate to count some fraction of the jobless population designated as discouraged (and out of the labor force) as among the officially unemployed.
We believe this logic should be extended to the entire group of marginally attached. As we've pointed out in the past, the marginally attached group as a whole also has a roughly 40 percent transition rate into the labor force. Even though more of the marginally attached are discouraged today than before the recession, the changing distribution has not affected the overall transition rate of the marginally attached into the labor force.
In fact, in terms of the propensity to flow into employment or officially measured unemployment, there is little to distinguish the discouraged from those who are marginally attached but who have other reasons for not recently seeking a job (see the chart):
What we take from these data is that, as a first pass, when we are talking about discouraged workers' attachment to the labor market, we are talking more generally about the marginally attached. And vice versa. Any differences in the demographic characteristics between discouraged and nondiscouraged marginally attached workers do not seem to materially affect their relative labor market attachment and ability to find work.
Sometimes labels matter. But in the case of discouraged marginally attached workers versus the nondiscouraged marginally attached workers—not so much.
Friday, May 23, 2014
The US labor market is not working : In a recent post Paul Krugman looks at the dismal performance of US labor markets over the last decade. To make his point, he compares the employment to population ratio for all individuals aged 25-54 for the US and France. The punch line: even the French work harder than the Americans! And this is indeed a new phenomenon, it was not like that 13 years ago [Just to be clear, there are other dimensions where the French are not working as hard: they retire earlier, they take longer vacations,... but the behavior of the 25-54 year old population is indeed a strong indicator of how a society engages its citizens in the labor market. ]
So are the French the exception? Not quite. Among OECD economies, the US stands towards the bottom of the table when it comes to employment to population ratio for this cohort (#24 out of 34 countries). ...
What is interesting is that most of the countries of the top of the list are countries with a large welfare state and very high taxes (including on labor). So the negative correlation between the welfare state and taxes and the ability to motivate people to work (and create jobs) that some bring back all the time does not seem to be present in the data. ...
[See the original post for the ordered list of countries.]
Wednesday, May 21, 2014
It's unlikely that this is limited to the NY Fed region. This is NY Fed president William Dudley:
... What Kinds of Jobs Have Been Created During the Recovery?
Let me turn to the topic of today’s press briefing: how the types of jobs in the region have changed over the last business cycle. Firms often change the way they utilize workers and the mix of skills they employ during recessions and recoveries. The weakening demand during recessions forces firms to look for new ways to be more efficient to cope with hard times. These adjustments do not affect all workers equally. Indeed, it’s what we typically think of as middle-skilled workers—for example, construction workers, machine operators and administrative support personnel—that are hardest hit during recessions. Further, a feature of the Great Recession and indeed the prior two recessions, is that the middle-skill jobs that were lost don’t all come back during the recoveries that follow. Instead, job opportunities have tended to shift toward higher- and lower-skilled workers.
As we’ll show, these same trends have played out in our region. While there’s been a good number of both higher-skill and lower-skill jobs created in the region during the recovery, opportunities for middle-skilled workers have continued to shrink.
I believe it is important for us to highlight these job trends and to understand their implications for our region. There have been significant and long-lasting changes to the nature of work. As a result, many middle-skilled workers displaced during the recession are likely to find that their old jobs will never come back. Furthermore, workers are increasingly facing higher skill requirements in order to land a good job. These dynamics in the labor market present a host of challenges for the region to address. However one thing is clear: workers will need more education, training and skills to take full advantage of the types of job opportunities being created in our region, as well as across the nation. So, it’s important that we work together to find ways to help people in our region adapt to these changes. ...
Tuesday, May 20, 2014
No, Taking Away Unemployment Benefits Doesn’t Make People Get Jobs, by Bryce Covert: When 1.3 million long-term unemployed people lost benefits because Congress let the program lapse, some claimed that taking away the checks would encourage people to go out and get a job. That isn’t panning out for the 74,000 people who are no longer getting checks in Illinois.
In January, one month after they lost benefits, 64,000 of them, or 86 percent, were still unemployed, according to an analysis of wage records by the Illinois Department of Employment Security (IDES). February was similar: 61,3000 people were still unemployed, or 82.7 percent of the original group. That means two months later, four out of five people who were cut off from benefits still weren’t bringing in wages.
“This notion that temporary unemployment benefits provide people a reason not to return to work really needs to end because it is not supported by the data,” IDES Director Jay Rowell said.
Other natural experiments have shown that, rather than spurring a flurry of hiring, cutting off benefits can have disastrous consequences. ...
Tuesday, May 13, 2014
Labor Market Seems Dented, Not Broken, by Justin Wolfers: There are two schools of thought about the longer-term prospects for the labor market. The darker view is that the Great Recession wrought permanent damage: The jobs that disappeared aren’t easily replaced, and the skills of the jobless are a poor match for the jobs that remain. ...
The sunnier view is that this is not a permanent shift, but rather the natural course of a recession... It’s a sunnier view because it suggests that a continuing recovery will largely solve our unemployment problem..., leaving no lasting mark.
The past two years have been kind to this more optimistic interpretation. ... It is surely too early to draw strong conclusions, but continued movements in this direction would suggest that the Great Recession hasn’t done lasting damage, and that it’s possible for the unemployment rate to head back toward 5 percent without the emergence of hiring bottlenecks.
It seems clear to me that there has been permanent damage, but we shall see...
Saturday, May 10, 2014
Dave Altig and Ellyn Terry at macroblog:
How Has Disability Affected Labor Force Participation?: You might be unaware that May is Disability Insurance Awareness Month. We weren’t aware of it until recently, but the issue of disability—as a reason for nonparticipation in the labor market—has been very much on our minds as of late. As we noted in a previous macroblog post, from the fourth quarter of 2007 through the end of 2013, the number of people claiming to be out of the labor force for reasons of illness or disability increased almost 3 million (or 23 percent). The previous post also noted that the incidence of reported nonparticipation as a result of disability/illness is concentrated (unsurprisingly) in the age group from about 51 to 60.
In the past, we have examined the effects of the aging U.S. population on the labor force participation rate (LFPR). However, we have not yet specifically considered how much the aging of the population alone is responsible for the aforementioned increase in disability as a reason for dropping out of the labor force.
The following chart depicts over time the percent (by age group) reporting disability or illness as a reason for not participating in the labor force. Each line represents a different year, with the darkest line being 2013. The chart reveals a long-term trend of rising disability or illness as a reason for labor force nonparticipation for almost every age group.
The chart also shows that disability or illness is cited most often among people 51 to 65 years old—the current age of a large segment of the baby boomer cohort. In fact, the proportion of people in this age group increased from 20 percent in 2003 to 25 percent in 2013.
How much can the change in demographics during the past decade explain the rise in disability or illness as a reason for not participating in the labor market? The answer seems to be: Not a lot.
Following an approach you may have seen in this post, we break down into three components the change in the portion of people not participating in the labor force due to disability or illness. One component measures the change resulting from shifts within age groups (the within effect). Another component measures changes due to population shifts across age groups (the between effect). A third component allows for correlation across the two effects (a covariance term). Here’s what you get:
To recap, only about one fifth of the decline in labor force participation as a result of reported illness or disability can be attributed to the population aging per se. A full three quarters appears to be associated with some sort of behavioral change.
What is the source of this behavioral change? Our experiment can’t say. But given that those who drop out of the labor force for reasons of disability/illness tend not to return, it would be worth finding out. Here is one perspective on the issue.
You can find even more on this topic via the Human Capital Compendium.
Monday, May 05, 2014
Difficult Labor Report, by Tim Duy: The headlines numbers from the April employment report are at first blush a challenge to the Fed's low rate commitment. One doesn't have to dig much deeper into the data, however, to see that the near term implications are minimal as the Fed maintains its strong focus on measures of labor market slack. Still, the rapid drop in unemployment - if it continues - will leave policymakers increasingly anxious that their one-way bet on labor market slack will quickly turn sour.
Nonfarm payrolls grew pay 288k, well above expectations of 215k. While this numbers pushes the three-month moving average higher, the longer-term trend remains the same:
Maybe this is the month the acceleration begins. Maybe not. Either way, the report supports the dismissal of the weak first quarter growth numbers (now tracking in negative territory) as transitory. Just as has been the case for the last three years, there is nothing here to suggest a dramatic change in the pace of underlying economic activity.
The unemployment rate decline was a bit more intersting as it collapsed to 6.3% on the back of falling labor force participation:
The downward trend accelerated in the second half of 2013, pushing us ever closer to levels traditionally associated with greater inflationary pressures and with those pressures tighter monetary policy. Policymakers, however, appear to remain content dismissing the unemployment rate in favor of a wider range of labor market indicators that suggest plenty of slack left in the economy. Federal Reserve Chair Janet Yellen's current four favorites:
The wage story is, in my opinion, the key. It is hard to argue against the labor slack story when employees can't push wages significantly higher. That alone should be enough to stay the Fed's hand. And if it isn't enough, they can always draw additional comfort from the inflation figures:
Inflation is, at best, only in the process of bottoming.
All that said, policymakers will be a little anxious that they are too quickly dismissing traditional metrics that would indicate they should be be adjusting their inflation forecasts higher in light of the unemployment decline. As I am relatively confident will be much discussed this week, variants of the Taylor rule suggest that policymakers should already be raising rates:
In this environment, policymakers will increasingly worry about the policy lags. They will want to hold rates low, but the further unemployment drops, the more they will fear that they risk falling behind the curve - that by the time the pace of wages growth accelerates, inflationary pressure will already be well established. This is especially the case if they view the 2% target as a ceiling. Hence I remain concerned that the risk is that policy turns sharply tighter relative to current expectations.
I am also challenged to see why I should not expect the now-infamous dots in the summary of economic projections to be pulled forward on the basis of the falling unemployment rate. I am looking forward to the next FOMC meeting for that alone.
I emphasize, however, that any substantially tighter policy remains only a "risk," not a baseline. I anticipate that in her Congressional testimony this week, Yellen will emphasize the alternative measures of labor market slack and the Fed's expectation that policy rates will remain well below "normal" rates for a protracted period. As a general rule one report doesn't change policy.
Bottom Line: Overall, the general contours of the employment report suggest reason to (very) modestly bring forward expected rates hikes, but little to suggest any dramatic change to the Fed's reaction function overall. Policymakers, however, will worry that the current reaction function is overly dependent on dismissing the unemployment rate as an indicator of inflationary pressure. And there is a risk that they will move quicker than expected if that bet starts to sour. Risk, not baseline.
Saturday, May 03, 2014
The EPI's Heidi Shierholz:
Number of Missing Workers Jumps to All-Time High: ... The biggest drop in LFPR in April was among men under the age of 20. To my knowledge, data on unemployment insurance exhaustions by age don’t exist, but it is unlikely that young workers are a big proportion of exhaustions. This means that the April drop in labor force participation is likely not being driven by the expiration of federal unemployment insurance benefits last December as some have suggested, but simply by the weak labor market.
There is currently an all-time-high of 6.2 million missing workers (potential workers who are neither working nor actively seeking work due to the weak labor market). Almost a quarter of them (1.4 million) are under age 25. The ... unemployment rate for young workers would be 18.4 percent instead of 12.8 percent if the missing young workers were in the labor force looking for work and thus counted as unemployed.
For a complete picture of the labor market prospects facing the new cohort of young adults graduating from high school and college this spring, see the Class of 2014 report released yesterday. It includes, for example, a detailed discussion of the finding that there is little evidence that today’s missing young workers are “sheltering in school”.
Friday, May 02, 2014
Dean Baker on the Jobs Report:
Economy Adds 288,000 Jobs in April, Sharp Drop in Labor Force Leads to Plunge in Unemployment: The economy added 288,000 jobs in April. With upward revisions to the prior two months’ data, this brings the three month average to 234,000. This is highest three month total since the economy added 829,000 jobs in the first three months of 2012. The household survey showed unemployment rate falling from 6.7 percent in March to 6.3 percent in April, but the drop was entirely the result of 806,000 people leaving the labor force. Employment, as measured in the household survey, actually fell by 73,000. The employment-to-population ratio (EPOP) remained unchanged at 58.9 percent. ...
On the whole, this is a very positive report. While the April job growth was likely inflated as a result of bad weather in prior months, the three month average is still near the peaks for the recovery.
Update: Jared Bernstein:
the decline in unemployment is entirely due not to job creation, but to labor force decline (employment actually fell slightly in the household survey). This important and closely watched indicator—the labor force participation rate—also fell 0.4 tenths, reversing recent gains and returning the lfpr to its low where it stood at the end of last year, commensurate with levels we haven’t seen since the late 1970s. Though part of the recent decline in the participation rate reflects our aging demographics, more than half in my judgment is due to weak demand.
The BLS noted that the large decline in the labor force—about -800,000—was likely due to fewer entrants as opposed to more leavers. And this is a volatile number, as I stress below. But neither can it be dismissed out of hand: it has been essentially stuck at historically low levels for a while now.
On the other hand, the payroll report shows pretty decent labor demand/job creation. As noted, the 288,000 jobs beat expectations, and gains for the prior two months were revised up by 36,000. Job gains occurred across most industries, with 67% of private industries expanding employment, the largest share in over two years (government employment was also up 15,000, almost all due to local government; federal employment was down slightly).
Monday, April 28, 2014
Good jobs are harder to find:
Recovery Has Created Far More Low-Wage Jobs Than Better-Paid Ones: The deep recession wiped out primarily high-wage and middle-wage jobs. Yet the strongest employment growth during the sluggish recovery has been in low-wage work, at places like strip malls and fast-food restaurants.
In essence, the poor economy has replaced good jobs with bad ones. That is the conclusion of a new report from the National Employment Law Project, a research and advocacy group, analyzing employment trends four years into the recovery.
“Fast food is driving the bulk of the job growth at the low end — the job gains there are absolutely phenomenal,” said Michael Evangelist, the report’s author. “If this is the reality — if these jobs are here to stay and are going to be making up a considerable part of the economy — the question is, how do we make them better?”...
The National Employment Law Project study found especially strong growth in restaurants and food services, administrative and waste services and retail trades. Those industries — which often pay wages at the federal minimum — accounted for about 40 percent of the increase in private sector employment over the past four years.
There has also been strong jobs growth in some high-paying industries, like professional, scientific and technical services — a category that includes accountants, lawyers, software developers and engineers. That sector accounted for about 9 percent of the private-sector job gains in the recovery.
Thursday, April 17, 2014
Not Just the Long-Term Unemployed: Those Unemployed Zero Weeks Are Struggling to Find Jobs: Leave aside for a moment the difficulty that the long-term unemployed, those who were unlucky and have been looking for a job for more than 52 weeks, have in finding a job. Even those who have been unemployed zero weeks are having trouble finding jobs in this economy. And this is important evidence against the idea that the labor market is doing better than people realize if you just ignore the long-term unemployed. ...
Wednesday, April 16, 2014
When in need of a quick post, Paul Krugman is always a good source:
Supply, Demand, and Unemployment Benefits: Ben Casselman points out that we’ve had a sort of natural experiment in the alleged effects of unemployment benefits in reducing employment. Extended benefits were cancelled at the beginning of this year; have the long-term unemployed shown any tendency to find jobs faster? And the answer is no.
Let me ... ask, how was it, exactly, that reduced benefits were supposed to encourage employment in the first place?
Making the unemployed miserable arguably increases labor supply, as workers become ... more willing to take whatever job they can find. But the US labor market in 2014 isn’t constrained by supply, it’s constrained by demand: ...firms ... have no need for as many hours of work as workers are willing to give.
So make the long-term unemployed more desperate; so what? They can’t do anything to increase the amount of work demanded, and in fact their reduced purchasing power reduces labor demand.
You might imagine that the long-term unemployed, through their desperation, might take jobs away from existing workers — but ... there’s no evidence that this is happening. ...
Wednesday, April 09, 2014
'Long-Term Unemployment Is Elevated Across All Education, Age, Occupation, Industry, Gender, And Racial And Ethnic Groups'
Who are the long-term unemployed? From Heidi Shierholz at the EPI:
Long-Term Unemployment Is Elevated Across All Education, Age, Occupation, Industry, Gender, And Racial And Ethnic Groups, by Heidi Shierholz: Today’s Economic Snapshot shows that long-term unemployment is elevated for workers at every education level. ... The long-term unemployment rate is between 2.9 and 4.3 times as high now as it was six years ago for all age, education, occupation, industry, gender, and racial and ethnic groups. Today’s long-term unemployment crisis is not at all confined to unlucky or inflexible workers who happen to be looking for work in specific occupations or industries where jobs aren’t available. Long-term unemployment is elevated in every group, in every occupation, in every industry, at all levels of education.
Elevated long-term unemployment for all groups, like we see today, means that today’s long-term unemployment crisis is not due to something wrong with these workers, it is due to the fact that businesses across the board simply haven’t needed to significantly increase hiring because they haven’t seen demand for their goods and services pick up enough to warrant it.
Nevertheless, Congress allowed federal unemployment insurance to expire at the end of 2013, and over two million workers have lost their unemployment benefits since then. In the first sign of progress in months, yesterday the Senate reinstated a temporary five-month extension of federal unemployment insurance. It will, however, face an uphill battle in the House. In considering this measure, the House should not ignore the fact that our long-term unemployment crisis is not the fault of individual unemployed workers failing to exert enough effort or flexibility in their job search. It is instead due to more than six years of weak hiring on the part of businesses, who simply don’t need more workers because they don’t have enough demand for their products.
Monday, April 07, 2014
Class interests stand in the way of raising the inflation target:
Oligarchs and Money, by Paul Krugman, Commentary, NY Times: Econonerds eagerly await each new edition of the International Monetary Fund’s World Economic Outlook. ... This latest report ... in effect makes a compelling case for raising inflation targets above 2 percent, the current norm in advanced countries. ...
First, let’s talk about the case for higher inflation. ... It’s good for debtors — and therefore good for the economy as a whole when an overhang of debt is holding back growth and job creation. It encourages people to spend rather than sit on cash — again, a good thing in a depressed economy. And it can serve as a kind of economic lubricant, making it easier to adjust wages and prices...
But ... would it be enough to get back to 2 percent, the official inflation target...? Almost certainly not.
You see, monetary experts ... thought that 2 percent was high enough to ... make liquidity traps ... very rare. But America has now been in a liquidity trap for more than five years. Clearly, the experts were wrong.
Furthermore,... there’s strong evidence that changes in the global economy are increasing the tendency of investors to hoard cash..., thereby increasing the risk of liquidity traps unless the inflation target is raised. But the report never dares to say this outright.
So why is the obvious unsayable? One answer is that serious people like to prove their seriousness by calling for tough choices and sacrifice (by other people, of course). They hate being told about answers that don’t involve more suffering.
And behind this attitude, one suspects, lies class bias. Doing what America did after World War II — using low interest rates and inflation to erode the debt burden — is often referred to as “financial repression,” which sounds bad. But who wouldn’t prefer modest inflation and a bit of asset erosion to mass unemployment? Well, you know who: the 0.1 percent... Modestly higher inflation, say 4 percent, would be good for the vast majority of people, but it would be bad for the superelite. And guess who gets to define conventional wisdom.
Now, I don’t think that class interest is all-powerful. Good arguments and good policies sometimes prevail even if they hurt the 0.1 percent — otherwise we would never have gotten health reform. But we do need to make clear what’s going on, and realize that in monetary policy as in so much else, what’s good for oligarchs isn’t good for America.
Saturday, April 05, 2014
Automation Alone Isn’t Killing Jobs, by Tyler Cowen, Commentary, NY Times: Although the labor market report on Friday showed modest job growth, employment opportunities remain stubbornly low in the United States, giving new prominence to the old notion that automation throws people out of work.
Back in the 19th century, steam power and machinery took away many traditional jobs, though they also created new ones. This time around, computers, smart software and robots are seen as the culprits. They seem to be replacing many of the remaining manufacturing jobs and encroaching on service-sector jobs, too.
Driverless vehicles and drone aircraft are no longer science fiction, and over time, they may eliminate millions of transportation jobs. Many other examples of automatable jobs are discussed in “The Second Machine Age,” a book by Erik Brynjolfsson and Andrew McAfee, and in my own book, “Average Is Over.” The upshot is that machines are often filling in for our smarts, not just for our brawn — and this trend is likely to grow.
How afraid should workers be of these new technologies? There is reason to be skeptical of the assumption that machines will leave humanity without jobs. ...
Friday, April 04, 2014
Dean Baker (see also "Comments on Employment Report" by Calculated Risk):
Economy Adds 192,000 Jobs in March, Unemployment Rate Unchanged: The ACA appears to be allowing workers to opt for part-time jobs and older workers to retire early.
The economy added 192,000 jobs in March, bringing the average over the last three months to 178,000. The unemployment rate was unchanged at 6.7 percent. The employment-to-population ratio (EPOP) edged up to 58.9 percent. This is the highest of the recovery, but still four full percentage points below its pre-recession level.
This report answered several questions that had come up based on the prior two reports. First, it appears the weakness in prior months was in fact largely the result of the weather. The three month average of 178,000 is probably close to the economy's underlying trend at this point. It was also encouraging to see a jump of 0.2 hours in the length of the average workweek to 34.5 hours. This completely wipes out the decline in average hours worked that many were attributing to the Affordable Care Act (ACA) and other measures.
The average hourly wage for production workers also fell slightly last month. While this is not good news, it does show that the concerns raised by many about a tight labor market leading to excessive wage growth, and that this would trigger inflation, were completely unfounded. Over the last year, wages for production and non-supervisory workers have risen by 2.2 percent. That’s up slightly from 1.9 percent over the prior twelve months, but still below the 2.3 percent rate of increase in the 12 months from March of 2009 to 2010. Basically, wage growth in this series has hovered near 2.0 percent for the last five years.
There is some evidence in this report that the ACA is having its predicted impact on the labor market. The number of employed people over age 55 fell by 133,000 in March. Since August, employment among people in this age group has risen by just 125,000. It had risen by an average of 1,150,000 annually over the prior four years, accounting for almost all of employment growth over this period. It is possible that the ACA is allowing many of these workers to retire early now that they can get health care insurance outside of employment. Workers in the 25-34 age group seem to be filling the gap, with an increase in employment of over 680,000 (2.2 percent) over the last seven months. However these numbers are erratic, so it is too early to make too much of this pattern.
The other area where we may be seeing the effect of the ACA is the rising number of people opting for part-time employment. The number of people who are voluntarily working part-time is up 415,000 (2.2 percent) from its year-ago level and is at its highest point since Lehman. (Involuntary part-time also rose, but is still below last fall’s levels.) At this point there is little evidence of more people opting for self-employment, as the number fell slightly in March, although it is still 262,000 (3.1 percent) above the year-ago level.
The job growth in March was heavily concentrated in employment services (42,000), restaurants (30,400), retail (21,300), and health care (19,400). The growth in retail is somewhat of a bounce-back after two months of declining employment. Manufacturing employment edged down by 1,000, its first drop since July. The decline was due to a drop in non-durable employment as the durable sector added 8,000 jobs. With overtime hours for production workers in the durable goods sector at their highest level since November of 2005, there may be more rapid hiring in the months ahead. Employment in the government sector was unchanged as a loss of 9,000 federal jobs and 2,000 state government jobs was offset by an increase in employment of 11,000 at the local level. Construction added 19,000 jobs, raising employment in the sector to 48,000 above the year-ago level.
With population growth implying labor force growth in the neighborhood of 90,000, the economy is cutting into the backlog of unemployed workers at the rate of 90,000 a month. With the economy still down close to 7 million jobs from trend levels, this would imply that we would reach full employment some time in 2020.
Monday, March 31, 2014
Janet Yellen says the Fed cares about the unemployed:
What the Federal Reserve is Doing to Promote a Stronger Job Market, by Janet L. Yellen, Federal Reserve: ... The past six years have been difficult for many Americans, but the hardships faced by some have shattered lives and families. Too many people know firsthand how devastating it is to lose a job at which you had succeeded and be unable to find another; to run through your savings and even lose your home, as months and sometimes years pass trying to find work; to feel your marriage and other relationships strained and broken by financial difficulties. And yet many of those who have suffered the most find the will to keep trying. I will introduce you to three of these brave men and women, your neighbors here in the great city of Chicago. These individuals have benefited from just the kind of help from community groups that I highlighted a moment ago, and they recently shared their personal stories with me.
It might seem obvious, but the second thing that is needed to help people find jobs...is jobs. No amount of training will be enough if there are not enough jobs to fill. I have mentioned some of the things the Fed does to help communities, but the most important thing we do is to use monetary policy to promote a stronger economy. The Federal Reserve has taken extraordinary steps since the onset of the financial crisis to spur economic activity and create jobs, and I will explain why I believe those efforts are still needed.
The Fed provides this help by influencing interest rates. Although we work through financial markets, our goal is to help Main Street, not Wall Street. By keeping interest rates low, we are trying to make homes more affordable and revive the housing market. We are trying to make it cheaper for businesses to build, expand, and hire. We are trying to lower the costs of buying a car that can carry a worker to a new job and kids to school, and our policies are also spurring the revival of the auto industry. We are trying to help families afford things they need so that greater spending can drive job creation and even more spending, thereby strengthening the recovery.
When the Federal Reserve's policies are effective, they improve the welfare of everyone who benefits from a stronger economy, most of all those who have been hit hardest by the recession and the slow recovery.
Now let me offer my view of the state of the recovery, with particular attention to the labor market and conditions faced by workers. Nationwide, and in Chicago, the economy and the labor market have strengthened considerably from the depths of the Great Recession. Since the unemployment rate peaked at 10 percent in October 2009, the economy has added more than 7-1/2 million jobs and the unemployment rate has fallen more than 3 percentage points to 6.7 percent. That progress has been gradual but remarkably steady--February was the 41st consecutive month of payroll growth, one of the longest stretches ever. ...
But while there has been steady progress, there is also no doubt that the economy and the job market are not back to normal health. ...
The recovery still feels like a recession to many Americans, and it also looks that way in some economic statistics. At 6.7 percent, the national unemployment rate is still higher than it ever got during the 2001 recession. ... It certainly feels like a recession to many younger workers, to older workers who lost long-term jobs, and to African Americans, who are facing a job market today that is nearly as tough as it was during the two downturns that preceded the Great Recession.
In some ways, the job market is tougher now than in any recession. The numbers of people who have been trying to find work for more than six months or more than a year are much higher today than they ever were since records began decades ago. We know that the long-term unemployed face big challenges. Research shows employers are less willing to hire the long-term unemployed and often prefer other job candidates with less or even no relevant experience.3
That is what Dorine Poole learned, after she lost her job processing medical insurance claims, just as the recession was getting started. Like many others, she could not find any job, despite clerical skills and experience acquired over 15 years of steady employment. When employers started hiring again, two years of unemployment became a disqualification. Even those needing her skills and experience preferred less qualified workers without a long spell of unemployment. That career, that part of Dorine's life, had ended.
For Dorine and others, we know that workers displaced by layoffs and plant closures who manage to find work suffer long-lasting and often permanent wage reductions.4 Jermaine Brownlee was an apprentice plumber and skilled construction worker when the recession hit, and he saw his wages drop sharply as he scrambled for odd jobs and temporary work. He is doing better now, but still working for a lower wage than he earned before the recession.
Vicki Lira lost her full-time job of 20 years when the printing plant she worked in shut down in 2006. Then she lost a job processing mortgage applications when the housing market crashed. Vicki faced some very difficult years. At times she was homeless. Today she enjoys her part-time job serving food samples to customers at a grocery store but wishes she could get more hours.
Vicki Lira is one of many Americans who lost a full-time job in the recession and seem stuck working part time. The unemployment rate is down, but not included in that rate are more than seven million people who are working part time but want a full-time job. As a share of the workforce, that number is very high historically.
I have described the experiences of Dorine, Jermaine, and Vicki because they tell us important things that the unemployment rate alone cannot. First, they are a reminder that there are real people behind the statistics, struggling to get by and eager for the opportunity to build better lives. Second, their experiences show some of the uniquely challenging and lasting effects of the Great Recession. Recognizing and trying to understand these effects helps provide a clearer picture of the progress we have made in the recovery, as well as a view of just how far we still have to go.
And based on the evidence available, it is clear to me that the U.S. economy is still considerably short of the two goals assigned to the Federal Reserve by the Congress. The first of those goals is maximum sustainable employment, the highest level of employment that can be sustained while maintaining a stable inflation rate. Most of my colleagues on the Federal Open Market Committee and I estimate that the unemployment rate consistent with maximum sustainable employment is now between 5.2 percent and 5.6 percent, well below the 6.7 percent rate in February.
The other goal assigned by the Congress is stable prices, which means keeping inflation under control. In the past, there have been times when these two goals conflicted--fighting inflation often requires actions that slow the economy and raise the unemployment rate. But that is not a dilemma now, because inflation is well below 2 percent, the Fed's longer-term goal.
The Federal Reserve takes its inflation goal very seriously. One reason why I believe it is appropriate for the Federal Reserve to continue to provide substantial help to the labor market, without adding to the risks of inflation, is because of the evidence I see that there remains considerable slack in the economy and the labor market. Let me explain what I mean by that word "slack" and why it is so important.
Slack means that there are significantly more people willing and capable of filling a job than there are jobs for them to fill. During a period of little or no slack, there still may be vacant jobs and people who want to work, but a large share of those willing to work lack the skills or are otherwise not well suited for the jobs that are available. ...
But a lack of jobs is the heart of the problem when unemployment is caused by slack, which we also call "cyclical unemployment." The government has the tools to address cyclical unemployment. Monetary policy is one such tool, and the Federal Reserve has been actively using it to strengthen the recovery and create jobs, which brings me to why the amount of slack is so important.
If unemployment were mostly structural, if workers were unable to perform the jobs available, then the Federal Reserve's efforts to create jobs would not be very effective. Worse than that, without slack in the labor market, the economic stimulus from the Fed could put attaining our inflation goal at risk. In fact, judging how much slack there is in the labor market is one of the most important questions that my Federal Reserve colleagues and I consider when making monetary policy decisions, because our inflation goal is no less important than the goal of maximum employment.
This is not just an academic debate. For Dorine Poole, Jermaine Brownlee, and Vicki Lira, and for millions of others dislocated by the Great Recession who continue to struggle, the cause of the slow recovery is enormously important. As I said earlier, the powerful force that sustains them and others who keep trying to succeed in this recovery is the faith that their job prospects will improve and that their efforts will be rewarded.
Now let me explain why I believe there is still considerable slack in the labor market, why I think there is room for continued help from the Fed for workers, and why I believe Dorine Poole, Jermaine Brownlee, and Vicki Lira are right to hope for better days ahead.
One form of evidence for slack is found in other labor market data, beyond the unemployment rate or payrolls, some of which I have touched on already. For example, the seven million people who are working part time but would like a full-time job. This number is much larger than we would expect at 6.7 percent unemployment, based on past experience, and the existence of such a large pool of "partly unemployed" workers is a sign that labor conditions are worse than indicated by the unemployment rate. Statistics on job turnover also point to considerable slack in the labor market. Although firms are now laying off fewer workers, they have been reluctant to increase the pace of hiring. Likewise, the number of people who voluntarily quit their jobs is noticeably below levels before the recession; that is an indicator that people are reluctant to risk leaving their jobs because they worry that it will be hard to find another. It is also a sign that firms may not be recruiting very aggressively to hire workers away from their competitors.
A second form of evidence for slack is that the decline in unemployment has not helped raise wages for workers as in past recoveries. Workers in a slack market have little leverage to demand raises. Labor compensation has increased an average of only a little more than 2 percent per year since the recession, which is very low by historical standards.5 Wage growth for most workers was modest for a couple of decades before the recession due to globalization and other factors beyond the level of economic activity, and those forces are undoubtedly still relevant. But labor market slack has also surely been a factor in holding down compensation. The low rate of wage growth is, to me, another sign that the Fed's job is not yet done.
A third form of evidence related to slack concerns the characteristics of the extraordinarily large share of the unemployed who have been out of work for six months or more. These workers find it exceptionally hard to find steady, regular work, and they appear to be at a severe competitive disadvantage when trying to find a job. The concern is that the long-term unemployed may remain on the sidelines, ultimately dropping out of the workforce. But the data suggest that the long-term unemployed look basically the same as other unemployed people in terms of their occupations, educational attainment, and other characteristics. And, although they find jobs with lower frequency than the short-term jobless do, the rate at which job seekers are finding jobs has only marginally improved for both groups. That is, we have not yet seen clear indications that the short-term unemployed are finding it increasingly easier to find work relative to the long-term unemployed. This fact gives me hope that a significant share of the long-term unemployed will ultimately benefit from a stronger labor market.
A final piece of evidence of slack in the labor market has been the behavior of the participation rate--the proportion of working-age adults that hold or are seeking jobs. Participation falls in a slack job market when people who want a job give up trying to find one. When the recession began, 66 percent of the working-age population was part of the labor force. Participation dropped, as it normally does in a recession, but then kept dropping in the recovery. It now stands at 63 percent, the same level as in 1978, when a much smaller share of women were in the workforce. Lower participation could mean that the 6.7 percent unemployment rate is overstating the progress in the labor market.
One factor lowering participation is the aging of the population, which means that an increasing share of the population is retired. If demographics were the only or overwhelming reason for falling participation, then declining participation would not be a sign of labor market slack. But some "retirements" are not voluntary, and some of these workers may rejoin the labor force in a stronger economy. Participation rates have been falling broadly for workers of different ages, including many in the prime of their working lives. Based on the evidence, my own view is that a significant amount of the decline in participation during the recovery is due to slack, another sign that help from the Fed can still be effective.
Since late 2008, the Fed has taken extraordinary steps to revive the economy. At the height of the crisis, we provided liquidity to help avert a collapse of the financial system, which enabled banks and other institutions to continue to provide credit to people and businesses depending on it. We cut short-term interest rates as low as they can go and indicated that we would keep them low for as long as necessary to support a stronger economic recovery. And we have been purchasing large quantities of longer-term securities in order to put additional downward pressure on longer-term interest rates--the rates that matter to people shopping for a new car, looking to buy or renovate a home, or expand a business. There is little doubt that without these actions, the recession and slow recovery would have been far worse.
These different measures have the same goal--to encourage consumers to spend and businesses to invest, to promote a recovery in the housing market, and to put more people to work. Together they represent an unprecedentedly large and sustained commitment by the Fed to do what is necessary to help our nation recover from the Great Recession. For the many reasons I have noted today, I think this extraordinary commitment is still needed and will be for some time, and I believe that view is widely shared by my fellow policymakers at the Fed.
In this context, recent steps by the Fed to reduce the rate of new securities purchases are not a lessening of this commitment, only a judgment that recent progress in the labor market means our aid for the recovery need not grow as quickly. Earlier this month, the Fed reiterated its overall commitment to maintain extraordinary support for the recovery for some time to come.
This commitment is strong, and I believe the Fed's policies will continue to help sustain progress in the job market. But the scars from the Great Recession remain, and reaching our goals will take time. ...
It is my hope that the courageous and determined working people I have told you about today, and millions more, will get the chance they deserve to build better lives. ...
Tuesday, March 25, 2014
When long-term unemployment becomes self-perpetuating, by Catherine Rampell, Commentary, Washington Post: Say it with me: The long-term unemployed are not lazy. Nor are they coddled, hammocked or enjoying a coordinated, taxpayer-funded vacation.
They are, however, extremely unlucky — and getting unluckier by the day. ...
It was already known that the longer workers have been out of a job, the lower their chance of finding work in the coming month. The Brookings paper — by the former Obama administration economist Alan Krueger and his Princeton colleagues Judd Cramer and David Cho — took this analysis a step further: What about (gulp) these workers’ longer-run prospects?
It turns out that from 2008 to 2012, only one in 10 people who were already long-term unemployed in a given month had returned to “steady, full-time employment” ... a little more than a year later. “Steady” in this case means that they were working for at least four consecutive months. And the other nine in 10 workers? They were still out of work, toiling in part-time or transitory jobs or had dropped out of the labor force altogether. ...
One implication of the Brookings research is that policymakers should have done more to prevent the short-term jobless from falling into long-term joblessness in the first place. ...
Tuesday, March 11, 2014
On That Hawkish Wage Talk, by Tim Duy: The issue of the degree of labor market slack in the US economy is now a hot topic. Joe Weisenthal and Matthew Bosler at Business insider have been pushing the debate forward, see here and here, for example. This is an important concern for monetary policy as the general consensus on the Fed is sufficient slack will continue to justify an extended period of low interest rates. Hence, rate hikes can be delayed until mid- to late-2015, or even 2016 as suggested by Chicago Federal Reserve President Charles Evans. There exists, however, considerable uncertainty about the amount of slack in labor markets. My feeling is that path of rates currently expected by policymakers assumes a great deal of slack. As a consequence, indications that slack is less than expected will tend to move forward the timing of the first rate hike and, perhaps the pace of subsequent tightening. Wage pressures are likely to be an early indicator that slack is diminishing.
I see two flavors of uncertainty regarding the amount of excessive slack. First is the question about the value of the unemployment rate as a signal of tightness. The decline in the labor force participation rate has clearly placed additional downward pressure on the unemployment, leading to speculation that the unemployment rate is signaling a tighter labor market than exists in reality. Under this scenario, an improving economy will trigger a flood of entrants into the labor force to provide additional slack. Thus, the unemployment rate is underestimating the degree of slack.
This argument, however, is becoming less persuasive by the day. Evidence seems to be mounting (see here and here) that retirement and illness/disability are a dominant reason for labor force exits since the recession began. Consequently, the decline in the labor force participation will be a persistent phenomenon. The Fed, I think, has largely moved in this direction.
The next issue is the degree of underemployment with the labor market. The dovish view is that the underemployed and long-term unemployed represent considerable slack:
The hawkish view is that this is not a cyclical problem but a structural one. The long-term unemployed, by this theory, simply lack the currently needed skills. This is countered by indications of discrimination against the long-term unemployed. Such discrimination effectively means that you need to have a job to get a job. The ability of firms to engage in such discrimination could be viewed as a cyclical problem. Firms could not be so choosy in a stronger labor market.
Regarding underemployment, I see evidence of the structural explanation in a comparison in the reasons for part time employment:
Those employed part time for clearly cyclical reasons are falling. Those employed part time because they could not find full time work is holding steady. It may be that the skill set of those workers is not consistent with the current types of full time jobs.
Doves will point to the lackluster data of the Jobs Openings and Labor Turnover (JOLTS) report to support the claim of weak labor markets with plenty of slack. The numbers are certainly not impressive:
That said, the counterpoint is the number of unemployed to job openings:
My view is that wage growth will ultimately settle the debate. Wage acceleration tends to occur as unemployment approaches 6%. If that wage acceleration does not occur, then the degree of labor market slack remains is high. The much longer and established data on hourly wages for production and nonsupervisory workers, however, appears to indicate some bubbling wage pressures:
My belief is that if this is happening for lower paid workers, it is only a matter of time before it happens for higher paid workers as well. That said, I am open to the possibility that the limited improvement we are seeing may not persist. It is, however, an issue that I think is of critical importance.
How will - versus how should - indications of tighter labor markets influence Fed policy? As I have said in the past, the Fed typically tightens policy ahead of inflationary pressures. In practice, that has meant hiking rates around the time wage growth bottoms out:
Is this time any different? Well, let's replace "tightens" policy above with "reduces accommodation" since the Fed would not claim that a 25bp increase in rates from 1% was tightening. They would describe it reducing the amount of financial accommodation to make policy less expansionary. This, arguably, describes what happened when the Fed began the tapering discussion. Inflation expectations fell:
And real interest rates rose:
Higher real interest rates and lower inflation expectations looks like a less accommodative/expansionary policy. The Fed began make policy less accommodative in the context of below target inflation and above target unemployment, but unemployment had fallen far enough that they felt it necessary to alter the level of accommodation to prevent incipient inflation pressures. And soon after it became evident that wage growth had bottomed. Coincidence? Probably not. In other words, so far the Federal Reserve is behaving just as they would in any other tightening cycle, with the only difference being that the first step is ending asset purchases rather than raising interest rates.
Moreover, it seems to be clear that the Evans rule was a diversionary tactic. The Fed never foresaw an instance where they would raise rates above as long as unemployment was above 6.5%. Moreover, as is clear from the tapering process, the inflation forecasts, and the interest rate forecast, there was never an intention to target inflation greater than 2.5%. The extra 0.5% was only an allowance for forecast error under the assumption that expected inflation would remain at 2%. They always expected inflation would hit its target from below, and never intended to risk overshooting on inflation.
Simply put, the Fed began unwinding policy pretty much exactly where you would expect given the behavior of unemployment and wage growth. So it is reasonable to believe that if they continue unwinding policy in a historically consistent manner, then there will not be a substantial pause between the end of asset purchases and the beginning of rate hikes. The date of the first rate hike will need to be moved forward by this theory.
They are more likely to move that date forward if they see less slack in labor markets than they currently believe. Furthermore, accelerating wage growth is likely to be the first conclusive evidence of that outcome. Hence my focus on wage growth. I suspect they will argue that if they don't move forward the date, they will be at risk of having to do more later.
Is the Fed pursuing the right policy? Should they allow wage to rise further before reducing financial accommodation? Well, I would say it is already too late for that. But could they delay rate hikes? I would like to see them do so because absent running the labor market at a red hot pace, I don't see obvious way to shift the balance of power to labor and reverse this trend:
That said, I would also add that the last two cycles leave me wary about the potential financial stability issues from such a policy. In the absence of a greater fiscal roll, however, we are left with leaning on monetary policy and risking the financial fallout.
Bottom Line: The Federal Reserve's policy path is dependent on a particular view of a labor market suffering from excessive slack that will continue to be a problem long into the future. It is reasonable to expect that evidence that slack is dissapating more quickly than expected will trigger a fresh assessment among policy makers regarding the appropriate policy path. Next week is probably too soon; later meetings are more likely. Given that wages already appear to be on the rise - a key sign of tightening labor markets - that change could happen quickly. This is not a call for higher rates; it is a warning that higher rates might be coming. This is especially the case if the Fed wants to avoid overshooting. I would argue that their actions to date - the signaling of a shift in policy when still missing on both parts of the dual mandate - suggest an intention to avoid overshooting similar to that of previous cycles.
Friday, March 07, 2014
Upward Grind in Labor Markets Continues, by Tim Duy: The employment report for February modestly beat expectations with a nonfarm payroll gain of 175k, leaving the recent trends pretty much intact:
Did the labor market shake off the impact of a cold and snowy winter? No. Aggregate hours worked turned over during the winter, sending the year-over-year gains southward as well:
Looks like the weather was less about hiring, and more about people not being able to get to their jobs.
The unemployment rate edged up:
I suspect we are seeing something like we saw in late 2011 when the unemployment rate fell sharply and then moved sideways for a few months. If there is less excess slack in the labor market than Fed doves believe we should soon be seeing greater upward pressures on wages. Hints of this emerge in the acceleration of wage gains for production and nonsupervisory workers:
Note that this comes even as the number of long-term unemployed rose. I think there is a very real possibility - as was suspected long ago would happen - that persistently high cyclical unemployment we saw during the recession and its aftermath has evolved into structural unemployment. Former Federal Reserve Chair Ben Bernanke in 2012:
I also discussed long-term unemployment today, arguing that cyclical rather than structural factors are likely the primary source of its substantial increase during the recession. If this assessment is correct, then accommodative policies to support the economic recovery will help address this problem as well. We must watch long-term unemployment especially carefully, however. Even if the primary cause of high long-term unemployment is insufficient aggregate demand, if progress in reducing unemployment is too slow, the long-term unemployed will see their skills and labor force attachment atrophy further, possibly converting a cyclical problem into a structural one.
More structural unemployment combined with evidence that the fall in labor force participation is increasingly attributable to retirement suggests less labor market slack. Fed officials will be watching this issue very closely. It is the most likely reason we would expect to see the expected date of the first rate hike moved forward in 2015. (For more on the structural/cyclical issue, I recommend Cardiff Garcia here).
We will see commentators ignore the production and nonsupervisory series in favor of the all employees series. The latter has yet to turn upward as aggressively as the former. The all employees series, however, has a much shorter history. Federal Reserve policymakers will be more comfortable with the longer and familiar production and nonsupervisory workers series. Moreover, I doubt they believe we should expect meaningful and persistent deviations between the two series over time. After all, if the wages of your lowest paid employees are rising, it is reasonable to believe that it is only a matter of time before that same trend hits your better paid employees.
Bottom Line: The employment report indicates ongoing slow and steady improvement in the economy sufficient to generate consistent job growth and drive the unemployment rate lower. The report has no implications for tapering because tapering is on a preset course (New York Fed President William Dudley confirmed what was long suspected yesterday). This one report by itself also says little about the first rate increase - still mid to late 2015. But watch the wage growth numbers and listen to the reaction of Fed officials. In my opinion, this is a key factor in the timing of rate policy. Traditionally, the start tightening prior or near to an acceleration in wages. The longer they stay still as unemployment falls and wage growth rises, the more nervous they will become that they are falling behind the curve. And they especially don't want to fall behind the curve given the size of their balance sheet. They talk a good game, but I think they are more worried about unwinding that balance sheet then they claim in public.
Dean Baker on the jobs report for February:
Economy Adds 175,000 Jobs in February, Despite Bad Weather: Unemployment in construction is lower than in the pre-boom years.
The establishment survey showed the economy added 175,000 jobs in February, in spite of the unusually harsh weather on much of the country. With modest upward revisions to the prior two months' data, this brings the 3-month average to 129,000. While this is considerably weaker than the fall months, weather has undoubtedly played a role in slowing job creation. (In contrast to the prior two months, February’s weather was unusually harsh.)
The mix of jobs in February was somewhat peculiar with the professional and business services category accounting for more than half of the total (79,000 jobs). This was driven in part by an unusual jump in accounting bookkeeping services of 15,700 jobs, which partially offset a decline of 30,800 reported in December. While the more skilled portion of this sector (computer and management services) has been showing healthy growth, growth in the less skilled portion has been especially strong. Temp agencies added 24,400 jobs in February and 227,700 over the last year. Services to buildings (e.g. custodians) added 11,400 jobs last month and 66,700 (3.6 percent) over the last year.
Manufacturing employment has slowed to a crawl. The sector added 6,000 jobs, with downward revisions bringing the three month average to just 6,300. There were downward revisions to retail with a loss of 4,100 jobs following a loss of 22,600 in January. In addition to the weather, this likely reflects changed seasonal hiring patterns.
Health care employment remains on a slower track, with the sector adding 9,500 jobs in February bringing the three month average to 5,900. The government sector added 13,000 jobs, with gains at the state and local level offsetting the loss of 6,800 jobs. Non-postal federal employment is now down by 72,900 (3.5 percent) over the last year.
The motion picture industry lost 14,100 jobs in February. Employment is down by 56,600 (15.5 percent) over the year, hitting its lowest level since June of 1995. Construction continued its upswing in spite of the weather adding 15,000 jobs. Unemployment in the sector is actually below pre-boom levels, with the unemployment rate averaging 12.6 percent in January and February compared with 14.0 percent for the same months in 2003.
The average hourly wage for all workers increased at a 2.3 percent annual rate in the last three months compared with the prior three. Interestingly, wages for production and non-supervisory workers rose somewhat more rapidly, growing at a 3.3 percent pace over this period. This implies that less educated workers seem to be doing somewhat better in the current economy, the opposite of the skills shortage view that is widely being promoted.
The household survey showed the unemployment rate sliding up to 6.7 percent. The big losers for the month were African American men, who saw a jump in their unemployment rate from 12.0 percent to 12.9 percent, the same as the January 2013 level. The EPOP for African American men is now 58.0, down more than 8.0 percentage points from pre-recession peaks. These numbers are erratic, but the general trend here has not been good.
By education level the big losers were those with college degrees who saw their unemployment rise from 3.2 percent to 3.4 percent. This compares to a pre-recession of level of just 2.0 percent. The number of workers involuntarily working part time fell by 59,000 in February, the lowest level since October of 2008. As happened in 2013 the duration measures of unemployment rose in February after falling sharply in January. This is explained by the shortening of benefit duration at the start of the year which leads many workers to drop out of the labor force. The percent of unemployment attributable to job leavers edged down to 7.8 percent, well below the average for 2013 and not much above the low of 5.5 percent at the trough. (By comparison, the pre-recession levels were close to 12.0 percent.) This doesn’t show confidence in the strength of the labor market.
It is difficult to determine the impact of the weather, but it is likely that we will continue to see a moderate pace of improvement in the job market in the months ahead. The recent wage growth is good, but still may prove anomalous.
Thursday, February 27, 2014
What age and size firms have the highest net job creation rates?
The Pattern of Job Creation and Destruction by Firm Age and Size, by John Robertson and Ellyn Terry, macroblog: A recent Wall Street Journal blog post caught our attention. In particular, the following claim:
It’s not size that matters—at least when it comes to job creation. The age of the company is a bigger factor.
This observation is something we have also been thinking a lot about over the past few years (see for example, here, here, and here).
The following chart shows the average job-creation rate of expanding firms and the average job-destruction rates of shrinking firms from 1987 to 2011, broken out by various age and size categories:
In the chart, the colors represent age categories, and the sizes of the dot represent size categories. So, for example, the biggest blue dot in the far northeast quadrant shows the average rate of job creation and destruction for firms that are very young and very large. The tiny blue dot in the far east region of the chart represents the average rate of job creation and destruction for firms that are very young and very small. If an age-size dot is above the 45-degree line, then average net job creation of that firm size-age combination is positive—that is, more jobs are created than destroyed at those firms. (Note that the chart excludes firms less than one year old because, by definition in the data, they can have only job creation.)
The chart shows two things. First, the rate of job creation and destruction tends to decline with firm age. Younger firms of all sizes tend to have higher job-creation (and job-destruction) rates than their older counterparts. That is, the blue dots tend to lie above the green dots, and the green dots tend to be above the orange dots.
The second feature is that the rate of job creation at larger firms of all ages tends to exceed the rate of job destruction, whereas small firms tend to destroy more jobs than they create, on net. That is, the larger dots tend to lie above the 45-degree line, but the smaller dots are below the 45-degree line. ...
Apart from new firms, it seems that the combination of youth (between one and ten years old) and size (more than 250 employees) has tended to yield the highest rate
Wednesday, February 19, 2014
Forget the minimum-wage job losses: it's government cuts that'll get you mad, by Heidi Moore: ...Which is worse: 500,000 Americans out of work, or 2m?... 500,000 is an estimate of the number of jobs the country might lose if the minimum wage gets raised to $10.10 an hour, according to a controversial analysis released Tuesday by the Congressional Budget Office. ...
What about those 2m jobs? That’s how much the economy will lose by 2019 because of federal budget cuts, as estimated by the Center for American Progress. And, well, I hate to break it to you, but Congress already voted on those last year, and it didn’t spur one fired shot.
Budget cuts, also known as austerity, are the most damaging economic decision Congress has made since the financial crisis. Former Federal Reserve chairman Ben Bernanke warned lawmakers several times that austerity measures would hurt the economy, but they largely ignored his warnings. Jobs lost to government budget cuts are part of the reason why the economy still looks so weak...
The cost of austerity doesn’t stop at 2m jobs, either. There could be as many as 7 million jobs that are never even created because of Washington budget cuts, according to the Economic Policy Institute. Those 7 million jobs would be the difference between the unhappy economy we have now ... and an actual recovery.
So, here’s the not-so-simple question: if everyone’s so angry about losing 500,000 jobs while paying the average worker more per hour, where’s the unstoppable outrage about the 2m jobs that already seem lost to austerity? ...