Category Archive for: Unemployment [Return to Main]

Thursday, April 17, 2014

'Not Just the Long-Term Unemployed: Those Unemployed Zero Weeks Are Struggling to Find Jobs'

Mike Konczal:

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

'Supply, Demand, and Unemployment Benefits'

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

Paul Krugman: Oligarchs and Money

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'

Tyler Cowen:

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. ...

See also, Dean Baker "If Technology Has Increased Unemployment Among the Less Educated, Someone Forgot to Tell the Data."

Friday, April 04, 2014

'Economy Adds 192,000 Jobs in March, Unemployment Rate Unchanged'

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.

Unincorporated Self-employed Workers as Percent of Employed, 2007 - 2014

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

'What the Federal Reserve is Doing to Promote a Stronger Job Market'

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. 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

Stop Long-term Unemployment Before It Starts

Catherine Rampell:

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

Fed Watch: On That Hawkish Wage Talk

Tim Duy:

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

Fed Watch: Upward Grind in Labor Markets Continues

Tim Duy:

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.

'Economy Adds 175,000 Jobs in February, Despite Bad Weather'

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

'The Pattern of Job Creation and Destruction by Firm Age and Size'

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 GetYou Mad'

Heidi Moore:

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? ...

Why Is the Job-Finding Rate Still Low?

From Liberty Street Econmics at the NY Fed:

Why Is the Job-Finding Rate Still Low?, by Victoria Gregory, Christina Patterson, Ayşegül Şahin, and Giorgio Topa: Fluctuations in unemployment are mostly driven by fluctuations in the job-finding prospects of unemployed workers—except at the onset of recessions, according to various research papers (see, for example, Shimer [2005, 2012] and Elsby, Hobijn, and Sahin [2010]). With job losses back to their pre-recession levels, the job-finding rate is arguably one of the most important indicators to watch. This rate—defined as the fraction of unemployed workers in a given month who find jobs in the consecutive month—provides a good measure of how easy it is to find jobs in the economy. The ... the job-finding rate is still substantially below its pre-recession levels, suggesting that it is still difficult for the unemployed to find work. In this post, we explore the underlying reasons behind the low job-finding rate. ...

Sunday, February 16, 2014

The Permanent Scars of Economic Pessimism'

As a follow-up to the post below this one, Antonio Fatas:

The permanent scars of economic pessimism: Gavyn Davies at the Financial Times reflects on the growing pessimism of Central Banks regarding the growth potential of advanced economies. In the US, the Euro area or the UK, central banks are reducing their estimates of the output gap. They now think about some of the recent output losses as permanent as opposed to cyclical.
It output is not far from what we consider to be potential, there is less need for central banks to act and it is more likely that we will see an earlier normalization of monetary policy towards a neutral stance...
But it is important to understand that the permanent effects are the consequence of the recession itself. If we could manage to reduce the length and depth of the recessions we would be minimizing those permanent effects. And in that sense, accepting these changes as structural and unavoidable is too pessimistic, leads to inaction and just makes matters worse. If you read the evidence properly, you want to do the opposite, you want to be even more aggressive to avoid what it looks at a much bigger cost of recessions.

'A Second Look at the Employment-to-Population Ratio'

Some of the Federal Reserve regional banks appear to be moving toward the conclusion that we are closer to full employment than we thought (and hence the need for stimulus, while not yet eliminated, is diminished).

My view is that the Fed has been overly optimistic throughout this long ordeal called the Great Recession, and, therefore, given that inflation is not a problem, if the Fed is going to make a mistake, it ought to be on the side of doing too much for too long rather than ending stimulus too soon:

A Second Look at the Employment-to-Population Ratio, by Pat Higgins, Macroblog, FRB Atlanta: This analysis is a companion piece to my Atlanta Fed colleague John Robertson's recent macroblog post. John's blog highlighted some findings of a recent New York Fed study by Samuel Kapon and Joseph Tracy on the employment-to-population (E/P) ratio. Their work has received considerable attention in the media and blogosphere (for example, here, here, and here). Kapon and Tracy's final chart (reproduced below) has received particular scrutiny.
The blue line represents the authors' estimate of the demographically adjusted E/P ratio purged of business-cycle effects. This line can be thought of as "trend." The chart shows that as of November 2013, the E/P ratio was only –0.7 percentage point below trend. Was the "gap" between actual and trend E/P really this small?
Attempting to answer this question requires digging into the details of Kapon and Tracy's method for estimating trend. One key excerpt is the following:
To overlay our demographically adjusted E/P ratio with the actual E/P ratio, we need to adopt a normalization… [W]e adopt the normalization that over the thirty-one years in our data sample [1982–2013] any business-cycle deviations between the actual and the adjusted E/P ratios will average to zero.
This methodology seems reasonable since one might typically expect business cycle effects to average out over 30 years. However, the 1982–2013 sample period is somewhat unusual in that the unemployment rate was elevated at both the starting and ending points.
The chart below shows estimates of three labor market gaps derived from the Congressional Budget Office's (CBO) estimates—released on February 4, 2014—of the potential labor force and the long-term natural rate of unemployment. (This rate is often referred to as the nonaccelerating inflation rate of unemployment, or NAIRU, and refers to the level of unemployment below which inflation rises.)
On average, the trend E/P ratio is below the actual rate by 0.86 percentage point. If one were to normalize the Kapon and Tracy E/P trend so that its average value was equal to CBO's trend, then the November 2013 E/P gap is about 1.5 percentage points. Whether or not the CBO estimate is the right benchmark is a matter of taste. CBO's recent estimate of NAIRU in the fourth quarter of 2013—5.5 percent—is lower than the 6 percent median estimate from the Survey of Professional Forecasters in the third quarter of 2013.
A second, more subtle issue in the Kapon and Tracy analysis is their treatment of cohorts:
We divide these individuals into 280 different cohorts defined by each individual's decade of birth, sex, race/ethnicity, and educational attainment. We assume that individuals within a specific cohort have similar career employment rate profiles. We use the 10.2 million observations [of CPS microdata] to estimate these 280 career employment rate profiles.
A well-known 2006 Brookings paper by Stephanie Aaronson and other Fed economists modeled trend labor force participation rate(LFPR) using birth-year cohorts. With estimates of trend LFPR and NAIRU, we can back out a trend E/P ratio. The chart below, adapted from Aaronson et al., plots age-group LFPRs against birth year.
We see that successive birth-year cohorts born between 1925 and 1950 had steadily increasing labor force attachment. Attachment for more recently born cohorts has leveled off and even declined slightly. People born in the 1990s have very low labor force attachment by historical standards. The inclusion of the "1990s—decade of birth" dummy variable in the Kapon and Tracy research probably implies that their model is interpreting much of this decline as structural. However, an alternative interpretation is that the decline is cyclical, because persons born after 1990 have been in an environment of high unemployment for most of their short working lives.
To gauge the sensitivity of trend or structural LFPR to how the youngest cohorts are treated, I used a stripped-down version of a model similar to Aaronson et al. Monthly LFPRs are modeled as a function of age, sex, birth date, and the CBO's estimate of the output gap during the January 1981 to January 2014 period. Time series published by the U.S. Bureau of Labor Statistics for 30 different age-sex cells are used so that the regression has 11,550 observations. Structural LFPR is constructed with the fitted values of the regression with a value of 0 percent for the output gap at all points in time. The trend E/P ratio is then backed out with the CBO's estimate of NAIRU.
The model is run with two different assumptions: First, following the approach of Aaronson et al., people born after 1986 have the same birth-year cohort effects as those born in December 1986. Second, no constraints are placed on birth-year cohort effects. Trend values of LFPR and E/P (taking on board the CBO's NAIRU) are plotted in the two charts below:


The January 2014 E/P gap with unconstrained cohort effects, as in Kapon and Tracy, is –1.0 percent, well below the –1.7 percent gap in the model with constrained cohort effects. Ultimately, both models are still very consistent with Kapon and Tracy's bottom line:
It is important to control for changing demographic factors when looking at the behavior of the E/P ratio over time. This step is particularly important today when these demographic factors are exerting downward pressure on the actual E/P rate, suggesting that the recent lack of improvement in the E/P ratio does not imply a lack of progress in the labor market. The adjusted E/P rate corroborates the basic picture from the unemployment rate that the labor market has been recovering over the past few years, but that it still has a ways to go to reach a full recovery.

Wednesday, February 12, 2014

'The Impact of Unemployment Duration on Compensation Growth'

Why has the Phillips curve "generally underpredicted compensation growth since 2009"?:

The Long and Short of It: The Impact of Unemployment Duration on Compensation Growth, by M. Henry Linder, Richard Peach, and Robert Rich:  How tight is the labor market? The unemployment rate is down substantially from its October 2009 peak, but two-thirds of the decline is due to people dropping out of the labor force. In addition, an unusually large share of the unemployed has been out of work for twenty-seven weeks or more—the long-duration unemployed. These statistics suggest that there remains a great deal of slack in U.S. labor markets, which should be putting downward pressure on labor compensation. Instead, compensation growth has moved modestly higher since 2009. A potential explanation is that the long-duration unemployed exert less influence on wages than the short-duration unemployed, a hypothesis we examine here. While preliminary, our findings provide some support for this hypothesis and show that models taking into account unemployment duration produce more accurate forecasts of compensation growth. ...

Monday, February 10, 2014

Paul Krugman: Writing Off the Unemployed

Why have politicians turned their backs on the unemployed?:

Writing Off the Unemployed, by Paul Krugman, Commentary, NY Times: Back in 1987 my Princeton colleague Alan Blinder published a very good book titled “Hard Heads, Soft Hearts.” It was, as you might guess, a call for tough-minded but compassionate economic policy. Unfortunately, what we actually got — especially, although not only, from Republicans — was the opposite. And it’s difficult to find a better example of the hardhearted, softheaded nature of today’s G.O.P. than ... the filibuster to block aid to the long-term unemployed.
What do we know about long-term unemployment in America?
First, it’s still at near-record levels. ... Yet extended unemployment benefits, which went into effect in 2008, have now been allowed to lapse. As a result, few of the long-term unemployed are receiving any kind of support.
Second, if you think the typical long-term unemployed American is one of Those People — nonwhite, poorly educated, etc. — you’re wrong... College graduates ... are actually a bit more likely than others to join the ranks of the long-term unemployed. ...
Third, in a weak job market long-term unemployment tends to be self-perpetuating, because employers in effect discriminate against the jobless. ...
What all of this suggests is that the long-term unemployed are mainly ... ordinary American workers who had the bad luck to lose their jobs ... at a time of extraordinary labor market weakness...
So how can politicians justify cutting off modest financial aid to their unlucky fellow citizens?
Some Republicans justified last week’s filibuster with the tired old argument that we can’t afford to increase the deficit. Actually, Democrats paired the benefits extension with measures to increase tax receipts. But in any case this is a bizarre objection at a time when federal deficits are not just falling, but clearly falling too fast, holding back economic recovery.
For the most part, however, Republicans justify refusal to help the unemployed by asserting that ... people aren’t trying hard enough to find jobs, and that extended benefits are part of the reason..., a fantasy at odds with all the evidence. ...
And this imperviousness to evidence goes along with a stunning lack of compassion. .... Being unemployed is always presented as a choice, as something that only happens to losers who don’t really want to work. ...
The result is that millions of Americans have in effect been written off — rejected by potential employers, abandoned by politicians whose fuzzy-mindedness is matched only by the hardness of their hearts.

Saturday, February 08, 2014

'The Media's Disastrous Coverage of the CBO Report'

Friday, February 07, 2014

'January Employment Report: 113,000 Jobs, 6.6% Unemployment Rate'

Calculated Risk on the employment report:

January Employment Report: 113,000 Jobs, 6.6% Unemployment Rate, by Bill McBride: From the BLS:
Total nonfarm payroll employment rose by 113,000 in January, and the unemployment rate was little changed at 6.6 percent, the U.S. Bureau of Labor Statistics reported today. ...
After accounting for the annual adjustment to the population controls, the civilian labor force rose by 499,000 in January, and the labor force participation rate edged up to 63.0 percent. Total employment, as measured by the household survey, increased by 616,000 over the month, and the employment-population ratio increased by 0.2 percentage point to 58.8 percent....
The headline number was well below expectations of 181,000 payroll jobs added. ...
This was a disappointing employment report, however there were some positives including upward revisions to previous reports, a decline in the unemployment rate, and an increase in the participation rate. ...

If this rate of job creation continues, just 113,000 jobs, it will be a long, long, long time before the labor market normalizes.

Thursday, February 06, 2014

Fed Watch: Another Month, Another Employment Report

Tim Duy:

Another Month, Another Employment Report, by Tim Duy: Tomorrow brings the January 2014 employment report. The usual caveats apply:

  • The monthly change in payrolls is a net number and represents only a fraction of the churn in the labor market.
  • The employment data is heavily revised. The preliminary number can greatly understate or overstate actual labor market behavior.
  • Nasty weather might also have impacted the numbers. Robin Harding at the Financial Times identifies other factors - expiration of unemployment benefits and annual revisions - that can also scramble the final numbers in the report.
  • Forecasting the change in payrolls is thus something of a fool's game. A game we all play nonetheless.

With all that said, I will venture a guess of a 200k gain in nonfarm payrolls for January:


This is a bit over consensus of 181k, but pretty much right in the middle of the range of estimates (125k-270k). Full disclosure: Last month my forecast was wildly optimistic. Still, I think that report was an outlier. Overall I don't see that the pace of improvement in the labor market has changed dramatically one way or another in the last few months. The economy have been generating 180-200k jobs a month for two years despite the ups and downs in the data. I suspect underlying activity continues to support a similar trend. Any improvements that were evident prior to the December report were likely modest. Indeed, I am skeptical that the pace of activity overall has dramatically improved either.
As far as monetary policy, it is likely that only a very, very weak report would deter Fed officials from the current tapering agenda. Even that is in question given that we will see another employment report - not to mention a plethora of other data - before the mid-March FOMC meeting. It seems that hawks and doves alike want to wind down the asset purchase program, with the only difference being the pace of tapering. Atlanta Federve Reserve President Dennis Lockhart sums up what I believe is the consensus view:
Absent a marked adverse change in the outlook for the economy, I think it is reasonable to expect a progression of similar moves, with the asset purchase program completely wound down by the fourth quarter of the year...
...But given my current views on the economy, I like the current positioning of policy.
It's in the right place for now, in my opinion. I think we policymakers should be patient—not too quick to respond to zigs and zags in the data.
Hawks, of course, would like a more rapid pace of tapering. Philadelphia Federal Reserve President Charles Plosser basically said "enough is enough" yesterday:
Notice that even though we are reducing the pace at which we are purchasing longer-term assets, we are still adding monetary policy accommodation. As I noted earlier, I believe the economy has already met the criteria of substantial improvement in labor market conditions, and the economic outlook has improved as well. So my preference would be that we conclude the purchases sooner rather than later...
...If the unemployment rate continues to drop at that pace, we will soon be at the 6.5 percent threshold in our forward guidance for interest rates.
Although the FOMC has indicated that it doesn't anticipate raising rates when the economy crosses that threshold, I do believe that we will have complicated our communications if we are still purchasing assets at that point. What is the argument for continuing to increase monetary policy accommodation when labor market conditions are improving rapidly, inflation has stabilized, and the outlook is for it to move back to goal?
Plosser would like to end asset purchases prior to hitting the unemployment threshold. Problem is, that threshold could easily be hit tomorrow if not at the next meeting. So, I guess all I can say to Plosser is "good luck with that."
Bottom Line: Even a weak employment report may not be immediately pivotal for monetary policy; there is still another report to go before the next FOMC meeting. A solid report, however, will further entrench the Fed's commitment to the current policy path.

Tuesday, February 04, 2014

Unemployment is Hellish

A follow-up to the post below this on how politicians have turned their backs on the unemployed:

New research reveals that unemployment is especially hellish in the U.S., by Kathleen Geier: ...I am one of those long-term unemployed you keep hearing about...
I’ve interviewed for some great jobs, and I’ve made it to the final stage several times. A few weeks ago, for my dream job, I was one of the final two people they considered — but then of course, they decided to go with the other person. I always hear, “We really liked you!” “We were so impressed!” But someone else always turns out to be a “better fit.” Always! It’s beyond frustrating. ... “Someone else was a better fit” — story of my life. ...
I’ve gone through episodes of deep depression and intense anxiety over this — you have no idea. Some day, somewhere else I will write about it all at length, but the Catch-22 is that I don’t want to do so until I find permanent work. I mean, I don’t want to become the internet’s poster child for unemployment — otherwise I’m afraid the stigma of being unemployed will stick and I’ll never land a job. I survive the horror day to day by keeping myself busy with other things, and by trying not to think about it too much. Denial is a coping strategy, people! Also, “one day at a time” may well be the best life advice anyone has ever given me about anything.
But this stretch — going on 18+ months now — of long-term unemployment is by far the most shattering, soul-destroying, traumatic thing I’ve ever experienced in my adult life, and that includes a heartbreaking divorce. I hope, one day, to write more about my personal story and explain just why long-term unemployment is so devastating. But for now, please take my word for it. Most important of all, please understand this is not just about me. There are millions more like me, who are experiencing mind-boggling levels of psychic distress in this labor market, and who are financially just hanging on by a thread. The suffering caused by this economy has been immense. It inflicts deep damage and it leaves scars. You can trust me on that one.

'Confronting Old Problem May Require a New Deal'

Eduardo Porter:

Confronting Old Problem May Require a New Deal, by Eduardo Porter, NY Times: ...As he delivered his fifth State of the Union address, President Obama, not unlike President Franklin D. Roosevelt early in his second term, seemed to have given up far too early in the game on trying to stimulate the recovery. ...
The Obama administration’s boldest propositions are sensible, from raising the minimum wage to $10.10 to extending emergency unemployment insurance. But they are not quite on the scale of a trillion dollars’ worth of lost gross domestic product.
This is not just the president’s doing. The bipartisan cooperation that would be needed to start a jobs program of the scale of what was tried during the New Deal — not to mention the World War II production explosion that finally ended the Depression — is out of the question today.
Perhaps more important, however, is that even among Democrats there remains little appetite for the kind of aggressive government action that was popular in F.D.R.’s day.
The fear, however, seems overdone. ...
There are potentially great benefits to government investments in public works at a time like this. ... And it would not even be very expensive. With the borrowing costs of the federal government below the rate of inflation, investments would actually help reduce the nation’s debt burden. Lenders are, in effect, paying the government to borrow money. ...
[T]he path favored by many Republicans in the House..., slash government spending and let the economy run its bedraggled course..., would probably transform our economic emergency from a painful though temporary setback into a permanent feature called stagnation.
And yet this is essentially the policy the nation is following.

I am not fully sold on the secular stagnation argument (see the article for more, Keynes worried about the same thing), but there's no excuse for turning our backs on the unemployed. We could have, and should have done more. Even now, it's not too late.

Wednesday, January 29, 2014

'The Fading of the Deficit'

Paul Krugman comments on the SOTU:

... I think the fading of the deficit both in reality and as an issue is important... Obama isn’t afraid of the big bad deficit any more, and he knows that there won’t be a Grand Bargain, so there’s nothing he can or should do on the front that absorbed so much of his energy for three years. ...

Glad thsi issue is falling off the political radar, but given how many households were hurt by the premature turn to deficit reduction endorsed by Obama, I have a hard time granting much credit to Obama for letting this issue fade.

Monday, January 27, 2014

'Obama’s Plan to End Discrimination Against the Long-term Unemployed'

Do you think this will work? I have my doubts:

Obama’s Plan to End Discrimination Against the Long-term Unemployed, by Jonathan Chait: In his State of the Union address tomorrow night, President Obama will announce that some of the largest firms in the United States have signed a pledge not to discriminate in hiring against the long-term unemployed, reports The Wall Street Journal. ...
Employers are simply using long-term unemployment as a heuristic, to weed out what they see as the weakest candidates. But this shortcut traps the unemployed in a cycle they cannot escape: The longer they’re unemployed, the progressively harder it becomes to acquire a job. ...
What Obama is trying to do in the State of the Union speech is to create a new kind of social norm in hiring. He’s arguing that employers should not let themselves use this kind of shortcut, and that more careful consideration can actually open up a wider pool of available talent. The administration has boiled down its recommendations to a series of best practices to avoid this form of discrimination.  ...
This isn’t going to revolutionize the job market. And it’s not as good as getting Congress to pass, say, a new infrastructure bill. But discrimination against the long-term unemployed is a kind of cultural problem in and of itself. And precisely, because it is a cultural problem, it’s the sort of thing a high-profile speech combined with concerted jawboning with corporate leaders has a hope of actually changing.

Monday, January 13, 2014

5 Reasons Why Your Pay Isn't Rising as Fast as it Should

At MoneyWatch:

... In theory, wages should grow at the rate of inflation plus the rate of growth of productivity. But in the last several years wage growth has been below this benchmark. Why? Here are five factors that are conspiring to restrain wage growth. ...

Fed Watch: Employment Report Keeps Policymakers on Their Toes

Tim Duy:

Employment Report Keeps Policymakers on Their Toes. by Tim Duy: Just about everyone (myself included) who ventured a payrolls forecast was crushed by the scant December gain of just 74k. How much should you adjust your outlook on the basis of just this one number? Not much, if at all. It is important to watch for trends in the data, and always keep Barry Ritholtz's warning in the back of your mind:
...we know from each month’s revisions that the initial read is off, often by a substantial amount. It’s a noisy series, subject to many errors and subsequent corrections.
To put this into some context, consider what it is we are measuring: The change in monthly hires minus fires. A monthly change in a labor force of more than 150 million people. That turns out to be a tiny net number relative to the entire pool -- about one tenth of one percent.
This is why I continually suggest ignoring any given month, and paying attention to the overall trend. That is the most useful aspect of the monthly NFP data...if you focus on the monthly numbers, you will be given so many false signals and head fakes that you cannot possibly trade on this information in an intelligent manner.
Indeed, the December number was mitigated by an upward revision to November, leaving the growth pattern looking very familiar:


One interpretation of the December outcome was that it was largely weather related. One would think, however, that such an event would have a forecastable negative impact on payrolls. Regardless, the bigger message is that the monthly change in payrolls is a volatile series, and one should be wary of putting too much emphasis on either small or large gains.
Perhaps the real story then is that another existing trend in the data, the downward pressure on the unemployment rate from a falling labor force participation rate, continues unabated:


Moreover, the pace of improvement in alternative measures of labor utilization is not accelerating and arguably appears to be slowing as might be expected if the formally cyclically unemployed increasingly become structurally unemployed:


Altogether, I think the report can be neatly summed up as 1.) indicative of a more modest improvement in activity than suggested by actual and estimated GDP numbers for the final half of 2013 and 2.) suggestive of structural change in labor markets.
The employment report generally complicates monetary policymaking. Not the nonfarm payrolls numbers so much; that number will largely be written off as anomalous in the context of the overall trend. Indeed, this was the first word from Fed officials. St. Louis Federal Reserve President James Bullard, via the Wall Street Journal:
"I would be disinclined to react to one month's number. I think it's important to get future jobs reports and see if new trends are developing," said Mr. Bullard at a press briefing following remarks here to local business leaders.
Richmond Federal Reserve President Jeffrey Lacker offered similar sentiments:
“As a general principle, it’s wise not to overreact to one month’s employment report,” Lacker said. “Employment has been growing along a pretty steady trend this year. It takes a lot more than one labor-market report to be convincing that the trend has shifted, and in my experience one employment report rarely has an effect by itself on monetary policy.”
I think the Fed is generally committed to winding down asset purchases this year, and will not want to be overly sensitive to just one report (that said, they will be overly sensitive to one number if it fits their preferred policy path). Only a more significant change in the overall tenor of the data will alter the pace of tapering.
The drop in the unemployment rate, however, is something more of a challenge. The Evans rule simply isn't looking quite so clever anymore:


Monetary officials generally believed not only that 6.5% unemployment was far in the future, but also that policy would become much more obvious as we approached that target because inflation pressures would be evident. Neither has been true. Not only has unemployment fallen more quickly than anticipated, but inflation remains stubbornly low. With regards to the former, officials increasingly see the decline in labor force participation as largely structural and outside the purview of monetary policy. Bullard, via the article quoted earlier:
Mr. Bullard signaled he wasn't particularly alarmed by a decline in labor force participation, saying it appears at the right level given current demographics.
And, via a nice Wall Street Journal interview with San Francisco President John Williams by Jon Hilsenrath:
We’re still working hard on this issue of employment-to-population. Everybody is struggling with the puzzle of why the employment-to-population ratio has stayed low. To what extent are movements in labor force participation structural or cyclical? And to what extent can monetary policy have an influence on those developments? I think the majority of the decline in the participation rate is due to structural factors related to the aging of the population and people going into disability. Very few people come back into the labor force from that. I do think part of it is cyclical. The data in the next year or so are going to inform us better about what is the trend.
With each passing month policymakers are increasingly comfortable taking the unemployment rate at face value. That means they increasingly expect the inflation numbers to pick up. Back to Williams:
As the unemployment rate continues to come down, utilization continues to go up, as the economy continues to improve, I would expect the underlying inflation rate to track back towards 2%.
But he clearly recognizes the potential for inflation to remain low:
The second question is why is inflation so low? To what extent does it reflect just some transitory influences, such as health care costs, and to what extent is it really reflecting a persistent ongoing inflation trend that is too low? And again how can monetary policy affect that? We’re in this world where inflation doesn’t move around a lot around 2%. It has become hard to model and to know exactly what are the factors causing inflation to be too low and which are the ones that are going to help bring it back to 2%. That gets to the downside risk question. If inflation does stay stubbornly low, that obviously is an argument for more monetary accommodation than otherwise.
Likewise, Bullard shares these concerns:
Mr. Bullard said he continues to watch inflation closely, saying it should rise as the economy picks up and the jobless rate continues to fall. But the central banker added he wants to actually see that rise come to fruition as the Fed assesses further tapering of its bond-buying.
"If inflation stepped lower in a clear way, I think that would give me some pause," Mr. Bullard said. "I'm looking for signs inflation is going to come back."
So where does this leave us? First of all, I think the Evans rule is already for all intents and purposes defunct. The unemployment rate is just a hair away from 6.5%, and the Fed has no intention of considering raising rates anytime soon. Second, there probably isn't a replacement for the Evans rule in the works. Bullard:
He expects the Fed for now to hold its threshold for unemployment at 6.5%. The Fed has said it won't increase interest rates until the jobless rate falls below that level so long as inflation stays contained.
"Moving (thresholds) around too much is likely to damage our credibility," Mr. Bullard said
And Williams on not setting a lower bound for inflation:
My view is the current [Fed policy] statement does a good job of capturing the fact that once unemployment gets below 6.5%, then obviously we’ll be taking seriously what is happening in inflation, we will be looking at what is happening with employment and growth and everything, and then we’ll be judging what is the appropriate stance of policy. It just gets very complicated quickly when you start adding more and more clauses about what conditions would you or would you not raise interest rates. Unfortunately, that is the game we’re playing … the FOMC statement has gotten awfully long. It has gotten awfully complicated. The statement is probably better used to try to emphasize the key points as opposed to trying to explain everything in our thinking.
My sense is that they thought the Evans rule was clever and simple, but it turns out that fixed numerical objectives are not quite so simple. Well, multiple numerical objectives are not quite so simple. The ironic outcome to the Evans rule experiment is that policy communication would arguably have been smoother if the Fed simply emphasized an inflation target. Policymakers could have been agnostic on the reasons for the declines in labor force participation; it was irrelevant given the path of inflation. Perhaps the focus on the unemployment rate was something of an unnecessary complication that now needlessly leaves the impression that policy will soon turn more hawkish than is the case.
Thus, the third takeaway is that policy is now largely about inflation (although arguably it always is always about inflation). Ann Saphir and Jonathon Spicer at Reuters:
Stubbornly weak inflation is shaping up as the wild card for U.S. monetary policy makers this year, with top Federal Reserve officials stumped by why it has lingered so low for so long and at odds as to what to do about it.
As the Fed wrestled through last year with deciding when to start trimming its massive bond-buying stimulus, the bulk of attention was focused on the unemployment rate, which until recently has been slow to fall following its spike up to 10 percent during the recession.
By last month, policy makers had grown confident enough in the job market to dial back on the program. Figures released Friday showed the jobless rate fell to a five-year low of 6.7 percent in December, despite the smallest monthly job gains in three years. With much of the hiring slowdown attributed to bad weather, however, many analysts say the Fed will stay on track with plans to end bond buying by late this year.
But there is a hitch: inflation has been drifting down for much of the last two years, measuring a feeble 1.1 percent in November by the Fed's preferred gauge.
As long as inflation reverts to target slowly (with a caveat to be noted below), the Fed will not be quick to hike rates. But the Fed will be increasingly nervous that a sudden burst of inflation means they are behind the curve. Williams:
Whether we cut purchases by 10 billion a month or not, we still have a very accommodative stance of policy and that is going to stay with us for quite some time. That is where I worry. If the economy really picks up or inflation or risks to financial stability really do start to emerge in a serious way, we need to be able to move policy back to normal, or adjust policy appropriately, in a timely manner. It’s always a difficult issue. This time it is just a much greater risk because we’re in a much more accommodative stance of policy.
I think it will be the sensitivity to positive inflation surprises that has the potential to add a hawkish tenor to policymaking. Without those surprises, policy will continue along current expectations. There is a caveat - note that Williams essentially admits that the possibility and willingness to use monetary policy to address financial stability. Triple mandate. Watch for it.
Bottom Line: I don't see much in the employment report to indicate any fundamental change to existing trends. Nor do I anticipate any change in policy. Tapering is likely to continue at its modest pace. As expected, the Evans rule is defunct, and it doesn't seem like policymakers are inclined to replace it with another set of fixed numerical guidelines. The primary driver of policy is now the pace of incoming data relative to the inflation outlook. Financial stability is probably something like a third-order concern at this point, at least as far as monetary policy is concerned. But that could change.

Friday, January 10, 2014

'Sharp Drop in Unemployment Due to People Leaving the Labor Force'

Dean Baker:

Sharp Drop in Unemployment Due to People Leaving the Labor Force: The headline unemployment rate fell sharply to 6.7 percent in December. However, this is not good news. The drop was almost entirely due to people leaving the labor force as the number of people reported employed in December only rose by 143,000, just enough to keep the employment-to-population ratio constant.
Blacks disproportionately left the labor market, with the labor force participation rate for African Americans dropping by 0.3 percentage points to 60.2 percent, the lowest rate since December of 1977. The rate for African American men fell 0.7 percentage points to 65.6 percent, the lowest on record.
The data on the establishment side was not any brighter with the survey reporting an increase of just 74,000 jobs. Some of this weakness was due to unusually slow growth in health care and restaurant employment. This is likely an anomaly that will be reversed in future months. However, there was also a decline in the index of average weekly hours. This suggests that the economy may be weaker than some of the more  recent optimistic accounts indicated.

More detail here.

Thursday, January 09, 2014

Fed Watch: Next Up: Employment Report

Tim Duy:

Next Up: Employment Report, by Tim Duy: Another quick post between appointments. Tomorrow is the all-important employment report release day for December. I say "all-important" partly in jest. I would caution against placing too much weight on a preliminary number that is well-known to be heavily revised. But the Federal Reserve seems to place an unusually high weight on the most recent month of data, so we must too.

Since it worked well last time, my quick-and-dirty estimate is a 245k gain for nonfarm payrolls in December:


Use with caution, usual caveats apply. Forecasting the preliminary nonfarm payroll gain is akin to throwing darts. And my prior is that something that worked well last month probably will not work well this month. That said, while this technique might not predict the exact number, I think it tells us that:

  1. The labor market is improving modestly.
  2. Any large deviation from a gain of 245k - either positive or negative - is likely not indicative of the underlying trend in labor markets.

For comparison, this is a decidedly above consensus forecast. Consensus is for 200k with a range of 120k to 225k. 245k would be a large upward surprise.

Finally, when considering the policy implications of the report (unless I happen to be up at 5:30am tomorrow, I won't get a chance to review the report until well after the market closes), consider the tension between incoming chair Janet Yellen's preferred preferred measures of labor market slack/tightness:


The improvement on the left exceeds that on the right. That argues for policy inertia unless policymakers shift their focus toward on side or the other. The obvious concern is that improvement on the left becomes too much for policymakers to easily ignore.

Saturday, January 04, 2014

Looking for (But Not Finding) Shortages of Skilled Labor in the Manufacturing Sector

Lots of comments lately on the "skills shortage" holding back the economy. Does it really exist? Let's turn to some research from Federal Reserve economists:

Looking for Shortages of Skilled Labor in the Manufacturing Sector, by Jessica Stahl and Norman Morin, Federal Reserve: Anecdotal reports have suggested that some firms have struggled to find sufficient numbers of skilled workers. For instance, the Federal Reserve's January 2013 Beige Book (PDF) mentioned that "contacts in several [Federal Reserve] Districts reported difficulties finding qualified workers in some specialized fields, such as skilled manufacturing, energy, and IT" (page ix). Here we focus on the manufacturing sector. Although manufacturing currently accounts for only 10½ percent of private employment, the reports of labor shortages are often specific to this sector.1   Indeed, earlier this year, inquiries conducted by the Philadelphia and New York Federal Reserve Banks suggested that skilled labor shortages were a significant factor restraining hiring in the manufacturing sector--though slow expected growth of sales was by far the most important reason cited.2 
Further information about the extent of skilled labor shortages in manufacturing--and, importantly, how they have changed over time--can be seen in data from the Census Bureau's Quarterly Survey of Plant Capacity Utilization (QPC) and its annual predecessor, the Survey of Plant Capacity (SPC). The QPC, which is jointly funded by the Federal Reserve Board and the Department of Defense, provides the data used to benchmark the Federal Reserve Board's measures of manufacturing capacity. The survey asks roughly 7,500 plant managers about their plants' actual production and total sustainable productive capacities and, when applicable, the reasons that plants are operating below capacity levels of output. 
The QPC and SPC have indicated fairly widespread labor shortages before. As shown in figures 1 and 2, "Insufficient supply of local labor force/skills" was cited as a factor restraining production by more than 20 percent of survey respondents in the late 1990s and by nearly 15 percent during the expansionary period leading up to the most recent recession.3 

Figure 1


Figure 2
Insufficient supply of local labor force/skills as a reason for operating at less than capacity:
Selected years
YearPercent of Respondents
1999 20.4
2002 7.6
2006 14.5
2009 1.5
2012 5.4

Note: The data are fourth-quarter values.
Source: Census Bureau

The share of plant managers choosing this reason plummeted to less than 2 percent during the recession. The share reporting that skills shortages were a restraint on production has moved up somewhat since then: As of the fourth quarter of last year, the proportion was about 5-1/2 percent (with a standard error of 0.7 percentage point), somewhat below the 7-3/4 percent share it reached in the second quarter of last year. The share citing skill shortages remains below its historical average, and the share is not higher than one would expect given the state of the wider labor market and the amount of slack in the manufacturing sector. In particular, the share is broadly consistent with a regression-based prediction using the unemployment rate and manufacturing capacity utilization. Indeed, both historically and currently, the dominant reason cited by plant managers for operating at less than capacity has been "Insufficient orders" (the red line in the figure); this reason was chosen by nearly 84 percent of respondents at the end of last year (with a standard error of 1.1 percentage points) and remains above its long-run average.4 

Even when the QPC and SPC data are examined for major industry categories within the broader manufacturing sector, they suggest that skilled labor shortages were not a major factor restraining production in the fourth quarter of 2012 (the latest available data). Figure 3 presents results for two industries that are frequently mentioned in press reports as facing labor shortages: machinery and fabricated metals. Plant managers in these industries historically have been significantly more likely than other managers to report that skilled labor shortages are restraining production: For example, they were mentioned in the late 1990s by one-third of respondents in the machinery industry. However, even for these two industries, the share of survey respondents in recent quarters who cited skilled labor shortages as a reason for operating below capacity has remained well below the share before the recession. 

Figure 3


All told, while some skilled labor shortages are being reported in the manufacturing sector, the extent to which these shortages are restraining production appear about in line with the current sluggishness in the labor market and the degree of slack in the manufacturing sector. Furthermore, the finding that skilled labor shortages are not a significant and widespread restraint on production is consistent with other data continuing to show subdued increases in the wages and salaries of manufacturing workers.

1. For instance, the 2011 skills gap report, Boiling Point? The Skills Gap in U.S. Manufacturing Leaving the Board, sponsored by The Manufacturing Institute (an affiliate of the National Association of Manufacturers) and Deloitte, stated that skilled labor shortages were a pressing problem within manufacturing, but noted that "[t]his problem is not new" (p. 1). 
2. "Cannot find workers with required skills" was the fourth most frequently named factor in the case of New York (where 33 percent of respondents named it among the three most important restraints on hiring) and fifth in the case of Philadelphia (around 25 percent). These figures are lower than in similar inquiries conducted in mid-2012; unfortunately, comparisons are not available for periods before the most recent recession, when the labor market was tighter. 
3. The responses are weighted by plant-level receipts; unweighted results are similar. 
4. In addition to "Insufficient orders" and "Insufficient supply of local labor force/skills," the other choices are: "Not most profitable to operate at capacity," "Sufficient inventory of finished goods on hand," "Insufficient supply of materials," "Equipment limitations," "Seasonal operations," "Lack of sufficient fuel or electrical energy," "Storage limitations," "Logistics/transportation constraints," "Strike or work stoppage," and "Environmental restrictions." Respondents may choose as many factors as they deem applicable. 
Disclaimer: FEDS Notes are articles in which Board economists offer their own views and present analysis on a range of topics in economics and finance. These articles are shorter and less technically oriented than FEDS Working Papers.

Friday, December 27, 2013

'Unemployment and Profits: A Dirty Little Secret'

Calculated Risk:

Unemployment and Profits: A dirty little secret, by Bill McBride: I'd like to repeat something I wrote 2 1/2 years ago:

[I]t really isn't much of a secret that Wall Street and corporate America like the unemployment rate to be a little high. But it is "dirty" in the sense that it is unspoken. Higher unemployment keeps wage growth down, and helps with margins and earnings - and higher unemployment also keeps the Fed on the sidelines. Yes, corporations like to see job growth, so people have enough confidence to spend (and they can have a few more customers). And they definitely don't want to see Depression era unemployment - but a slowly declining unemployment rate (even at 9%) with some job growth is considered OK.

Not much has changed (the unemployment rate is still high at 7%). And I still think unemployment should be the #1 political issue. ...

A high unemployment rate keeps wages down for most working Americans - and the recent income growth has flowed mostly to the owners of corporations and not to labor. This is not an ideal economic situation for most Americans (but ideal for a few). Enough rant - and I hope I don't repeat this again in another 2 years.

best to all

Paul Krugman: The Fear Economy

Why has Congress turned its back on the unemployed?:

The Fear Economy, by Paul Krugman, Commentary, NY Times: ... Some people would have you believe that employment relations are just like any other market transaction; workers have something to sell, employers want to buy what they offer, and they simply make a deal. But anyone who has ever held a job in the real world — or, for that matter, seen a Dilbert cartoon — knows that it’s not like that.
The fact is that employment generally involves a power relationship: you have a boss, who tells you what to do, ... and high unemployment has greatly weakened workers’ already weak position in that relationship.
We can actually quantify that weakness by looking at the quits rate... Quitting is ... a risk; unless a worker already has a new job lined up, he or she doesn’t know how long it will take to find a new job, and how that job will compare with the old one.
And the risk of quitting is much greater when unemployment is high, and there are many more people seeking jobs than there are job openings. As a result, you would expect to see the quits rate rise during booms, fall during slumps — and, indeed, it does. ...
Now think about what this means for workers’ bargaining power. When the economy is strong, workers are empowered. They can leave if they’re unhappy ... and know that they can quickly find a new job if they are let go. When the economy is weak, however, workers have a very weak hand, and employers are in a position to work them harder, pay them less, or both.
Is there any evidence that this is happening? And how..., at this point, after-tax profits are more than 60 percent higher than they were in 2007, before the recession began. We don’t know how much of this profit surge can be explained by ... the ability to squeeze workers who know that they have no place to go. But it must be at least part of the explanation. ...
What’s more, I don’t think it’s too much of a stretch to suggest that this reality helps explain why our political system has turned its backs on the unemployed..., the economy may be lousy for workers, but corporate America is doing just fine. ...
Too many Americans currently live in a climate of economic fear. There are many steps that we can take to end that state of affairs, but the most important is to put jobs back on the agenda.

Tuesday, December 24, 2013

'Robots and Economic Luddites'

Dean Baker:

Robots and Economic Luddites: They Aren't Taking Our Jobs Quickly Enough: Lydia DePillis warns us in the Post of 8 ways that robots will take our jobs. It is amazing how the media have managed to hype the fear of robots taking our jobs at the same time that they have built up fears over huge budget deficits bankrupting the country. You don't see the connection? Maybe you should be an economics reporter for a leading national news outlet.
Okay, let's get to basics. The robots taking our jobs story is a story of labor surplus, too many workers, too few jobs. Everything that needs to be done is being done by the robots. There is nothing for the rest of us to do but watch.
There can of course be issues of distribution. If the one percent are able to write laws that allow them to claim everything the robots produce then they can make most of us very poor. But this is still a story of society of plenty. We can have all the food, shelter, health care, clean energy, etc. that we need; the robots can do it for us.
Okay, now let's flip over to the budget crisis that has the folks at the Washington Post losing sleep. This is a story of scarcity. We are spending so much money on our parents' and grandparents' Social Security and Medicare that there is no money left to educate our kids.
Some confused souls may say that the problem may not be an economic one, but rather a fiscal problem. The government can't raise the tax revenue to pay for both the Social Security and Medicare for the elderly and the education of our kids. This is confused because if we are living in the world where the robots are doing all the work then the government really doesn't need to raise tax revenue, it can just print the money it needs to back its payments.
Okay, now everyone is completely appalled. The government is just going to print trillions of dollars? That will send inflation through the roof, right? Not in the world where robots are doing all the work it won't. If we print money it will create more demands for goods and services, which the robots will be happy to supply. As every intro econ graduate knows, inflation is a story of too much money chasing too few goods and services. But in the robots do everything story, the goods and services are quickly generated to meet the demand. Where's the inflation, robots demanding higher wages?
In short, you can craft a story where we have huge advances in robot technology so that the need for human labor is drastically reduced. You can also craft a story where an aging population leads to too few workers being left to support too many retirees. However, you can't believe both at the same time unless you write on economic issues for the Washington Post.
Just in case anyone cares about what the data says on these issues, the robots don't seem to be winning out too quickly. Productivity growth has slowed sharply over the last three years and it is well below the pace of 1947-73 golden age. (Robots are just another form of good old-fashioned productivity growth.)

labor productivity

On the other hand, the scarcity mongers don't have much of a case either. Even if productivity growth stays at just a 1.5 percent annual rate its impact on raising wages and living standards will swamp any conceivable tax increases associated with caring for a larger population of retirees.

Sunday, December 22, 2013

'Labor Force Participation Rates Revisited'

Are changes in labor force participation cyclical? Timothy Dunne and Ellie Terry at macroblog:

Labor Force Participation Rates Revisited: In an earlier macroblog post, our colleague Julie Hotchkiss examined the decline in labor force participation from the onset of the Great Recession into early 2012, concluding that cyclical factors likely accounted for most of the drop. In this post, we examine how labor force participation has changed since the start of 2012 (and admittedly, we’re much less ambitious in our analysis than Julie). Motivating our analysis, in part, is the observation that much of the recent decline in the labor force participation rate (LFPR) is related to rising retirements (see the November 19 Research Rap by Shigeru Fujita). This is not surprising, as the percentage of individuals aged 65 and older in the population has been increasing sharply over the last half decade. That said, our approach indicates that the LFPR of prime-age workers (ages 25–54) continues to fall, and this is an important source of the overall decline in LFPR in the recent data. Such declines in LFPR in these age categories should be less related to retirement decisions, keeping on the table the possibility that a weak overall labor market remains a key drag on labor force participation.
A straightforward decomposition illustrates that the decline in LFPR among prime-age workers is a major contributor to the overall decline in LFPR. To see this, we separate the change in LFPR into three components: one that measures the change due to shifts in the LFPR within age groups—the within effect; one that measures changes due to population shifts across age groups—the between effect; and one that allows for correlation across the two effects—a covariance term. It works out the covariance term is always very close to zero, so we will omit discussion of that term here. The analysis breaks the data down into five age groups: 16–24, 25–34, 35–44, 45–54, and 55+.
The chart presents the decomposition from Q1 2012 to Q3 2013. Over this period, the overall LFPR declined by half a percentage point, from 63.8 percent to 63.3 percent. The blue areas represent the change due to within-age-group effects, and the green areas represent the change due to between-age-group effects. The sum of the bars is equal to the overall change in labor force participation.
Decomposition of Change in Labor Force Participation (Total Decline from Q1 2012 to Q3 2013 = 0.5)
Three key results emerge. First, increases in labor force participation for the youngest age group boosted overall labor force participation by 0.075 percentage points. Second, the growing population share of the 55+ age group reduced LFPRs over the period by 0.21 percentage points, accounting for roughly 40 percent of the overall decline. Third, labor force participation for prime-age workers continued to fall. The combined within effect for the prime-age individuals (25–34, 35–44, and 45–54) reduced the participation rate by 0.28 percentage points—or a little over half of the overall decline in labor force participation. Additional declines in labor force participation were associated with the reduction in population shares of prime age workers.
From an accounting standpoint, the analysis shows that the fall in the LFPR for prime-age workers is a main contributing factor to the recent decline in labor force participation. Indeed, the LFPR of prime-age workers fell from 81.6 to 81.0 from Q1 2012 to Q3 2013, with similar declines for both men and women. Given that prime-age workers make up more than half of the population, it is not surprising that the drop in the LFPR for these age groups accounts for a substantial fraction of the overall decline.
To put this in perspective, we present the same decomposition from Q1 2010 to Q4 2011, where the decline in the LFPR is 0.8 percentage point. While the magnitude of the overall change is different, the decomposition results are quite similar. The decline in participation rates for prime-age workers accounts for a little over 60 percent of the overall decline, with a substantial drag from the rise in the share of older workers (accounting for a third of the drop). In short, the changes in participation due to within and between effects over the first two years look quite similar to that of the second two years of the labor market recovery.
Decomposition of Change in Labor Force Participation (Total Decline from Q1 2010 to Q4 2011 = 0.8)
A corollary to this analysis is that these sources of decline in labor force participation have allowed the unemployment rate to decline more sharply than expected, given the moderate employment growth observed. We will not take a stand on whether these are “wrong” or “right” reasons for unemployment rate declines. Rather, we note that the patterns observed early in the recovery are still in place (more or less) in the recent data.

Monday, December 16, 2013

The Impact of Unemployment on Well-Being

Kathleen Geier at the Washington Monthly:

What social science says about the impact of unemployment on well-being: it’s even worse than you thought, by Kathleen Geier: While reading this odd and meandering New York Times op-ed this morning, I stumbled upon a link to a fascinating study from last year on the impact of unemployment on non-monetary well-being. It was conducted by Stanford sociologist Cristobal Young, who discovered that unemployment has an even more catastrophic effect on personal happiness that we thought.

The study produced three major findings. The first is the devastating impact job loss has on personal well-being. Job loss, says Young, “produces a large drop in subjective well-being”

The second finding is that while unemployment insurance (UI) is successful as a macroeconomic stabilizer, it doesn’t make unemployed people any happier. ...

Third, job loss has a strong, lasting negative impact on well-being that may persist for years ...

Other research suggests that what Young refers to as “the scarring effect” of job loss can last from three to five years, or even longer. He also notes that “the more generalized fear of becoming jobless” may persist. ...

The sheer human misery created by the economic downturn has been stunning. The economic damage is, in some ways, the least of it. Another study shows that the long-term unemployed experience shame, loss of self-respect, and strained relationships with friends and family. They even suffer significantly higher rates of suicide. ...

It's hard to understand why policymakers haven't done more to try to alleviate the unemployment crisis.

Sunday, December 15, 2013

'Inequality and Unemployment Are the Same Problem'

Dean Baker:

Ezra Klein Misses the Mark: Inequality and Unemployment Are the Same Problem [Creative Commons]: In his Washington Post column this morning, Ezra Klein dismisses the problem of inequality and argues that progressives should instead focus on unemployment. While he will get no argument from me on the need to focus on unemployment, the idea that this is a separate issue from inequality is seriously misplaced.
Ezra gets to this spot by first dismissing the idea that inequality harms growth. He is certainly right that the evidence is less conclusive than we might like, but I would attribute that largely to the reluctance of the economic profession to even consider this possibility.
For example, Ezra notes my friend and co-author Jared Bernstein's conclusion that it is difficult to find a link between rising inequality and weaker consumption in the data. This is true, but the obvious reason is that the decades of rising inequality have also been the decades of the stock market and housing market bubbles.
Standard economic theory predicts that these bubbles would increase consumption, a story that fits the data well. Consumption as a share of income hit highs (i.e. savings rates reached lows) at the peaks of both the stock and housing bubbles. Consumption fell sharply following the collapse of both bubbles.
If we just do some simple arithmetic we can get an idea of the size of the effect of the upward redistribution of 10 percentage points of disposable income from the bottom 80 percent to the top 1 percent. If we assume that the bottom 80 percent would have spent 95 percent of this income and the top 1 percent would only spend 75 percent, then the difference would be 20 percentage points or 2 percent of disposable income.
This would translate into a loss of demand of 1.6 percentage points of GDP. That is what would have to be made up by larger budget deficits, trade surpluses, or a flood of investment. We certainly had much larger budget deficits on average over the last three decades than we did in prior decades so that can make up the shortfall in demand, although we also had much larger trade deficits making the problem worse.
In any case, the fact that we didn't have solid evidence on this issue should not be as surprising as Ezra suggests. While some of us have long warned of this scenario, leading economists like Paul Krugman and Larry Summers have just recently begun to take seriously the possibility of secular stagnation. For decades the profession has treated it as an article of faith that there could not be sustained shortfalls in demand so inadequate consumption due to the upward redistribution of income could not possibly be a problem.
However the other side of the unemployment inequality issue is possibly more important. One of the main points of Jared and my new book is that unemployment is a main cause of inequality. This is because when more people get hired it disproportionately benefits those in the bottom half and especially the bottom fifth of the income distribution.
These are the people who are most likely to get jobs. And those with jobs will also have the opportunity to work longer hours. And, a tight labor market will create conditions in which workers at the bottom will have more bargaining power. Walmart and McDonalds will be paying workers $15 an hour if that is the only way that they can get people to work for them. 
For this reason, the high unemployment policy that Congress is pursuing with its current budget policy is a key factor in the upward redistribution of income that we have seen in the last three decades. This means that people concerned about inequality should be very angry over budgets that don't spend enough to bring the economy to full employment (also an over-valued dollar). So Ezra is absolutely right that progressives should be yelling about unemployment, but inequality is a very big part of that picture.

Wednesday, December 11, 2013

Public and Private Sector Payroll Jobs: Reagan, Bush, Clinton, Bush, Obama

Calculated Risk takes a look at public and private job growth for recent presidents:



Monday, December 09, 2013

Paul Krugman: The Punishment Cure

Letting unemployment benefits expire is bad economics and shows "a complete lack of empathy for the unfortunate":

The Punishment Cure, by Paul Krugman, Commentary, NY Times: Six years have passed since the United States economy entered the Great Recession, four and a half since it officially began to recover, but long-term unemployment remains disastrously high.
And Republicans have a theory about why this is happening. ...: Unemployment insurance, which generally pays eligible workers between 40 and 50 percent of their previous pay, reduces the incentive to search for a new job. As a result, the story goes, workers stay unemployed longer. In particular, it’s claimed that the Emergency Unemployment Compensation program, which lets workers collect benefits beyond the usual limit of 26 weeks, explains why there are four million long-term unemployed workers in America today, up from just one million in 2007.
Correspondingly, the G.O.P. answer to the problem of long-term unemployment is to increase the pain of the long-term unemployed: Cut off their benefits, and they’ll go out and find jobs. How, exactly, will they find jobs when there are three times as many job-seekers as job vacancies? Details, details. ...
The view of most labor economists now is that unemployment benefits have only a modest negative effect on job search — and in today’s economy have no negative effect at all on overall employment. On the contrary, unemployment benefits help create jobs, and ... slashing unemployment benefits — which would have the side effect of reducing incomes and hence consumer spending — would just make the situation worse.
Still, don’t expect prominent Republicans to change their views, except maybe to come up with additional reasons to punish the unemployed. For example, Senator Rand Paul recently cited research suggesting that the long-term unemployed have a hard time re-entering the work force as a reason to, you guessed it, cut off long-term unemployment benefits. You see, those benefits are actually a “disservice” to the unemployed.
The good news, such as it is, is that the White House and Senate Democrats are trying to make an issue of expiring unemployment benefits. The bad news is that they don’t sound willing to make extending benefits a precondition for a budget deal, which means that they aren’t really willing to make a stand.
So the odds, I’m sorry to say, are that the long-term unemployed will be cut off, thanks to a perfect marriage of callousness — a complete lack of empathy for the unfortunate — with bad economics. But then, hasn’t that been the story of just about everything lately?

Friday, November 29, 2013

'The Dallas Fed Rebuffs the Idea that Immigrants are Stealing Jobs from Americans'

Gillian Tett of the FT summarizes research from the Dallas Fed:

...when it comes to immigration – of the legal and illegal kind – the Lone Star Fed is not sitting with the Tea Party core. On the contrary, it has just published a paper – under the provocative title “Gone to Texas” – arguing that immigration is good for the local economy. And it rebuffs the idea that immigrants are stealing jobs from native-born Americans. On the contrary, it insists, they tend to boost growth in a win-win way.
Now, if this conclusion had emerged in a state with few immigrants and plenty of unfilled jobs (think North Dakota), that might be unsurprising. But the picture that Fed researchers paint of Texas is eye-popping. Since 1990, the number of foreign-born people living there has jumped from 1.5 million to 4.3 million...”, and that “among large states, none has experienced a surge like Texas has, with immigrants rising from 9 per cent of the population in 1990 to 16.4 per cent in 2012”.
Some immigrants are highly skilled... But most are not: two-thirds do not have a high-school diploma, two-thirds come from Mexico, and almost half – or 1.8 million people – are illegal...

Here's a link to the report.

Wednesday, November 27, 2013

'Breadlines Return'

Sending people to food kitchens is not cool, especially with the labor market so far from full recovery and there aren't enough jobs for the unemployed:

Breadlines Return, by Teresa Tritch, NY Times: ...The Times’s Patrick McGeehan described a line snaking down Fulton Street in Brooklyn last week, with people waiting to enter a food pantry run by the Bed-Stuy Campaign Against Hunger. The line was not an anomaly. Demand at all of New York City’s food pantries and soup kitchens has spiked since federal food stamps were cut on Nov. 1. ...
The Great Recession was the worst downturn since the Great Depression.  And yet,... food stamp cuts are occurring even though need is still high and opportunity low. ...
And there are more food-stamp cuts to come. House Republicans have proposed to cut the program by $40 billion over 10 years...; the Senate has proposed a $4 billion reduction. ...
If the current downturn has not mirrored the Great Depression, that’s thanks to safety net programs... Breadlines have, by and large, been replaced by food stamp... Now is not the time to cut back. Now is the time to provide.

Thursday, November 21, 2013

'Don’t Blame the Robots: Assessing the Job Polarization Explanation of Growing Wage Inequality'

From Lawrence Mishel, Heidi Shierholz, and John Schmitt:

Don’t Blame the Robots: Assessing the Job Polarization Explanation of Growing Wage Inequality, by Lawrence Mishel, Heidi Shierholz, and John Schmitt, EPI–CEPR Working Paper: Executive summary Many economists contend that technology is the primary driver of the increase in wage inequality since the late 1970s, as technology-induced job skill requirements have outpaced the growing education levels of the workforce. The influential “skill-biased technological change” (SBTC) explanation claims that technology raises demand for educated workers, thus allowing them to command higher wages—which in turn increases wage inequality. A more recent SBTC explanation focuses on computerization’s role in increasing employment in both higher-wage and lower-wage occupations, resulting in “job polarization.” This paper contends that current SBTC models—such as the education-focused “canonical model” and the more recent “tasks framework” or “job polarization” approach mentioned above—do not adequately account for key wage patterns (namely, rising wage inequality) over the last three decades. Principal findings include:
1. Technological and skill deficiency explanations of wage inequality have failed to explain key wage patterns over the last three decades, including the 2000s.
The early version of the “skill-biased technological change” (SBTC) explanation of wage inequality posited a race between technology and education where education levels failed to keep up with technology-driven increases in skill requirements, resulting in relatively higher wages for more educated groups, which in turn fueled wage inequality (Katz and Murphy 1992; Autor, Katz, and Krueger 1998; and Goldin and Katz 2010). However, the scholars associated with this early, and still widely discussed, explanation highlight that it has failed to explain wage trends in the 1990s and 2000s, particularly the stability of the 50/10 wage gap (the wage gap between low- and middle-wage earners) and the deceleration of the growth of the college wage premium since the early 1990s (Autor, Katz, and Kearney 2006; Acemoglu and Autor 2012). This motivated a new technology-based explanation (formally called the “tasks framework”) focused on computerization’s impact on occupational employment trends and the resulting “job polarization”: the claim that occupational employment grew relatively strongly at the top and bottom of the wage scale but eroded in the middle (Autor, Levy, and Murnane 2003; Autor, Katz, and Kearney 2006; Acemoglu and Autor 2012; Autor 2010). We demonstrate that this newer version—the task framework, or job polarization analysis—fails to explain the key wage patterns in the 1990s it intended to explain, and provides no insights into wage patterns in the 2000s. We conclude that there is no currently available technology-based story that can adequately explain the wage trends of the last three decades.
2. History shows that middle-wage occupations have shrunk and higher-wage occupations have expanded since the 1950s. This has not driven any changed pattern of wage trends.
We demonstrate that key aspects of “job polarization” have been taking place since at least 1950. We label this “occupational upgrading” since it primarily consists of shrinkage in relative employment in middle-wage occupations and a corresponding expansion of employment in higher-wage occupations. Lower-wage occupations have remained a small (less than 15 percent) and relatively stable share of total employment since the 1950s, though they have grown in importance in the 2000s. Occupational upgrading has occurred in decades with both rising and falling wage inequality and in decades with both rising and falling median wages, indicating that occupational employment patterns, by themselves, cannot explain the salient wage trends.
3. Evidence for job polarization is weak.
We use the Current Population Survey to replicate existing findings on job polarization, which are all based on decennial census data. Job polarization is said to exist when there is a U-shaped plot in changes in occupational employment against the initial occupational wage level, indicating employment expansion among high- and low-wage occupations relative to middle-wage occupations. As shown in Figure E (explained later in the paper but introduced here), in important cases, these plots do not take the posited U-shape. More importantly, in all cases the lines traced out fit the data very poorly, obscuring large variations in employment growth across occupational wage levels.
4. There was no occupational job polarization in the 2000s.
In the 2000s, relative employment expanded in lower-wage occupations, but was flat at both the middle and the top of the occupational wage distribution. The lack of overall job polarization in the 2000s is a phenomenon visible in both the analyses of decennial census/American Community Survey data provided by proponents of the tasks framework/job polarization perspective (Autor 2010; Acemoglu and Autor 2012) and in our analysis of the Current Population Survey. Thus, the standard techniques applied to the data for the 2000s do not establish even a prima facie case for the existence of overall job polarization in the most recent decade. This leaves the job polarization story, at best, as an account of wage inequality in the 1990s. It certainly calls into question whether it should be a description of current labor market trends and the basis of current policy decisions.
5. Occupational employment trends do not drive wage patterns or wage inequality.
We demonstrate that the evidence does not support the key causal links between technology-driven changes in tasks and occupational employment patterns and wage inequality that are at the core of the tasks framework and job polarization story. Proponents of job polarization as a determinant of wage polarization have, for the most part, only provided circumstantial evidence: both trends occurred at the same time. The causal story of the tasks framework is that technology (i.e., computerization) drives changes in the demand for tasks (increasing demand at the top and bottom relative to the middle), producing corresponding changes in occupational employment (increasing relative employment in high- and low-wage occupations relative to middle-wage occupations). These changes in occupational employment patterns are said to drive changes in overall wage patterns, raising wages at the top and bottom relative to the middle. However, the intermediate step in this story must be that occupational employment trends change the occupational wage structure, raising relative wages for occupations with expanding employment shares and vice-versa. We demonstrate that there is little or no connection between decadal changes in occupational employment shares and occupational wage growth, and little or no connection between decadal changes in occupational wages and overall wages. Changes within occupations greatly dominate changes across occupations so that the much-focused-on occupational trends, by themselves, provide few insights.
6. Occupations have become less, not more, important determinants of wage patterns.
The tasks framework suggests that differences in returns to occupations are an increasingly important determinant of wage dispersion. Using the CPS, we do not find this to be the case.  We find that a large and increasing share of the rise in wage inequality in recent decades (as measured by the increase in the variance of wages) occurred within detailed occupations.  Furthermore, using DiNardo, Fortin, and Lemieux’s reweighting procedure, we do not find that occupations consistently explain a rising share of the change in upper tail and lower tail inequality for either men or women.
7. An expanded demand for low-wage service occupations is not a key driver of wage trends.
We are skeptical of the recent efforts of Autor and Dorn (2013) that ask the low-wage “service occupations” to carry much or all of the weight of the tasks framework. First, the small size and the slow, relatively steady growth of the service occupations suggest significant limitations of a technology-driven expansion of service occupations to be able to explain the large and contradictory changes in wage growth at the bottom of the distribution (i.e., between middle and low wages, the 50/10 wage differential), let alone movements at the middle or higher up the wage distribution. The service occupations remain a relatively small share of total employment; in 2007, they accounted for less than 13 percent of total employment, and just over half of employment in the bottom quintile of occupations ranked by wages. Moreover, these occupations have expanded only modestly in recent decades, increasing their employment share by 2.1 percentage points between 1979 and 2007, with most of the gain in the 2000s. Relative employment in all low-wage occupations, taken together, has been stable for the last three decades, representing a 21.1 percent share of total employment in 1979, 19.7 percent in 1999, and 20.0 percent in 2007.
Second, the expansion of service occupation employment has not driven their wage levels and therefore has not driven overall wage patterns. The timing of the most important changes in employment shares and wage levels in the service occupations is not compatible with conventional interpretations of the tasks framework. Essentially all of the wage growth in the service occupations over the last few decades occurred in the second half of the 1990s, when the employment share in these occupations was flat. The observed wage increases preceded almost all of the total growth in service occupations over the 1979–2007 period, which took place in the 2000s, when service occupation wages were falling (another trend that contradicts the overall claim of the explanatory power of service occupation employment trends).
8. Occupational employment trends provide only limited insights into the main dynamics of the labor market, particularly wage trends.
A more general point can and should be drawn from our findings: Occupational employment trends do not, by themselves, provide much of a read into key labor market trends because changes within occupations are dominant. Recent research and journalistic treatment of the labor market has highlighted the pattern of occupational employment growth to assess the extent of structural unemployment, the disproportionate increase in low-wage jobs, and the “coming of robots”—changes in workplace technology and the consequent impact on wage inequality. The recent academic literature on wage inequality has highlighted the role of changes in the occupational distribution of employment as the key factor. In particular, occupational employment trends have become increasingly used as indicators of job skill requirement changes, reflecting the outcome of changes in the nature of jobs and the way we produce goods and services. Our findings indicate, however, that occupational employment trends give only limited insight and leave little imprint on the evolution of the occupational wage structure, and certainly do not drive changes in the overall wage structure. We therefore urge extreme caution in drawing strong conclusions about overall labor market trends based on occupational employment trends by themselves.

I suppose I should note that I haven't read this closely enough yet to endorse every word (or not). Full paper here (scroll down).

Wednesday, November 20, 2013

Just a Reminder about the Condition of the Labor Market...


Someone should do something.

Monday, November 11, 2013

'Greenspan’s Dilemma Revived'

Izabella Kaminska at FT Alphaville:

Greenspan’s dilemma revived, by Izabella Kaminska: Deficit continues to be a dirty word in the US..., whilst the idea that the US is an unsustainable deficit spender increasingly propagates in mainstream circles.

But, as Ethan Harris at Bank of America Merrill Lynch shows on Monday, nothing could be further from the truth. In reality the US deficit is contracting at a relatively speedy rate... And, bar the employment situation..., all of this comes in the context of an ever more quickly reviving economy...

Which leaves the following as the most notable point being made by Harris, in reference to the natural unemployment rate (NAIRU):

If inflation persists below 1.5%, we would expect the interest rate forecast to drop further. We also expect the FOMC to cut its unemployment rate guidepost for hiking rates from 6.5% to 5.5% or lower. Ultimately, the Fed may decide to “overshoot” the inflation-neutral NAIRU to force inflation back up to target.

This in itself could become ever more crucial in the months to come. In short, it echoes exactly the same sort of dilemma Alan Greenspan faced all the way back in 1996. Do you raise rates despite little obvious inflationary pressure and risk stagnating growth? Or do you give the notion of a “new economy” — the idea that technological change is fuelling a boom in productivity and alleviating inflationary pressures — the benefit of the doubt?

Janet Yellen, it must be said, is uniquely positioned to make that call if she is confirmed. Not only was she there the first time around, she may have had more input on Greenspan’s ultimate decision than many remember. Call it something akin to mea culpa dotcom crash hindsight. ...

Saturday, November 09, 2013

'How Much Unemployment Insurance Do We Need?'

Perhaps I missed something, but one thing that seems to be missing here is that one benefit of unemployment insurance is that it allows workers to find better matches for their skills. But if, as this research finds, unemployment insurance reduces search intensity, this benefit would be reduced:

How much unemployment insurance do we need?, by Rafael Lalive, Camille Landais, Josef Zweimüller, Vox EU: In response to the Great Recession, unemployment insurance has been extended in many countries, but there is controversy over whether such extensions are optimal. Unemployment insurance entails direct fiscal costs, and encourages job seekers to prolong their search. The familiar benefit of unemployment insurance is that it allows the jobless to maintain their consumption. However, by reducing the search effort of other workers, it also improves a given worker’s chance of finding a job. Unemployment insurance extensions appear less costly when these search externalities are considered.

The global crisis that erupted in 2008 has put millions of workers out of a job. The US, for instance, experienced a dramatic increase in unemployment from around 4% to more than 10% during the Great Recession. Unemployment remained stubbornly high even when the economy began to recover.

Governments throughout the world have responded by making their unemployment insurance systems more generous (OECD 2012). Some observers argue that US unemployment would have returned much faster to normal levels if the US had not expanded the duration of benefit payments from 26 to 99 weeks. Were unemployment insurance extensions too generous? What is the optimal level of unemployment insurance? How much money should job seekers receive and for how long?

Optimal unemployment insurance

In theory, economists have a simple answer to these questions. Unemployment insurance should be set optimally, i.e. such that adding a dollar to unemployment insurance generosity produces as much benefit as it costs (Baily 1978). But how does one go about finding the right amount of unemployment insurance in practice? Actual policy needs to be based on sound evidence. Chetty (2008) discusses a new approach to finding the optimal amount of unemployment insurance. The key idea of his ‘sufficient statistics’ approach is to combine credible evidence on the benefits and costs of more generous insurance with a plausible theoretical framework to back out the optimal level of unemployment insurance.

But, what is the evidence regarding the costs and benefits of unemployment insurance extensions? The costs of more generous unemployment insurance are the total costs to taxpayers. The total costs have two components – direct and additional.

  • The direct costs are those paid to job seekers who exhaust their regular benefits.
  • Additional costs arise because more generous benefits induce job losers to stay longer on unemployment insurance benefits or enter unemployment more frequently.

Interestingly, a growing number of studies give us well-identified measures of the costs at the individual level. Card and Levine (2000) for instance find that adding 13 weeks of benefit payments will prolong job search by about one week in the US. Lalive and Zweimüller (2004) find a very similar impact for Austria. Lalive, van Ours, and Zweimüller (2006) discuss the costs of raising the benefit level compared to adding weeks of benefits, and find that increasing benefit levels is less costly than prolonging benefit duration.

Economists have spent less effort in estimating the benefits of unemployment insurance.

  • Unemployment insurance benefits individuals if it helps to better smooth consumption between employment and unemployment.

Gruber (1997) finds that job seekers experience a drop in consumption of 6% compared to when they were still employed. His estimates suggest that the drop in consumption would have been almost four times larger (22%) without unemployment insurance. This study therefore shows that unemployment insurance does what it is designed to do – insure people.

Unemployment insurance and search externalities

However, unemployment insurance generosity does not only affect individual workers’ search effort, it may also affect the competition for jobs. The idea is simple:

  • When generous unemployment insurance induces all other workers to search less intensively, it become easier for me to find a new job.

This means that optimal unemployment insurance needs to account for search externalities. Existing studies on the effects of extending unemployment benefits do not take these externalities into account. If these externalities are empirically relevant, then micro studies miss an important part of the picture.

Landais, Michaillat & Saez (2013) provide a theoretical analysis of optimal unemployment insurance in the presence of search externalities. They set up a search and matching model which shows that stronger search externalities increase the socially-desirable generosity of unemployment insurance. An important implication of this result is that unemployment insurance should be more generous during recessions – when jobs are scarce and externalities are strong. Conversely, unemployment insurance should be less generous during booms when jobs are plentiful and externalities are weak.

Empirical evidence for search externalities

Are search externalities really empirically relevant? Lalive, Landais and Zweimüller (2013) provide evidence for search externalities in a quasi-experimental setting. ...

Interestingly, recent studies conclude that the US benefit extension programmes of the Great Recession increased unemployment significantly, but by less than half a percentage point (Rothstein 2011, Farber and Valletta 2013). This evidence suggests that the unemployment insurance extensions in the US were less costly than previously thought.

Friday, November 08, 2013

What Labor Market Statistic Matters Most?

I have a post at CBS MoneyWatch:

What Labor Market Statistic Matters Most?

[Traveling today, so not sure how much I'll be able to post...]

Paul Krugman: The Mutilated Economy

Policy failures can be very costly:

The Mutilated Economy, by Paul Krugman, Commentary, NY Times: Five years and eleven months have now passed since the U.S. economy entered recession. ... Official unemployment remains high, and it would be much higher if so many people hadn’t dropped out of the labor force. Long-term unemployment ... is four times what it was before the recession.
These dry numbers translate into millions of human tragedies — homes lost, careers destroyed, young people who can’t get their lives started. And many people have pleaded all along for policies that put job creation front and center. Their pleas have, however, been drowned out by the voices of conventional prudence. We can’t spend more money on jobs, say these voices, because that would mean more debt. We can’t even hire unemployed workers and put idle savings to work building roads, tunnels, schools. Never mind the short run, we have to think about the future!
The bitter irony, then, is that it turns out that by failing to address unemployment, we have ... been sacrificing the future, too. ... Or so say researchers from the Federal Reserve, and I’m sorry to say that I believe them. ...
According to the paper..., our seemingly endless slump has done long-term damage through multiple channels. The long-term unemployed eventually come to be seen as unemployable; business investment lags thanks to weak sales; new businesses don’t get started; and existing businesses skimp on research and development.
What’s more, the authors ... suggest that economic weakness has already reduced America’s economic potential by ... more than $1 trillion a year ... for multiple years. ... The ...evidence is overwhelming that ... by not even making unemployment a major policy priority ... we’ve done ourselves immense long-term damage.
And it is, as I said, a bitter irony, because one main reason we’ve done so little about unemployment is the preaching of deficit scolds, who have wrapped themselves in the mantle of long-run responsibility — which they have managed to get identified in the public mind almost entirely with holding down government debt. ...
Is there any chance of reversing this damage? The Fed researchers are pessimistic, and, once again, I fear that they’re probably right. America will probably spend decades paying for the mistaken priorities of the past few years.
It’s really a terrible story: a tale of self-inflicted harm, made all the worse because it was done in the name of responsibility. And the damage continues as we speak.

Wednesday, November 06, 2013

Fed Watch: On Lowering the Unemployment Target

Tim Duy:

On Lowering the Unemployment Target, by Tim Duy: There is much buzz over the possibility the Federal Reserve will lower the unemployment rate threshold at an upcoming FOMC meeting. See, for example, a nice summary by Jon Hilsenrath at the Wall Street Journal. To be sure, such a change was already a part of the policy discussion. From the minutes of the July FOMC meeting:

Finally, the potential for clarifying or strengthening the Committee's forward guidance for the federal funds rate was discussed. In general, there was support for maintaining the current numerical thresholds in the forward guidance. A few participants expressed concern that a decision to lower the unemployment threshold could potentially lead the public to view the unemployment threshold as a policy variable that could not only be moved down but also up, thereby calling into question the credibility of the thresholds and undermining their effectiveness. Nonetheless, several participants were willing to contemplate lowering the unemployment threshold if additional accommodation were to become necessary or if the Committee wanted to adjust the mix of policy tools used to provide the appropriate level of accommodation.

To a certain extent, the issue of thresholds has taken on a new urgency as a result of the tapering debate. The Fed's excellent adventure with tapering this summer indicated that they do not fully understand the transmission mechanisms of large scale asset purchases (see Federal Reserve Governor Jeremy Stein for more). That uncertainty is another reason to wind down the program, something I think the Fed has a bias toward. But the economy has been giving little room for the FOMC to maneuver. They do not want to withdraw accommodation at this point, only to limit additional accommodation. The tightening of financial conditions this summer, however, suggested that tapering is tightening.

Consequently, the FOMC, now uncertain of the impact of ending asset purchases, wants an alternative tool for providing accommodation if needed. Enter forward guidance. The discussion was furthered by new staff studies, particularly English, Lopez-Salido, and Tetlow (2013) that illustrates the effectiveness of threshold-based forward guidance. As summarized by Hilsenrath:

The research paper—written by William English, the head of the Fed's monetary-affairs division and two other authors—argues the Fed's unemployment threshold for rate increases would be more effective if it were lower than 6.5%, possibly as low as 5.5%. In effect that would mean waiting until the job market got much better before raising rates.

The research winds, it would appear, are blowing in the direction of lowering the unemployment threshold, thereby committing to a longer period of lower rates. Not that this change will be instantaneous, or even certain. There will be resistance within the FOMC to giving up the wide degree of policy discretion under the current policy. And some believe the change will have limited impact:

San Francisco Fed President John Williams expressed skepticism Tuesday about changing the threshold. "I'm not sure in this circumstance that changing the language from 6.5 to a lower number would actually tell people on its own anything different than we're saying now," he said.

What the FOMC is saying currently is summarized by New York Federal Reserve President William Dudley:

We have established a threshold of 6.5 percent for the unemployment rate as long as we do not expect inflation to exceed 2 ½ percent at a one-to-two year horizon and inflation expectations remain well-anchored. It is likely to take a considerable amount of time to reach the 6.5 percent unemployment rate threshold. Moreover, because the 6.5 percent unemployment rate is a threshold, and not a trigger, depending on the economic circumstances, we might wait a long time after we breach the threshold before we begin to raise our federal funds rate target.

The basic story is that the Fed has already made clear that 6.5% is a threshold, not a trigger, and policymakers have indicated that they see it likely that rates will remain near zero well after 6.5% is reached. Indeed, the lower unemployment threshold has little impact on the actual timing of lift-off from the zero-bound. Table 2 of the English et al. paper reports the median date of first tightening from simulations of their model; the difference between the 6.5% and 5.5% thresholds (with the inflation threshold at 2.5%) is only one quarter (2015:3 to 2015:4). Williams can thus argue that there is little practical policy difference between the two thresholds - interest rates are likely to remain low for a very long time in either scenario.

That said, the 5.5% threshold is associated a more rapid unemployment decline and lower policymaker losses (although the share of draws for which welfare improves is slightly lower than the 6.5% scenario). Given incoming Chair Janet Yellen's interest in the costs of high unemployment, and her interest in optimal control policies of the type explored in this research, the opportunity for improvement in outcomes must be tempting. But Yellen herself has warned:

While optimal control exercises can be informative, such analyses hinge on the selection of a specific macroeconomic model as well as a set of simplifying assumptions that may be quite unrealistic. I therefore consider it imprudent to place too much weight on the policy prescriptions obtained from these methods, so I simultaneously consider other approaches for gauging the appropriate stance of monetary policy.

In short, policymakers increasingly believe they have an effective tool on hand if the process of ending asset purchases results in a undesirable tightening of financial conditions. But while the Fed is moving closer to lowering the employment threshold, this is not necessarily a certain offset for ending asset purchases. It may come into play only if the process of ending asset purchases results in a undesirable tightening of financial conditions. But it may also come into play prior to tapering. Indeed, the existing threshold is looking a little bit silly if the Fed does not start tapering soon. It is hard to see that 6.5% has any meaning whatsoever if the Fed is still purchasing assets at a rate of $85 billion a month at that point. So if the Fed has not tapered substantially as 6.5% comes into view, I would anticipate changing the threshold regardless of the forward guidance implications.

There seem to be two more under-appreciated implications from the English et al. paper. The first is not only that threshold based forward guidance works, but that it also lowers the probability of returning to the zero bound within four quarters relative to a Taylor rule. This result offers hope to those of us that worry about permanent ZIRP. The second implication is that, looking down the road, presumably threshold-based forward guidance is also a tool to help manage expectations when (hopefully) activity is stronger and inflation is a real concern. In other words, not only can it be used to replace asset purchases, but also maybe asset sales.

Bottom Line: Policymakers would like to normalize policy by moving away from asset purchases to interest rates. Emphasizing forward guidance is part of that process. Incoming research suggests not only that threshold based forward guidance is effective, but has room to be even more effective. That should be a comfort to policymakers who worry that ending asset purchases will excessively tighten financial conditions; they have a tool to change the mix of policy while leaving the level of accommodation unchanged. Whether they use it or not is another question. There has clearly been some discomfort among policymakers regarding changing the unemployment threshold. This suggests it would not necessarily be an immediate replacement for ending asset purchases. That said, it is difficult to see how the current threshold is meaningful at all if the Fed is still purchasing assets when the threshold is breached. Indeed, the current low level of unemployment relative to the threshold, combined with clear indications that the Fed has no intention of raising rates anytime soon, argues by itself that a change in the thresholds is a likely scenario in the months ahead.

Tuesday, November 05, 2013

DeLong on Blinder's 'After the Music Stopped'

Brad DeLong reviews Alan Blinder's new book:

You Got Me Feelin Hella Good So I'm Gonna Keep on Dancing: Alan Blinder: "After the Music Stopped": Tuesday Book Reviews Extended Version Weblogging: A Review of Alan Blinder's After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead (New York: Penguin Press), J. BRADFORD DELONG is Professor of Economics at the University of California at Berkeley

Properly edited shorter version in Foreign Affairs, July/August 2013

Alan Blinder is the latest economist out of the gate with an analytical account of the recent economic downturn. His 2013 After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead (New York: Penguin) is, I think, the best of accounts--at least the best for those without the substantial background and experience in finance needed to successfully crack the works of Gary Gorton. It is the best for four reasons:

  1. The narrative is very good--it is, from my perspective at least, clear and correct.
  2. Alan Blinder has a deep understanding of macroeconomics--thus he can place the events in context, and explain just how it was that the housing boom and its crash had such catastrophic effects on the American economy while, say, the dot-com boom and its crash did not (and was in fact a net plus for the U.S. economy as a whole: a lot of research and development got done, a lot of useful business-model experimentation took place, and a lot of very valuable twenty-first century virtual infrastructure got built--the housing boom brought us no analogous benefits).
  3. Alan Blinder has a very clear sense of the policy options, both in the past and now: what did work, what would have worked, what might have worked, and what would still work were we to try it to get us out of the current fix we are in.
  4. As noted, the book is very readable, even for those who have not been marinated in finance enough to grasp the technicalities and even for those who find topics like "the fall of the rupee" sensational and interesting. For those who do and have worked in or near Wall Street or it equivalent, I recommend Gary Gorton. For everybody else, I recommend Alan Blinder.The topic is certainly enormously important. The economy is today, still, four and a half years after the crash of 2008, six years after the emergence of the first signs of significant trouble in Wall Street, and seven years after the peak of the housing boom, deeply depressed.

Blinder writes that "policy makers are still nursing a frail economy back to health". I am not so sure that is right. It does not look, to me at least, "frail" and "being nursed back to health". To me, it still looks very sick. Blinder writes: "having the national unemployment rate near 8 percent is a lot better than having it near 10 percent, but it is far from good". Blinder is thinking in terms of an economy in which acceptable (although far from ideal or attainable) employment performance has an unemployment rate of 6 percent, and thus that we are halfway back to economic health.

I see an economy in which the share of American adults who were employed was 63% in the mid-2000s, fell to 58.5% in 2009, and is still 58.5% today. We would have expected the natural aging of America's population to have carried the share of adults at work from 63% down to 62% over the past seven years or so--not to 58.5%. And we would have expected the collapse of people's retirement savings either in housing or in stocks in 2008 to have led many Americans to postpone retirement. Given the collapse in the value of retirement savings and their impact on desired retirements, I see a healthy American economy today as one that would still have the same adult employment-to-population ratio of 63% as the economy of the mid-2000s.

From that perspective, we are not halfway back to health. We had a gap of 4.5% points between actual employment and full employment at the end of 2009. We have a gap of 4.5% points between actual employment and full employment today. We are flatlining. It is true that in late 2009 there were still real and rational fears that things might become worse very quickly, and that that possibility is no longer on the menu. But in my view our "recovery" has taken the form not of things getting better but of having successfully guarded against the possibility that things would get even worse. And that is a very feeble recovery indeed. And, in Europe, things are getting worse right now.

Most economists would say that there is a silver lining, in that this is not a Great Depression. I have been calling the current episode the "Lesser Depression". I now think that most economists are--and that I was--wrong in claiming this silver lining. ...[continue to much, much, much more]...

Saturday, November 02, 2013

'Employment Effects of International Trade'

This is a research summary from the NBER Digest. I discusses work from Autor, Dorn, Hanson, and Song that finds "Workers bear substantial costs as a result of the 'shock' of rising import competition":

Employment Effects of International Trade, by Claire Brunel, NBER Digest: In the past two decades, China's manufacturing exports have grown dramatically, and U.S. imports from China have surged. While there are many reports of plant closures and employment declines in sectors where import competition from China and elsewhere has been strongest, there is little evidence on the long-run effect on workers. In Trade Adjustment: Worker Level Evidence (NBER Working Paper No. 19226), David Autor, David Dorn, Gordon Hanson, and Jae Song examine the impact of exposure to rising trade competition from China on the employment and earnings trajectory of U.S. workers between 1992 and 2007. They find that workers bear substantial costs as a result of the "shock" of rising import competition. The adjustment to such shocks is highly uneven across workers, and varies according to their previous conditions of employment.
Individuals who in 1991 worked in manufacturing industries that experienced high subsequent import growth earned lower cumulative earnings over the 1992-2007 period, and they were at elevated risk of exiting the labor force and obtaining public disability benefits. The difference between a manufacturing worker at the 75th percentile of industry trade exposure and one at the 25th percentile of exposure amounted to reduced earnings equal to 46% of initial yearly income. Trade exposure also increased job churning across firms, industries, and sectors. Workers in sectors highly exposed to trade with China spent less time working for their initial employers, less time in their initial two-digit manufacturing industries, more time working elsewhere in manufacturing, and more time working outside of manufacturing.
The authors find that both the degree of job churn and the way earnings and employment adjust to import shocks differ substantially across demographic groups. Earnings losses are larger for individuals with low initial wages, low initial tenure, low attachment to the labor force, and for those employed at large firms with low wage levels. Losses for workers with high initial earnings are generally quite modest. For a given size import shock, high wage workers experience a larger reduction in their earnings and employment with their initial employer compared to low wage workers. However, for high skill workers separations are more likely to be voluntary, and are less likely to take place as part of a mass layoff, so initial losses are offset by gains in subsequent jobs. Low-wage workers tend to stay longer in their initial trade-exposed firms and industries, are more likely to separate from their initial firm during mass layoffs, and incur greater losses of earnings both at the initial firm and after moving to other employers.

Monday, October 28, 2013

'Millions of Dreams Ruined'

Dean Baker reminds us that:

... The United States is still down almost 9m jobs from its trend path. We are losing close to $1tn a year in potential output, with cumulative losses to date approaching $5tn.
These numbers correspond to millions of dreams ruined. Families who struggled to save enough to buy a home lost it when house prices plunged or they lost their jobs. Many older workers lose their job with little hope of ever finding another one, even though they are ill-prepared for retirement; young people getting out of school are facing the worst job market since the Great Depression, while buried in student loan debt. ...

We still have a substantial number of unemployed -- millions above full employment level (and that's not even including discouraged workers and the underemployed):

Yet how much have you heard from Washington lately -- from either party -- about the need to do something to help with this problem? Sure Republicans would stand in the way of doing more (though they favor doing less, e.g. cuts to unemployment compensation, food stamps, etc.), but that's partly a reflection of the Democrat's failure to make an issue of obstructionism in the press. Why haven't Democrats made an issue of helping the unemployed at every opportunity in the same way that Republicans make an issue of the debt, etc.?