Economist's View

Kinsley's Howlers

Michael Kinsley tries to take on Paul Krugman, but ends up showing he really doesn't know what he is talking about. For details, see:

• Seven Howlers from Michael Kinsley's Very Misguided War Against Paul Krugman - Brad DeLong
• The worst piece of conventional wisdom you will read this year - Daniel Drezner

I suppose Kinsley is just trying to do his cute contrarian thing, and show his flair as a writer, but this kind of crap does real harm. If we are going to mock people, it ought to be the people who embraced the false ideas Krugman is addressing all the while ignoring the plight of the unemployed. To me, the way so many turned their backs on the unemployed is unforgiveable and it's puzzling why Kinsley would contribute to it through this sort of false equivalency. The unemployment problem isn't even mentioned in his article, though he does say:

I don’t think suffering is good, but I do believe that we have to pay a price for past sins, and the longer we put it off, the higher the price will be.

Actually, solving problems today, e.g. increasing employment so that fewer people exit the labor force permanently, lowers the long-run price. In any case, who's this "we" he's talking about? Has he or any of his VSP buddies suffered as much as the long-term unemployed, some of whom may never find a job again? If we were to say you and your VSP friends need to "suffer" higher taxes in the future so we can help the unemployed today (suffer is, of course, hardly the right word to use for increasing taxes on high income households), would he be on board, or we he confound it with nonsense like he wrote in his latest article?

'About That Debt Crisis? Never Mind'

Paul Krugman on the recent news that the deficit is falling:

About That Debt Crisis? Never Mind, by Paul Krugman: OK, another toe dipped in reality. The new CBO numbers are out, and they scream “debt crisis? What debt crisis?” ...

Yes, debt rose substantially in the face of economic crisis — which is what is supposed to happen. But runaway deficits? Not a hint.

Yes, there are longer-term issues of health costs and demographics. As always, however, these have no relevance to what we should be doing now...

Meanwhile, our policy discourse has been dominated for years by what turns out to be a false alarm. To the millions of Americans who are out of work and may never get another job thanks to premature fiscal austerity, the VSPs would like to say, “oopsies!”

Or maybe not even that. ...

It's a good scam if your goal is to reduce the size and influence of government: implement spending cuts that slow the economy, never mind the unemployed, then call loudly for tax cuts and deregulation to spur economic growth. Repeat as needed.

FRBSF Economic Letter: Will Labor Force Participation Bounce Back?

This is related to the recent post from Gavyn Davies. Recall that he is worried about the unemployment rate giving misleading signals about the labor market. Many workers have dropped out of the labor force, and if those workers return to the labor force as the economy improves, then the measured unemployment rate will make conditions in the labor market look better than they actually are.

In this Economic Letter from the SF Fed, Leila Bengali, Mary Daly, and Rob Valletta argue that this is, in fact, something to worry about. They "find evidence, reinforcing other research, that the recent decline in participation likely has a substantial cyclical component" (i.e. their analysis concludes that exit from the labor market is temporary for a substantial number of people, and they will begin seeking work again when the economy improves):

Will Labor Force Participation Bounce Back?, by Leila Bengali, Mary Daly, and Rob Valletta, Economic Letter, FRBSF: The most recent U.S. recession and recovery have been accompanied by a sharp decline in the labor force participation rate. The largest declines have occurred in states with the largest job losses. This suggests that some of the recent drop in the national labor force participation rate could be cyclical. Past recoveries show evidence of a similar cyclical relationship between changes in employment and participation, which could portend a moderation or reversal of the participation decline as the current recovery continues.

Since the beginning of the recession in 2007, the U.S. labor force participation rate has dropped sharply. Some of this decline reflects long-term demographic trends and other factors that helped push down the participation rate before 2007. But the recent withdrawal of prime-age workers from the labor market is unprecedented and may reflect a cyclical component that could reverse as the labor market recovery solidifies. The return of these workers to the labor force would partially offset the longer-term demographic influences and potentially cause the participation rate to bounce back (Daly et al. 2012, Van Zandweghe 2012). Moreover, the increase in the number of active jobseekers in the labor force associated with higher participation could slow the decline in the unemployment rate.

Assessing the contribution of cyclical factors and the likelihood of a reversal or slower decline in labor force participation is difficult based on aggregate labor market data alone. Such data cannot perfectly distinguish between long-term trends and shorter-term cyclical factors, particularly given the severity of the labor market dislocation during the past recession. To assess the role of cyclical factors in the current recovery, we examine state-level variation in the relationship between changes in the labor force participation rate and changes in employment over several business cycles. ...

After a detailed analysis, they conclude that:

The U.S. labor force participation rate has declined sharply since 2007, intensifying a downward trend that has been evident since about 2000. Distinguishing between long-term influences on the participation rate, such as demographics, and short-term cyclical effects is important because it helps us understand and predict the future path of macroeconomic variables such as the unemployment rate. Using state-level evidence on the relationship between changes in employment and labor force participation across recessions and recoveries, we find evidence, reinforcing other research, that the recent decline in participation likely has a substantial cyclical component. States that saw larger declines in employment generally saw larger declines in participation. A similar positive relationship was evident in past recessions and recoveries. In the current recovery, it will probably take a few years before cyclical components put significant upward pressure on the participation rate because payroll employment is still well below its pre-recession peak.

Let me add, once again, that the costs of being wrong are not symmetric. If we are going to make a policy mistake, the bias ought to be toward keeping policy in place too long (and perhaps enduring a temporary bout of inflation) rather than putting the brakes on too quick (and ending up with an elevated unemployment rate and all of the short-run and long-run consequences that come with it).

'The Fed Dials the Wrong Unemployment Number'

Gavyn Davies argues the Fed is targeting the wrong thing (unemployment instead of employment):

...the Fed has a headache. Its forward guidance on unemployment is in danger of giving misleading signals about the need for tightening, and it probably needs to be changed. ...

The difficulty is that unemployment is declining towards the announced threshold in part because large numbers of people have left the labour force altogether as the recession has dragged on, and this probably means that the official unemployment rate is no longer acting as a consistent measuring rod for the amount of slack in the labour market.

The upshot is that the Fed will probably want to keep short rates at zero until unemployment has dropped a long way below 6.5 per cent...

[I]t is a distortion which the Fed cannot afford to ignore. Its mandate requires that it should aim for “maximum employment”, not “minimum unemployment on the official statistics”, which is what it risks doing under its current forward guidance. ...

If the Fed is going to make a mistake -- ease too long or tighten too soon -- you can probably guess which mistake I think is worse.

Fed Watch: 'Really? One Basis Point?' and 'Rising Structural Unemployment?"

Two from Tim Duy. Here's the first:

Really? One Basis Point?, by Tim Duy: Bloomberg has a story with an ominous opening paragraph:

Bank of Japan Governor Haruhiko Kuroda’s stimulus policies are backfiring in the housing market, where mortgage rates are rising even as the central bank floods the financial system with cash.

Lions, tigers, and bears, oh my! The next paragraph:

Fixed 35-year home-loan costs rose to 1.81 percent this month, the first increase since February and up from an all-time low of 1.8 percent in April, according to data compiled by the Japan Housing Finance Agency. Federal Reserve Chairman Ben S. Bernanke’s monetary easing almost halved 30-year U.S. mortgage rates since 2008 to 3.35 percent on May 2.

Seriously? The case against Kuroda is that after declining since February, mortgage rates climbed a whole basis point? And Kuroda is expected to accomplish in a few months what took Bernanke five years? And I thought I could be a harsh critic of central bankers!

Hopefully this is just a typo; I can't seem to locate a time series of the 35-year mortgage rate in Japan. Otherwise, one might be tempted to conclude that the reporters were biased against Abenomics.

And here's the second:

Rising Structural Unemployment?, by Tim Duy: This tweet from Andy Harless caught my eye:

HIres-to-openings ratio looking uglier & uglier bls.gov/news.release/j… Looks like rising structural unemployment

— Andy Harless (@AndyHarless) May 7, 2013

The chart:

The ratio of hires to openings fell to the low of the last cycle. Now compare the ratio to the unemployment rate:

Unemployment appears to be too high relative to the hires/openings ratio (caution is warranted, however, as the JOLTS data only extends back to 2001). One would normally associate such a low ratio with low unemployment as the number of hires would be relatively low because of the lack of available workers. In this case, however, the number of hires appears to be low despite a large pool of potential employees, consistent with the concern that available workers lack the skills firms seek. Structural unemployment, as Harless suggests.

That said, recall that Matthew O'Brien pointed us at research here and here suggesting that high unemployment is attributable not to structural factors, but instead to a bias against the long-term unemployed. O'Brien recognizes the insidious nature of this problem:

Circles don't get more vicious than this. The people who need work the most can't even get an interview, let alone a job. It's a cycle that could end with the long-term unemployed becoming unemployable. It's what economists call hysteresis, the idea being that a slump, left untreated, can make us permanently poorer by reducing our future ability to do and make things.

Bias against the long-term unemployed might explain why wage growth remains muted:

One would think that a low hires/openings ratio suggests that wage growth would be accelerating (as employers appear to face a relative shortage of workers), but that is not the case. Indeed, low wage growth is one reason to believe that excessive unemployment is cyclical in nature. How does this fit with the long-term unemployed story above? Perhaps that although firms have a bias against the long-term unemployed, those potential workers still place downward pressure on wages. The newly unemployed don't require higher wages despite demand for their skills because they know there is a large pool of people available with similar skills. If the newly unemployed demand too high wages, they may induce employers to take another look at the pool of long-term unemployed. Consequently, they do not seek higher wages.

Incidentally, this also explains the low quits rate. The consequences of becoming long-term unemployed are particularly severe, raising the expected cost of voluntarily leaving a job.

So I guess the "good" news would be this: If bias against the long-term is simply creating the illusion of structural unemployment, then we are not yet faced with the problem of hysteresis. If the pool of long-term unemployed can place downward pressure on wages, then they must have a valuable skill set. Otherwise, they would not represent a threat to the newly unemployed. Keep the demand up for employees long-enough, and firms will eventually give up their bias against the long-term unemployed (I assume this would be preferable to the alternative of prematurely escalating wages). Eventually, the pool of unemployed would decrease and then wage pressures increase.

Still, the longer we wait for this bias to diminish, the more likely it is that the unemployment does indeed become structural. Then we would expect rapidly rising wages despite elevated unemployment. Another argument for pulling on all the stimulus levers. Alas, that is not the case.

Update: And after I wrote all this, I saw this Harless tweet:

Likely part of the reason 4 low hires/opening is that most applicants r now long-term unemployed, who face a more rigorous screening process

— Andy Harless (@AndyHarless) May 8, 2013

Apparently on the same path.

'Extended Benefits Didn’t Keep People From Taking Jobs'

We can be "kinder and gentler" without destroying (or even much affecting) the job market:

Extended Benefits Didn’t Keep People From Taking Jobs, by Amy Schatz, WSJ: Extended unemployment insurance benefits in the most recent recession prompted some people who would otherwise have dropped out of the workforce to stay in a little longer, but didn’t encourage people to reject jobs, according to new research recently released by the Federal Reserve Bank of San Francisco [by] Robert Valletta, a San Francisco Fed economist and Henry Farber, a Princeton University economist...

Baker and Duy on the Jobs Report

Dean Baker on the jobs report:

Economy Adds 165,000 Jobs in April, Unemployment Drops to 7.5 Percent: Recent job reports show there is zero evidence that the prolonged period of high unemployment has anything to do with the workforce’s lack of skills.

The April jobs numbers came in somewhat better than expected with the Labor Department reporting 165,000 new jobs. Job growth for the prior two months was revised up by 114,000, bringing average job growth for the last three months to 212,000. The unemployment rate edged downward to 7.5 percent, the lowest level since December of 2008.

While the total jobs number was somewhat better than the consensus prediction, the composition was disturbing. More than a fifth of the added jobs (34,600) were in employment services. Restaurant employment accounted for 38,000 jobs and the retail sector added 29,300. These three sectors accounted for more than half of April job growth. Health care added 19,000 jobs, a bit less than its 25,000 average over the last year.

In addition to the unbalanced nature of the job growth, there was 0.2 hour decline in the length of the average workweek. This led to 0.4 percentage point drop in the index of average weekly hours, equaling the largest declines since the recovery began.

The job losers were led by the government sector, with the federal government shedding 8,000 jobs, 3,500 of which were in the Postal Service. State and local governments lost 3,000 jobs, bringing their job loss over the last year to 224,000. Construction shed 6,000 jobs, all in the non-residential sector. This reflects less public building as reported in the March construction data. Manufacturing employment was flat in April for the second consecutive month. There is clearly little momentum in this sector right now. ...

The unemployment duration measures all fell in April, largely reversing increases from the prior two months. The share of long-term unemployed fell by 2.2 percentage points to 37.4 percent, the lowest number since October of 2009. It is important to remember that the reduction in the maximum duration of unemployment benefits has likely played a role in this decline since many unemployed workers give up looking for jobs when benefits expire.

One disturbing item in the household data was a 1.0 percentage point drop in the share of unemployment due to voluntary quits. This is the sharpest fall since February of 2009 and could be an indication of less confidence in the job market.

One issue worth emphasizing from this and past reports is that there is zero evidence that the prolonged period of high unemployment is due to a lack of skills of the workforce. This is known because there are no major areas of the economy in which we see the standard signs of a shortage of skilled workers: rising wages, increasing hours, and large numbers of vacancies. However at an even more basic level, the rise in unemployment rates has been roughly proportionate across education levels.

In fact, the unemployment rate has gone up slightly more for college grads relative to its pre-recession level than for people without high school degrees. ...

This report is consistent with the weak growth we have seen since the end of the stimulus. It will be surprising if the unemployment rate does not rise by the end of the year.

Tim Duy:

Quick Employment Thoughts: Running to meeting in a few minutes, but have some quick thoughts on the employment numbers:

Don't Get Fooled Again.  San Franscisco Fed President John WIlliams discounted the last employment report, and he was right to do so. The underlying economy continues to grind along at a slow and steady pace; it doesn't pay to get pulled into becoming overly optimistic or pessimistic about what the latest numbers. The twelve month moving average is remarkably steady:

Summer Tapering Back On The Table.  The recent data flow suggested that plans to begin tapering QE this summer with a year-end target for ending the program. And the inclusion of the "may increase or decrease" clause in the last statement seemed to imply that the recognized the shift in the tone of the data. But the Fed did not alter its economic outlook at the latest FOMC meeting. The combination suggests that the Fed would delay plans to end QE if the data faltered, that such a plan was not a sure thing. But this data suggests that their forecast was more correct than not, which then gives them room to follow the plan that appeared to be coalescing as the last meeting. In short, over the last six months, nfp growth has been 208k a month in spite of the sequester. This can certainly be interpreted as stronger and sustainable improvement.

Bottom Line: The employment report does not alter the Fed's forecast, but provides renew confidence in that forecast. Which could bring a summer tapering of QE back into play.

'Unemployment Hits New Highs in Spain, France'

I've been having computer troubles all day. A quick one from Calculated Risk:

WSJ: "Unemployment Hits New Highs in Spain, France", by Bill McBride: This is no surprise ... from the WSJ: Unemployment Hits New Highs in Spain, France ... Maybe, just maybe, policymakers in Europe will get the message that the almost singular focus on deficit reduction has been a policy mistake.

'Unemployment and the Free Market'

Chris Dillow takes on the idea that free market policies can solve our unemployment problem:

Unemployment and the Free Market, Stumbling and Mumbling: Bryan Caplan deserves praise for calling on free market economists to pay more attention to the "grave evil" of unemployment. I fear, though, that he overstates what free market policies can contribute to solving the problem.

My chart shows the problem. It shows the UK unemployment rate between 1855 (when data begins) and 1914. You can see that the jobless rate was often high - it averaged 4% - and volatile.

Note: data comes from the Bank of England.

And this was during a period of as free markets as one could practically get. This undermines at least three "free market" explanations for unemployment:

- "Welfare benefits mean the unemployed have little incentive to get work." In the 19th C, though, the only state support the unemployed got was in the Workhouse - and even as late as in my lifetime, this was spoken of with terror.

- "Big government and taxes deter job creation." But public spending in this time averaged only around 10% of GDP, and labour market regulation except for a few Factory Acts was nugatory by modern standards.

- "Wages are too rigid". But wages fell in nominal terms in 13 of the 59 years here, and in real terms in 12 of these years. Average nominal wages fell by 9% between 1874 and 1879, which is consistent with some sectors seeing very large falls.

There is, though, an alternative theory that fits these data. It's that a free market will see large swings in aggregate demand and employment, and that unemployment cannot be prevented by wage reductions alone. This was pointed out most famously - well famous in my house anyway - by Michal Kalecki in 1935... [long quote] ...

There's a good reason why almost all major economies abandoned free market economics. It's that such economies didn't and couldn't avoid mass unemployment.

I'll concede - much more than most lefties - that there's a big place for free market economics. But the labour market ain't it. 

Our Lack of Skilled Policymakers

Dean Baker:

...the sequester is throwing around 600,000 people out of work according to the Congressional Budget Office. These are people who have the necessary skills to fill jobs in the economy but who will not be working because people in Washington lack the skills to design policies to keep the economy near full employment.

Paul Krugman: The Jobless Trap

We've been worried about the wrong thing:

The Jobless Trap, by Paul Krugman, Commentary, NY Times: F.D.R. told us that the only thing we had to fear was fear itself. But when future historians look back at our monstrously failed response to economic depression, they probably won’t blame fear, per se. Instead, they’ll castigate our leaders for fearing the wrong things.

For the overriding fear driving economic policy has been debt hysteria... After all, haven’t economists proved that economic growth collapses once public debt exceeds 90 percent of G.D.P.?

Well, the famous red line on debt, it turns out, was an artifact of dubious statistics, reinforced by bad arithmetic. ... But while debt fears were and are misguided, there’s a real danger we’ve ignored: the corrosive effect, social and economic, of persistent high unemployment. ...

Five years after the crisis, unemployment remains elevated, with almost 12 million Americans out of work. But what’s really striking is the huge number of long-term unemployed, with 4.6 million unemployed more than six months and more than three million who have been jobless for a year or more. Oh, and these numbers don’t count those who have given up looking for work because there are no jobs to be found. ...

The key question is whether workers who have been unemployed for a long time eventually come to be seen as unemployable, tainted goods that nobody will buy. ... And there is, unfortunately, growing evidence that the tainting of the long-term unemployed is happening as we speak. ... So we are indeed creating a permanent class of jobless Americans.

And let’s be clear: this is a policy decision. The main reason our economic recovery has been so weak is that, spooked by fear-mongering over debt, we’ve been doing exactly what basic macroeconomics says you shouldn’t do — cutting government spending in the face of a depressed economy.

It’s hard to overstate how self-destructive this policy is. Indeed, the shadow of long-term unemployment means that austerity policies are counterproductive even in purely fiscal terms. Workers, after all, are taxpayers too; if our debt obsession exiles millions of Americans from productive employment, it will cut into future revenues and raise future deficits.

Our exaggerated fear of debt is, in short, creating a slow-motion catastrophe. It’s ruining many lives, and at the same time making us poorer and weaker in every way. And the longer we persist in this folly, the greater the damage will be.

'Getting Back to Full Employment'

Jared Bernstein calls for "direct, public job creation":

Getting Back to Full Employment: Getting back to full employment—not debt, deficits, sequester, debt ceilings—is what we ought to be talking about... I’m happy to say, in fact, that in my travels outside this benighted town (DC), it’s the question I get asked most often (“why isn’t Washington doing anything about jobs!!??”). ....

So how do we get there from here?

Of course, the first thing is to get the macro policy right, and I go on about that enough about that ... already. Dean Baker emphasizes dollar policy here as well: the trade deficit is a drag on growth and factory jobs, so that too is a target in the quest for full employment.

But for this post, I’d like to focus on something else, motivated by the chart below, one I’ve posted before. It simply plots private sector job growth against productivity growth. Up until about 15 years ago, you could have nicely employed this picture against your Luddite friends who complain about productivity killing jobs.

Source: BLS

Until then, the two lines largely grew together. Yes, we were more productive, but growth resulted in higher demand that fed back into the economy’s job-creation function in ways that boosted job growth. The income and wage benefits of growing productivity certainly haven’t reached very far down the income scale since the late 1970s—that’s the inequality story. But even as inequality grew in the 1980s and 1990s, job creation largely kept pace with output per hour.

That hasn’t been the case since, and it is a matter of grave concern. The reasons go beyond my scope here, but a prime suspect observed at the crime scene is an acceleration of labor-saving capital investment, like robotics (see Brynjolfsson and McAfee for incisive work on this question).

Here, I want to introduce a different solution, one that isn’t better fiscal and monetary policy to maximize growth. It’s direct, public job creation. That is, if the private sector can’t be counted upon to generate the needed job opportunities to absorb our labor supply, then there is a role for government to correct this important market shortcoming. ...

What, specifically, am I talking about? Not so much a bunch of guys setting up camp in the woods and building stuff circa the 1930s, though that worked well at the time...

But those days have passed, I think, and contemporary direct job creation programs are not limited to public sector jobs. A more common model today is subsidized work, often in the private or NGO sectors. The TANF subsidized jobs program during the Recovery Act is a good recent example of an effective, though small, program that placed over 250,000 low-income workers in 2009-10. As Pavetti et al report, the program worked with private and government employers to create “new temporary jobs that would otherwise have not existed.” ...

There’s obviously a ton to be done, both in terms of infrastructure (upgrading and repairing public goods) and services, and while displacement must be prohibited and monitored (and punished, when it’s exposed), research suggests that a lot of what happens here is you pull forward a hire that might have happened later or nudge an employer at the margin of a hiring decision to go ahead and pull the trigger.

I’ll have a lot more to say about this in coming weeks and yes, I know it’s way outside the current political box. But this relatively new gap between employment and productivity will only exacerbate the old gap between income and productivity unless we begin to think and act outside that box on ways to achieve full employment. Direct job creation is part of the answer.

Paul Krugman: The Excel Depression

Will the "Reinhart-Rogoff fiasco" change "the obviously intense desire of policy makers, politicians and pundits across the Western world to turn their backs on the unemployed and instead use the economic crisis as an excuse to slash social programs"?:

The Excel Depression, by Paul Krugman, Commentary, NY Times: ... At the beginning of 2010, two Harvard economists, Carmen Reinhart and Kenneth Rogoff, circulated a paper ... that purported to identify a critical “threshold,” a tipping point, for government indebtedness. Once debt exceeds 90 percent of gross domestic product, they claimed, economic growth drops off sharply.

Ms. Reinhart and Mr. Rogoff had credibility thanks to a widely admired earlier book on the history of financial crises, and their timing was impeccable. The paper came out just after Greece went into crisis and played right into the desire of many officials to “pivot” from stimulus to austerity. As a result, the paper ... was, and is, surely the most influential economic analysis of recent years.

In fact,... Reinhart-Rogoff faced substantial criticism from the start... As soon as the paper was released, many economists pointed out that a negative correlation between debt and economic performance need not mean that high debt causes low growth. It could just as easily be the other way around, with poor economic performance leading to high debt. ...

Over time, another problem emerged: Other researchers ... couldn’t replicate the Reinhart-Rogoff results. ... Finally,... the mystery of the irreproducible results was solved. First, they omitted some data; second, they used unusual and highly questionable statistical procedures; and finally, yes, they made an Excel coding error. Correct these oddities and errors, and you get what other researchers have found: some correlation between high debt and slow growth, with no indication of which is causing which, but no sign at all of that 90 percent “threshold.” ...

The ... Reinhart-Rogoff fiasco needs to be seen in the broader context of austerity mania: the obviously intense desire of policy makers, politicians and pundits across the Western world to turn their backs on the unemployed and instead use the economic crisis as an excuse to slash social programs. ... For three years,... austerity advocates insisted ... that terrible things happen once debt exceeds 90 percent of G.D.P. But “economic research” showed no such thing; a couple of economists made that assertion, while many others disagreed. Policy makers abandoned the unemployed and turned to austerity because they wanted to, not because they had to.

So will toppling Reinhart-Rogoff from its pedestal change anything? I’d like to think so. But I predict that the usual suspects will just find another dubious piece of economic analysis to canonize, and the depression will go on and on.

'This Was a Disappointing Employment Report'

Can't disagree with CR's bottom line, "This was a disappointing employment report":

March Employment Report: 88,000 Jobs, 7.6% Unemployment Rate: From the BLS:

Nonfam payroll employment edged up in March (+88,000), and the unemployment rate was little changed at 7.6 percent, the U.S. Bureau of Labor Statistics reported today. ...

The change in total nonfarm payroll employment for January was revised from +119,000 to +148,000, and the change for February was revised from +236,000 to +268,000. The headline number was well below expectations of 193,000 payroll jobs added.  However employment for January and February were revised higher.

... The Labor Force Participation Rate decreased to 63.3% in March... The participation rate is well below the 66% to 67% rate that was normal over the last 20 years, although a significant portion of the recent decline is due to demographics.

The Employment-Population ratio was also declined to 58.5% in March (black line). ...

This was a disappointing employment report and worse than expectations.

Austerity matters.

Too bad we don't have something like a need for infrastructure that, if we were to employ people to overcome it, could hep with this problem.

'The Price Is Wrong'

As noted below, it is a slow day, but this is well worth reading (there's quite a bit more in the original post):

The Price Is Wrong, by Paul Krugman: It’s a slow morning on the economic news front, as we wait for various euro shoes to drop, so I thought I’d share a meditation I’ve been having on the diagnosis and misdiagnosis of the Lesser Depression. ...

So, start with our big problem, which is mass unemployment. Basic supply and demand analysis says that ... prices are supposed to rise or fall to clear markets. So what’s with this apparent massive and persistent excess supply of labor? In general, market disequilibrium is a sign of prices out of whack... The big divide comes over the question of which price is wrong.

As I see it, the whole structural/classical/Austrian/supply-side/whatever side of this debate basically believes that the problem lies in the labor market. ... For some reason, they would argue, wages are too high... Some of them accept the notion that it’s because of downward nominal wage rigidity; more, I think, believe that workers are being encouraged to hold out for unsustainable wages by moocher-friendly programs like food stamps, unemployment benefits, disability insurance, and whatever.

As regular readers know, I find this prima facie absurd — it’s essentially the claim that soup kitchens caused the Great Depression. ...

So what’s the alternative view? It’s basically the notion that the interest rate is wrong — that given the overhang of debt and other factors depressing private demand, real interest rates would have to be deeply negative to match desired saving with desired investment at full employment. And real rates can’t go that negative because expected inflation is low and nominal rates can’t go below zero: we’re in a liquidity trap. ..

There are strong policy implications of these two views. If you think the problem is that wages are too high, your solution is that we need to meaner to workers — cut off their unemployment insurance, make them hungry by cutting off food stamps, so they have no alternative to do whatever it takes to get jobs, and wages fall. If you think the problem is the zero lower bound on interest rates, you think that this kind of solution wouldn’t just be cruel, it would make the economy worse, both because cutting workers’ incomes would reduce demand and because deflation would increase the burden of debt.

What my side of the debate would call for, instead, is a reduction in the real interest rate, if possible, by raising expected inflation; and failing that, more government spending to increase demand and put idle resources to work. ...

So yes, the price is wrong — but it’s a terrible, disastrous mistake to focus on the wrong wrong price.

Why should workers bear the burden of a recession they had nothing to do with causing? We should do our best to protect vulnerable workers and their families, and if it comes at the expense of those who were responsible for the boom and bust, I can live with that (and no, the cause wasn't poor people trying to buy houses -- people on the right who are afraid they will be asked to pay for their poor choices, or who want to pursue an anti-government, do not help the unfortunate with my hard-earned investment income agenda have tried to make this claim, and they are still at it, but it is "prima facie absurd").

'The Same-Old, Same-Old Labor Market'

David Altig (there is much more detail, graphs, etc. in the original post):

The Same-Old, Same-Old Labor Market, macroblog: In his March 24 Wall Street Journal piece on declining government payrolls, Sudeep Reddy offers up a key observation:

The cuts in the public-sector workforce—at the federal, state and local levels—marked the deepest retrenchment in government employment of civilians since just after World War II... down by about 740,000 jobs since the recession ended in June 2009. At the same time, the private sector has added more than 5.2 million jobs over the course of the recovery.

As the Journal article notes, the story of shrinking government employment combining with private-sector payroll expansion has been remarkably consistent for much of the recovery. ...

It is worth pointing out that the monthly average of 17,000 state, local, and federal government jobs lost since March 2010 has been nearly matched by average monthly increases of better than 14,000 jobs in manufacturing, a sector that persistently shed jobs in the previous recovery. The replacement of private- for public-sector employment has generated 175,000 to 185,000 net jobs per month in both 2011 and 2012. To put one perspective on that figure, at current labor force participation rates (along with some other assumptions and caveats), that pace would be sufficient to reach the Federal Open Market Committee's 6.5 percent unemployment threshold by sometime in spring 2015 (as you can verify yourself with the Atlanta Fed's Jobs Calculator). That calculation raises the stake somewhat on the matter of how "the rest of the private sector responds."

Think how much better things would be without shrinking government employment, or even better with a temporary expansion in government employment to bridge the gap until private sector employment prospects improve.

Corporate Profitability

Corporations are making "historic levels" of profit:

Economy built for profits not prosperity, by Lawrence Mishel, EPI: Newly released data on corporate profitability for 2012 show the continuation of historic levels of profitability despite excessive unemployment and stagnant wages for most workers. Specifically, the share of capital income (such as profits and interest, which are hereafter referred to as ‘profits’) in the corporate sector increased to 25.6 percent in 2012, the highest in any year since 1950-1951 and far higher than the 19.9 percent share prevailing over 1969-2007, the five business cycles preceding the financial crisis. ...

This helps to explain the lack of enthusiasm among corporate leaders for a jobs/stimulus program. They're doing fine. (Though that won't stop them from arguing that corporate tax cuts -- which would further increase the mountain of cash they are sitting on -- are the key to the recovery. Note however that business investment is relatively strong and "This historic share of income going to profits reflects historically high returns on investments, meaning more profit per dollar of assets.")

Update: I meant to add, if only there was some way of putting those idle funds -- and people -- to work productively (picture Paul Krugman banging his head against the wall in frustration as our infrastructure crumbles...)

'Is Job Polarization Holding Back the Labor Market?'

Stefania Albanesi, Victoria Gregory, Christina Patterson, and Ayşegül Şahin of the NY Fed ask:

Is Job Polarization Holding Back the Labor Market?

Their answer:

Our findings show that while job polarization is an important ongoing trend in the labor market, it’s not a key contributor to the sluggish labor market recovery. Our analysis suggests that the weakness in the labor market is broad based and not limited to a certain segment of the market.

They find that the slow recovery is NOT due to pre-existing, "ongoing trends in the labor market that were exacerbated during the recession," i.e. (consistent with most evidence on this), it's a cyclical, lack of demand problem not a structural problem.

Why Don’t Politicians Care about the Working Class?

We are live:

Why Don’t Politicians Care about the Working Class?, by Mark Thoma: If we want to ensure that our children and grandchildren have the brightest possible future, the national debt is not the most important problem to address. Reversing the polarization of the labor market – the hollowing out of the middle class and the associated rise in inequality over the last thirty years or so – is much more important. But money driven politics and a political class that has all but forgotten about the working class – Democrats in particular have forgotten who they are supposed to represent – stand in the way of progress on this important problem. ...

'Focusing on Low- and Moderate-Income Working Americans'

It's nice to see the Fed thinking in these terms. This is from a speech by Federal Reserve Governor Sarah Bloom Raskin:

Focusing on Low- and Moderate-Income Working Americans: ... Challenges Posed by Labor Market Conditions
The Great Recession stands out for the magnitude of job losses we experienced throughout the downturn. These factors have hit low- and moderate-income Americans the hardest. The poverty rate has risen sharply since the onset of the recession, after a decade of relative stability, and it now stands at 15 percent--significantly higher than the average over the past three decades.¹ And those who are fortunate enough to have held onto their jobs have seen their hourly compensation barely keep pace with the cost of living over the past three years.² ...

About two-thirds of all job losses resulting from the recession were in moderate-wage occupations, such as manufacturing, skilled construction, and office administration jobs. However, these occupations have accounted for less than one-quarter of subsequent job gains. The declines in lower-wage occupations--such as retail sales and food service--accounted for about one-fifth of job loss, but a bit more than one-half of subsequent job gains. Indeed, recent job gains have been largely concentrated in lower-wage occupations such as retail sales, food preparation, manual labor, home health care, and customer service.³

Furthermore, wage growth has remained more muted than is typical during an economic recovery. To some extent, the rebound is being driven by the low-paying nature of the jobs that have been created. ... In fact, while average wages have continued to increase steadily for persons who have remained employed all along, the average wage for new hires have actually declined since 2010.⁴

The faces of low-wage Americans are diverse. They include people of varying employment status, race, gender, immigration status, and other characteristics. Many such Americans are attached to the workforce and are deeply committed to both personal success and to making a contribution to society. For purposes of reference, in 2011, low wage was defined as $23,005 per year or $11.06 per hour.⁵

Today, about one-quarter of all workers are considered "low wage." They are sanitation workers, office receptionists, and nursing assistants; they are single mothers of three who worry: How will I be able to send my children to college? What if my landlord raises the rent this year? Tens of millions of Americans are the people who ask themselves these questions every day.

This diverse group of workers faces numerous barriers when trying to access the labor market or advance in their current positions. ...

We know, for example, that location presents thorny challenges for many low-wage workers. Within metropolitan areas, jobs are not spread out evenly and job creation tends to be depressed in low-income communities. As a result, many low-wage workers face long commutes and serious commuting difficulties due to less reliable transportation and an inadequate transportation infrastructure. Moreover, a number of low-wage employees work non-standard hours, exacerbating both transportation and childcare issues, as well as personal health problems.⁷

Traditionally, many workers find jobs through social networks and through personal connections that they have to the labor market. But, because low-income individuals are typically less mobile, more isolated, and less socially connected than other people, they are often left out of the social networks that, in practice, lead to jobs for most Americans. ...

[T]he 21^st century labor market is increasingly complex; it continues to generate new challenges. For example, growth in sectors such as green industries and advanced manufacturing is creating jobs, but these jobs may demand different skills. Access to reliable information becomes critical for workers who are considering a new job, and must carefully weigh the skills and credentials required by potential employers with the cost of training and the likelihood of gaining employment.

And, more and more, employers are requiring post-secondary credentials. Today, a high school diploma alone is less likely to qualify an individual for a job with a path toward meaningful advancement. And, as demand for more credentials increases, workers who lack those credentials will find it increasingly difficult to gain upward mobility in the job market.

Contingent Work
Many employers are looking to make the employment relationship more flexible, and so are increasingly relying on part-time work and a variety of arrangements popularly known as "contingent work." This trend toward a more flexible workforce will likely continue. For example, while temporary work accounted for 10 percent of job losses during the recession, these jobs have accounted for more than 25 percent of net employment gains since the reces­sion ended.¹⁰ In fact, temporary help is rapidly approaching a new record, and businesses' use of staffing services continues to increase.¹¹

Contingent employment is arguably a sensible response to today's competitive marketplace. Contingent arrangements allow firms to maximize workforce flexibility in the face of seasonal and cyclical forces. The flexibility may be beneficial for workers who want or need time to address their family needs. However, workers in these jobs often receive less pay and fewer benefits than traditional full-time or "permanent" workers, are much less likely to benefit from the protections of labor and employment laws, and often have no real pathway to upward mobility in the workplace.¹²

Many workers who hold contingent positions do so involuntarily. Department of Labor statistics tell us that 8 million Americans say they are working part-time jobs but would like full-time jobs.¹³ These are the people in our communities who are "part time by necessity." As businesses increase their reliance on independent contractors and part-time, temporary, and seasonal positions, workers today bear far more of the responsibility and risk for managing their careers and financial security. Indeed, the expansion of contingent work has contributed to the increasing gap between high- and low-wage workers and to the increasing sense of insecurity among workers.¹⁴

Flexible and part-time arrangements can present great opportunities to some workers, but the substantial increase in part-time workers does raise a number of concerns. Part-time workers are particularly vulnerable to personal shocks due to lower levels of compensation, the absence of meaningful benefits, and even a lack of paid sick or personal days. Not surprisingly, turnover is high in these part-time jobs.

Access to Credit
The economic marginalization that comes with the growth of part-time and low-paying jobs is exacerbated by inadequate access to credit for many working Americans. Ideally, people chronically short of cash would have access to safe and sound financial institutions that could provide reliable and affordable access to credit as well as good savings plans. Unfortunately, many working Americans have no practical access to reasonably priced financial products with safe features, much less the kind of safe and fair credit that is available to wealthier consumers.

Working Americans have several core financial needs. They need a safe, accessible, and affordable method to deposit or cash checks, receive deposits, pay bills, and accrue savings. They may also need access to credit to tide them over until their next cash infusion arrives. They may be coming up short on paying their rent, their mortgage, an emergency medical expense, or an unexpected car repair. They may want access to a savings vehicle that, down the road, will help them pay for these items and for education or further training, or start a business. And many want some form of non-cash payment method to conduct transactions that are difficult or impossible to conduct using cash.

Products and services that serve these core financial needs are not consistently available at competitive rates to working Americans. Those with low and moderate incomes may have insufficient income or assets to meet the relatively high requirements needed to establish a credit history. Others may have problems in their credit history that inhibit their ability to borrow on competitive terms.

Many workers simply may not have banks in their communities, or may not have access to banks that actually compete with each other in terms of pricing or customer service. There is a growing trend toward greater concentration of financial assets at fewer banks. In my mind, this raises doubts about whether banking services will continue to be provided at competitive rates to all income levels of customers wherever they may live. ... While branch-building has been on the rise, indications are that the increase in the number of bank offices has not occurred evenly across neighborhoods of varying income.¹⁵

In fact, a significant number of low- and moderate-income families have become--or are at risk of becoming--financially marginalized. The percentage of families earning $15,000 per year or less who reported that they have no bank account increased between 2007 and 2009 such that more than one in four families was unbanked. Families slightly further up the income distribution, earning between $25,000 and $30,000 per year, are also financially marginalized: 13 percent report being unbanked and almost 24 percent report being underbanked.¹⁶

This combination of economic insecurity and financial marginalization has incentivized more low- and moderate-income families to seek out alternative financial service providers to meet their financial needs. Some of the providers they find, such as check-cashers and outfits furnishing advance loans on paychecks, can lead unwary workers into very deep financial holes. ...

There is no simple cure to these conditions, but government policymakers need to focus seriously on the problems, not simply because of notions of fairness and justice, but because the economy's ability to produce a stable quality of living for millions of people is at stake. Our country cannot achieve prosperity without addressing the powerful undertow created by flat wages and tenuous financial security for so many millions of Americans.

The Role of Monetary Policy
So how can the Federal Reserve address these challenges? Let me start with monetary policy. Congress has directed the Federal Reserve to use monetary policy to promote maximum employment and price stability. The Federal Reserve's primary monetary policy tool is its ability to influence the level of interest rates. Federal Reserve policymakers pushed short-term interest rates down nearly to zero as the financial crisis spread and the recession worsened in 2007 and 2008. By late 2008, it was clear that still more policy stimulus was necessary to turn the recession around. The Federal Reserve could not push short-term interest rates down further, but it could--and did--use the unconventional policy tools to bring longer-term interest rates such as mortgage rates down further.

Fed policymakers intend to keep interest rates low for a considerable time to promote a stronger economic recovery, a substantial improvement in labor market conditions, and greater progress toward maximum employment in a context of price stability. Both anecdotal evidence and a wide range of economic indicators show that these attempts are working to strengthen the recovery and that the labor market is improving.

Nonetheless, and again, the millions of people who would prefer to work full time can find only part-time work. While the Federal Reserve's monetary policy tools can be effective in promoting stronger economic recovery and job gains, they have little effect on the types of jobs that are created, particularly over the longer term. So, while monetary policy can help, it does not address all of the challenges that low- and moderate-income workers are confronting. That said, the existing mandate regarding maximum employment requires policymakers on the Federal Open Market Committee (FOMC) to understand labor market dynamics, which obviously must include an understanding of low- and moderate-income workers.

Regulatory and Supervisory Touchpoints
In addition to monetary policy, the Federal Reserve's regulatory and supervisory policies have the potential to address some of the challenges faced by low-income communities and consumers. ... If banking practices are undermining the ability of the economically marginalized to become financially included and to access the credit they need in an affordable way, regulators must move in quickly...

Swift and decisive corrective action is not always how federal bank regulators have responded ... in the past. In my view, for example, regulators' response to the rampant, long-running problems in loan-servicing practices at large financial institutions was not swift and was not decisive. ...

Ed Leamer Argues the Unemployment Problem is Mostly Structural (I Disagree, and Policy Can Help in Any Case)

I disagree with the claim that our unemployment problem is mostly structural (and hence there is nothing that monetary or fiscal policy can do about it) and I've presented lots of evidence supporting the view that there is a large cyclical component (e.g., latest). But not everyone agrees. Here's Ed Leamer arguing for the structural interpretation:

Here's how I see it. As I said, I am convinced by the evidence showing there's a large cyclical component to the unemployment problem, but I could be wrong (and so could Leamer and others -- I think they are). So which is the bigger error, not helping struggling households who could be helped, or trying to extend a hand when it's not going to do much good? I'd rather make the mistake of trying to help when it isn't necessary instead of leaving people stranded when help is possible.

But suppose unemployment is, in fact, mostly a structural problem. If we could help to overcome the "slow uptake" problem after recessions by (1) providing public employment that bridges the gap until private sector jobs are available, (2) keeping people connected to the labor market and reducing the likelihood they'll drop out, go on disability, or choose some other socially costly alternative, (3) enhancing our long-run growth prospects, (4) saving ourselves money in the long-run, and (5) accomplish this with policies directed at "supply-side" problems that help with demand at the same time, shouldn't we do it?

Infrastructure spending has these features. We can delay basic maintenance for awhile much as a household or business can defer maintenance on a car or delivery vehicles, but there comes a point when the failure to do basic maintenance will cost us even more in the long-run (change your oil now, or change your engine later). We have delayed investment in infrastructure long-enough, and it's time to put people to work rebuilding for the future. These policies don't depend upon whether its cyclical or structural, we have the need -- the benefits exceed the costs (which are unusually low due to the recession) -- and there are millions of people who want to work, but cannot find employment. Why not put them to work doing something productive?

Paul Krugman: Dwindling Deficit Disorder

The deficit was never our biggest problem, that title goes to unemployment, and it's even less of a problem today:

Dwindling Deficit Disorder, by Paul Krugman, Commentary, NY Times: For three years and more, policy debate in Washington has been dominated by warnings about the dangers of budget deficits. A few lonely economists have tried from the beginning to point out that this fixation is all wrong, that deficit spending is actually appropriate in a depressed economy. But even though the deficit scolds have been wrong about everything so far — where are the soaring interest rates we were promised? — protests that we are having the wrong conversation have consistently fallen on deaf ears.

What’s really remarkable at this point, however, is the persistence of the deficit fixation in the face of rapidly changing facts. People still talk as if the deficit were exploding...; in fact, the deficit is falling more rapidly than it has for generations, it is already down to sustainable levels, and it is too small given the state of the economy. ...

There are, of course, longer-term fiscal issues: rising health costs and an aging population will put the budget under growing pressure over the course of the 2020s. But I have yet to see any coherent explanation of why these longer-run concerns should determine budget policy right now. And as I said, given the needs of the economy, the deficit is currently too small. ...

Yes, we’ll want to reduce deficits once the economy recovers... But unemployment, especially long-term unemployment, is still unacceptably high. “The boom, not the slump, is the time for austerity,” John Maynard Keynes declared many years ago. He was right — all you have to do is look at Europe to see the disastrous effects of austerity on weak economies. And this is still nothing like a boom.

Now, I’m aware that the facts about our dwindling deficit are unwelcome in many quarters. Fiscal fearmongering is a major industry inside the Beltway, especially among those looking for excuses to do what they really want, namely dismantle Medicare, Medicaid and Social Security. People whose careers are heavily invested in the deficit-scold industry don’t want to let evidence undermine their scare tactics; as the deficit dwindles, we’re sure to encounter a blizzard of bogus numbers purporting to show that we’re still in some kind of fiscal crisis.

But we aren’t. The deficit is indeed dwindling, and the case for making the deficit a central policy concern, which was never very strong given low borrowing costs and high unemployment, has now completely vanished.

Deeply Irresponsible Fiscal Policy

Austerity is hurting job growth:

Federal Austerity’s Bite on Job Growth, by Binyamin Appelbaum, NY Times: The latest jobs report could have been even better. Employers added 236,000 jobs in February,... but analysts generally agree that the number would have been higher if the federal government had not increased payroll tax rates in January. And the sequestration of federal spending, which began last week, has joined the tax increases in restricting the pace of job growth.

As a result, the rest of the year is shaping up as a tug of war between a strengthening private sector and federal austerity. ...

Not to mention the austerity that has already happened (see below).

With that background, let's turn it over to Simon Wren-Lewis:

Causing recessions, mainly macro: If a car driver falls asleep at the wheel of his car, do we say they caused the accident that follows? Of course we do: it would be absurd to say otherwise. We take it as given that it is the driver’s responsibility to keep control of the car.

Now imagine that the Fed or the MPC had kept interest rates at their pre-recession levels from 2008 onwards. Would we say that monetary policy had made the recession worse. Of course we would. We expect monetary policy to do everything it can to bring the recession to an end. ...

Yet when it comes to fiscal policy, it seems people suddenly take a different view. Some ‘neutral’ path for government spending and taxes is defined, and only if they differ from these paths do we say fiscal policy made the recession worse. Has austerity reduced UK GDP by 2.5%, as the IMF suggest, or by 1.4%, as the OBR suggest? But this asks the wrong question. The right question is why has fiscal policy not been used to help end the recession. That is the question Keynes posed in the General Theory following the Great Depression.

The moment that monetary policy hit the zero lower bound, fiscal policy should have been used to first limit the size of the recession, and then bring the recession to an end. The former happened under the previous Labour government in the UK and Obama in the US, and it worked. My quarrel with what happened afterwards is not that fiscal policy was restrictive compared to some neutral path, but that it did not continue to do whatever was necessary to sustain the recovery. Quite simply, when monetary policy could no longer do the job, fiscal policy should have taken on the stabilization role. ...

Often the questions we ask are more revealing than the answers we give. Questions like “was it the Eurozone crisis rather than fiscal policy that really caused the UK double dip”, or “is the weak US recovery down to greater uncertainty or restrictive fiscal policy”, or “budgets were in surplus in Spain and Ireland before the recession so what more could they do” in my view miss the point, much as the statement “it was oil prices rather than monetary policy that caused 1970s inflation” would miss the point. Whatever shocks have caused weak demand in this recession, if monetary policy is constrained, fiscal policy should be trying to offset these shocks.  In these situations, the presumption should be that fiscal policy is countercyclical. If it wasn’t, that is a failure of policy. The driver was falling asleep at the wheel. ...

Just one note. Although I agree with him that fiscal policy was used by "Obama in the US, and it worked," it was far, far from adequate (it made things not quite as bad, but still bad). In fact:

Spending is still elevated a bit relative to pre-crisis — reflecting higher spending on unemployment benefits and food stamps, plus the ongoing pressures of baby-boomer retirement and rising medical costs. But it’s way down from the peak. Yes, we’ve been engaged in austerity — and this is a major reason the recovery has been so weak.

But everyone knows we have a deficit problem, right? That's why we need austerity even though it makes it harder for people looking for work -- work that will ease their financial struggles. Making them pay this cost is necessary since the deficit problem must be solved immediately!

Well, not so much, or at all. The deficit is gone:

Gone Deficit Gone, by Paul Krugman: So says the CBO, although not directly.

Anyone who is serious (as opposed to Serious) about matters fiscal knows that it’s highly misleading just to focus on the raw deficit numbers (ONE TRILLION DOLLARS), for two reasons.

First, fluctuations in the deficit tend to be driven by the business cycle... You want to take out these “automatic stabilizers” when assessing the underlying state of the budget. Second, we don’t have to balance the budget to have a sustainable fiscal position; all we need is to ensure that debt grows more slowly than GDP. ...

CBO ... estimates that  ... the cyclically adjusted deficit will be $423 billion. ... A reasonable, indeed fairly conservative guess is that nominal GDP will in future grow by 4 percent per year, half from real growth and half from inflation. This means that the sustainable deficit is 4 percent of $11.5 trillion, or $460 billion. Hey, we’re there!

And next year the adjusted deficit is projected to be much smaller:

Yes, late this decade deficits will start to rise again thanks to rising health costs and an aging population, yada yada. But I have yet to hear a coherent argument about why the long-term problem of paying for the benefits we want — which will eventually have to be resolved through a combination of cost savings and revenue increases — should constrain our fiscal policy right now, in the midst of what remains a terrible economic slump.

And I would say that the figure above is, in fact, a portrait of deeply irresponsible fiscal policy — because it is just crazy that in this deeply depressed economy we are now pursuing a fiscal policy that is tighter than the policy we followed at the height of the housing bubble.

So let’s try to stop doing that. And everyone repeat with me: there is no deficit problem.

The problem of "deeply irresponsible fiscal policy" is not confined to Europe.

Fed Watch: A Solid Employment Report

Tim Duy:

A Solid Employment Report, by Tim Duy: The February employment report was solid - not a blockbuster report, but definitely solid. And three of the last four employment reports have been solid as well, with payroll growth about 200k per month. This will undoubtedly raise some chatter that the Federal Reserve's large scale asset purchase program will be tapered back soon than later. I suspect such talk would be premature. While the labor market currently has some momentum, we have seen such momentum fade in the past. Moreover, we are still deep in the labor market hole, so to speak. The Fed has time to see this play out, and, even if labor markets continue to improve at this pace, will most likely take that time, delaying any reduction of the pace of asset purchases until late this year.

Headline job gains totaled 236k for February:

December was revised up, but January was revised down. The three-month average is 191k, while the twelve-month average is a more modest 164k, declining slowly over the year. Note that during the last two years we have seen momentum on either side of the start of the year fade by spring or summer. The Fed knows this as well, and thus will tend to question the resiliency of these numbers. This is especially the case as the fiscal contraction is just beginning to work its way through the economy. Note that government employment continues to be an overall drag on the numbers:

The sequester may aggravate this trend in the near term. Calculated Risk is optimistic that layoffs at the state and local levels are mostly over; my conversations with municipalities in Oregon tend to be somewhat more pessimistic. Even though revenues are stabilizing in some cases, costs continue to rise, squeezing budgets. Anecdotal and regional evidence, so use with caution.

The unemployment rate edged down to 7.7%; at this rate of decline, we will be into next year before we see 6.5%. And that's not a trigger for Fed action on interest rates - as long as inflation remains contained, 6.5% early next year suggests a rate hike in late 2014 or early 2015, consistent with current expectations. Why the delay after hitting 6.5%? Again, I think it reflects the depth of the hole. Progress on some indicators remains woefully slow:

See also Robin Harding's cheat-sheet on Federal Reserve Vice Chair Janet Yellen's last speech.

Hawkish monetary policymakers might try to gain some traction on wage gains:

Here again, the depth of the hole matters. Wage growth has considerable room to climb before it becomes a worrisome inflation indicator. And note that the all employees figure is not showing the same gains:

I would expect that the intensity of public comments by Federal Reserve policymakers increases as the year progresses. The hawks will almost certainly get increasingly nervous, and like to be heard. This will probably continue to show up in the minutes. But the doves, and currently dovish-leaning center, recognize the importance of clear communications, and thus will feel compelled to respond even more vociferously than in the past. In my opinion, this is not a great overall strategy, but unless Federal Reserve Chairman Ben Bernanke wants to exert more direct control over communications to get everyone on the same talking points, it is what we have.

Bottom Line: A solid report, but we need a longer stream of solid reports before Fed chatter turns decisively toward tighter policy.

The Employment Situation -- February 2013

From the BLS:

Total nonfarm payroll employment increased by 236,000 in February, and the unemployment rate edged down to 7.7 percent... Employment increased in professional and business services, construction, and health care.

The unemployment rate edged down to 7.7 percent in February but has shown little movement, on net, since September 2012. The number of unemployed persons, at 12.0 million, also edged lower in February.

Lots of yahoos! out there about this report, so let me offer a few cautions from Phil Izzo at the WSJ:

... The number of people who say they are working increased by 170,000, solid increase from the prior month. Meanwhile, the number of people counted as unemployed tumbled by an even larger 300,000. That sparks some concern. It means that all of those unemployed didn’t find jobs. Many of them are likely retirees or people who leave the labor force to go to school. But there also are large numbers of discouraged workers dropping out of the labor force. The number of discouraged workers jumped in February.

The issue can be seen in the smaller drop in the broader unemployment rate, known as the "U-6"... That includes everyone in the official rate plus [discouraged workers and part-time workers who would rather be working full-time.] ... In February,... the number of part-time workers who would like full-time jobs increased and the ranks of those marginally attached to the labor force climbed.

The disparity highlights the plight of the long-term unemployed, whose ranks increased in February even as those without a job for a shorter time had an easier time finding a new position. The longer someone is out of a job, the harder it is for them to find work.

We should also recognize that these numbers are often revised substantially, e.g. last month's number was revised downward from 157,000 to 119,000. With that said, again from the WSJ (Ben Casselman):

Jobs reports are often a mishmash of good news and bad, with no clear signal of the direction of the labor market. Not this month. Virtually all of the major indicators were pointing in the right direction: Payrolls were up, the unemployment rate was down and every major piece of the private sector posted job gains. The consumer sector appears to have shrugged off higher taxes and rising gas prices; retailers and restaurants added jobs. Perhaps the only significant negative was a downward revision to January’s job growth, which could suggest the Fiscal Cliff had a bigger impact on employment than initially thought.

Update: See also Dean Baker:

Job Growth Picks Up Steam in February, by Dean Baker: The Labor Department reported that the economy added 236,000 jobs in February. With a small downward revision to job growth over the prior two months, this brings the average growth rate over the last three months to 191,000. The unemployment rate fell to 7.7 percent, but this drop was largely attributable to a decline in labor force participation. The employment-to-population ratio (EPOP) was unchanged at 58.6 percent, exactly the same as the rate in February of 2012 and just 0.4 percentage points above the low hit in the summer of 2011. This compares with an EPOP of 63.0 percent in 2007. The 54.8 percent employment-to-population ratio for women is just 0.2 percentage points above the low hit last month.

The decline in labor force participation in this cycle has been striking. While the unemployment rate has dropped more than 40 percent of the way back to its pre-recession level, the employment-to-population ratio is still far closer to its trough than its pre-recession peak. ...

By education attainment there is the striking anomaly: The EPOP for those with less than a high school degree is almost back to its pre-recession level. It rose by 1.9 percentage points in February to 41.9 percent. This compares with a 43.3 percent average for 2007. Insofar as the aging of the population is a factor depressing EPOPs, the decline should show up most clearly among those with less than a high school degree since these are disproportionately older workers. The fact that EPOPs have not fallen much for this group suggests that the aging of the population is not an important factor behind declining EPOPs. ...

There was some modest good news on the wage front with the average hourly wage increasing at a 2.85 percent rate in the last three months compared to the prior three. This would indicate some acceleration and actual real wage growth, but it is way too early to assume the pattern will continue.

The 236,000 new jobs reported for February are a good sign and better than generally expected, but there is the risk that this is being driven by unusually good winter weather. This could lead to a situation like we saw last year with very weak job growth in the spring as the result of hiring being pulled forward. This is basically a picture of an economy that is showing modest growth, but has not yet felt the impact of the end of the payroll tax cut and the sequester.

How Much Should We Worry About Debt, Inflation, and Unemployment?

Here are the slides from a talk I gave last night:

How Much Should We Worry About Debt, Inflation, and Unemployment? (ppt ) (pdf)

The last slide concludes with:

We face a tradeoff. Attempts to lower unemployment can increase the risk of inflation and increase the debt . The reverse is true as well. Attempts to lower the debt and reduce the risk of inflation can increase unemployment.

In my view, presently we are too worried about inflation and debt, and not worried enough about unemployment.

'Austerity is Already Here'

[source, article]

Alternative title: "How to Make a Slow Recovery Even Slower." I'm guessing you already know my opinion of austerity. Cutting the budget during a deep recession and expecting the confidence fairy to undo the harm is (and has proven to be) a very bad idea.

'Rebuilding Unemployment Insurance'

Have distractions this morning, so a quick one. Thoughts on this? (I don't like all of these proposals, but do like the ones that offer a positive incentive, e.g. a bonus, for finding work sooner rather than later):

Rebuilding Unemployment Insurance, by Tim Taylor: In theory, the federal government sets minimum guidelines for each state's unemployment insurance system, and then each state sets its own rules for what is paid in and and what benefits are offered. Each state has its own unemployment trust fund. The idea is that the the trust fund will build up in good economic times, and then be drawn down in recessions. But it hasn't actually worked that way for a long time, and the problem is getting worse.  Christopher J. O’Leary lays out the issue and possible solutions in "A Changing Federal-State Balance in Unemployment Insurance?" written for the January 2013 Employment Research Newsletter published by the Upjohn Institute. 

When a recession hits, the federal government has developed a habit of stepping in with extra unemployment insurance funds. For example, the feds stepped in with additional funding ... in 1958, 1961, 1971, 1974, 1982, 1991 and 2002--as well as during the most recent recession. With the feds stepping up, it has been easier and easier for the states to keep their unemployment taxes as low as possible. For example, average unemployment insurance taxes (adjusted for inflation) were $274/employee in 2008, lower than the $350/employee in 1994 and the $515/employee in 1984, according to Ronald Wilus of the U.S. Department of Labor. 

As a result, over time the feds are paying for a larger share of unemployment insurance during recessions. ... What would be needed to get back to a system where states save up funds for unemployment insurance money in trust funds--even if some federal help might occasionally be needed?

One step suggested by O'Leary is to raise the "tax base." At present, the minimum federal standard requires that states collect unemployment insurance taxes on the first $7000 of taxable wages--a level that was established back in 1983. Just adjusting that $7,000 base for inflation would mean increasing it to about $16,000. O'Leary notes that 35 states currently have a taxable wage base at or below $15,000.

A second step would be to have a rule that unemployment insurance benefits would not kick in until after a waiting period. O'Leary writes: "A much neglected potential reform on the benefit side would be to institute waiting periods of 2–4 weeks, with the duration of the wait depending inversely on the aggregate level of unemployment. ... A somewhat longer waiting period will reduce program entry by those with ready reemployment options, and help to preserve the income security strength of the system for those who are involuntarily jobless for 4, 5, or 6 months."

Yet another step would be to use federal rules to discourage states from lowballing the funding of their unemployment insurance and relying on an influx of federal funding. ...

It's worth pointing out that unemployment insurance has a number of problems other than whether it is pre-funded. You need to meet certain qualification tests for unemployment insurance, typically based on earnings in the previous year or so, and as a result, many of the unemployed do not receive unemployment insurance. In January 2013, about 3.5 million people were receiving unemployment insurance benefits, but about 12.3 million people were unemployed. 

There are also a number of proposals that seek to adjust the incentives so that unemployment insurance can better co-exist with incentives to find a new job. Some proposals are that unemployment benefits should be larger, so as to soften the economic blow of unemployment, but for a shorter time, to hasten the incentive to find a new job. Some proposals would require or allow people to set up individual unemployment accounts, which they could keep at retirement, so that people would tap their own money before turning to the government fund. One proposal would offer a bonus to those receiving unemployment insurance if they found a job quickly, because it could be less costly for the unemployment insurance trust fund if they find a job faster rather than linger on receiving benefits.

The Great Recession and its aftermath have wrecked the premises of the existing unemployment insurance system. It's time to rebuild.

Scarborough and Friends 'Bug-Eyed, Table-Pounding Terror'

After two relatively wonky posts, let's turn to Jon Chait for a bit of (serious) fun:

Scarborough and Friends Trying to Make ‘Debt Deniers’ Happen, by Jonathan Chait: The deficit scold cause has suffered significant intellectual erosion... In the short run, the interest rate spike they keep insisting will happen keeps not happening. In the long run, the health-care-cost inflation that is at the root of the long-term fiscal predicament is growing markedly less dire. The case for prudent fiscal adjustment remains strong, but the case for bug-eyed, table-pounding terror is growing increasingly ridiculous.

But bug-eyed, table-pounding terror is the stock-in-trade of the fiscal scold movement. And so they are striking back by labeling anybody with a calmer view of the deficit as a “debt denier.” Joe Scarborough ... has a new op-ed in Politico brandishing the epithet. ... Let’s examine their case on the merits...

Analyzing the argument in a Joe Scarborough–authored op-ed is inherently challenging. (The written word in general is just a terrible medium for Scarborough, hiding his winning personality while exposing his inaptitude for analysis.) It mainly consists of using variations of “debt denier” repeatedly to describe his opponents. To his credit, Scarborough finally cites one actual economist... Unfortunately for Scarborough, the economist he cites, Alan Blinder, turns out to hold essentially the same view as Krugman. ... That Scarborough would support his claim that Krugman’s view is “extreme” and “indefensible” by citing Blinder is just a total failure of reading comprehension. ...

It is the belief of the debt scolds that their issue holds such overweening importance that it can only be considered in moralistic terms. To Joe Scarborough and the whole team of anti-debt television personalities, calibrating out the ideal terms of debt reduction is like calibrating out how much to spend fighting Hitler. The fiscal scolds have so successfully inculcated their moralistic urgency about debt, so thoroughly dominated the news agenda, that millions of people like Joe Scarborough think it is self-evidently insane and evil to in any way minimize the awesome scale of the crisis. Scarborough can't really explain why Krugman is wrong, because the nub of the issue is that Krugman's way of looking at the issue simply offends him.

We do have to make adjustments in the long-run, but as Jon Chait notes, "Not only do we not need to start reducing the budget deficit this year, it would actually be harmful to do so with unemployment still high." That's the most important problem we face right now, high levels of long-term unemployment (e.g. see here for how harmful it can be to individuals). If Scarborough and friends would use their "bug-eyed, table-pounding terror" when talking about long-term unemployment, we might get somewhere on addressing this problem. But somehow the struggles of real people in the real world are less important than imaginary problems in the future that, despite dire predictions from the deficit hawks, have not materialized.

The Minimum Wage and Employment when Employers Have Market Power

Richard Green:

Where's the monopsony?: President Obama, Paul Krugman and Robert Reich have all been pushing for an increase in the minimum wage. I want to agree with them, and Krugman is certainly correct that the preponderance of empirical evidence shows that the minimum wage's impact on total employment is negligible.

But the question is, why? Krugman's statement that human beings are not Manhattan apartments is true, and allows him to support the minimum wage while being appropriately skeptical of rent control, but it doesn't give a satisfactory answer as to why putting a floor on the price of labor would not create excess supply of labor.

There is in economic theory a set of circumstances, however, under which an increase in the minimum wage might raise employment. If an employer has a market largely to itself--if it has monopsony power--then it will both pay its workers less than their productivity warrants and not hire enough workers to be at the most efficient level of employment. Raising the minimum wage would then both increase pay and induce more workers into the labor market, hence increasing employment. If government could nail the minimum wage to the marginal revenue product of the least productive workers, the minimum wage could produce a first-best outcome--one where pay and employment levels were efficient.

For the argument to work, the demand for labor needn't be perfectly monopsonistic, but rather less than perfectly competitive. The fact that wages and labor productivity seem to have less and less to do with each other is evidence that the demand for labor is not competitive, but it would be nice to have further, detailed evidence of the industrial organization of labor demand.

David Card agrees with the monopsony perspective. Here is part of an interview of him (from 2006) by Douglas Clement of the Minneapolis Fed where he discusses this issue (in particular, see the part about "each employer has a tiny bit of monopoly power over his or her workforce," his comments on advocacy are also interesting):

Minimum Wage

Region: Your research on the effects of raising the minimum wage, much of which was compiled in your book with Alan Krueger, generated considerable controversy for its conclusion that raising the minimum wage would have a minor impact on employment.

Have you continued to conduct research on the impact of raising the minimum wage? And do you have an opinion about "living wage" legislation and the petition that's been circulated recently with 650 or so economists calling for an increase in the minimum wage?

Card: I haven't really done much since the mid-'90s on this topic. There are a number of reasons for that that we can go into. I think my research is mischaracterized both by people who propose raising the minimum wage and by people who are opposed to it. What we were trying to do in our research was use the minimum wage as a lever to gain more understanding of how labor markets actually work and, in particular, to address a question that we thought was quite important: To what extent does the simplest model of supply and demand actually describe how employers operate in the labor market? That model says that if an employer wants to hire another worker, he or she can hire as many people as needed at the going wage. Also, workers move freely between firms and, as a result, individual employers have no discretion in the wages that they offer.

In contrast to that highly simplified theoretical model, there is a huge literature that has evolved in labor economics over the last 25 years, arguing that individuals have to spend time looking for job opportunities and employers have to spend time finding employees. In this alternative paradigm a range of wage offers co-exist in the market at any one time. That broader theory is, I think, pretty widely accepted in most branches of economics. The same idea is used to think about product markets where two firms that sell very similar products may not charge exactly the same price. The theory explains a lot of things that don't seem to make sense, at least to me, in a simple demand and supply model.

For example, what does it mean for a firm to have a vacancy? If a firm can readily go to the market and buy a worker, there's no such thing as a vacancy, or at least not a persistent vacancy. During the early 1990s, when Alan and I were working on minimum wages, it was our perception that many low-wage employers had had vacancies for months on end. Actually many fast-food restaurants had policies that said, "Bring in a friend, get him to work for us for a week or two and we'll pay you a $100 bonus." These policies raised the question to us: Why not just increase the wage?

From the perspective of a search paradigm, these policies make sense, but they also mean that each employer has a tiny bit of monopoly power over his or her workforce. As a result, if you raise the minimum wage a little—not a huge amount, but a little—you won't necessarily cause a big employment reduction. In some cases you could get an employment increase.

I believe that that model of the labor market is correct. There are frictions in the market and some imperfect information. It doesn't mean that if we raised the minimum wage to $20 an hour we wouldn't have massive problems, if we enforced it. Realistically, of course, the U.S. is never going to enforce a draconian minimum wage, nor is one ever going to be passed. However, our results don't mean that minimum wages in other economies couldn't have some effect.

I think economists who objected to our work were upset by the thought that we were giving free rein to people who wanted to set wages everywhere at any possible level. And that wasn't at all the spirit of what we actually said. In fact, nowhere in the book or in other writing did I ever propose raising the minimum wage. I try to stay out of political arguments.

I think many people are concerned that much of the research they see is biased and has a specific agenda in mind. Some of that concern arises because of the open-ended nature of economic research. To get results, people often have to make assumptions or tweak the data a little bit here or there, and if somebody has an agenda, they can inevitably push the results in one direction or another. Given that, I think that people have a legitimate concern about researchers who are essentially conducting advocacy work. I try to stay away from advocacy of any kind, but that doesn't prevent people from being suspicious that I have an agenda of some kind.

I've subsequently stayed away from the minimum wage literature for a number of reasons. First, it cost me a lot of friends. People that I had known for many years, for instance, some of the ones I met at my first job at the University of Chicago, became very angry or disappointed. They thought that in publishing our work we were being traitors to the cause of economics as a whole.

I also thought it was a good idea to move on and let others pursue the work in this area. You don't want to get stuck in a position where you're essentially defending your old research. I certainly think it's possible that someone will come up with credible research documenting a situation where raising the minimum wage has a significant employment effect. I rather doubt we will see that right now because minimum wages are fairly low, at least in northern California where I live. My guess is that small raises in the minimum wage won't have much of an effect.

I think the monopsony power argument is correct (an argument I made in a job market paper long, long ago in trying to explain the correlation between wages and productivity).

We Must Make the New Machines

Harvard's Ricardo Hausmann is interviewed in the MIT Technology Review:

You Must Make the New Machines, by Antonio Regalado: ...Why has the number of American manufacturing jobs been decreasing so quickly?

The fundamental reason is that productivity in manufacturing has been rising rapidly and demand for manufactured products has been growing more slowly. To supply the stuff that people want requires fewer jobs.

And then, manufacturing is becoming feasible in more parts of the world. There is more competition, including from countries with much lower wages. As they emulate American production, they take market share.

What’s the best manufacturing strategy for the U.S. in that situation?

It’s certainly not playing defense and trying to save jobs. The U.S. has very, very high wages compared to other countries. Yet it also has a comparative advantage, which is deep knowledge, high R&D intensity, and the best science and technology base in the world.

The step that makes the most sense for the U.S. is to become the producer of the machinery that will power the next global manufacturing revolution. That is where the most complex and sophisticated products are, and that is the work that can pay higher wages.

What kind of revolution are you talking about?

My guess is that developments around information technology, 3-D printing, and networks will allow for a redesign of manufacturing. The world will be massively investing in it. The U.S. is well positioned to be the source of those machines. It can only be rivaled by Germany and Japan. ...

The U.S. ... should look to ... pharmaceuticals, chemicals, and machinery. It’s very hard to get into those. Very few countries are in that game. ...

If you look broadly at the U.S...., the country is super-competitive at agriculture and the industries that support it, like farm machinery, agrochemicals, and genetically modified seeds. It is strong in aerospace with Boeing, GE, Northrop Grumman, and Pratt & Whitney. It is a leader in pharmaceuticals and medical equipment, and it is the clear leader in information technology and the Internet. New industries often arise from the combination of capabilities...

How well is the U.S. doing in staying competitive?

For a while now, the U.S. has been much less focused on being competitive than most other places are. Americans have the feeling they are born to win, and if they don’t, someone else is cheating. The U.S. has many self-inflicted wounds. It has an infrastructure that’s increasingly lousy and a corporate tax rate higher than most countries’. But the most important [problem] is immigration policy. It’s been a real disaster by preventing the attraction and retention of the high-skilled people who come here to study and then don’t stay.

Does Raising the Minimum Wage Really Help Workers?

I have some comments on the minimum wage at MoneyWatch:

Does raising the minimum wage really help workers?

One of the questions I address is whether it would be better to increase the EITC instead of increasing the minimum wage.

'Why Has Employment Remained Stubbornly Low?'

Remember the debate about whether the slow recovery was due to lack of demand, regulation, or taxes?:

Aggregate Demand and State-Level Employment, by Atif Mian and Amir Sufi, FRBSF Economic Letter: What explains the sharp decline in U.S. employment from 2007 to 2009? Why has employment remained stubbornly low? Survey data from the National Federation of Independent Businesses show that the decline in state-level employment is strongly correlated with the increase in the percentage of businesses complaining about lack of demand. While business concerns about government regulation and taxes also rose steadily from 2008 to 2011, there is no evidence that job losses were larger in states where businesses were more worried about these factors. ...

Paul Krugman: Kick That Can

Now is NOT the time for austerity:

Kick That Can, by Paul Krugman, Commentary, NY Times: John Boehner, the speaker of the House, claims to be exasperated. “At some point, Washington has to deal with its spending problem,” ... “I’ve watched them kick this can down the road for 22 years since I’ve been here. I’ve had enough of it. It’s time to act.” ...

While it’s true that we will eventually need some combination of revenue increases and spending cuts to rein in the growth of U.S. government debt, now is very much not the time to act. Given the state we’re in, it would be irresponsible and destructive not to kick that can down the road.

Start with a basic point: Slashing government spending destroys jobs and causes the economy to shrink. This really isn’t a debatable proposition... Even Republicans admit, albeit selectively, that spending cuts hurt employment. Thus John McCain warned earlier this week that the defense cuts scheduled to happen under the budget sequester would cause the loss of a million jobs. ...

Still, won’t spending cuts (or tax increases) cost jobs whenever they take place, so we might as well bite the bullet now? The answer is no — given the state of our economy, this is a uniquely bad time for austerity.

One way to see this is to compare today’s economic situation with ... the big winding down of military spending in the late 1980s and early 1990s, following the end of the cold war. Those spending cuts destroyed jobs... At the national level, however, the effects were softened by monetary policy...

Today, by contrast, we’re still living in the aftermath of the worst financial crisis since the Great Depression, and the Fed, in its effort to fight the slump, has already cut interest rates as far as it can — basically to zero. So the Fed can’t blunt the job-destroying effects of spending cuts...

The point, again, is that now is very much not the time to act; fiscal austerity should wait until the economy has recovered...

But aren’t we facing a fiscal crisis? No,... medium-term forecasts, like the 10-year projections released Tuesday by the Congressional Budget Office, are distinctly not alarming. ...

Realistically, we’re not going to resolve our long-run fiscal issues any time soon, which is O.K. — not ideal, but nothing terrible will happen... Meanwhile, we face the imminent threat of severe economic damage from short-term spending cuts.

So we should avoid that damage by kicking the can down the road. It’s the responsible thing to do.

'We’re Still Having the Wrong Discussion'

Haven't checked in with Robert Reich for awhile:

The Economic Challenge Ahead: More Jobs and Growth, Not Deficit Reduction, by Robert Reich: Can we just keep things in perspective? On Tuesday, the President asked Republicans to join him in finding more spending cuts and revenues before the next fiscal cliff whacks the economy at the end of the month.

Yet that same day, the Congressional Budget Office projected that the federal budget deficit will drop to 5.3 percent of the nation’s total output by the end of this year. 

This is roughly half what the deficit was relative to the size of the economy in 2009. It’s about the same share of the economy as it was when Bill Clinton became president in 1992. The deficit wasn’t a problem then, and it’s not an immediate problem now. 

Yes, the deficit becomes larger later in the decade. ... The real deficit problem comes after that — when rising healthcare costs combined with 76 million decaying boomers will cost us all a fortune. ...

Right now the central challenge is to reignite the economy — getting jobs back, improving wages, and restoring growth. Deficit reduction moves us in the opposite direction. ...

In other words, we’re still having the wrong discussion. It shouldn’t be how to cut the budget deficit. It should be how to bring back good jobs and economic growth. 

Deficit hawks and government-haters are still framing the debate. That bodes ill for all of us.

I never thought that the policymakers at the Fed would be the only ones who seem to care about the unemployed. Right now, the jobs deficit is far more important to our future than the budget deficit.

Arguments For and Against the Use of Machines

A repeat from the past: Arguments for and against the use of machines:

Leeds Woollen Workers Petition, 1786, Modern History Sourcebook: This petition by workers in Leeds (a major center of wool manufacture in Yorkshire) appeared in a local newspaper in 1786. They are complaining about the effects of machines on the previously well-paid skilled workers.

To the Merchants, Clothiers and all such as wish well to the Staple Manufactory of this Nation.

The Humble ADDRESS and PETITION of Thousands, who labour in the Cloth Manufactory.

SHEWETH, That the Scribbling-Machines have thrown thousands of your petitioners out of employ, whereby they are brought into great distress, and are not able to procure a maintenance for their families, and deprived them of the opportunity of bringing up their children to labour: We have therefore to request, that prejudice and self-interest may be laid aside, and that you may pay that attention to the following facts, which the nature of the case requires.

The number of Scribbling-Machines extending about seventeen miles south-west of LEEDS, exceed all belief, being no less than one hundred and seventy! and as each machine will do as much work in twelve hours, as ten men can in that time do by hand, (speaking within bounds) and they working night-and day, one machine will do as much work in one day as would otherwise employ twenty men.

As we do not mean to assert any thing but what we can prove to be true, we allow four men to be employed at each machine twelve hours, working night and day, will take eight men in twenty-four hours; so that, upon a moderate computation twelve men are thrown out of employ for every single machine used in scribbling; and as it may be supposed the number of machines in all the other quarters together, to nearly equal those in the South-West, full four thousand men are left to shift for a living how they can, and must of course fall to the Parish, if not timely relieved. Allowing one boy to be bound apprentice from each family out of work, eight thousand hands are deprived of the opportunity of getting a livelihood.

We therefore hope, that the feelings of humanity will lead those who have it in their power to prevent the use of those machines, to give every discouragement they can to what has a tendency so prejudicial to their fellow-creatures.

This is not all; the injury to the Cloth is great, in so much that in Frizing, instead of leaving a nap upon the cloth, the wool is drawn out and the Cloth is left thread-bare.

Many more evils we could enumerate, but we would hope, that the sensible part of mankind, who are not biassed by interest, must see the dreadful tendancy of their continuance; a depopulation must be the consequence; trade being then lost, the landed interest will have no other satisfaction but that of being last devoured.

We wish to propose a few queries to those who would plead for the further continuance of these machines:

Men of common sense must know, that so many machines in use, take the work from the hands employed in Scribbling, and who did that business before machines were invented.

How are those men, thus thrown out of employ to provide for their families; and what are they to put their children apprentice to, that the rising generation may have something to keep them at work, in order that they may not be like vagabonds strolling about in idleness? Some say, Begin and learn some other business. Suppose we do; who will maintain our families, whilst we undertake the arduous task; and when we have learned it, how do we know we shall be any better for all our pains; for by the time we have served our second apprenticeship, another machine may arise, which may take away that business also; so that our families, being half pined whilst we are learning how to provide them with bread, will be wholly so during the period of our third apprenticeship.

But what are our children to do; are they to be brought up in idleness? Indeed as things are, it is no wonder to hear of so many executions; for our parts, though we may be thought illiterate men, our conceptions are, that bringing children up to industry, and keeping them employed, is the way to keep them from falling into those crimes, which an idle habit naturally leads to.

These things impartially considered will we hope, be strong advocates in our favour; and we conceive that men of sense, religion and humanity, will be satisfied of the reasonableness, as well as necessity of this address, and that their own feelings will urge them to espouse the cause of us and our families -

Signed, in behalf of THOUSANDS, by

Joseph Hepworth Thomas Lobley

Robert Wood Thos. Blackburn

From J. F. C. Harrison, Society and Politics in England, 1780-1960 (New York: Harper & Row, 1965), pp. 71-72.

---

Letter from Leeds Cloth Merchants, 1791, Modern History Sourcebook: This statement by the Cloth Merchants of Leeds (a major center of wool manufacture in Yorkshire) defended the use of machines. It appeared in 1791.

At a time when the people, engaged in every other manufacture in the Kingdom, are exerting themselves to bring their work to market at reduced prices, which can alone be effected by the aid of machinery, it certainly is not necessary that the cloth merchants of Leeds, who depend chiefly on a foreign demand, where they have for competitors the manufacturers of other nations, whose taxes are few, and whose manual labour is only half the price it bears here, should have occasion to defend a conduct, which has for its aim the advantage of the Kingdom in general, and of the cloth trade in particular; yet anxious to prevent misrepresentations, which have usually attended the introduction of the most useful machines, they wish to remind the inhabitants of this town, of the advantages derived to every flourishing manufacture from the application of machinery; they instance that of cotton in particular, which in its internal and foreign demand is nearly alike to our own, and has in a few years by the means of machinery advanced to its present importance, and is still increasing.

If then by the use of machines, the manufacture of cotton, an article which we import, and are supplied with from other countries, and which can every where be procured on equal terms, has met with such amazing success, may not greater advantages be reasonably expected from cultivating to the utmost the manufacture of wool, the produce of our own island, an article in demand in all countries, almost the universal clothing of mankind?

In the manufacture of woollens, the scribbling mill, the spinning frame, and the fly shuttle, have reduced manual labour nearly one third, and each of them at its-first Introduction carried an alarm to the work people, yet each has contributed to advance the wages and to increase the trade, so that if an attempt was now made to deprive us of the use of them, there is no doubt, but every person engaged in the business, would exert himself to defend them.

From these premises, we the undersigned merchants, think it a duty we owe to ourselves, to the town of Leeds, and to the nation at large, to declare that we will protect and support the free use of the proposed improvements in cloth-dressing, by every legal means in our power; and if after all, contrary to our expectations, the introduction of machinery should for a time occasion a scarcity of work in the cloth dressing trade, we have unanimously agreed to give a preference to such workmen as are now settled inhabitants of this parish, and who give no opposition to the present scheme.

Appleby & Sawyer

Bernard Bischoff & Sons

[and 59 other names]

From J. F. C. Harrison, Society and Politics in England, 1780-1960 (New York: Harper & Row, 1965), pp. 72-74.

FRBSF Economic Letter: Long-term Unemployment

The SF Fed's Rob Valletta is optimistic about the long-run prospects for the long-term unemployed:

Long-term Unemployment: What Do We Know?, by Rob Valletta: U.S. labor market conditions have improved over the past few years. But the average duration of unemployment has remained very high, suggesting that job prospects for the long-term unemployed have stagnated. However, a closer look at the data indicates that the incidence of long-term unemployment has declined over the past few years, and that job prospects for the long-term unemployed are not as downbeat as the average duration data suggest.

U.S. labor market conditions reached a low point in late 2009 and early 2010. Since then, the nation’s economy has added 4¾ million payroll jobs and the unemployment rate has fallen by over two percentage points, from 10.0% in October 2009 to 7.8% in December 2012. At the same time though, the average duration of unemployment rose from about 28 weeks to a peak of nearly 41 weeks in late 2011. Since then, it has dropped only slightly, to 38 weeks. Persistently high unemployment duration in the face of an improving labor market raises the possibility that a significant share of current joblessness is structural, or essentially permanent, in nature.

This Economic Letter examines in detail unemployment duration, the characteristics of the long-term unemployed, and their prospects of finding a job. While unemployment duration remains near historical highs, the characteristics of the long-term unemployed and their recent job-finding rates suggest that a sustained cyclical recovery will largely eliminate long-term joblessness. ...

But we shouldn't take this as a reason to stand by and do nothing. If we can help the process along, or ensure against the chance that this analysis is wrong -- and we can -- we (meaning fiscal policymakers) should do it. Lack of demand + high unemployment + crumbling infrastructure + interest and other costs abnormally low = obvious solution.

Fed Watch: Mixed Messages in the Employment Report

Tim Duy on the employment situation report:

Mixed Messages in the Employment Report, by Tim Duy: Another first Friday, another employment report. Is this what our lives are meant to amount to? Sitting glassy eyed in front of a screen, clutching a cup of coffee like a life preserver, waiting for the internet to spit up some numbers that are only going to be changed next month? And to do this day, after day, after day?

Apparently, yes. And apparently I need some more coffee to drown any philosophical urges.

This is an intriguing employment report. Calculated Risk describes it as:

This was another sluggish growth employment report, but with strong upward revisions to prior months.

Mark Thoma agrees, and adds:

And "another sluggish report" ought to bring some soul-searching in Congress, followed by action to try to help with job creation (even with the prior revisions recovery is far too slow to be acceptable).

Brad DeLong adds it to his "Soft Bigotry of Low Expectations Department." Cardiff Carcia at FT Alphaville is a bit more (modestly) optimistic:

Overall the report is (modestly) good news, showing that the economy was adding jobs at a faster rate than we thought in the final quarter of last year.

On the other hand, Wall Street cheered, sending stocks and bonds both higher. I can see that. Right now, one can imagine two threats to the current happy state of affairs on Wall Street. One is some accident, fiscal, European, war in the Middle East or whatever, take your pick, that plunges the global economy back into recession. The other is that activity accelerates such that the Fed removes accommodation earlier and faster than currently anticipated. Outcomes in between - ones that suggest the Federal Reserve will stay on its current path while at the same time growth is set to continue - seem then most likely to leave that current state of affairs in tact. And this report delivers exactly that message. Nothing here to suggest the Fed needs to accelerate its time table. Well, almost nothing.

Nonfarm payrolls grew by 157k in January, a little below consensus expectations, but upward revisions pushed the November and December numbers to 247k and 196k, respectively. The twelve-month moving average is now 168k:

The unemployment rate edged up, even after adjusting for the population control effect:

Consider the combination - solid if not spectacular job growth plus a stagnant unemployment rates equals a growing economy and the Fed on hold. At least, that is the message of the Evan's rule with regards to the federal funds rate. Moreover, it is anticipated that some version of the Evan's rule will also apply to the tapering off of asset purchases. So not only is the lift-off from the zero bound delayed, but so too is the end of asset purchases. Something for both equity and bond traders. What's not to like?

On a softer note, the employment numbers in the household report are not as rosy as those of the establishment report:

Something to keep an eye on as a possible precursor to softening in the establishment numbers in future months.

Was there anything here that might prompt the Fed to rethink policy? It's a bit of a stretch at this point, but note that wage growth continued to accelerate:

Like I said, a bit of a stretch. Wage growth can accelerate quite a bit (at least, in my opinion) before it becomes an inflation concern. Indeed, as Mark Thoma points out, the real problem continues to be too little inflation to begin with. For many of us, accelerating wage growth is a good thing. But look for more hawkish policymakers to point to rising wages as evidence that a.) the economy has made a solid turn such that asset purchases are no longer necessary and that b.) the Evan's rule is faulty because one cannot adequately summarize the state of the economy in just two variables. That said, I don't think any such noise would be enough to shift the path of policy. Just another little thing to think about.

On a final note, the ISM report came in better than expected:

Good enough to signal the economy is not collapsing, not good enough to indicate the Fed needs to change course.

Bottom Line: To be sure, I would prefer stronger employment numbers. And I would prefer the support for those numbers came from a little more fiscal policy relative to monetary policy. But I can also see that, from the point of view of financial market participants, this can be described as a Goldilocks data day. Not too warm, not too cold. Just right.

The Employment Situation: Needs Improvement

The Employment Situation:

Total nonfarm payroll employment increased by 157,000 in January, and the unemployment rate was essentially unchanged at 7.9 percent, the U.S. Bureau of Labor Statistics reported today. Retail trade, construction, health care, and wholesale trade added jobs over the month.

I agree with Calculated Risk:

This was another sluggish growth employment report, but with strong upward revisions to prior months.

And "another sluggish report" ought to bring some soul-searching in Congress, followed by action to try to help with job creation (even with the prior revisions recovery is far too slow to be acceptable). But somehow a deficit problem years in the future is more important than people struggling today.

More from CR:

The headline number was below expectations of 185,000. However employment for November and December were revised up sharply. ... The unemployment rate increased slightly to 7.9% from 7.8% in December. The unemployment rate is from the household report and the household report showed only a small increase in employment. ... The Labor Force Participation Rate was unchanged at 63.6% in January.. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years, although a significant portion of the recent decline is due to demographics. The Employment-Population ratio was also unchanged at 58.6% in January...

We shouldn't simply accept this as the inevitable consequence of a financial recession. Policy matters, and policymakers in Congress have not done their jobs. If the politics of big money didn't protect them -- if members of Congress faced the unemployment line when they failed -- maybe things would be different. That's why the political empowerment of the working class is the key to better employment policy.

Fed Watch: Room For Upside in Tomorrow's ISM Report?

Tim Duy:

Room For Upside in Tomorrow's ISM Report?, by Tim Duy: Calculated Risk has the run down on tomorrow's employment report, opting to bet on the high side of the forecast. Likewise, I am inclined to bet on the high side of the ISM forecast of 50.7, up from 50.5 the previous month. A couple of things to keep in mind:

1. Industrial production firmed in recent months:

Those that thought the mid-year slowdown in production bolstered their case for an imminent recession need to head back to the drawing board.

2. Core durable goods orders are stronger:

A significant portion of the sharp slowdown this year has been reversed. Eventually, this will impact the ISM index.

3. The Chicago PMI surprised on the upside, gaining sharply to 55.6 from 50.0 in December.

4. The Markit PMI has tended to the strong side in recent months:

All in all, it looks like manufacturing is shaking off some of those mid-year doldrums. Consequently, I would expect the ISM index to come in ahead of expectations.

Spending on Infrastructure Can Reduce Our Expected Debt

I couldn't resist one more plea for infrastructure construction:

How Spending on Infrastructure Can Reduce Our Long-Run Debt Burden

Spending more on infrastructure will improve our growth prospects, lower long-term unemployment, and some types of spending can actually save us money in the long-run.

The Unemployment Problem is Cyclical

John Taylor argues, indirectly, that the unemployment problem is mostly cyclical, not structural:

... I like to tell the story about what Senator Hubert Humphrey said when President Ford’s Council of Economic Advisers, where I worked with Alan Greenspan, reported to the Joint Economic Committee (JEC) that it was raising the definition of the normal unemployment rate from 4.0% to 4.9%.  Humphrey, who chaired the JEC, was outraged and told us in the JEC hearing that “if the country was suffering a plague and you economists were doctors your solution would be to raise the definition of normal body temperature above 98.6 degrees”   

So I am worried when people stop talking about today’s very high unemployment rates as if they were normal. ...

He goes on to try to blame Obama for the slow recovery of labor markets ("It is not a good sign that the inaugural address was silent on the subject..."), as though the Republicans -- his party -- and its obstructionist ways has nothing to do with the fact that Obama couldn't get his jobs program passed, or any further stimulus measures put in place. But it's nice to see Taylor acknowledge that the problem is cyclical not structural, and that fiscal policy can make a difference (Obama can hardly be blamed for the Fed's actions, so when he complains that Obama isn't talking about this problem, he must have fiscal policy in mind -- probably tax cuts for the wealthy rather than, say, spending on infrastructure, but it's a start.)

Paul Krugman: The Dwindling Deficit

The budget deficit is not our biggest problem:

The Dwindling Deficit, by Paul Krugman, Commentary, NY Times: It’s hard to turn on your TV or read an editorial page these days without encountering someone declaring, with an air of great seriousness, that excessive spending and the resulting budget deficit is our biggest problem. Such declarations are rarely accompanied by any argument...; it’s supposed to be part of what everyone knows.

This is, however, a case in which what everyone knows just ain’t so. ...

It’s true that right now we have a large federal budget deficit. But that deficit is mainly the result of a depressed economy — and you’re actually supposed to run deficits in a depressed economy to help support overall demand. The deficit will come down as the economy recovers... Indeed, that’s already happening. ...

Still, will economic recovery be enough to stabilize the fiscal outlook? The answer is, pretty much..., the budget outlook for the next 10 years doesn’t look at all alarming.

Now, projections that run further into the future do suggest trouble, as an aging population and rising health care costs continue to push federal spending higher. But here’s a question you almost never see seriously addressed: Why, exactly, should we believe that it’s necessary, or even possible, to decide right now how we will eventually address the budget issues of the 2030s?

Consider, for example, the case of Social Security. ... At this point, “reform” proposals are all about ... moves that would gradually reduce benefits... So the plan is to avoid cuts in future benefits by committing right now to ... cuts in future benefits. Huh? ...

And much the same logic applies to Medicare. So there’s a reasonable argument for leaving the question of how to deal with future problems up to future politicians. ...

So, no big problem in the medium term, no strong case for worrying now about long-run budget issues.

The deficit scolds dominating policy debate will, of course, fiercely resist any attempt to downgrade their favorite issue. They love living in an atmosphere of fiscal crisis: It lets them stroke their chins and sound serious, and it also provides an excuse for slashing social programs, which often seems to be their real objective.

But neither the current deficit nor projected future spending deserve to be anywhere near the top of our political agenda. It’s time to focus on other stuff — like the still-depressed state of the economy and the still-terrible problem of long-term unemployment.

European Labor Markets: Six Key Lessons

Jonathan Portes (he also provides discussion of each of these points):

European labor markets: six key lessons from the Commission report, by Jonathan Portes: I haven't always been complimentary about the European Commission - either its economic analysis or its policy advice. So it's nice to be able to be wholeheartedly positive about the excellent report "Employment and Social Developments in Europe 2012"...

The report is really worth reading. But it's close to 500 pages, and the main messages deserve as wide an audience as possible, so I thought I'd try to highlight them with some commentary. To my mind, the key ones are the following:

1. Economic weakness in Europe, and the consequent rise in unemployment, are mostly to do with a lack of aggregate demand, which in turn is the result of mistaken macroeconomic policies - especially aggressive fiscal consolidation...

2. Although financial markets may have stabilized - who knows for how long - things are getting worse, not better, in the real economy of the crisis countries...

3. Countries with more generous welfare states, but also more flexible labor markets, have fared best...

4. Following on from this, structural reforms in labor markets are required in many countries - but they need to be based on evidence! Segmented labor markets are a problem and raise youth unemployment...

..and even in recession, minimum wages at a sensible level do more good than harm. ...

5. Where they were allowed to operate, the "automatic stabilizers" worked...(in both macroeconomic and social terms)...

...while where they were overridden, in the pursuit of "self-defeating austerity", things have got worse...

6. Latvia, Ireland (and even Estonia) may look like "success stories" to some in the Commission, and perhaps to the financial markets (at present) but the reality in terms of jobs and incomes is rather different. ...

Too bad fiscal policymakers didn't do their homework and learn these lessons about austerity, social insurance, automatic stabilizers, and so on before putting harmful or ineffective policy in place (or failing to implement policy when action is called for, e.g. to reduce unemployment). Wish I thought they were doing their homework now.

'Skill-Biased Technological Change and Rising Wage Inequality'

Lots of discussion recently about whether technological change is the primary source of wage inequality in recent decades (as opposed to policy and institutions). According to this, there are many "problems and puzzles for the skill biased technical change story": 

Skill-Biased Technological Change and Rising Wage Inequality: Some Problems and Puzzles, by Owen Sidar: Dylan Matthews has a nice post on the inequality & skill biased technical change debate between David Autor, who is one of my favorite labor economists, and some folks at EPI.

I wanted to highlight this paper by David Card and John DiNardo that goes through some problems and puzzles for the skill biased technical change story. Here’s how they conclude:

Our main conclusion is that, contrary to the impression conveyed by most of the recent literature, the SBTC hypothesis falls short as a unicausal explanation for the evolution of the U.S. wage structure in the 1980s and 1990s. Indeed, we find puzzles and problems for the theory in nearly every dimension of the wage structure. This is not to say that we believe technology was fixed over the past 30 years or that recent technological changes have had no effect on the structure of wages. There were many technological innovations in the 1970s, 1980s, and 1990s, and it seems likely that these changes had some effect on relative wages. Rather, we argue that the SBTC hypothesis by itself is not particularly helpful in organizing or understanding the shifts in the structure of wages that have occurred in the U.S. labor market. Based on our reading of the evidence, we believe it is time to reevaluate the case that SBTC offers a satisfactory explanation for the rise in U.S. wage inequality in the last quarter of the twentieth century. 

I think that skill-biased technical change is part of the explanation for rising inequality, but it's far from the entire story.

Visualizing Labor Market Improvement

David Altig at Macroblog on "summarizing the general state of the labor market":

... the employment half of the Fed's dual mandate from Congress ... has been heightened since the Federal Open Market Committee (FOMC) announced, first in September, that it will continue its asset-purchase programs as long as "the labor market does not improve substantially." But what constitutes substantial improvement is a matter of some art...

A terrific gallery that includes "a range of labor market indicators" is available at the Calculated Risk blog—you might also check out the Cooley-Rupert Economic Snapshot—but here at the Atlanta Fed, we have been experimenting with our own method for summarizing the general state of the labor market. Though this project is very much a work in progress, the idea is to highlight variables that look at employer behavior, signals of employer and employee confidence, measures of labor resource utilization, and leading indicators of labor market conditions.

As a first pass, we've organized a collection of variables we find interesting, grouped in the categories I just described. ...

We've based one prototype for how all of this information might be visualized at once on the following "spider chart" ... Here's how to read this chart: Think of each point on the inner orange circle as representing the value of each of our labor-conditions variables in the fourth quarter of 2009. ... (We've chosen 2009:IVQ as a benchmark because that's the last time we experienced two consecutive quarters of negative employment growth. You can thus think of 2009:IVQ as the quarter just before the beginning of the current "jobs recovery.")

The chart's outer dark-red circle represents the value of each of the labor-conditions variables in the first quarter of 2007—the beginning of the last recession... Moving out from the inner orange circle to outer dark-red circle tracks the progress each variable makes from its value at the end of the recession (i.e. 2009:IVQ) toward its prerecession (i.e. 2007:IVQ) level. ...

As of the December 2012 employment report, here's where we stand:

The chart tells a familiar, but not too happy, story. Only one of the variables in the collection of employer behavior, employee and employer confidence, and labor resource utilization categories has recovered even half the gap from its prerecession benchmark. The labor resource utilization variables look particularly bad, with one variable—marginally attached workers—actually getting worse over the recovery as a whole. On the brighter side, our leading-indicator variables are looking relatively strong, perhaps portending improvement ahead.

The interpretation of these spider charts comes with several caveats. First, a variable such as the level of payroll employment will eventually exceed its pre-recession level, and grow consistently over time as the population grows. A variable like "hiring plans"—which is the net percentage of firms in the National Federation of Independent Business survey expecting to hire employees in the next three months—cannot grow without bound. Thus, the charts by construction are about visualizing the transition to some fixed benchmark, not a device for monitoring labor markets over the long run.

Second, it is not obvious that 2007:IVQ levels are necessarily the best benchmarks for all (or even any) of the variables we are monitoring. ...

Finally, signs of labor market improvement sufficient to alter the pace of FOMC asset purchases may be more about momentum or steady progress than about the return to a specific target or threshold. In fact, this chart depicts signs of such progress over the past three years...:

...but that progress has been very modest in some cases, notably along labor utilization dimensions.

It’s Not a Skill Mismatch: Disaggregate Evidence on the US Unemployment-Vacancy Relationship

From Vox EU, William Dickens and Rand Ghayad argue skills mismatch is not what's driving high levels of unemployment:

It’s not a skill mismatch: Disaggregate evidence on the US unemployment-vacancy relationship,by William Dickens, Rand Ghayad, Vox EU: The Beveridge curve – the empirical relationship between unemployment and vacancies – is thought to be an indicator of the efficiency of the functioning of the labour market. Normally when vacancies rise, unemployment falls following a curved path that typically remains stable over long periods of time. When vacancies rise and unemployment does not fall (or falls too slowly) this may be an indication of problems of structural mismatch in the labour market leading to an increase in the lowest unemployment rate that can be maintained without increasing inflation (the Non-Accelerating Inflation Rate of Unemployment (NAIRU). Key contributions to this strand of work were progressively made by Dow and Dicks-Mireaux (1958), Lipsey (1960), Holt and David (1966), Hansen (1970), and Bowden (1980).

More jobs, more jobless

The unemployment-vacancy relationship has received much attention among economists and policymakers over the past few years. Since the end of the Great Recession, we started seeing the Beveridge curve shifting out toward the upper right, reflecting a decrease in labour market efficiency. The outward shift means that firms can’t fill their available job openings as readily as we would have expected in light of the high unemployment rate (Kocherlakota 2010).

Controversial interpretations of the data

The basic fact that recent ‘job vacancy, unemployment’ points lie outside the locus of points that seemed to define the Beveridge curve in the 2000s is not in dispute, but its interpretation has been controversial. Interpretations of the recent data range from a temporary cycling around a stable Beveridge curve due to the prolonged slow recovery from the Great Recession to a quasi-permanent shift of the Beveridge curve due to pervasive mismatch between the qualifications of job applicants demanded by employers and the qualifications offered by unemployed job searchers.

Figure 1 plots vacancy-unemployment points from 2001 on. The curved relationship between unemployment and vacancies depicted in Figure 1 is often called the Beveridge curve. Over the recession of the early 2000s, and the recovery from that recession, the vacancy-unemployment relationship remained remarkably constant, as it has for long periods of time in the past. However, in the recovery from the most recent recession we see that vacancies have grown considerably without producing the normal decline in unemployment. It looks as if the Beveridge curve may have shifted out. The figure displays an empirical relationship combining data on vacancies from the Job Openings and Labour Turnover Survey (JOLTS) with the aggregate unemployment rate obtained from the Bureau of Labor Statistics’ monthly household survey. The data span the period January 2001 through June 2012 and are seasonally adjusted. The solid line in Figure 1 reflects a stylised Beveridge curve that was estimated using data on unemployment and vacancy rates for the period prior to the start of the recession. The plot reveals that by September 2009, the vacancy-unemployment points started to deviate away from the fitted curve in an anti-clockwise direction indicating a higher unemployment rate at any given level of job openings.

Figure 1. Total vacancies and unemployment rates by unemployment duration

Source: CPS and JOLTS. Data are monthly rates, span the period 2001m1-2012m6, and are seasonally adjusted.

The seasonally adjusted BLS series of monthly unemployment rates for all employees, 16 years and over is disaggregated to examine the vacancy-unemployment relationship at different durations of unemployment. We do this to see if the unemployed with different durations benefit differently from the recent increase in the vacancy rate. We use data from the BLS’s Job Openings and Labour Turnover Survey (JOLTS) for the aggregate vacancy rate and plot that against the fraction of the labour force unemployed at different durations. Figure 2 presents that relationship for those unemployed for less than five weeks.

Figure 2. Monthly vacancy and unemployment rates, using unemployed persons with duration less than five weeks

Source: CPS and JOLTS. Data are monthly rates, span the period 2001m1-2012m6, and are seasonally adjusted.

The relationship between the vacancy rate and the very short run (less than five weeks) unemployment rate is essentially vertical: around 2% of the labour force is in the first five weeks of a spell of unemployment regardless of the level of job vacancies. There does not appear to have been any change in the relationship in 2009. Hence, individuals with unemployment spells less than five weeks do not explain what we see in the aggregate plot.

Figures 3 and 4 illustrate the vacancy-unemployment relationships using unemployed persons with duration 5-14 weeks and 15 -26 weeks respectively.

Figure 3. Monthly vacancy and unemployment rates using unemployed persons with duration of 5-14 weeks

Source: CPS and JOLTS. Data are monthly rates, span the period 2001m1-2012m6, and are seasonally adjusted.

Figure 4. Monthly vacancy and unemployment rates using unemployed persons with duration of 15-26 weeks

Source: CPS and JOLTS. Data are monthly rates, span the period 2001m1-2012m6, and are seasonally adjusted.

Figure 5 combines all those unemployed for less than 27 weeks and compares their fraction of the labour force to the aggregate vacancy rate.

Figure 5. Monthly vacancy and unemployment rates using unemployed persons with duration less than 27 weeks

Source: CPS and JOLTS. Data are monthly rates, span the period 2001m1-2012m6, and are seasonally adjusted.

Evidence of an outward shift

As with the graphs for each of these durations individually, there is no evidence of an outward shift. However, when the relationship is plotted using the fraction of the labour force that has been unemployed for more than 26 weeks, a number of interesting features are immediately apparent. First, the pattern in Figure 6 reveals a counter-clockwise outward shift that is consistent with what we see when we use the aggregate unemployment rate.

Figure 6. Monthly vacancy and unemployment rates using unemployed persons with duration greater than or equal to 27 weeks

Source: CPS and JOLTS. Data are monthly rates, span the period 2001m1-2012m6, and are seasonally adjusted.

In addition to the shift, the pattern in Figure 7 shows that the vacancy and unemployment points for the long-term unemployment group starts shifting out at the same time the aggregate vacancy-unemployment relationship breaks down.

Implications of an outward shift of the Beveridge curve

Disaggregating the vacancy-unemployment relationship reveals some interesting new facts that may shed light on the implications of what appears to be an outward shift of the Beveridge curve in recent years. While the Beveridge curve for all workers appears to be shifting out starting in 2009, data on vacancy and unemployment rates for individuals who have been unemployed for less than 27 weeks reveals the usual downward sloping relationship with no sign of any outward shift. Interestingly, a dynamic plot of the vacancy versus short-term unemployment rates shows clockwise cycling of the vacancy-unemployment points for those unemployed. In contrast, we see a large anti-clockwise movement when the vacancy rate is plotted versus the unemployment rate for those unemployed for more than 26 weeks. Taken together this suggests that the short-term unemployed are benefiting more than the long-term unemployed from increases in vacancies during the recovery.

Other than the contrast between the long- and short-term unemployed, we break down the vacancy-unemployment relationship by industry, education levels, age groups, and among both blue and white collar workers. In these decompositions we notice a similar pattern to what we see in Figure 1: there appears to be a breakdown in the vacancy unemployment relationship sometime at the trough of the recession.

We conclude that any explanation for the change in the vacancy unemployment relationship must account for its pervasiveness across different industry, blue-white collar occupations, age, and education groups, its concentration among the long-term unemployed and its absence from the short-term relationship.

• One reason that the Beveridge curve relationship for the long-term unemployed shifted may be a shift in the desirability of the long-term unemployed to employers.

It is possible that the long-term unemployed are increasingly made up of workers whose skills are not suited to available jobs. However, if this were the case why wouldn’t we see some outward shift in the short-term relationship as well? Furthermore, the fact that the vacancy-unemployment relationship has shifted in all industries when only the workers who were previously employed in those industries are considered calls the mismatch hypothesis into question as well.

• Another possibility is that the long-term unemployed in this recession may be searching less intensively, either because jobs are much harder to find or because of the availability of unprecedented amounts and durations of unemployment benefits.

This seems like a more likely explanation, though if a drop in search intensity is due only to difficulty finding jobs it again raises the question of why we wouldn’t see that at shorter durations as well.

References

Ghayad, Rand and William Dickens (2013),”What Can We Learn by Disaggregating the Unemployment-Vacancy Relationship?”, Prospective article, Federal Reserve Bank of Boston, Working Paper.

Bowden, R (1980), “On the existence and secular stability of the u‐v loci”, Economica, 47, 35–50.

Dow, J and Dicks‐Mireaux, L (1958), “The excess demand for labour. a study of conditions in Great Britain, 1946–56”, Oxford Economic Papers, 10, 1–33.

Hansen, B (1970), “Excess demand, unemployment, vacancies and wages”, Quarterly Journal of Economics, 84, 1–23.

Holt, C and David, M (1966), “The concept of vacancies in a dynamic theory of the labour market”, in ibid. (eds.) Measurement and Interpretation of Job Vacancies, NBER, New York, Columbia University Press.

Kocherlakota, Narayana (2010), “Inside the FOMC”, Speech delivered in Marquette, Michigan., 17 August, Federal Reserve Bank of Minneapolis.

Lipsey, R (1960), “The relation between unemployment and the rate of change of money wage rates in the United Kingdom, 1862–1957: a further analysis”, Economica, 27, 1–31.

Fed Watch: Employment Report Nothing If Not Consistent

I should have waited a few more minutes -- here's Tim Duy's reaction to the employment report:

Employment Report Nothing If Not Consistent, by Tim Duy: The employment report for December 2012 continues the trend of remarkable consistency:

On his Twitter account, Neil Irwin runs the numbers:

Consistency! Dec. payrolls (+155k); 3 mo avg (151k); 6 mo avg (160k); 12 mo avg (153k); 24 mo. avg (153k).

No exciting year-end ramp up like at the end of 2011, just more of the same. Something a little different, however, in the wage data:

Statistical bounce? Or evidence of enough improvement in labor markets that firms actually need to step up the pace of wage growth? I would certaintly see that as good news, although I will let the equity analysts puzzle over what that means for corporate margins.

Aggregate hours worked made a healthy gain in December:

suggesting that the underlying economy continues to chug along at a moderate pace despite the ups-and-downs of quarterly GDP reports.

Construction gained 30k jobs. This may be a Sandy-related increase or, as some will suspect, a reflection of improving housing starts:

On the latter point, I would add that the construction sector still looks employee-heavy relative to the level of starts:

Prior to 2006, the ratio held remarkably steady at 4. This suggests to me that housing starts need to go higher until construction firms begin hiring more aggressively. Until then, expect firms to increase the hours of existing workers.

Manufacturing gained 25k, seemingly at odds with the softness of recent months reported by the ISM and core-manufacturing orders data. Professional and business services gained just 19k, with the subcategory of temporary help basically flat - is this where fiscal cliff angst impacted hiring? Education and health services had a solid, although expected, gain of 65k, leisure and hospitality gained 31k.

The government sector continued to shed jobs, loosing 13k employees, including 11.5k in local education:

There is some hope that the government sector offers more job support this year as state and local finances improve. I am skeptical that we get better than just holding steady on average. Anecdotally, local finances are still very tight. Although housing starts are increasing, in many cases the new construction won't come on the tax roles for 9 to 12 months or longer. In addition, I suspect the first wave of revenue relief will end up in the pockets of public employees seeking to offset the weak wage growth of recent years.

The household survey details were not as strong as the establishment numbers, although differences between the two are not unusual. Employment grew by just 23k, while the ranks of unemployed gain by 164k. The labor force gained by 192k, leaving the unemployment rate flat at the revised November rate of 7.8%. The rise in the number of unemployed could indicate workers returning to the labor force, which would suggest improved confidence in the state of the labor market.

What does this report imply for the Fed? As it is largely consistent with past reports, it doesn't seem likely to have immediate implications. Some were unsettled by this part of the most recent minutes:

In considering the outlook for the labor market and the broader economy, a few members expressed the view that ongoing asset purchases would likely be warranted until about the end of 2013, while a few others emphasized the need for considerable policy accommodation but did not state a specific time frame or total for purchases. Several others thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet. One member viewed any additional purchases as unwarranted.

The key part of this section is "considering the outlook for the labor market and the broader economy." If you believe that although 2013 growth will on average be modest, but accelerate in the second half of the year, you might reasonably believe that job growth will accelerate as well. Moreover, it is reasonable to expect that the various financial and fiscal risks will ease throughout the year as well. If this is true, then the Fed will start easing back on the asset purchase program. This is especially true if the unemployment rate moves closer to 6.5%; they will want to be done with asset purchases prior to considering a rate increase. Of course, if none of this comes to pass - for example, fiscal multipliers are higher than anticipated and the economy continues to muddle along - then the Fed will continue asset purchases. As always, it is data dependent.

Bottom Line: The employment report is, on average, more of the same. Ongoing slow but steady improvement. The year-over-year gain in wages might be a precursor to a more positive dynamic in the labor market, but one month does not make a trend. In and of itself, the report is likely consistent with the Fed's forecast, and thus not a motivation for an imminent policy change.

'Unemployment Unchanged at 7.8 Percent, Economy Adds 155,000 Jobs'

Running way behind this morning, so will take advantage of the Creative Commons license at CEPR and rely on Dean Baker for analysis of the employment report (see also Calculated Risk, Angry Bear):

Unemployment Unchanged at 7.8 Percent, Economy Adds 155,000 Jobs, by Dean Baker: Manufacturing added 25,000 jobs, the strongest growth since April.

The unemployment rate remained at 7.8 percent in December, the same as the revised number for November. The unemployment rate has essentially been unchanged the last four months. Interestingly, while the unemployment rate has fallen by 0.7 percentage points from its year-ago level, the employment-to-population ratio (EPOP) is unchanged at 58.6 percent, just 0.4 percentage points above the low for the downturn. The establishment survey showed the economy adding 155,000 jobs in December. This is virtually identical to the 151,000 average over the last three months and the 154,000 average over the last year.

There was little very new in the demographic distribution of unemployment. White men continue to do somewhat better than white women, with the unemployment rate for white men dipping by 0.2 percentage points to 6.2 percent, putting it marginally below the 6.3 percent rate for women. The unemployment rate for white men had peaked at 9.6 percent in Oct-Nov of 2009 when the unemployment rate for white women was just 7.3 percent. The unemployment rate for African Americans rose by 0.8 percentage points to 14.0 percent, indicating that a 1.3 percentage points drop reported in November was an aberration.

The big job gainers continue to be the over 55 cohort, with employment growth of 32,000 in December, more than the 28,000 overall employment gain for workers 16 and older reported in the household survey. Over the last year, older workers have accounted for 1,777,000 of the 2,409,000 reported gain in employment. The biggest losers have been the 45-54 cohort, who have seen their employment fall by 288,000 over this period. In both cases the gender split has been close to even.

All the duration measures of unemployment fell in December. The median duration of unemployment is now 2.6 weeks below its year-ago level; the mean 2.8 weeks lower; and the share of long-term unemployed is down by 3.7 percentage points. On the other side, the number of discouraged workers is up 123,000 from the year-ago level, the largest increase since December of 2010.

The job growth in the establishment survey continues to show some erratic seasonal patterns. Retail reported a loss of 11,300 jobs after adding a total of 107,000 the prior two months. The decline was driven by a loss of 18,700 jobs in clothing. This reflects earlier hiring for the holiday shopping season. Jobs for couriers fell by 10,800 in December, a decline that will almost surely be reversed.

Manufacturing added 25,000 in December, the largest increase since a 42,000 rise reported in March. The rise in jobs was also accompanied by a small increase in the length of the average work week from 40.6 to 40.7 hours. Interestingly, the non-durable sector accounted for most of the rise, adding 14,000 jobs. While most of this gain was just offsetting a 13,000 decline reported in November, there was 0.2 hour increase in the length of the work week in the non-durable sector, raising it to 40.3 hours compared with 40.0 in October.

Construction added 30,000 jobs in December. This sector has been an anomaly, with employment up by just 20,000 year-over-year in spite of large gains in both residential and non-residential construction. The information sector shed 9,000 jobs, largely reversing an increase of 13,000 jobs in November. Employment in the temp sector was essentially flat in December, providing little evidence of any pent-up demand awaiting the resolution of the “fiscal cliff” debate.

Health care added 44,500 jobs, which is likely just offsetting the relatively weak 19,700 jobs reported for November. Restaurants added 38,000 jobs in December, considerably more than the 24,000 average over the last year.

Government employment fell by 13,000, almost entirely the result of a drop of 11,500 jobs in local government education. Over the last year jobs in local government education have been down by 54,000, but this is almost exactly offset by an increase of 53,000 jobs in state government education.

There is little in this report to suggest any divergence from the modest growth path that the economy has been following the last two years. The 155,000 pace of job growth is consistent with a declining unemployment rate, but will not return us to full employment until the next decade.

Unpuzzling the Puuzzled

Greg Mankiw says he is puzzled:

A Krugman Puzzler

Brad DeLong does the unpuzzling that, as he notes, shouldn't be needed:

In Which Greg Mankiw Pretends to Be Puzzled...

PGL explains what Mankiw should be puzzled about:

Paul Krugman Puzzles Greg Mankiw

Adam Ozimek continues the discussion:

Krugman vs Mankiw on Interest Rates

Paul Krugman with more on the topic:

Bond Vigilantes and the Power of Three

Nothing to add, that pretty much covers it, but I do wonder: When Greg Mankiw asks, relative to 2003, "are circumstances different now?" just how much eggnog has he had?