JOLTS, Sept. 2016

It's been a while since I posted JOLTS data.  Generally, the data continues to follow the pattern of an aging recovery.  I continue to believe that we are at a place where monetary policy can be important.  If the Fed pulls back too much, we will contract.  If they accommodate rising wages, then recovery can continue for a long time.

I think the association of rising wages with inflation is a virus.  Wages are rising because a healthy economy reduces the frictions that allow firms and workers to adjust and shift.  If corporate profits are leveling off while wages rise, then monetary policy needs to accommodate enough nominal activity to prevent corporate profits from falling enough to disrupt these healthy economic trends.  If that becomes inflationary, then we can moderate, but to pre-emptively pull back is going to trigger contraction by cutting into corporate profits.

The election has presented a bit of a surprise, though.  I have been focusing on monetary policy because I assumed no relief was going to come to the mortgage market from GSE expansion or regulatory easing on the banks.  After everyone took a deep breath last night, Trump didn't act like a monster when he gave his speech, and markets rebounded this morning.  Banks are up in the 5% range as I type this.

Could it be that Trump will govern as a sane person, and that also some of the Dodd-Frank regulations that have cut low income households out of homeownership will be retracted?  I don't have the feeling that Trump explicitly understands the connection between the banks and the condition of his rural voter base.  But, he does seem to have a bias toward lighter banking regulations.  Does this mean that we will meander our way into finally healing the housing market?

The yield curve has also steepened significantly today.  Up by 25 basis points or so at the long end of the Eurodollar curve.  This is exactly what I would expect to happen if mortgages were going to expand and the housing market was going to heal.

Wouldn't that be funny if Trump ended up being our rescuer?

August JOLTS news not so great

The August JOLTS report adds further concern about the strength of the economy.  I think the Openings measure is an outlier.  I think it might be signaling both cyclical strength and secular weakness.  The increase in Openings without similar movements in the other measures suggests a rightward move in the Beveridge Curve, which coincided in the 1970s and early 1980s with possible frictions in the labor market and rising secular unemployment levels.

While Layoffs remain very low, Hires and Quits have leveled off.  This could be an early sign of a cyclical top.  There is no reason why we can't coast along a high growth trajectory for many years, like we did in the late 1990s, but this would require a willingness to allow expansion.  In the current regulatory and technological context, that probably means rising wages, rising inequality, rising home prices, rising building, and rising debt.  A plurality of the country appears to be generally against the realistic achievement of growth that includes these properties, so I am just hoping we can have as much growth as we can get until that plurality pushes us into an unnecessary cyclical contraction.  Some forbearance from the Fed would be a nice step in the direction of allowing some reasonable growth.

Quits and hires are starting to look like the late 2005-2006 period, where the yield curve and JOLTS data both flattened.  These were early signs of a downturn.  I don't think a downturn is inevitable.  If the Fed raises rates and the yield curve flattens as a result, the danger of a downturn is high.  If we allow it, we could see expansion for years with relatively flat behavior among the JOLTS indicators.  But both hires and quits have been level for nearly a year, now.  This is beginning to be a pretty strong indicator of a maturing recovery phase.

Real Wage Growth and Tight Labor Markets

The Atlanta Fed publishes a lot of great stuff on their blog.  This is a recent post about Quits and wage growth.  What they find is that while wage growth does correlate strongly with Quit rates, wage growth rises most strongly, and more in line with quits, among job quitters.

From the Atlanta Fed post

This is why the relationship between real wage growth and inflation is not strong.  In the aggregate, employers and workers aren't locked into some ongoing negotiating drama.  It seems like they are, and this fits with our us vs. them narratives about fighting over income shares.  But, in the aggregate, there just isn't that much to fight over.

Profits, as a proportion of national income fluctuate by around 1% to 3% through business cycles.  Most of this is due to shocks that move profits out of equilibrium and labor out of full employment.  It seems that less than 1% of national income at any given time is available due to some sort of cyclical negotiating power.



Source

The reason wages grow during expansions, when unemployment is low, is because of the quits.  The growth doesn't come from capturing more production from existing employers.  The growth comes from finding a job where you can be more productive.  The reduced frictions and risks of shopping your skills mean that you can match your skills better.  Laborers are becoming more productive, not simply because of the application of capital, but because capital is complementing their labor more efficiently, because small disloyalties can be committed by employees and employers without undue damage.  There are many more separations during expansions than there are during contractions.  It's just hard to remember that because the separations that happen during contractions are so painful.

It seems like this can't be the case.  In every workplace, there are individuals who provide value to the firm with sharp variance to their compensation.  And, between firms, there can be tremendous differences of returns to invested capital.  But, these represent inefficiencies that must play out within the realm of either labor or capital compensation.  There are too many interdependent variables and actors to remotely comprehend, but that mass of unpredictable, untrackable activity creates an aggregate result that contains very little systematically tradable income.

I believe some of the reduction in profit as a share of national income which we do see late in some of the longer expansions may be the result of lower risk premiums and more forward looking corporate capital allocation.  The effects of this tend to be overwhelmed by real shocks to the economy that happen subsequently, so it doesn't seem to carry on into long term growth rates.  For instance, growth rates are low now even though the late 1990s were a period of transformative corporate investment.  Maybe the effects just aren't measured well. Both the late 1990s and the late 1960s were at the tail end of especially stable periods where profits declined relative to compensation during healthy recoveries and both periods are known for creating a new wave of frontier firms.

In any case, it seems as though the overwhelming factor for positive outcomes is stability.  That seems to be associated with inflation rates in the 2% to 4% range.  Stability will be related to low unemployment and low risk premiums.  The risk to our economy of wage growth, if there is any risk at all, seems greatly overshadowed by the risk of business cycle instability.  If we are managing the economy as if low risk premiums and tight labor markets are problems to be avoided, then we are  doing it wrong.

PS.  Evan Soltas has an interesting post on this issue.  I'm still wrapping my head around all the ramifications, but he finds that while some sectors have increased their productivity over this period than other sectors, compensation within each sector has basically grown in line with productivity.  At the least, it suggests that average compensation tracks productivity at the sector level.  Evan argues that the standard intuition that compensation tends to track productivity seems to be a better explanation of changing distribution of compensation than changes in labor market institutions.

At least the Bivens and Mishel report from EPI seems to be moving toward defining the issue as about distribution of income within labor rather than about the split between capital and labor.  Their headline graph lends itself to unhelpful labor vs.capital narratives, but almost all of the differences between median compensation and average productivity, as presented in the graph, are happening within compensation and the cost of housing.  Maybe the conversation can move to productive grounds.  Confiscatory or obstructive policies toward capital income would be deeply unhelpful.  Evan's post, I think, is actually a good argument for pro-growth, pro-capital policies.  There would be great benefits to creating more opportunities for workers to move into the more productive sectors.  That could be accomplished through domestic capital formation and through more aggressive international trade.

May 2015 Employment

Last month, I wrote: "Next month will have to be an outlier for unemployment to come in above 5.2%."  So, my perfect track record remains intact.  It was apparently an outlier.  Right again!

So, what's going on?  I think it's a little bit outlier, a little bit persistence in higher unemployment numbers, and a little bit of a lull in employment growth.

Here is my graph comparing insured unemployment and total unemployment.  For 18 months after the end of 2012, there was a steady trend in the decline of very long duration unemployed workers.  Since July 2014, this decline has slowed, although it continues to have a downward trend.  Since July 2014, the red and dark blue lines show the upper and lower bounds of expected total unemployment, based on a continuation of the previous trend at the lower bound and a complete halt to the decline of very long term unemployment at the upper bound.  This month, that range was from 4.8% to 5.3%.  Total unemployment came in at 5.5%.  So, total unemployment has bumped above the range we would expect, given continued unemployment claims.  This is not a pattern we expect to see.  Here is the graph, smoothed, and going back to the 1970s.  There is a counterclockwise pattern that we see through business cycles.  The trigger for a change in trend at this point in the cycle should be a sharp increase in unemployment claims.  But, before that happens, we would expect to see unemployment insurance claims level out while total unemployment continues to fall.  So, the movement of the last few months is probably anomalous, and I would still expect to see a correction down in the unemployment rate of at least 0.2-0.3%.

This bump up in total unemployment is playing out in the shorter unemployment durations.  One reason for this may be dynamics related to Part Time Employment for Economic Reasons, which is still slightly elevated from what we might consider recovery levels.  (Note: The sharp downward shift in 1994 is a measurement change.)  Not only is total unemployment elevated compared to insured unemployment, but the number of job losers is also elevated compared to insured unemployment.  An elevated level of job losers, compared to insured unemployment, seems to have coincided with periods where there were high levels of part time workers for economic reasons.  This might have to do with less universal unemployment insurance claims by part time workers.  So, it may be continued claims that is the false signal right now.  Or, more specifically, we may be seeing temporary frictions from the normalization of the labor market.

We tend to imagine workers having hours cut and then having full time status reinstated.  But, I think we need to be careful about narrative explanations here.  Both labor supply and labor demand have strong influences on the labor market.  (Colloquially, and sometimes academically, we understate the influence of labor supply.)  There is a lot of churn among workers as these markets normalize, and it seems reasonable that some of this exchange between part time and full time could create temporary unemployment from market frictions, even if the causal factor is employment growth that is pulling workers back into the full-time labor market.  In the 1980's, this increased level of unemployment and job losers, relative to insured unemployment, appears to have persisted for several years.  That might be the case again.

JOLTS data appear to continue to show generally positive trends.  This data is a month behind, and a little noisy.  A weighted moving average gives a little faster indication of changing trends, and here Hires and Quits are beginning to show weakness, while Job Openings continues to look very strong.  But, all of these indicators were very strong in late 2014, so it is a little early to call this a problem.

A possible lull in hires might be related to some of the increase in unemployment.  I had expected to see some of the unusually high very short duration unemployment dissipate this month.  But there appears to be a hump of unusual unemployment moving through the durations in the seasonally adjusted data.  On the bright side, very short durations moved back to normal levels this month.  Maybe there has been a temporary hiring lull.

Looking at flows, there has been a decrease in net flows from Unemployed to Employed.  But, flows directly from Not in the Labor Force to Employed continue to be very strong.  In addition, the individual flows all continue to move in positive directions, even though they are at or near full recovery levels.

Any lack of flow out of unemployment into employment appears to be matched by very strong flows back into the labor force and directly into employment.

Wage growth was relatively strong in May.  I only have real wage growth through April (because I use the PCE price index to adjust for inflation).  Wage growth has recently crossed slightly below the long term trend given by the unemployment rate.  But, that should recover slightly this month, once we have inflation numbers.

In total, I think these indicators still point to a healthy labor market and to an unemployment rate that should step down a bit from current levels.  The forces that pushed it from my 5.2% call to the 5.5% print may reflect some persistent headwinds, but I think we should still expect a reversion to a trend in the unemployment rate that is lower than the last couple of months' numbers imply.

The Treasury/Housing trade

I may be jumping the gun a little bit, but I think it looks like it is time to take a position on the treasuries/housing trade.  My thesis is that there is a large disequilibrium in the fixed income market.  Implied returns on houses and cyclically adjusted very long term real interest rates generally rose and fell together until 2007, when tight monetary policy caused a collapse in the housing credit market.  Since then, fixed income savings has been forced into treasuries, because of a lack of access to the real estate market, due to a stagnant mortgage market and market frictions that prevent investors from immediately making up for the lack of owner-occupiers in the single family home market.  The drop in total real estate holdings below trend is much more severe than any movement in the 2000s above trend.

A recovery in the mortgage market should allow savings to flow more readily into housing.  This should allow treasuries and residential real estate to coalesce back at an equilibrium relationship.  This means that home values should rise and treasury yields should also rise.

I don't know where the new balance will be.  This is not a hedged position.  If the economy falters before recovery is established, both of these positions will fail.  I don't believe that the policy interest rate is the bottleneck to the productive economy right now, though.  I believe mortgage credit is.  As long as the banks continue to expand mortgage credit, I believe the Fed would need to raise rates significantly in order to damage the coming recovery.  The key is expanding mortgages.

The point of taking the dual position (long housing, short treasuries) is so that I don't need to know the balance.  If long term real interest rates don't rise very much, the gains from this position will come mostly from the housing position.  If long term real interest rates rise more, then home prices will rise less, but the short treasury position will gain.

Mortgage growth appears to just be beginning at commercial banks.  Forward risk free interest rates have pulled back to new lows.  And, the employment market continues to look strong.  Job openings and quits continue to grow, even though hiring has leveled off in the past few months.  And, employment flows all continue to normalize, with strong flows back into the labor force.

Along with the new rise in mortgage levels, it looks like home price growth might be starting to move again.  I am counting on this new kink up in price appreciation to be persistent.

There might be several ways to capture exposure to residential housing.  I am not sure if any are better than taking an out-of-the-money option position on marginal, leveraged homebuilders.  Possibly the Case-Shiller Index would be a way.  And, there are many REITS of various types to choose from.

Note that unlike some economics bloggers, I am frequently devastatingly wrong.  Mileage may vary.

December 2014 JOLTS

Still lookin' good.

Hiring, job openings, and quits are not only all rising.  They are all accelerating.  The labor market is looking great.

My back of the envelope estimate is that the baby boomer effect (the large number of older workers) probably causes the job openings rate to be about 0.25% higher than in previous cycles, and the quits and hires rates to be about 0.25% lower.  That puts the labor market cycle at about where we were in mid-to-late 2005, when the unemployment rate was around 5%.

The baby boomer effect should be pulling down the unemployment rate, because older workers tend to have less unemployment churn.  Again, looking at the back of the envelope, insured unemployment correlates to about a 4.3% unemployment rate, compared to recent cycles.  My simple estimates attribute about 0.8% of the additional unemployment to the very long term unemployed that appear to have mostly timed out of extended unemployment insurance before the program had ended, and another 0.5% to persistence in unemployment that appears to be typical of more frequent or extended downturns.  So, I think the current labor market, accounting for these effects, does resemble the 2005-ish labor market, whether we are looking at JOLTS, insured unemployment, or unemployment durations.  But, these comparisons are moving targets because of the unusual demographic situation.

Here is a Fred graph, which I think makes for interesting perusal.  I think we can compare where we are now to where we were in about 2005 and 1995.

First, I would note that in 1995 when the unemployment rate levels out for a while, the Fed Funds rate topped out at about 6%, and the Fed pulled it back to 5.25%, avoiding a yield curve inversion.  I think that could have something to do with the expansion that continued for another 4 years.  If the Fed would have pulled back from 5.25% to, say, 4.5% in 2006, I think that 2007-2010 would have looked more like the late 1990's.  Home prices would have moderated, but not collapsed.  There would have been a slight hump in unemployment, then a continuation of the expansion.  Note that following the small decline in the Fed Funds rate in 1995, real wages rose, but inflation didn't.

Also, notice in 2005 when real wages started to rise, they were not accompanied by rising inflation.  Actually, despite the frequent framing of current Fed policy in terms of "wage inflation" there is no evidence of this sort of relationship over the past 50 years.  We are at a point in the cycle where real wages should see a healthy rise.  Inflation will be related to other issues.

If lending doesn't loosen up, inflation will come from a supply shock in housing, and, ironically, this looks like it will be widely attributed to wage inflation, with tighter monetary policy the cure.  That will be completely wrong, but it will appear as if it is right.  Considering how little evidence there is now in the historical data for "wage inflation", I doubt that it will take much for that narrative to be widely seen as confirmed.

Somebody should write about this housing problem.  A long time ago, this one blogger started a fascinating series on the topic, but he's gone AWOL.  He was last seen in the alley behind the local mall, a bottle of gin in his hand, his hair disheveled, filthy, a wild look in his eye, mumbling something about effective rates of return to frightened passersby.

November 2014 JOLTS

JOLTS data continue to come in strong.  Older workers tend to have lower unemployment but longer unemployment durations.  Specialization, better personal financial safety nets, etc. create frictions in re-employment so that I think we are seeing demographic-based movements in openings and quits.  Openings are higher, quits are lower, and hires are lower.  If we split the difference between openings and quits, JOLTS data suggest the labor markets are comparable to something around late 2005.

The unemployment rate was under 5% then.  I had been expecting this to mean that we would continue to see the unemployment rate drop sharply, but I am starting to think that there is some persistence in measured unemployment.  There might have been a shift right in the Beveridge Curve (x=unemployment, y=openings), even after adjusting for demographics, as there had been in the 1970's and 1980's after there had been several recessions in relatively short succession.  Basically a higher NAIRU, I guess, which I guess is basically the consensus view right now.

So, while I don't abide the supposed fear of wage-inflation, I do think that we should see the benefits of an economy running at full employment, even if the unemployment rate is a little high, which should mean higher RGDP growth, decreasing risk premiums, increasing real wage growth, and increasing real interest rates.  According to JOLTS, we are a long way from any concerns.

October JOLTS and a Rant about Risk & Recovery

JOLTS data continues to signal strength in the labor market.  As with the regular employment data, this probably will be less important in the near term.  Strength in the labor market seems persistent, and at the top of the cyclical range.  Now it is just a matter of remaining in this range.  Eventually, JOLTS might be an early signal of a cyclical downturn, but that seems to be a distant issue for the time being.


Hires, openings, and quits continue to accelerate.  Not only the levels, but the trend growth rates are as strong as they have been in this recovery.  We should be very optimistic about near term real economic growth.

Openings per unemployed worker continues to recover.  I think the Beveridge Curve will continue to persist with this rightward shift, partly as a result of persistence in the inflated unemployment rate, and partly because of a higher openings rate, related to the aging labor force.  An older labor force should also tend toward a lower unemployment rate, so if we can manage to extend this recovery for another five years and work off the persistent cyclical unemployment, this relationship might move back to the previous trend.

The next graph demonstrates some of these labor force changes (some of which are simply demographic).  We can see that, compared to the early 2000's, the Quits Rate has declined relative to the Job Openings Rate.  Older workers tend to have a lower Quits Rate, so this shift will probably remain in place for some time, and then begin to shift back as baby boomers retire.

In general, these shifts appear to be relatively mild in the historical context.  Here is a long term graph of the Beveridge Curve from the San Francisco Federal Reserve Bank.  We are still in the general range of the 60s, 90s and 2000s, well left of the 70s and 80s.  (Openings are currently at 3.3%, unemployment at 5.8%.)

Generally, I think we tend to think of this relationship as shifting from left to right, so we think of rightward shifts as bad, since they are related to higher unemployment.  But, I think the relationship may be more subtle than that.  A higher Openings Rate should lead to a faster employment recovery rate.

So, we see the shift right in the 1970s and 1980s, and we might relate this to employment frictions.  And there may be some truth to this.  But, we could also view that period as having shifted upward.  The higher relative Openings Rate may have helped to bring faster recoveries.  That suggests fewer cyclical frictions.  Possibly this is related to the slower rates of recovery in the past three cycles.  On the other hand, openings were relatively low in the 1950's, and cyclical recoveries were very fast in that decade.

Risk Premiums, Real Growth, and Inflation

I wish there wasn't such a perception about strong labor markets leading to inflationary pressures.  This seems to be a false notion, coming out of a narrative-based interpretation of labor markets.  Strong quits and openings suggest a safe context for job searching among the labor force.  In effect, this is the sign of a low risk premium for labor, which I would expect to run parallel with the risk premium for equity.  This should lead to greater risk-taking - both through more innovative investments and through more churn in labor markets.  The strongest effect of this risk taking should be higher real economic growth.

Some of the inflation narrative may come from a misinterpretation of the relative level of wages and profits.  In a low risk context, risk premiums will decline and interest rates will rise.  This will be related to higher leverage.  Even if returns to capital remain level, the higher leverage will cause more of the capital returns to be allocated to debt (interest).  Profit margins will decline as a result of this leverage, but this is an arbitrary distinction with regard to income shares.

Lower risk premiums also mean that compensation will rise.

We tend to talk about debt as the result of careless or greedy consumers and speculators.  But, the movement in equilibrium debt levels is the product of much more subtle effects from these changing risk premiums.

We need to rid ourselves of this notion that investors and corporations are a teeming throng of capital-bearing zombies, mindlessly bidding up assets with an insatiable and unsustainable lust for profit.  And, we need to rid ourselves of this notion that labor and capital are defined by a bidding war for a fixed pie of production.

In the three modern examples of extended, decade long recoveries, the mature portion of those recoveries (the late 60s, late 80s and late 90s) are associated with rising compensation, rising interest income, and declining profit shares.  These are the signs of an economy with low risk aversion and lower frictions to real growth.  Those who push for a manipulated end to the recovery because of financial stability concerns or because of concerns about wage inflation are needlessly hampering our shared abundance.

Commenter TravisV might want us to look at the late 1960s (see graph below).  This is the period where the Fed began to err on the side of higher inflation.  Look at compensation during that period.  If the Fed doesn't decide it has to kneecap the recovery, this is what we could have.  Surely we can manage this without going all the way to 10% inflation.  But, if the Fed prefers another demand shock to even 4% inflation, which appears to be the case, then this positive outcome seems unlikely.

Misplaced emphasis on interest rates and inflation creates confusion here.  It isn't so much the inflation itself that would lead to this sort of recovery.  It's the lowered risk of an NGDP shock, which then lowers risk premiums.  Persistently accommodative Fed policy will lower profit shares, and we will all be fat and happy.  There is no reason for divisiveness on this matter.  Political factions are unified in accepting false premises over which to argue, when no argument is necessary at all.

There doesn't even need to be a supply side vs. demand side argument.  Long economic expansions clearly lead to falling profit shares.  Call it "trickle down" if you like, but labor clearly benefits over time from a healthy corporate sector.  And, how do we get there?  Demand side stability.  I'm ok, you're ok.  Can we stop fighting over false premises?  (Here's a follow up.)

Be careful.  The two vertical axes are not scaled the same.

September JOLTS come in strong

September JOLTS confirm recent strength in employment.  Hires and quits jumped and job openings remained strong.  Taken together, openings and quits suggest a labor market similar to mid-2005, when the unemployment rate was at about 5%.  Recent strength in both of these measures suggests to me that the approx. 0.8% of the unemployed who are very long term unemployed (VLTUE) are not aggressively involved in the labor market.  The strong trends in quits and openings makes me more confident that the slow decline in VLTUE will continue and also that recent trends in regular unemployment declines will continue.  We might see the current pace of a monthly drop of 0.1% or more continue for a few more months before the trend flattens out.

 

After the June employment report, I argued that quits and openings pointed to an unemployment rate just about where we were at the time (6.1%), once adjustments were made for demographic comparisons and the remaining inflation in the unemployment rate stemming from VLTUE.  Since then, the unemployment rate has dropped 0.3% and momentum in hires, quits, and openings confirm the strength of that drop.

Long Term Non-employment

The Financial Times has an interesting article on long term unemployment.  It is a review of this presentation at Jackson Hole by Jae Song and Till von Wachter.

They utilize longitudinal microdata to track the employment status of displaced workers over time.  Using "non-employment" in lieu of "unemployment", they find little difference between the re-employment behavior of workers in the recent recession and workers of previous recessions.  Here is a graph of very long term non-employment persistence from the paper.  While there has been some change in the trend over time, there is little difference between recessionary times and expansionary times.  Also, there is little difference between the outcomes since 2008 and previous periods.  This is a fairly shocking finding, considering the well-known existence in the BLS's Household Survey of a large quantity of very-long-term unemployed workers.

Here is a graph of unemployment duration by age.  Keep in mind that short term unemployment durations are pretty normal now, so all of this extra average duration is coming from 1/6 of the pool of unemployed workers.  So, estimating from BLS data, it looks like about 5.2% of the labor force is unemployed in a fairly normal labor market, with average unemployment durations of less than 20 weeks.  Then, there is another 1% of the labor force that is unemployed, with an average unemployment duration of more than 120 weeks.

At first glance, these data are telling two different stories.  Here are some more graphs from the article.  First, this graph shows the fraction of the labor force that has been non-employed for one year, two years, etc.  This shows that extended unemployment was slightly worse in the 2008 recession than it had been in 1980, but not excessively worse.

The next graph (Figure 12A from the paper) shows the re-employment behavior of displaced workers in four recessions.  The recovery to employment in the 2008 recession has followed a pattern similar to previous recessions.  It is worth noting that a displacement episode appears to lead to a permanent 10% reduction in employment among the affected workers.

Finally, in the Figure 6A from the paper, we can see the surprising finding that the level of long-term nonemployment has been unusually low in the 2009-2011 period.

This suggests that much of the very long term unemployment in the current count is mostly a categorization issue related to workers whose behavior hasn't been materially different from previous recessions, but who may have been more likely to refer to themselves as unemployed in surveys because of subtle framing effects related to public labor policies, such as emergency unemployment insurance (EUI).  If that is the case, it would suggest several implications:

1) Unemployment has been overstated, relative to previous recessions.  This would apply to the approximately 1% of the labor force that currently is categorized as unemployed with very long unemployment durations.  It would also apply to the U-6 unemployment rate that includes marginally attached and part time workers.  The paper outlines how there tends to be marginal employment activity over time with long term non-employed workers, after a displacement, but that over time permanently non-employed workers become a larger proportion of the remaining non-employed.  Following this pattern, we should continue to see a reduction in U-6 unemployment.  I suppose that we might end up with a permanently self-identified population of unemployed workers, but I think it is more likely that to the extent that this group reflects the displaced workers who permanently leave the labor force, they will slowly begin to self-identify as not-in-the-labor-force.

So, if this is the case, the current unemployment rate, stated comparably to previous periods, might be in the low 5%s.  This would explain how real wages have been higher than we should have expected, given the unemployment rate.  The authors also point out that the permanently non-employed displaced workers tend to be older, which also might explain why unemployment in this recession tended to be excessively high for older age groups.

Here is a graph of employment flows.  Note that the most unusual movement in the recent recession was the unusual increase in flows between unemployment and "Not in Labor Force".  Flows between Employment and "Not in Labor Force" and between Employment and Unemployment reached levels slightly worse than the 2000 recession and about the same as the labor market in 1995 when these data series begin.  And, these sets of flows are currently back at normal recovery levels.  This would lead one to expect a business cycle where unemployment topped out in the high single digits and is back around 5%.  The outlier here is the flows between unemployed and "Not in Labor Force", which moved much higher, relative to the other flow sets, and which remain elevated.  Could this unusual movement reflect a change in self-identification and categorization among marginally attached workers who, in previous downturns, simply identified as "Not in Labor Force"?

This also comports with the recent high level of job openings and the idea that, adjusted for demographics, JOLTS indicators point to a historically comparable unemployment rate around 5.7 (which, given our current demographics would come in at around 5.3%).

2) I have been too hard on EUI.  If this paper is on to something, then EUI didn't change labor behavior significantly, so it shouldn't be blamed for the long-term unemployment problem or for significant hysteresis in the labor market.  These are workers who are mostly just being labeled differently within a fairly typical labor market behavior.  I would still argue that it might not be the most efficient redistribution program, but this paper seems to support the argument that the apparent increase in unemployment durations from EUI comes mostly from movement between "Not in Labor Force" and Unemployment, not from delays in re-employment.

To the extent that this data is informative, it might suggest that in the next downturn, an extremely generous EUI program won't necessarily be that damaging to the labor market - it will just appear to be.

These implications would all generally point to a more optimistic picture of the current economic context.  It would mean that historically comparable Labor Force Participation took a deeper cyclical dive than the reported numbers suggest.  Although, the adjusted statistic would show a dip earlier in the recession, with stronger recovery since then.  But, it also means that we are currently basically recovered and that the labor recovery was stronger and sooner than we thought it was.  Much of the remaining reductions in unemployment would typically be recorded as re-entries into the labor force.

Finally, these findings show how beneficial functional NGDP targeting could be.  There is something to be said for the creative destruction that might come out of a difficult economic period.  But, I think it's incorrect to argue for unnecessary economic disruptions.  The aggregate costs surely outweigh the benefits.  This paper points to significant permanent disemployment coming from economic dislocations.  If some of these labor disruptions are a result of suboptimal monetary policy, and if more stable nominal demand could prevent some of these dislocations, it could lead to higher labor force participation and utilization over time.  I don't think higher labor force participation should be considered a goal, a priori.  But, the permanent disemployment from these dislocations are almost certainly inefficient and are not remotely optimal for the affected workers, so in this case, it would represent improvement.

A Brief Look at Unemployment Persistence

I have been using this graph, which compares unemployment to insured unemployment, to guide expectations of labor trends.  I am afraid that we have a "new normal" where there will be strong pressures for pro-cyclical labor policies similar to those we have seen in the last 5 years, that continue to create persistence in unemployment as we move out of recessions.




Source: http://www.frbsf.org/economic-research/files/JEP-slides.pdf

There appear to be long term trends in the Beveridge Curve (job openings vs. unemployment), which are probably a product of policy and cultural changes and demographic factors.  It occurs to me that there may be some status quo bias in this thinking, though.  So, I extended the graph of total vs. insured unemployment back further.  I can get back to 1971 with data from Fred.  (I used the 12 month moving average of continued claims as a proportion of Civilian Labor Force for both better consistency in relative long term levels and noise reduction.)

The Beveridge Curve suggests that there were frictions in the labor market in the 1970's and 1980's that inflated the unemployment rate.  I would have expected this to be related to more persistent unemployment, higher unemployment durations, and thus higher unemployment compared to insured unemployment.  But, the recessions in this period don't exhibit high unemployment relative to insured unemployment.  And, later in the 1980's when unemployment remains high compared to insured unemployment, the Beveridge Curve implies a more robust labor market.

I take this as a sign for optimism.  Maybe short term trends aren't destiny...Of course short term trends aren't destiny.  The current cycle has been unusual in the level of total unemployment and in the persistence of high insured and uninsured unemployment.  The cycles in the early 1970's and 2000's had fairly low total unemployment, compared to insured unemployment.  The 1980 recession also was proceeding well until the second wave came.  Then the we moved through the worst of it pretty quickly.  (The red dots represent each month.)  But, after the recession ended, there was persistence in high unemployment for several years, and this persistence continued through the early 1990's recession, considering the very tame levels of insured unemployment. (The red dots are above the normal range of the relationship and are close together.)

This relationship might be an interesting one to watch as unemployment peaks during the next downturn.  Have pro-cyclical policy and cultural changes meant that this relationship been much steeper since the 1970's, but low relative peak levels of insured unemployment kept total unemployment low until the most recent downturn?  Or, is there a chance that the next time insured unemployment gets to 3% or 4%, that a healthy labor market will help push total unemployment down quickly as insured unemployment declines?

Maybe my interpretation of the Beveridge Curve is backwards.  Maybe instead of thinking the unemployment rate was high compared to vacancies in the 1970's, maybe we should think that the vacancies rate was high compared to unemployment, and this is related to the healthy recovery in total unemployment as insured unemployment declined from the peaks.  I have been thinking of the Beveridge Curve on a slope, and that a more robust labor market is signaled by a movement toward the origin (movement number 1).  But, maybe a better functioning labor market is signaled by a shift to the left, but also a flattening, in the Beveridge Curve (movement number 2).

Maybe right/left shifts are related to labor supply and up/down shifts are related to labor demand.  To the extent that the relationship moves cyclically, it moves diagonally along the curve as both supply and demand change through the sentiment changes of the business cycle.  But, possibly, the unusual position of the 1970's Beveridge Curve was a combination of loose monetary policy that kept vacancies high during cyclical downturns and other policies or cultural shifts that were keeping unemployment high during recoveries.  Maybe a little looser monetary policy with a less regulated labor market is the best of both worlds, but of course I would say that.

Unemployment and JOLTS, with demographic adjustments

I've done quite a few posts on the significant distortions that the baby boomer lifecycle is causing in comparative labor statistics.  There are so many places where we are using time series to assess the state of the economy, and we are using measures that have stable names but that are measuring something whose fundamental character is changing.  In broad terms, for instance, we think we are measuring "Quits" or "Unemployment Rate", a stable set of data regarding an economy over time.  But, really, we are kind of measuring "Quits or Unemployment among a lot of 50 year olds" today compared to "Quits or Unemployment among a lot of 35 year olds" 15 years ago.  We think we are comparing changes in our economy, ceteris paribus, but in some cases, we are being fooled.  The economy is the "ceteris paribus" and we are just measuring how 50 year olds are different than 35 year olds.

Last December, I tried to adjust the Quits rate from the JOLTS survey to account for age demographics.  I haven't revisited the adjustments since then.  Today I thought I'd update this and see where things stand.  The red line in this graph is where we would expect Quits to be if demographics had remained constant.  The trend lines in this graph are parallel.  Growth in Quits has more or less followed the trend from 2003 to 2006, except for the period from the summer of 2011 to the fall of 2012, where it leveled out.  (It might be worth noting that this period of stagnant Quits roughly falls in the time period between QE2 and QE3, with Quits increasing on trend during the QEs.)

Here is a graph of all of the JOLTS indicators, with this demographically adjusted Quits level added.  Note that, with this adjustment, Quits is back to the same level of early 2004, when the Unemployment Rate was at 5.7%.

Job Openings is back to the level of late 2005, when the Unemployment Rate was 5.1%.  Some combination of labor market frictions is probably responsible for the lower Quits rate among older workers.  They tend to have much lower employment churn and longer unemployment durations.  Some of this is probably due to greater specialization as a result of their more mature career development, etc.  These factors would tend to cause Job Openings to be overstated, relative to earlier periods, because employers would require more time to match jobs with workers, given these frictions.  I have a fairly direct way of adjusting the Quits rate by using unemployment and unemployment duration data, by age.  These inputs aren't available for Job Openings adjustments.  If we assume that the scale of the effect is similar between Quits and Job Openings, then adjusted job openings would imply an expected Unemployment Rate of about 5.7%.

The lower churn among older workers could also explain some of the lower hiring levels, so that hiring adjusted in a similar way to quits should also imply an unemployment rate in the high 5's.

Older workers also have lower unemployment, generally.  Adjusting for age, we might expect that the current unemployment rate would be about 0.4% higher than it is if demographics were still equal to what they were in 2000.

Comparing all of these measures to the previous recession, with these rough demographic adjustments, we have:

				Stated	Adjusted
Quits Rate				1.6%	1.8%
Job Openings Rate				2.7%	2.3%
Unemployment Rate				6.1%	6.5%
UER implied from Quits				6.4%	5.7%
UER implied from Job Openings				5.1%	5.7%

So, the measures, demographically adjusted to compare to the previous recession, give us a picture where Openings and Quits suggest that Unemployment should be nearly 1% lower than it is.  I have separately estimated that about 1.2% of the labor force remain drawn into unemployment because of the unprecedented generosity of Emergency Unemployment Insurance (EUI).  It seems like this group of workers could explain the disconnect between unemployment and the JOLTS data.

About 0.3% of the unemployed labor force is related to lower exit rates of cohorts who became unemployed in 2013 and were generally eligible for EUI.  These workers appear to be actively engaged in the labor market, even though their unemployment exit rates were a little slow.

Another approx. 0.8% of the labor force have very long unemployment durations and would have been expired out of EUI even if it hadn't been terminated at the end of 2013.  The Quits and Openings rates may suggest that these workers have a limited impact on quitting and hiring decisions of other workers and employers.

I have done a lot of posts on Labor Force Participation Rates where I have argued that LFP, once adjusted for demographics, is roughly where we would expect it to be at the end of a deep recession.  But, that LFP level includes these Very Long Duration Unemployed workers in the labor force.  So, these are not workers who would have left the labor force without EUI.  They are probably mostly workers who would have reentered the labor force.

I've been fairly clear that I don't think such long term EUI was a wise policy.  I'm not sure we did these workers any favors by having such generous EUI policy.  If the main point of this policy was to lessen the incentive for them to accept sub-optimal work opportunities in the months following their loss of work, it seems that what we have done is to create about a million and a half workers, who, at the end of the labor contraction, still are in a position where they will need to accept sub-optimal work opportunities, but now have to try to acquire those opportunities with a big red flag on their resumes.  So, they are likely, after having missed two years or more of potential productive work time, to be facing even worse opportunities than they had initially.  In trying to save workers from uncomfortable, but manageable, outcomes, we may have subtly pushed them into desperate outcomes with no obvious, systematic solution.

In any event, these workers are slowly leaving unemployment, though it is unclear where their marginal flow is going - to work or out of the labor force.  The net result may be that we have a labor market that, for the most part, is operating at full employment.  Normally, there would be some segment of opportunistic labor that would cause cyclical fluctuations in labor force participation.  Now there is an additional segment that will also reenter employment cyclically, which might be another reason to expect an exceptionally long recovery period, if we can avoid having all the "bubblemania" jibber-jabber push the Fed into unnecessarily hawkish monetary policy.

The best scenario probably involves short term interest rates hitting 2-3% pretty quickly after their initial lift, and then moving sideways, a la the late 1990's.  My fear, which is probably becoming a broken record, is that this scenario probably includes an equilibrium price of homes 30-40% higher than today's, adjusted for inflation over time, and I don't think the Fed and most everyone else wants to believe me (or the market) over their own lying eyes.

April 2014 JOLTS

JOLTS were reported Tuesday, and Job Openings jumped in April, putting the Beveridge Curve in territory that would have signaled full employment 10 years ago.  This is great news.  I think it signals that the employment strength we have been seeing in the last couple of months is not a statistical aberration, and it gives me more confidence that we will see more employment gains over the next couple of months.

One caveat, though, is that the 2000's vintage Beveridge Curve was not typical.  The JOLTS data doesn't go back any farther than that, so it's hard to find versions of the relationship tying into older data.  Here is one that I've found from the Federal Reserve Bank of San Francisco.  The relationship in the 1970's and 1980's would target us at 8% unemployment or more with April's Job Openings level.

We all like to push our own policy preferences onto these statistical canvasses, and I'd like to do that as much as the next guy.  But, the 70's and 80's had their own, minor, baby boomer generation that was hitting retirement, and I wonder if the rightward shift has to do with behavioral tendencies of an older work force that tends to be unemployed less, but for longer durations, than younger workers.  Maybe a 3.1% Job Openings rate corresponds to a 6.3% unemployment rate in the current demographic context.

On the other hand, the difference between where the Beveridge Curve is now and where it was 10 years ago is roughly equal to the unusual number of very long duration unemployed, which is probably a combined product of demographics, EUI, and the recession.  The shape of the distribution of unemployment durations would suggest that the Beveridge Curve has more room to shift back to the left.  We are, after all, still to the right of all historical Beveridge Curve locations outside of that 15 year period in the 1970's & 1980's.

Here are graphs of the trends in Openings, Quits and Hires, and the long term levels of all the JOLTS categories (below).  I would have been ecstatic if we had seen a rise in Quits along with this rise in Openings, but still, trends remain positive.

Also, here is a graph of employment flows, through May.  These kind of tell a similar story to the other indicators.  Flows into and out of Employment and Unemployment are roughly back at a level that would normally correspond to full recoveries.  But flows into and out of the Labor Force remain high.  Again, this points to a labor market mostly functioning at recovery levels, but with a large pool of marginally attached workers.  I see lots of narratives about this group that are really more about the narrative authors than they are about the group itself.  I suspect that all those narratives and more exist here, so if we take everyone's expectations and throw them in a blender, we'll get a decent picture of what to expect.  I think there is some upward drift in the Labor Force flows over the past 20 years, having to do with the demographics I discussed above, so I suspect that unemployment will continue to retain an extra 0.2-.03% of marginal workers, even in full recovery, but most of this group will slowly re-enter the workforce.

I think this is reinforced by the Quits data.  It has not shifted like the Openings data has, in relation to unemployment.  I felt like it pointed to a slightly overstated unemployment rate a few months ago, but with the recent decline in the unemployment rate, the Quits/Unemployment rates seem to be in line with previous levels.  This suggests that current workers see the current groups of unemployed workers as potential competitors, which, to me, argues against the narrative that the unusual group of very long term unemployed is a product of a skills mismatch.  If that was the case, workers would be quitting as if unemployment was at 5%.

Whatever the factors are that are keeping unemployment over 6%, it looks to me like the nuts and bolts of this economy are ready to finish the labor recovery this year.