In October 2015, after a September payroll employment estimate of 142,000 new jobs, described as "grim" and "dismal" in the media, I wrote this blog post,
arguing that we might well see less employment growth in the future. That conclusion came from simple labor force arithmetic. With the working-age population (ages 15-64) growing at a low rate of about 0.5%, if the labor force participation rate failed to increase and the unemployment rate stopped falling, payroll employment could grow at most by 60,000 per month, as I saw it last October.
After the last employment report, which included an estimate of a monthly increase of 38,000 in payroll employment, some people were "shocked," apparently. Let's take a look at a wider array of labor market data, and see whether they should be panicking.
If you have been following employment reports in the United States for a while, you might wonder why the establishment survey numbers are always reported in terms of the monthly change in seasonally-adjusted employment. After all, we typically like to report inflation as year-over-year percentage changes in the price level, or real GDP as quarterly percentage changes in a number that has been converted to an annual rate. So, suppose we look at year-over-year percentage changes in payroll employment:
That wouldn't quite make your cat climb the curtains. Employment growth rates were above 2% for a short time in early 2015, and the growth rate has fallen, but we're back to growth rates close to what we saw in 2013-2014.
What's happening with unemployment and vacancies?
The unemployment rate is currently at 4.7%, only 0.3 percentage points higher than its most recent cyclical low of 4.4% in May 2007, and the vacancy rate (JOLTS job openings rate) has been no higher since JOLTS came into being more than 15 years ago. Thus, by the standard measure we would use in labor search models (ratio of vacancies to unemployment), this job market is very tight.
If we break down the unemployment rate by duration of unemployment, we get more information:
In this chart, I've taken the number of unemployed for a particular duration, and expressed this as percentage of the labor force. If you add the four quantities, you get the total unemployment rate. Here, it's useful again to compare the May 2016 numbers with May 2007. In May 2007, the unemployment rates for less than 5 weeks, 5 to 14 weeks, 15-26 weeks, and 27 weeks and over were 1.6%, 1.4%, 0.7%, and 0.7%, respectively. In May 2016 they were 1.4%, 1.4%, 0.7%, and 1.2%, respectively. So, middle-duration unemployment currently looks the same as in May 2007, but there are fewer very-short-term unemployed, and more long-term unemployed. But long-term unemployment continues to fall, with a significant decline in the last report.
Some people have looked at the low employment/population ratio and falling participation rate, and argued that this reflects a persistent inefficiency:
So, for example, if you thought that a large number of "involuntarily" unemployed had dropped out of the labor force and were only waiting for the right job openings to materialize, you might have thought that increases in labor force participation earlier this year were consistent with such a phenomenon. But the best description of the data now seems to be that labor force participation leveled off as of mid-2015. Given the behavior of unemployment and vacancies in the previous two charts, and the fact that labor force participation has not been cyclically sensitive historically, the drop in labor force participation appears to be a secular phenomenon, and it is highly unlikely that this process will reverse itself. Thus, it seems wrongheaded to argue that some persistent wage and price stickiness is responsible for the low employment/population ratio and low participation rate. There is something to explain in the last chart alright (for example, Canada and Great Britain, with similar demographics, have not experienced the same decline in labor force participation), and this may have some connection to policies in the fiscal realm, but it's hard to make the case that there is some alternative monetary policy that can make labor force participation go up.
Another key piece of labor market information comes from the CPS measures of flows among the three labor force states - employed (E), unemployed (U), and not in the labor force (N). We'll plot these as percentage rates, relative to the stock of people in the source state. For the E state:
The rate of transition from E to U is at close to its lowest value since 1990, but the transition rate from E to N is relatively high. This is consistent with the view that the decline in labor force participation is a long-run phenomenon. People are not leaving E, suffering a period of U, and then going to N - they're going directly from E to N. Next, the U state:
In this chart, the total rate at which people are exiting the U state is lower than average and, while before the last recession the exit rate to E was higher than the exit rate to N, these rates are currently about the same. This seems consistent with the fact that the unemployment pool currently has a mix that tilts more toward long-term unemployed. These people have a higher probability than the rest of the unemployed, of going to state N rather than E. Finally, for state N:
Here, the rates at which people are leaving state N for both states E and U are relatively low. Thus, labor force participation has declined both because of a high inflow (from both E and U) and a low outflow. But, the low outflow rate to U from N (in fact, the lowest since 1990) also reflects the tight labor market, in that a person leaving state N is much more likely to end up in state E rather than U (though no more likely, apparently, than was the case historically, on average).
The last thing we should look at is productivity. In this context, a useful measure is the ratio of real GDP to payroll employment, which looks like this:
By this measure, average labor productivity took a large jump during 2009, but since early 2010 it has been roughly flat. There has been some discussion as to whether productivity growth measures are biased downward. Chad Syverson, for example,
argues that there is no evidence of bias in measures of output per hour worked. So, if we take the productivity growth measures at face value, this is indeed something to be shocked and concerned about.
1. The recent month's slowdown in payroll employment growth should not be taken as a sign of an upcoming recession. The labor market, by conventional measures, is very tight.
2. The best forecast seems to be that, barring some unanticipated aggregate shock, labor force participation will stay where it is for the next year, while the unemployment rate could move lower, to the 4.2%-4.5% range, given that the fraction of long-term unemployed in the unemployment pool is still relatively high.
3. Given an annual growth rate of about 0.5% in the working age population, and supposing a drop of 0.2-0.5 percentage points in the unemployment rate over the next year, with half the reduction in unemployment involving transitions to employment, payroll employment can only grow at about 80,000 per month over the next year, assuming a stable labor force participation rate. Thus, if we add the striking Verizon workers (about 35,000) to the current increase in payroll employment, that's about what we'll be seeing for the next year. Don't be shocked and concerned. It is what it is.
4. Given recent productivity growth, and the prospects for employment growth, output growth is going to be low. I'll say 1.0%-2.0%. And that's if nothing extraordinary happens.
5. Though we can expect poor performance - low output and employment growth - relative to post-WWII time series for the United States, there is nothing currently in sight that represents an inefficiency that monetary policy could correct. That is, we should expect the labor market to remain tight, by conventional measures.
How about the quality of jobs?ReplyDelete
What do you have in mind?Delete
Found this from last year by a BLS economist. It includes a change of age distribution in the workforce between 2000 and 2014. He then gives analysis by age group, etc., of reasons given as to why are people not in the labor force.
Suppose wages are downward rigid in long-term relationships but flexible at entry. When long-term workers are overpaid, job-to-job transitions fall, and so does productivity growth.ReplyDelete
Is unemployment to job vacancies a less meaningful metric because hires to job vacancies are at a 15 year low? Also, 25 to 54 year old labor force participation made a 2% level drop in the last recession. Employment/population for that age group also dropped more aggressively. Age adjusted E/P seems to show more business cycle sensitivity as well. Does your argument about secular changes in labor force participation also apply to the 25 to 54 group?ReplyDelete
Thank you for the post.
"Age adjusted E/P seems to show more business cycle sensitivity as well."Delete
Age adjusted or not, in a typical business cycle downturn in the past, participation did not move much, but unemployment did. So, if the labor force is constant, say, and unemployment is going up, employment has to be going down.
"Does your argument about secular changes in labor force participation also apply to the 25 to 54 group?"
If you look at all groups, participation has gone down in the 16 to 24 group (by a lot), and the 25 to 54 group, but hasn't changed much for 55 and over. Possibly the 55+ group is actually similar, but you're seeing the baby boom cohort moving into old age, and they have higher participation (particularly among women) than the previous cohort. A complete analysis would look at the supply side of the labor market (fertility, household labor supply decisions, choices about education and training) and the demand side (skill requirements for example).
let me say ... an insightful diagnosis about the labour market, but the forecasts are conditioned forecast, conditioned to your very tight assumptions, they are almost an identityReplyDelete
Regarding the productivity slowdown, there were some recent interesting op eds published at Project Syndicate by Roubini, Rodrik, and a little earlier by Eichengreen. In case anyone is interested, here are the links:ReplyDelete
It's often good to look at one's old emails and posts to check one's priors. The mild pessimism here should be questioned, after two NFPs over 250,000, a participation rate (overall and 25-54yr cohort) that has resumed its increase from its trough but is still 2% below its precrisis levels, and precious little inflation. Greater labor force participation might show up as weaker productivity, but like Martha Stewart would say, That's A Good Thing.ReplyDelete
Bullard and Kocherlakota's views are right: the Fed has no business normalizing when it is far, far away from achieving its dual mandate and progress on success is achingly slow.