Friday, May 2, 2014

April 2014 Employment Review

The noise went back the other direction this month & took us all the way to 6.3%.  Let's take a look at the parts & pieces.

First is unemployment by duration.  I suspect there was some statistical noise this month that moved unemployment down.  Here we can see that unemployment declined across durations.  But, all the excess unemployment is currently in the ">26 weeks" category.  The other categories are pretty much at normal levels.  They might have a few 100,000 to give between now and the cyclical peak, almost entirely from the 15-26 week category.  (As a percentage of the labor force, that dip in 0-4 week unemployment in December was the lowest level ever recorded.)  So, while it's a good sign to see them declining, there is likely to be some bounce-back there in the coming months.  Also, keep this is mind when reading the inevitable misreadings of statistical noise as desperate workers giving up.  That story doesn't match up well with the significant declines in short-duration unemployment.

That statistical noise looks like it helped the ">26 week" category, too.  I am not seeing any unusual decline in my estimated number of very long term unemployed this month, so I don't believe that this month's decline is strong evidence of an EUI effect, although the trends remain relatively positive, in general.  Most of the decline in unemployment over the past few months has been among workers under 45 years old.  There appears to be a correlation between older workers, EUI, and very long term unemployment, so the relatively small decline in unemployment among older workers also suggests that the unemployment decline is not particularly related to the termination of EUI.

I have been watching the churn in long term unemployment.  The gross number of people leaving long term unemployment over the past 3 months has been remaining strong at about 2 million.  It dipped down to about 1.8 million last month.  It recovered to about 1.9 million this month, so it didn't get all the way back to 2 million, but at least it's heading in the right direction.  January wasn't an easy month to compare against, either.  If this flow remains at 2 million a quarter, long term unemployment should be below 3 million by July.

It's a similar story if we look at this flow as a percentage.  It bounced back this month to above 35%, and the moving average continues to improve, but I would have liked to have seen a stronger shift in the trend coming out of the end of EUI.  As I mentioned yesterday, though, the problematic portion of very long term duration unemployment probably did not have much of a direct involvement with EUI by the end of 2013.  The re-engagement of that group of workers with the labor force will probably be a little more complicated and slow than we would like.  I still expect to see an acceleration in the exits from long term unemployment, but this is a process that will continue for many months.  Here's a graph of the duration categories back to 2006, for reference.  Keep in mind that population growth and demographic shifts probably will keep the longer duration unemployment levels from declining all the way back down to 2006 levels.

In the comparison between continued unemployment claims and the unemployment rate, this month obviously pulled us back toward the long term relationship.  But, as we can see in the graph, there is a long way to go, and this month's movement, in terms of this relationship, was not unusual.  The question will be how quickly this convergence happens.  It's hard to see that in this graph.

Here's a graph of the ratio over time.  This shows a few interesting things.  First, we can see how when a recession first affects the labor market, the ratio decreases, because an uptick in involuntary unemployment creates a sharp increase in unemployment claims.  The ratio then increases as sclerosis in the labor market leads to longer unemployment durations, so that the unemployment rate includes many workers who are not collecting standard UI benefits.  Then, the ratio declines back to typical levels under 3.0 as the labor market recovers.  Second, it is interesting to see that in this cycle, EUI was implemented before there was the typical cyclical increase in standard unemployment insurance claims.  Third, it would be unusual to see a decline to the level that would correspond to full recovery in less than about 18 months, at the soonest.  But, the current relationship is highly unusual, so it wouldn't be out of the question to see the return to a normal ratio level happen more quickly than it has in the past.

It really is pitiful, the extent to which the federal government damaged the labor market in 2008.  In June, they instituted EUI, which would have the effect of making the labor market less flexible because it would have some marginal influence on sticky wages.  Then, in July, they instituted the second in a string of minimum wage hikes.  So, in a context where Congress is clearly concerned about labor market health, they force a wage hike on the most vulnerable workers.  Talk about sticky wages.  Then, at the Fed meeting in September - a meeting where FOMC members explicitly state that they believe that EUI has already had a negative effect on the unemployment rate, the committee decides to inflict the labor market that has been freshly seasoned with significant wage inflexibility with a whopping deflationary shock.


Looking at flows, we can see some of the likely statistical favors this month's employment report received.  In every single pair of flows, this month's movement was favorable.  These tend to be very noisy, so this was likely a one-time improvement.  But, it is important to keep in mind that all these flow pairs are going in the right direction, and the previous 3 months have had noise-movements in the other direction, so that it is likely that 6.3% is a legitimate reading and the unusual movement was the result of the movements in the other direction in previous months.

Even with the drop in "NtoE", the cumulative flow from NtoE over the past 4 months is still very high.  The flows between U and E (green and blue) have been showing tremendous strength, and this month's positive movement is part of a well established and positive trend.  The decrease from "NtoU" follows several months of unusually positive readings compared to the longer decreasing trend.  And, this is counterintuitive, but a decrease in this flow is bullish.  We tend to see this through a narrative of desperate workers coming into the labor force.  But, it is just as likely that a decrease is the result of a lack of desire for work among those who are not in the labor force.  The fact that this pair of flows has a clear pattern of being low during booms and increasing during busts strongly suggests that something like the positive interpretation is dominant.  This set of flows is the one set that has been unusually high relative to other measures of the labor market - probably due in part to EUI - so a decline in this flow pair is something we should expect after the end of EUI.  The complicated relationship between EUI and very long term unemployment is evidenced by the high level of this flow pair compared to historical levels.  I'm disappointed that we haven't seen more decline in this flow pair since the end of the year.

Lastly, looking at the flows into and out of unemployment, we can see a little bit each of legitimate strength and statistical noise.  The extreme decline in unemployment owes partly to the unusual decline in the net "NtoU" movement.  But, we can see that this net flow has been unusually high since December.  The trend in this net flow has been flat since the beginning of 2011, and the cumulative net flow of the last few months is roughly in line with that trend.  Net flows from Unemployment to Employment have been trending up nicely since the beginning of 2011, which is a sign that the labor market is actually gaining momentum.  This month had a strong net flow here this month, but it wasn't highly divergent from trend.

I think the totality of these indicators suggests that 6.3% as of April 2014 is a good estimate of long term trends in the labor market.  Labor markets look relatively strong even though there is no clear indication yet of an EUI-related 2014 boost.

No comments:

Post a Comment