Monday, June 9, 2014

May 2014 Employment Review

I had wondered if this month would confirm a strong employment trend, which would have corresponded to a range of 5.9%-6.3%.  Or, this month could suggest that trends are continuing along the long term pace and last month was a statistical aberration, which would have corresponded to a range of 6.1%-6.5%.  The month came in at 6.3%, and it looks like a combination of the two.  There was some statistical reversion compared to last month, but with some hopeful signals.

The first graphs here are from flows data.  These are pretty noisy numbers, so it is tough to see much change from month to month.  All of these flows reverted back from last month's strong movements, which was expected.  The trends are all moving in the right direction, but last month's improved unemployment numbers were partly from unusual movements.

The next graph is the comparison of insured unemployment and total unemployment.  There was some snap-back this month.  This will bounce around from month to month, as all of these indicators do, but last month's drop in unemployment was much closer to the trend in this relationship than this month's pause.  This points to more potential for falling unemployment in the coming months.

The remaining graphs are related to unemployment by duration of unemployment.  This data shows strong confirmation of less persistent unemployment coinciding with the end of EUI.  First, regarding this month's unemployment, the total number of unemployed workers remained about the same as last month.  But, note that this comes from an increase in very short term unemployment and a decrease in long term unemployment.

Both initial and continued claims on unemployment insurance have been declining recently, so this increase in short term unemployment is probably either (1) the result of a surge in quits (which we won't be able to confirm until JOLTS data for May is released in July), or (2) the result of a statistical aberration in the May numbers, overstating unemployment.  Both of these would be reasons for bullishness on employment.

This improvement in unemployment churn is evident in the % of long term unemployed exiting unemployment, which surged this month to more than 38%.

The next graph is the unemployment by duration graph, again, but in line graph form.  This helps to see the shape of unemployment over time, and the change in unemployment durations as we have left EUI.  I was originally wrong about exactly how this would play out, because I didn't fully account for the fact that many of the very long term unemployed have timed out of even EUI.  So, there is a group of very long term unemployed that is slowly shrinking, by about 0.05% of the labor force per month.  They are not effected by EUI.  By the end of 2013, for unemployment durations under about 75 weeks, the labor market was fairly normalized, but EUI and the existence of marginally attached workers and very long term unemployed workers were continuing to push unemployment durations higher.  The end of EUI increased the exit rate from unemployment for workers across durations.  This is visible in this line graph.  The decline in very long term unemployment has continued to decline at a stable pace.  But the big change in the past 8 months has been the additional decline in 5-26 week unemployment (which also pulled down the "over 26" category at a stronger pace).

This has probably mostly played out at the lower durations.  As these cohorts age, the longer duration categories will inherit smaller cohorts because of these higher exit rates, so that, over time, long duration unemployment will decrease as a result of employment trends that are already established today.  Generally, long duration unemployment in the near future can be roughly estimated by the relative behavior of the shorter durations.  Next is a graph comparing actual long term unemployment to the unemployment predicted by shorter durations.  Here we can see how there was unusual employment behavior specific to "over 26 week" durations.

The next graph shows the difference between the forecasted long term duration unemployment and the actual long term unemployment.  I consider this to be a rough approximation of the number of very long unemployed workers.

May's continuation of these trends continues to suggest that, excluding the very long term unemployed, the unemployment rate is down to about 5.3%.  A 5.5%-5.7% unemployment rate by the end of 2014 still seems reasonable.  Compared to today's 6.3% rate, in broad terms, it looks to me like about 0.1% will come out of 15-26 week durations, about 0.2%-0.4% will come from the natural continuing decline in "over 26 weeks" as the higher exit rates of recent cohorts continue to move through the durations over time, and about 0.3% will come from the continued decline in very long term unemployed (shown in the last graph).

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