Tuesday, February 10, 2015

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.


  1. > If lending doesn't loosen up, inflation will come from
    > a supply shock in housing

    Sorry Kevin, I am confused. Wouldn't a frozen credit situation make it harder to buy a home, which lowers home values somewhat but might increase demand for rentals? In what way would that situation be a "supply shock"?

    I know, only barely following as usual...


    1. If you can't follow, I probably need to write more clearly. :-)

      The reason I call it a supply shock is because I am treating the housing market as a single market. There isn't an additional renter. There is just a household that is renting from someone else instead of from themselves. The total supply of homes is smaller because, on the margin, some of those households would be building new homes.

      It is possible for landlords to build homes, but owner-occupiers are 65% of the market, and they are more like 80% or more of single family homes, so for landlords to make up for the lack of owner-occupier supply, they would need to build units at a rate several times higher than any historical rate, which is probably an impossible gap to make up. Commercial and multi-unit building is stronger than single family owner-occupier building, but not nearly enough to make up the gap.

  2. Thanks Kevin, that makes sense. So the lack of credit inhibits building, which drives up rents, which looks like inflation, now I'm following.

  3. Happy for more houses (in the right places too, where people want to live).

    That said, the number of hours worked in the private-sector are now the same as 2009...and 1999.


    I did a post at Historinhas (Marcus Nunes)

    Yes, of late the labor market is getting better...but we will need years and years of getting better more...

    1. I'm with you Ben. But, I do think demographics explains a lot of this. The limited growth in the labor force has been mostly outside prime working age.


    2. You know, if wages were higher (or taxes on wages lower) that would increase the supply of labor....wages have been dead...

      A robust labor market (which we have not had since 1999---see hours worked) would hike wages, and increase the supply of labor...

      Possibly you have the demographics explanation backward. Marginal workers see no reason to become productive, given the weak labor market, and the cruddy way they are treated...in a robust labor market, they see higher wages and employers who become solicitous....

    3. I have a different take. First, working age population has not been growing. It's not just labor force. And even within that group, there is some aging that would pull expected participation down. I agree that labor markets have been tough since 08, but age adjusted labor force participation was very strong in 06-07.
      I think wages have been very high since 08, given the level of unemployment. They look and feel low because inflation has been low and what inflation we have had has been from supply side issues in housing, plus the typical problems in healthcare, etc. I don't think there is much room for relative growth in compensation. We just have screwed up housing, healthcare, and education policies that eat up all of our productivity.

      But that's why I like your input. You have a different take on some of this.

  4. Kevin-
    How are you adjusting for net immigration? Immigration is well off its late 90s/early 2000s peak- in raw terms peak to trough was around 400,000 fewer immigrants and in % of US population it is even starker. If we include the infamous "jobless recovery" and 2001 recession we are talking 3-5 million immigrants (maybe more) that you would have expected- heavily skewed toward prime working age.

    1. Great point. I'm not sure how this would effect the rates that are in my post, but that would feed into Benjamin's points about total employment. That's another reason that we have seen a stagnation in total hours worked.