Tag Archives: unemployment rate

Early signals point to unemployment trouble

In January, I wrote a post that supported shortening the unemployment benefits for the long-term unemployed. I used data from North Carolina to show a 1.4% drop in the unemployment rate in just six months. Unfortunately, analytics website Five Thirty Eight published an article from their data lab today that tells a different story.

Since the end of the Emergency Unemployment Compensation program cut unemployment benefits for many Americans three months ago, those whose checks have stopped coming still aren’t finding jobs. In my own analysis of the North Carolina data, I noted that one potential red flag was the high percentage (3/4 of a percent) who dropped out of the workforce altogether. The unemployed who become discouraged and quit trying to find work cause the biggest flaw with the unemployment measure, causing a counter-cyclical movement against the unemployment rate. That drop-out red flag seems to be a larger driver of the overall rate than we’d hoped.

“The number is much smaller today not because the long-term unemployed, as these Americans are defined by the Labor Department, have found jobs, but because they have given up looking for work.”
-Ben Casselman, Five Thirty Eight

These data’s prognosis isn’t good. In essence, Five Thirty Eight’s data lab has found that after six months, your chances of finding a permanent job are close to “hopeless.” Those who are finding employment are accepting part-time or temporary work.

Casselman also has an interesting take on how policy will react in the coming years and in the next recession. While there have been mixed reviews about how to interpret the Fed’s unemployment target, it seems like it will continue to serve as an indicator to some extent. The Fed’s 6.5% threshold seemingly has been reached, and scaling back stimulation into the economy has already garnered speculation for the first interest rate increases in years. For those who have dropped out of the workforce or yet to find employment, the future looks bleak.

“The Fed has been pulling back on its efforts to stimulate the economy, despite continued high unemployment and low inflation, suggesting it thinks the long-term unemployed are gone for good.”
-Casselman

It’s hard to pinpoint how to manage the long-term employment situation in America. On one hand, it isn’t possible to continuing paying out benefits forever to millions without jobs. Yet, this three month data shows hints that it isn’t a lack of effort preventing Americans from the workforce. The chances of finding work quickly diminish after six months unemployed, so the first step is ramping up the efforts to get laid-off workers going right out of the gate. Additionally, hiring long-term unemployed to government jobs such as infrastructure projects or creating easier access to community volunteering opportunities can help prospective employees keep their resume fresh and full of work experiences.

Immigration Reform: A Spark for the Economic Recovery

Although immigration reform in the United States can be extremely controversial, I believe  successful reform will greatly benefit the economy. A successful overhaul of America’s immigration policy would benefit our economy by opening our borders to highly skilled noncitizens. According to the Wall Street Journal, “The most important reason to reform immigration laws is to promote economic growth and prosperity. The U.S. has long had a generous immigration system, but it has been skewed to family unification rather than U.S. economic interests”. Considering the slow recovery from the financial crisis of 2008, I believe immigration reform could be an effective way to give the economy a meaningful push forward. The current immigration system seems outdated and reform seems in the best interest of the economy.

Attracting and keeping highly skilled workers would be a positive step toward economic growth. Highly skilled workers would provide a boost to productivity, which in turn would help increase gross domestic product (GDP). According to the Wall Street Journal, “In today’s global economy, with many rising nations, the U.S. is in an increasingly competitive contest for human capital. Yet often today the U.S. educates talented foreigners in our schools only to deny them visas to stay and work in America. The companies they create will be in China and India rather than Austin or Minneapolis”. I have always thought that it was silly for foreign students to come to the United States for a fantastic education, but not be able to stay after graduation and contribute to long run economic growth. During high school (boarding school), I lived with a foreign student who expressed the challenges he would face if he wished to work in the United States after college. Although some foreign students might (understandably) wish to return home, I think it is clearly in the best (economic) interest for the United States to retain these trained workers.

On the one hand, some see immigration reform as a boost for the economy. On the other hand, some claim that immigrants steal American jobs and depress wages. According to the Wall Street Journal, “The populist wing of the [right] wing party has talked itself into believing the zero-sum economics that immigrants steal jobs from U.S. citizens and reduce American living standards”. However, in the long run this will likely not be the case. The concern that immigrants “steal” American jobs operates under the assumption that immigrants only impact the labor supply and not labor demand. The key is that immigrants would not be substituting for American workers – instead, immigrants would complement the natural-born American labor force. Although adding more workers to the labor force in isolation would lower wages and add to the unemployment rate, this ignores the fact that new workers will also add to demand by spending the money they earn.

Successful immigration reform would provide increased productivity and higher wages once businesses expand to absorb the larger labor force and meet increased demand from a larger population. Unfortunately, promoting the benefits of long run policy can be a challenge since the long run is so intangible. As Keynes said, “In the long run we are all dead”. In the short run, the increase in demand for labor might lag behind the increase in demand for goods and services causing unemployment rate rise in the few years following the implementation of immigration reform. However, I am confident that the long run is not that far off. Ultimately, adding immigrants to the labor force should benefit the United States economy. The political landscape can be extremely challenging, but the Senate has a bill that might solve these issues. According to the Wall Street Journal, “This is why the Senate bill wisely opens the gates wider for foreign graduates and high-tech (H1-B) visas“. I am hopeful that the Senate bill will get passed and implement successful immigration reform.

FED renews focus on its duel mandate

Wednesday, the FED dropped the unemployment rate as a benchmark for when to raise the federal funds rate.  It has hinted at doing this for since January, since the indicator has been decreasing due to discouraged workers dropping out of the workforce as opposed to being hired.  In its place, the FED has said it will use a more comprehensive approach, as it seeks to continue its accommodating monetary policy until inflation becomes a problem or employment picks up.

Not everyone shares this opinion, not even on the Board of Governors.  The president of the Minneapolis Federal Reserve Bank, Narayana Kocherlakota, was the lone dissenter in this past weeks FOMC meeting.  While he argues the new policy will lead to uncertainty, I question the viability of his alternative.

Central to his disagreement is the ambiguous nature of the FED’s guidance with respect to he interest rate going forward. Mr. Kocherlakota thinks that without a firm number to track, the FED’s commitment to its message won’t be taken seriously.  However, the FED has had to move its previous number (6.5% unemployment rate) because it was about to be realized, and the FED would like to see the economy closer to full employment before rates increase.  If the conviction of the FED rested on a deterministic number, then picking another on may seem as arbitrary as the first.

As an alternative, he suggests lowering the unemployment number to 5.5%, to provide a more determined target.  I feel that there is a problem with this.  Using data series from FRED, one of which is graphed below, it can be seen that the natural rate of unemployment in the short and long term is at or above 5.5% for the foreseeable future.  Using it as a guide provides no valuable information since one would think that the FED would try to step off the zero lower bound if the United States was at the natural rate of employment.  The FED needs a different metric in order to give it the leeway it needs.

alfredgraph

If a policy with a firm benchmark is desired to insure credibility and confidence, instead of the unemployment rate why not use inflation as a guide?  While some have argued to raise the target inflation, there are very rational reasons for why 2% was chosen, and nothing so extreme is needed.  Instead, the FED should say that the central bank will do what it feels is prudent to foster a return to the natural level of output while inflation remains below the targeted levels.

I feel that Inflation will play a central role in the FED’s decision to raise interest rates, whether it wants to put a number to it or not.  With inflation at its current levels, the FED has the price stability it needs.  Provided this price stability remains, the FED should do all it can to stimulate employment.  While a firm number would bestow confidence in markets, it can also cause exactly what we are seeing now when the economy reaches predetermined levels in unanticipated ways.  Based on past results, the United States should have a little more confidence in its Central Bank to handle its business.

Fed Drops Unemployment Target

In recent news, the Fed is still staying on course with the bond buying program. However, some changes have been made to expand the array of indicators used to start raising short-term interest rates, rather than solely focusing on the unemployment rate. Also, Yellen reported at the meeting that the Fed will keep short-term rates lower than usual even after the unemployment and inflation rates return to long-term levels.

In regard to the unemployment rate, the Fed has now decided to drop the connection that it once made to raising the interest rate once the economy has reached the 6.5% unemployment threshold. The Fed plans to use other measures that it believes will represent the situation more accurately, such as the U6 measure (includes marginally attached workers and those working part time but prefer full time work), the share of workers who have been unemployed for six months or more, the rate at which people are quitting jobs, and the share of adults who are holding or seeking jobs.

In terms of interest rates, the Fed plans to keep the short-term rate lower than usual even after the jobless rate and inflation rate return to long term levels. Since the Fed expects a 4% rate as the normal long-run rate, this implies that officials do not expect rates to get back to this level anytime soon. Later actions taken by the Fed were to continue in reduce its bond-buying program to $55 billion. The long-term goal of the program is to hold down long-term interest rates, thus boosting spending, hiring, and growth.

One discrepancy that I noticed in the report was that even though the Fed said it plans to keep rates low well after the Fed returns to the long-run trend, the projections of the actual officials seemed a bit aggressive. More specifically, “Ten of 16 officials saw short-term rates rising to 1% or more by the end of 2015, with four of them right at 1%. Six officials saw rates below 1% by the end of 2015. In December, ten officials saw rates below 1% by the end of 2015. Twelve of 16 officials saw the target fed funds rate rising to 2% or above by the end of 2016, while four officials saw rates staying below 2% by the end of 2016.” In my opinion, I found the projections of these officials in comparison with Yellen’s earlier statements to be contradicting. From Yellen’s report, it seems that the Fed thinks the economy isn’t good enough right now, but will accelerate in the next 12 months- therefore warranting higher interest rates… but the Fed said that it plans to keep rates low “for a considerable time” after the bond buying program ends, given that the program is scheduled to end this fall. However, I anticipate this vagueness has to do with the fact that it depends on the condition of the labor market later this fall. If there were still high unemployment in the labor market and the inflation rate were still running below 2%, this would be good reason to believe that the Fed would hold the interest rate near current levels.

U.S. consumers ending their wintery ‘hibernation’

About a month ago, I wrote that disappointing retail numbers were nothing to fret about. Record-low temperatures and high precipitation across the United States resulted in treacherous roads, dangerously cold weather, and ultimately a number of great reasons to stay inside. It came as no surprise that buying a new vehicle and a trendy swimsuit weren’t on the short list of things to do for U.S. consumers. A month later, it seems that times have changed. After a 0.6% drop in January, the Wall Street Journal reported this week that retail sales have rebounded by increasing 0.3% in February.

“Consumers appear to be emerging from their dens to visit stores and restaurants,
a sign the U.S. economy could be poised to perk up from a winter chill.”

-Morath & Mitchell, WSJ

A month later, I still believe that the slow start to 2014 is just a bump in the long road to recovery. While many are reluctant to admit that the recovery is proceeding well, the evidence is there.  January’s aforementioned historically bad weather combined with a typical slow post-holiday spending pattern to spark concerns, but the optimism of the February retail news is further reinforced by the fact that February’s weather was nothing to write home about. J.P. Morgan Chase economist Michael Foroli explains that “the weather in February was worst of the winter, but retail sales still posted the best gain since October.” While beating the frigid temperatures of January, average February temperatures were again lower than historical averages. As spring approaches, March is expected to make up for the year’s slow start and reinforce the U.S. economy’s solid recovery, but it is likely that the wintry effects of January and February will leave a lasting mark on the overall economy.

“Many economists expect the nation’s overall economic growth in the first quarter to slip
below a 2% pace, after a better than 3% annualized gain in the last six months of 2013.”
WSJ

Those hesitant to pin the slow start on weather point to other factors such as the end of unemployment benefits for millions of Americans in December. However, as the unemployment rate approaches the Federal Reserve’s targeted rate of 6.5%, discretionary spending should continue to increase for the average American. Additionally, cold weather costs such as utility bills will taper back to normal levels and save households hundreds in monthly costs. While it may be unlikely to completely make up for 2014’s slow start with strong spring sales, there should be optimism moving forward as we return to normal moving into March and warmer months.

Job Market Rebounds

The job market appeared to be more promising in February as hiring has picked up. Despite the cold winter, there is more hope that the US economy will break out of the slump this spring. After two months of weak growth in the labor market, non-farm payrolls have grown by 175,000 in February. Also, the unemployment rate has increased from 6.6 to 6.7 percent, but a large part of this was due to more people joining the workforce.

Screen Shot 2014-03-14 at 3.13.34 PM

Due to the fact that retail sales, manufacturing output, and housing have weakened in recently, this jump in the job market could be a step leading to less people worrying about the US economy. If the harsh winter really was the cause of sluggish sales, we may see a direct increase in sales as the weather improves. For example, Bob Evans Farms Inc. commented that the cold, especially in the Midwest, has been the cause of a downturn on sales. The company also commented that this means that they will have to lay off workers.

However, there are also positive signs- “For the first time in 46 months, more unemployed people found a job than dropped out of the workforce.” This shows signs that less people are discouraged to find work. This is also noticeable from the unemployment rate, due to the fact that more people are joining the labor force. In addition, a measure of people working part time who want a full-time job has fell to 12.6%, its lowest since November 2008. Another possible sign of a stronger labor market is the rise in average hourly earnings by 2.2% in the past year.

In my opinion, I believe the news about the labor force is good news, but I only see the recent job creation as having more of a neutral effect on the economy. The public only expected about 150,000 news jobs to be created. However with 175,000 new jobs actually being created, the labor market isn’t decelerating but it also isn’t accelerating. The actual amount of jobs for the economy to stay on track should be around 250,000 every month. Also, the recent job creation has implications at the Fed. The graph below shows a rise in the unemployment rate from 6.6 to 6.7. This buys the Fed more time to decide whether or not to raise the short-term interest rate from near zero once the unemployment rate drops below the 6.5% threshold. In terms of purchases, it still looks as though the Fed will still pull back its bond-buying to $55 billion this March.

Screen Shot 2014-03-14 at 3.13.55 PM

February Employment Report: Implications for Monetary Policy

During her inaugural public appearance since becoming chairwoman, Janet Yellen confirmed that her intention is to continue the policies of her predecessor Ben Bernanke. As the economy improves, Yellen intends to slowly wind down the large-scale asset purchases – also referred to as quantitative easing (QE). I believe the February employment report provides data to confirm this plan, however, constructing forward guidance will still be a challenge.

The February employment report was released on Friday, March 7th and showed positive signs about the economic recovery. According to the Wall Street Journal, “Nonfarm payrolls grew by a seasonally adjusted 175,000 in February, the Labor Department said Friday, following a two month stretch of weaker growth. The unemployment rate ticked up to 6.7%, in part because more people joined the workforce”. Although the unemployment rate increased, it increased for all the right reasons. In this case, the rise in the unemployment rate reflects a rise in the labor force participation rate – a sign that conditions are improving in the labor market. As sentiment about the labor market improves, people are choosing to return to the labor force and pursue jobs. In addition, the increase 175,000 jobs added beat expectations and was more than the previous month – indicating that adverse weather likely depressed previous employment reports this winter. I speculate that the strong February employment report will encourage the Federal Reserve (Fed) to continue tapering.

I believe the Fed might find this an opportune time to adjust forward guidance, but I am not sure how they will do it. According to the Wall Street Journal, “A more vexing challenge for the Fed will be fine-tuning its official policy statement, which is loaded with assurances of low-interest rates in the future”. With the exception of the February employment report, the unemployment rate has been falling consistently. The Fed has already stated that it intends to keep rates low even after the unemployment rate falls below the 6.5% threshold. As I have mentioned before, the Fed might want to consider nominal gross domestic product (GDP) targeting.

However, I do not expect the Fed to announce nominal GDP targeting because it would be too much of a surprise. The Fed’s dual mandate includes unemployment and inflation, which means these two indicators will remain important (perhaps this can be legally changed one day). According to the Wall Street Journal, “[Janet Yellen] and other top officials have suggested a new statement could emphasize the Fed’s interest in a broad array of indicators, rather than a single unemployment indicator”.  Although I do not know what array of indicators they will choose, I believe this is a good first step. I think it would make sense for Yellen to choose a large selection of indicators that provide a sense of financial stability. Financial stability should be an explicit factor for interest rate decisions. Regardless of what indicators Yellen mentions, I am sure she will state that interest rates will stay low for awhile.

Although the economic recovery has been disappointingly slow, the economic outlook is undeniably improving as confirmed by the February employment report. Reducing asset purchases to $55 billion per month should be a clear decision, however, adjusting forward guidance poses more issues.

Unemployment Benefit, Extended or Not?

A study by senior economist at the Federal Reserve Bank of Philadelphia Makoto Nakajima in 2010 found that the extended unemployment benefit accounted for an increase in the unemployment rate by 1.2 percentage points. A recent working paper of the Federal Reserve Bank of Atlanta by Lei Fang and Jun Nie also concluded that unemployment insurance extension is accounted for 0.5 percentage point of the unemployment rate in the 2008-2012 periods.

This makes sense since unemployed workers tend to be less picky in selecting jobs when they are no longer secured from receiving benefit from the government. Another reason is that they would increase their effort in searching for a job as said by Credit Suisse economist, Dana Saporta,“Some people who lost their benefits may increase their efforts to seek work if they were less-incentivized to do so while receiving federal assistance.”

It seems that this notion is hard to argue. Economists tend to be in favor of the benefit cut. Moreover, recent news and opinion also support this view (some are here, here, and here), that the benefit cut will increase likelihood jobless person from being employed and further discourage him or her to be more picky in searching job. In some extend, I agree with this view, especially when it comes to low level workers where they are able to do wide range of jobs that no need specific training and education. For this kind of worker, a benefit extension without selective criteria to get it is prone to discourage jobless people for accepting job offer immediately.

On the other hand, I think extension is still needed when the problem is not because jobless people are too picky in finding job or because they value paid-leisure more than hard work, rather because of lack of job offers as said by Jesse Rothstein, a professor at the University of California, Berkeley, “The problem we have right now is not a shortage of people who want jobs. The problem we have is a shortage of jobs and that doesn’t get better if you make people more desperate.”

Mr. Obama point it out clearly when he responded to criticism that jobless benefit discourage unemployed people from looking a job,”Folks aren’t looking for a handout. They’re not looking for special treatment. There are a lot of people who are sending out resumes every single day. But the job market is still tough in pockets around the country and people need support.”

The benefit extension, I think, is not for everyone and everywhere. Unemployment rate data for states released by Bureau of Labor Statistics shows that rates widely vary across states with the lowest South Dakota of 2.6 percent and the highest Rhode Island of 9.1. Michigan, home for our university, unfortunately is at number four from the bottom with 8.4 percent, higher than national average of 6.7 percent. Although it need to be supported with research, it is more likely that finding a job here in Michigan is harder than that in South Dakota. It could be because there are only few jobs available here than there. If this is the case, state is one of good candidates for criteria to determine the benefit extension.

Lastly, I would like to emphasize my point that we need criteria to determine whether or not a jobless person is eligible for a benefit extension. Establishment of such criteria would ensure the benefit will not discourage them from seriously looking for a job. Meanwhile it will also ensure that those who are struggling from searching jobs due to a job shortage to be patient enough in their efforts.

Forget About the Unemployment Rate Altogether

The unemployment rate might be the most looked at and talked about figure in the United States when it comes to the economy. If not the absolute most, it is certainly up there. And for what reason? The national unemployment rate is some overall number that is supposed to somehow represent the condition of our economy in general. Yet, this is not realistic because the economic conditions are different in so many places around the country, and are different among so many different groups and partitions of the population. What’s more is that even the individual unemployment rates among various locations and various groups of people don’t always tell the whole story. Let’s start with my first point, though.

The unemployment rate can be an extremely misleading figure depending on what you really care about. What really matters may be a specific location in the US, or a specific age group, or a particular race or gender, or maybe a combination of several of these characteristics. The following sequence of statistics compliments this idea exactly.

If you are a college-educated woman, your unemployment rate is less than 4%. If you are an African-American male with a high-school diploma or less, the rate is well into the mid-20s, and it is in the teens for Hispanics at that education level. If you live in Nebraska or North Dakota, there has been no unemployment crisis in the past five years, and the rate has consistently stayed below 5%. If you live in the areas hit hardest by the bursting of the housing bubble—Central California, Greater Phoenix, Las Vegas, vast swaths of Florida—or the areas decimated by the woes of the auto industry, the unemployment rate has frequently been above 10%.

If we’re even going to consider the unemployment rate at all, it should only be for specific locations or groups of people, or some combination. Seeing the national unemployment rate of 6.6% currently does not tell you anything about the percentages laid out above. The unemployment rate may have been useful from the time it was created (around the time of the Great Depression) up through the mid-1900s, but now that there is so much data out there, we must pay more attention to the details as opposed to this overall average. In order to stimulate the economy and continue to emerge from the Great Recession (and hopefully start to emerge at a quicker pace), policies need to be targeted at the groups who need the most help, as opposed to targeting the nation as a whole. Most of the issues that exist are localized, whether physically, or within a specific group of people broken out by age, race, or gender. National policies are not nearly as effective as localized, targeted ones would be.

Hari Sreenivasan and Nela Richardson take a step in the right direction in an interview on PBS. They discuss the unemployment rates among minorities and young people specifically, as opposed to the national figure. Something astounding that gets pointed out is that the unemployment rate is essentially double among African Americans compared to White Americans at every level of education (approximately 12% to 6% overall). A big cause of this is related to college education and “the fact that… blacks graduate at lower levels than white students do.” However, some of the age ranges that they use may not be the most significant as they include a range of ages 16-19 and the differences in the unemployment rates. Also, they completely ignore the labor force participation rate in this discussion, which brings me to my second point that the unemployment rate never tells the whole story.

While the difference in unemployment rates among white people and black people is startling, when you take the labor force participation rate into account, it is not as ridiculous of a spread. The LFPR among whites fell 2.2% whereas the LFPR among blacks fell slightly less at about 1.8% between Q1 2010 and Q4 2013. This means that more White Americans simply stopped working or looking for work, while comparatively more African Americans continued to work or search for work. Of course this affects the calculations of their respective unemployment rates (decreasing that for White Americans more than for African Americans).

In the end, I believe that we should, at the very least, disregard the national unemployment rate altogether. It can be the most misleading figure we look at each and every day and should not be considered valuable any longer.

Replacing the Unemployment Rate

The unemployment (UE) rate, which is a measure of the prevalence of unemployment as a percentage, is one half of the Federal Reserve’s dual mandate (the other half is inflation). Since the 2008-2009 financial crisis, the UE rate has been on the forefront of both financial and mainstream news. According to the Wall Street Journal, “[The UE rate] was used to justify the nearly $800 billion stimulus bill in 2009”. In addition, the stubbornly high UE rate was also used to defend the numerous rounds of quantitative easing. Thus, the UE rate is a key factor in decisions about fiscal policy as well as monetary policy.

In January, the unemployment rate fell to 6.6%. This is a significant improvement from its peak of 10% in late 2009. The downward trend in the unemployment rate has been cited as an indication of a strengthening economy, but there are reasons to believe it might not tell the entire story. According to the Wall Street Journal,

The unemployment rate is falling so quickly in part because of many people dropping out of the labor force. The portion of Americans who are working or looking for work has been on a downward trajectory for many years, a process that gained momentum during the recession and which puts downward pressure on ratios of both employment and unemployment”.

Who are those dropping out of the labor force? On the one hand, some are part of the aging population. On the other hand, some are discouraged workers. As the economy returns to full speed, discouraged workers will hopefully be able to find jobs and return to the labor force (while those as part of the aging population will not return to the labor force). Although the economy is returning to full employment, the level of full employment will likely be lower.

For these reasons, I have started to lose faith in the UE rate as an effective economic indicator. According to the Wall Street Journal, “The unemployment rate, in short, is one of the most consequential numbers shaping our body politic. Unfortunately, it is the most misleading”. Not only does it misrepresent the health of the labor force, but it is also put on a pedestal and given outsized importance over other statistics. For example, the UE rate declined in both the January and December employment reports despite the number of jobs added falling significantly short of projections. I think the fact that the Fed is mandated to make decisions based on the UE rate is becoming a more obvious problem. As a result, I think the Fed should consider replacing the UE rate with another benchmark that better indicates when it needs to change monetary policy.

I am not alone in this belief. At the recent FOMC meeting, Fed officials explained they will not immediately change the course of monetary policy when the UE rate falls below the 6.5% threshold. The inappropriateness of the UE threshold is because it is a function of the labor-force participation rate, which means the UE rate can become distorted by events such as the expiration of unemployment benefits. An effective replacement might be a nominal GDP target, which represents real growth and real inflation. If the Fed can successfully target and achieve 4-5% nominal growth, then we would almost be back to our growth rate before the 2008-2009 financial crisis.