Tag Archives: unemployment

Yellen at the Economic Club of NY

In Janet Yellen’s speech to the Economic Club of New York on Wednesday, she assured investors that low interest rates would continue and also focused on low inflation and economic slack. This was a follow-up to her meeting in March that left investors with the impression that interest rates would rise in the near future.

During the speech, Ms. Yellen made sure to point out that the economy is an uncertain place, and the Fed cannot lose sight of this as they propose monetary policy. However, she did give a more concrete prediction of when she expects to rise rates. She intends to keep interest rates low until at least the middle of 2015, given that the economic outlook allows the US to maintain low interest rates.

Another main point that Yellen stressed was the inflation rate target. She said that she was more worried about inflation becoming too low rather than too high. Later she added that the Fed’s focus should be on lifting inflation to the 2% target, not holding it down. During the speech, she commented, “The Fed is “well aware” that inflation could shoot above its 2% goal, she said. ‘At present, I rate the chances of this happening as significantly below the chances of inflation persisting below 2%.’” Low inflation is a problem because it signals weak economic demand. Also, not leaving a large enough inflation threshold can lead to deflationary problems in the future. Deflation is detrimental to the economy because it leads to many painful outcomes- the combination of falling prices, consumers’ reduced likelihood of spending, and falling wages depresses the economy and sets it into a deflationary trap. This triggers a vicious circle because rising debt leads to less spending, which leads to further deflation… and repeat.

The problem comes into play when the Fed tries to dictate certain economic issues like long-term unemployment and income inequality. The Fed mentioned that it would like to see wage inflation because this would indicate that slack in the labor market is starting to disappear. Hence, they don’t want discouraged workers to get dropped out of the labor force permanently. Decreasing slack in the labor market will later get job creation back on track. However, the problem is that it’s hard for the central bank to influence these policies. At the end of the day, the central bank is chartered by congress as an independent agency within the government- not to be a policymaker itself. I think that in terms of the trade off between inflation and unemployment, the Fed has more control on the economy through dictating stable inflationary levels. As we have already seen, the Fed has abandoned the unemployment target because there are too broad of measures included that make up this target- many of which the Fed can only indirectly control, if at all. Although the two issues are interrelated- short-term unemployment is relevant for inflation, I believe that the Fed would get the most out of rising inflation back to the 2% target.

[REVISED] The “Zipper” Project

When we talk about unemployment in the U.S., we’re talking about economic conditions. When it comes to unemployment in China, it’s a social problem. When 1.35 billion people live in an economy second to the U.S.’s, how many jobs do you think that are available to the country? Yet China’s unemployment rate is as low as 4.1%. Despite the fact that labor-intensive manufacturing has provided abundant positions to hold the figure, during the process of urbanization, however, there are still a considerable number of farmers turning into jobless workers. In order to sponge out these extra workforces, local governments invented a special kind of projects – “Zipper” projects.

So what really is zipper project? Like a zipper, which is frequently zipped and unzipped, zipper project is a kind of frequently repeated construction or maintenance project. Most of the zipper projects are labor intensive, cheap and time-consuming. If you’ve been to China, you should’ve seen workers planting rode-side trees or fixing roads, those are most frequently used zipper projects. The reason I’m so sure that you have seen them is because they are there all the time – not long after the projects are finished, the same or another group of workers will be sent back to tear everything down and start over. It’s kind of like “the Myth of Sisyphus” in real life, only that it’s not a punishment but a way to provide temporary job opportunities.

“Zipper” project, is yet another unique social phenomenon in China. It exists to solve a social problem, but it’s not a real solution, because zipper projects can’t eliminate the migrant worker problem from the root. If anything, it’s a compromise.

It’s a compromise between keeping the rapid growth of China’s economy and maintaining the stableness of China’s society. You have to admit the difficulty of running a country is not linear to its population. Feeding the biggest population in the world while keeping up with the world’s economy growth is not an easy task. Many think the idea of zipper projects sounds ridiculous, as it makes no sense for a city to waste resources on prying and patching the same part of the road repeatedly. The reality is, however, if it weren’t for the zipper projects, there would be hardly enough temporary jobs to buffer the huge number of incoming migrant workers. When these people coming into the city without jobs, trouble comes, too. Between putting the the society at risk and wasting resource, it’s wiser to choose the latter.

This reminds me of the famous “Trolley Problem”: you see a trolley running towards five people out of control and there’s lever that can divert the trolley to a sidetrack where there lies one person, what would you do? I guess for the Chinese decision makers who shoulder the responsibility of 1.35 billion people, utility beats morality.

What does labor market slack look like?

In her remarks at the Economic Club of New York Wednesday, Janet Yellen focused on the things that the FED would be watching closely going forward.  The chairwoman made it clear she was more concerned with continued low prices then with inflation exceeding the 2% target set by the central bank. However, the FED’s primary focus remains on the labor market.  Fixing this market might take more then just monetary policy.

The Labor market has been characterized as having significant “slack” in it.  This term accurately describes the ability for businesses to add jobs with out having pulling up wages.  An increase in wages could cause inflation, so the FED is closely watching the labor market for signs of tightening.

What makes up this “slack”?  The Federal Reserve Bank of Atlanta publishes what is known as the Labor Market Spider Chart.  The chart provides a comparison of many labor market metrics at various times in one chart.  An image is shown below, but the link is interactive, so I encourage you to check it out.

Levels-Spider-Chart-from-the-Atlanta-Federal-Reserve-961x1024

This chart has a lot of information in it.  Most notably that there are a large amount of people working temporarily and part-time then would be in a healthy labor market.  There is also a dramatic decrease in marginally attached workers, are the discouraged workers who have worked or looked for work in the past year.  Given the other factors in this chart, some of this decrease may be due to workers giving up entirely and dropping out of the labor force, as opposed to actual hires, which are slightly worse then in 2012.

Janet Yellen would also mention that she believes that the economy can reach healthy levels in the employment market by 2016.  If the spider chart can be used to visualize labor market slack, then it can show tightening as well.  The Other parts of the circle need to shift out to their pre-recession levels as well.

There is a slight symmetry to the above graphs.  Hires on the right have to have some effect on job finding rate on the left.  Similarly with job openings and job availability.  Whether the FED alone can institute the policies needed to bring about the needed changes is unclear.  There is a lot of work to do.  The president of the Minneapolis Federal reserve bank, Narayana Kocherlakota has suggested certain fiscal polices that models suggest could result in the needed growth.  However, even if these policies where implemented, 2016 may be a very ambitious goal.

 

(Revised) Fed Drops Unemployment Target

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.

In recent news, the Fed’s minutes released three weeks after the March 18-19 meeting resolved the discrepancy that I addressed in the above paragraph. Reserve officials were concerned at the March meeting that they might have accidentally communicated to the public that they plan to raise interest rates in the near future. While referencing graphs of the Fed officials’ projections, some commented that “this component of the projections could be misconstrued as indicating a move by the committee to a less accommodative reaction function”. In other words, the Fed officials were concerned that a rise in interest rate would lead to a less stimulated economy during a time where exactly the opposite is needed in order to fully recover from the recent recession. “The minutes underscore that Fed officials had not become more impatient to raise rates, a message Ms. Yellen and other members of the Fed’s policy committee have reinforced in public remarks since the meeting.” The Fed’s minutes were well-received. After they were released, many investors experienced stock gains and bond prices increased as well. The minutes also showed that Ms. Yellen had an extra meeting on March 4th to discuss whether and how the Fed should alter the tapering. Meetings like these are unusual, compared to those of her predecessor, Ben Bernanke. Bernanke only held meetings like these during the financial crisis. However, holding meetings like these while not in a recession is beneficial because it shows great leadership and prudence. It proves that Janet Yellen is committed to translating the directions of the Fed very clearly to the public.

Academic Job Looks Promising

The recent article, “Tech Leaps, Job Losses and Rising Inequality” on the New York Times by Eduardo Porter talks about how growing technology is contributing to widening of income inequality in the U.S. As implementing cheaper technologies to industries, low skilled workers are replaced by these new machines. The article points out how certain medical conditions are tried to be diagnosed by technology. One example given is how researchers at Microsoft Research are developing a system that can predict with accuracy a probability of a pregnant woman’s suffering postpartum depression by looking at her tweets on Twitter. Science has made almost impossible things possible in the last century. If technology gets developed at the same rate as it has been for last decades, we could see today’s impossible ideas to come in our hands.

So, if technology is going to grow as it has been and if new technologies are going to replace workers whose job can be done by the new machines, what human beings are left to do?

The answer is simply that those jobs which are hard for robots to perform will be the jobs that humans will be competing for. The main function of these jobs include interpersonal communication, in which today’s technology hasn’t been developed to the extent to compete with humans. The jobs that require this characteristics include teachers and professors, variety of advising jobs, and motivational speakers!  Because, as of today, the technology hasn’t reached to the point where we can substitute another human with a machine to communicate our feelings. Even though we are experiencing growth of online schools and free Massive Online Open Courses (MOOC) offered by such as edX, Coursera and Khan Academy, human to human communication which these online education technologies lack is why teachers and professors will not have to worry about their jobs as for now. Even though we can get same amount and quality of education by taking online classes or MOOC, these courses can’t offer a type of relationship we can have with our professors in college. Professors not only teach the content of the course, but they motivate students to achieve more (Remember, most of us are going to make at least $2 million in our life time according to Professor Kimball). In other words, robots haven’t been programmed to motivate us emotionally.

Another reason that demand for academic jobs will be greater in the future is that as technology replaces jobs that require low skills or skills that can be programmed in a machine, people will be looking for to get skills that machines cannot possess. Most of these skills require higher education as how advising job requires to deep knowledge about the topic from the adviser. Therefore, demand for higher education will surge in the awakening of greater technology. Presumably so, then teachers and professors will be demanded in higher numbers.

Academic job will be demanded in greater number in the future because of its inherent function of interpersonal communication and demand for higher education.

Fed Officials Expect Overshooting Unemployment Rate

Following the Fed’s March 18-19 meeting, the policy making committee provided a collection of charts showing the projections of macro economic main variables in the coming years. Before discussing the projections, I should note here a little bit of confusion I have. In the projection file, it states that these projections are “based on FOMC participants’ individual assessments of appropriate monetary policy.” Therefore, these number’s aren’t actually projections as done by someone outside of the Fed, but these are the expected values of these economic variables that could be seen according to Fed officials’ own appropriate policy. 

In other words, when looking at these projections, we should take into consideration that these projections are influenced by each committee member’s policy recommendation.

The recent post on the WSJ touches on how this projection could be misleading the market into expecting that interest rate rise will come sooner than expected. According to the article, some Fed’s policy committee members raised their expectation of interest rates in 2015 and 2016. This could signal market that the Fed policy makers are looking at possible rate increase which is sooner than expected prior to March meeting.

ProjectionFed_March

 

From the above chart we could see what rate Fed officials are expecting fed funds rate target to be in 2014, 2015, 2016 and long-run. In 2014, according to the chart, we see that the policymakers almost unanimously expect the fed funds rate target be at the current level of 0 to 0.25 percent target. In 2015 and 2016, the averages of the Fed officials’ expected fed funds rate are around 1 percent and 2.5 percent, respectively. The policy makers expect the rate to be around 4 percent in the long-run. This rate is slightly lower than the historical average of the fed funds rate target since 1990, which is 4.2 percent. In general, the committee members expect to have similar fed funds rate target that it has had since 1990.

Note that, the expected fed funds rate target is still lower than long-run expected rate of 4 percent at around 2.5 percent in 2016. Hence, it is plausible that somewhat easy monetary policy will be taking place until 2016. But we should always remember that low interest rate doesn’t always mean expansionary monetary policy as Milton Friedman put it, “After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.”

The surprise of the projection comes when we look at another chart which was included in the same projection report. The following chart shows how the committee members expect the unemployment rate to be under appropriate policy in coming years and in the long-run.

ProjectionFed_MarchUn

 

The central tendency among the policy makers regarding the expected unemployment rate in 2016 is along with the long-run projection: at 5.2-5.6 percent.

So, what can we conclude about the Fed’s future policy from these two charts?

The Fed policy makers are believing (or seems to be) that under appropriate policy, the Fed will be pursuing expansionary policy even after the unemployment rate reaches the long-waited long-run average. In other words, the Fed policy makers think overshooting the unemployment rate is a viable option for the Fed policy in coming years. This is along the line with the worry about low inflation in coming years. Another chart in the projection shows how the policy makers expect inflation to be in coming years.FedINflation

 

As we see from the chart that central tendency among the officials regarding the expected inflation in 2016 is below the Fed’s target of 2 percent inflation. It is kinda counter-intuitive; they target 2 percent, but expect it to be below it. Or are they really targeting 2 percent?

Then, given the the below target inflation rate, the Fed officials shouldn’t be worried about their fed funds rate target expectation below the long-run expectation.

From the Fed officials’ projection, we can conclude that the Fed will be still operating somewhat stimulus policy in 2016 relative to their long-run policy.– if we assume these projections are made with rational expectation

Minimum wage vs Unemployment: A Historical Approach

As President Obama continues his cross-country tour encouraging a raise in minimum wage, there is a lot of speculation as to how the change would affect the minimum wage in America. Of course, where better to look than history to see how increases in minimum wage have affected the short-term unemployment rate in America.

The below graph shows FRED data on the civilian unemployment rate across time, along with data points I’ve added to show where the minimum wage was increased by more than 10%. The proposed increase to $10.10 from the current rate of $7.25 would be the second largest change in history, compared to an 88% change in 1950 (the 1950 increase took the wage from $0.40/hour to $0.75/hour).  More detailed information on other wage increases can be found in the table I’ve created.

FRED_unemployment

So what have we seen from rate hikes in the past? There are a couple important trends to consider. First, there has been a much more noticeable increase in unemployment for recent minimum wage increases. Since 1990, 5/6 (83%) of rate increases have resulted in a short-term increase in unemployment rate. In addition, all five were prior to or during a recession – a bad sign for those in favor of increasing the rate once again. Oddly enough, the other big rate increase, the aforementioned 88% hike in 1950, actually was turning a huge decline in unemployment. The wage increase’s timing significantly helped, as it was during a cyclical boom following the late 1940s recession.

The big question mark from this data is how today’s mark compares to a wage in the cents. Is data from the 1950s relevant for today? While history’s tales often tell true, it is always hard to justify comparing what seem like apples to oranges. When considering the trends mentioned above since 1990, it may be safer to take the successful increases of the 1950s with a grain of salt.

Screen Shot 2014-04-09 at 7.09.18 PM

However, while similar increases have seemed to spark or worsen recession periods in the past quarter of the century, trials seem to tell another story. The Wall Street Journal reported today that the city of San Jose hasn’t experienced job loss after moving the minimum from $8 to $10. After the announcement that the wage would move, there was a sharp reaction resulting in many layoffs. However, once the change went through, things quickly leveled out and there was a similar reaction in the positive direction. While it is dangerous to take this small sample too seriously, it could provide evidence that minimum wage workers are going to be needed, even at higher salaries.

The Congressional Budget Office has estimated that while there will be approximately 500,000 finding themselves without a job, the wage increase will bring almost a million out of poverty in the United States. But before we make one of, if not the most, drastic change in minimum wage in history based on economic models, it is important to view the negative consequences that have been so frequent in the recent past.

Unemployment According to FRED

 

What can we see with this graph representing the changes in the unemployment rate in the past 60 years (approximately)? We can clearly see that the unemployment rate in this graph on FRED goes through periods of crests and troughs. It seems to hover around the natural rate, 5%. The exception is in the late 70’s and the 80’s. The lower troughs of the graph are above the natural rate. This tells us that unemployment during that time was very high. In approximately 1981, the unemployment rate was over 10%. That is a very bad unemployment rate, and it indicates economic troubles. From the mid 90’s to the first decade of the new millennium, we can see that the unemployment rate hovered around 5% again.

We can see that in recent years, the unemployment rate has been very high. Part of this can be attributed to the recession of 2008. The positive is that the unemployment rate has been declining since 2010. This is a sign that the economy has been creating more and more jobs this decade. Right now, we can only hope that this trend continues. Personally, I hope that it does because I will be graduating in a bout a year, and I would like to have a job ready. In a few of my previous posts about unemployment, there has been an increasing trend in the creation of jobs this year. Each month has seen more jobs created than the previous. As I mentioned in these other posts, one of the reasons for this is the weather changing. With the winter winding down, more jobs are created. Last month, the United States added a little less than 200,000 jobs. If more than 200,000 jobs are added this month, then that would be another step in the right direction.

Going back to Mankiel’s book, A Random Walk Down Wall Street, we cannot base our decisions on previous trends. As we can see on the graph, the unemployment rate does not follow a perfectly linear trend. Stocks do not follow perfectly linear trends either. Right now, one would expect that the unemployment rate would continue to decrease because it has been this decade, according to the graph. However, something unexpected and unpredictable could happen, such as a natural disaster, that could leave a lot of people jobless. If this were to happen, then the unemployment rate would skyrocket.

Mankiel also mentions that there is more than meets the eye with investments. Once again, we could treat the unemployment rate like a stock in terms of unpredictability. I mentioned in a previous post that one reason why the unemployment rate is decreasing is that the size of the labor force is also shrinking. We need to keep background details, such as this, in mind when analyzing and making predictions and assumptions.

Corporate Profits and Employment Growth: Why They Don’t Have to Come Together

One of the most pressing economic concerns in the post-recession era is how to boost job growth. Despite a recent string of positive job monthly job reports, unemployment remains a primary concern. From an output perspective, we have already returned to the level of real GDP we were at before the crisis. As the graph below shows, however, total employment has lagged behind.Screen Shot 2014-04-07 at 6.13.02 PM

An opinion piece in today’s WSJ by Bill Galston explores this issue of slow job recovery. Galston points out that fixating on one number – the unemployment rate – does not begin to tell the full story:

“During the recession, 60% of job losses occurred in middle-wage occupations paying between $13.83 and $21.13 per hour, while 21% of losses involved jobs paying less than $13.83 hourly. During the recovery, however, only 22% of new jobs paid middle wages while fully 58% were at the lower-wage end of the scale. In other words, millions of re-employed workers have experienced downward mobility.”

This downward mobility trend is the reason behind the great concern over inequality that has been topical as of late. More Americans are finding that their only opportunities are at the bottom of the income scale, and opportunities in the middle are fleeting. One of the culprits of this trend is an increase in automation and computerization of tasks once performed by wage earning humans. Low interest rates and high costs of hiring employees (benefits, healthcare, etc) give firms a strong incentive to turn to technology to boost output instead of hiring additional labor.

The other concern that Galston brings up is that corporate profits are soaring at the same time that wages and employment have remained stagnant. As he describes:

“Corporate profits after taxes in the fourth quarter of 2013 rose to an annual level of $1.9 trillion—11.1% of GDP, a postwar high. Meanwhile, total compensation—wages and benefits such as health insurance and pensions—fell to their lowest share of GDP in at least 50 years. From December 2007 through the third quarter of 2013, the compensation share of national GDP declined to 61% from 64%.”

Galston’s point goes back to a point Paul Krugman has brought up recently about capital income earners (he calls them the oligopolists) versus the wage income earnings. The capital income earners are receiving a higher share of national income than at any point in recent history. However, just because corporate profits are soaring, does not necessarily mean that wages and employment gains have to follow. An interesting write up in Zero Hedge, describes the problem – in order for companies to invest more and hire more, aggregate demand has to rise. Just because companies are making money, does not necessarily mean that the demand is sufficient to warrant increased investment and hiring. Companies may be boosting profits by cutting costs, which does not warrant expanding their business. Until consumers and businesses increase their demand for goods and services, thereby boosting aggregate demand, corporations will not boost hiring enough to offset the losses suffered during the recession.

Looking into unemployment in US

Since Federal Reserve’s tapering took place in the beginning of 2014, I was concerned if it could maintain its desired unemployment rate of 6.5% and inflation rate of 2% in my previous blog post Federal Reserve’s decision – tapering. April has arrived (it is hard to believe that more than 1/4 of 2014 passed already!), and data shows that the US economy is in the process of recovery from its recession from 2010.

I plotted the unemployment rate from 2008 to 2014, using FRED : Federal Reserve Economic Data website. From this graph, I could see a high increase in unemployment rate from mid 2008 to 2010 (from 4.9% to 10%), when the international economy was in a turmoil due to worldwide recession. With efforts such as quantitative easing and other monetary/fiscal policies, unemployment rate has been decreasing steadily to 6.7% as of March 2014. From the graph, it could be observed that since the tapering by Federal Reserve started in 2014, unemployment rate has been steady at 6.7%, just above the Federal Reserve’s target of 6.5%. Therefore, one could say that Federal Reserve’s tapering in 2014 was a right decision, not overstimulating the economy yet still meeting its economic goals.

fredJPG

 

However, regardless of this positive economic data there is a downside. Wall Street Journal article Five Years of Declining Unemployment Doing Little to Close Race Gaps points out the downside very well. According to the article, although the unemployment rate has been decreased steadily since October 2009, the unemployment rate gap among the race has not been decreasing much. The graph below shows this gap. Among various races, Asians and white people have relatively lower unemployment rate compared to Black or African American and Hispanic or Latino American. Furthermore, it can be seen that the gap between unemployment rate of Black or African American and White American got even bigger in 2014, compared to 2010 when unemployment rate peaked.

1 2

As we all know, economic growth and decrease in inequality are two important economic goals. It is a good thing that the US economy is getting better, despite Federal Reserve’s decision of tapering in 2014. However, a way to decrease the gap of inequality is still vague to me. Maybe it might be beyond the scope of economists; we are all aware that Asians and White Americans has a higher ratio of college graduate degree, and I think this is the main reason for inequality among various races. I think it is important to create policies that can encourage them to get higher education- something that monetary policies cannot be easily achieved by neither Federal Reserve nor extensive monetary policies.