More Weak Job Data: Have we Reached the Natural Rate? Is this as Good as it Gets?
The June report from the Bureau of Labor Statistics shows continued weak growth of payroll jobs. Just 80,000 new jobs were reported for the month, while an upward revision to the May data was cancelled by a downward revision for April. The unemployment rate remains stuck at 8.2 percent. What is more, the broad measure of unemployment, U-6, is actually climbing again, after three years of decline. The broad measure includes discouraged workers and those involuntarily working part time. Is this as good as it is going to get?
The answer depends on which of two different stories of stalling job growth turns out to be true. The pessimistic view is that the recession has caused lasting structural damage to the labor market, so that the skills of some unemployed workers have become obsolete and they are unlikely ever to find work. In technical terms, that would mean that the natural rate of unemployment has risen. The natural rate is the lowest rate of unemployment that the economy can reach without risk of an unsustainable inflationary boom.
Alternatively, it may be that we are still well below the natural rate of unemployment, but something is holding back the expansion—overly cautious monetary policy, fiscal drag, a weak global economy, or some combination of the three. In that view, we can expect employment eventually to recover to historical levels once the expansion accelerates again.
On the face of it, there is some evidence for each of these views in the latest jobs report. In support of the pessimistic view, the rate of long-term unemployment remains at a level that is unprecedented compared with previous post-World War II recessions. In June, 41.9 percent of unemployed workers had been out of work for 27 weeks or more. That was down a bit from May, but the long-term unemployment rate has fallen just 0.7 percentage points over the past year. Before the recession began, fewer than 20 percent of unemployed workers had been without jobs that long.
In support of the view that there is still room for improvement, the latest jobs report shows signs of continuing fiscal drag, in the form of the loss of another 4,000 government jobs. With government employment in steady decline, the private sector must add even more jobs to bring the unemployment rate down.
Rather than pour over each month’s data for clues, why not resolve the issue by measuring the natural rate of unemployment directly? That is just what Murat Tasci, a research economist at the Cleveland Fed has tried to do. In a recent research report, Tasci explains why he thinks that the natural rate of unemployment has not risen as sharply during the Great Recession as some people believe.
Tasci’s approach begins from the observation that unemployment is, by definition, a process of job search. Although U-6, the broad unemployment rate, does include workers who are not looking for jobs because they think there are none, the standard unemployment rate includes only those who are actively looking for work. That being the case, short-term changes in unemployment depend on the relationship between flows into and out of the pool of unemployed workers. Those flows, in turn, depend on the balance between two groups, one consisting of those who lose their jobs or quit to find a better one, and the other consisting of those who find jobs or become discouraged and stop looking.
During the Great Recession, the unemployment rate rose sharply because separations increased and job-finding decreased. However, those changes do not greatly alter the longer-term trends that underlie cyclical changes. In the model used by Tasci and his colleagues, the long-term job-finding trend has decreased greatly over the past decade, but at the same time there has been a parallel downward trend in separations. As the following chart shows, the result is that the natural rate, which reflects the balance between separations and job finding, has moved up and down only modestly around a steady trend value of about 5.5 percent.
If the Great Recession has not changed the natural unemployment rate, then, why has it taken so long for joblessness to return to its equilibrium level? Tasci offers two explanations.
One is that the economy as a whole has been growing slowly. As mentioned above, that may be because monetary policy is not allowing nominal GDP to grow fast enough, because of fiscal drag from falling federal defense expenditures and the budget squeeze on state and local governments, or because of troubles in major trading partners like Europe and China.
The other reason is that with both separations and job turnover trending downward, labor turnover as a whole is very slow. Recovery from a recession always requires some structural shifts in the labor force, for example, a move from construction jobs to service jobs following the collapse of the housing bubble. If total turnover is slow, that structural adjustment takes longer. The high long-term unemployment rate is one sign of that.
On balance, then, this line of research undermines the argument that the economy is already at its natural rate. What we see in the June job numbers are not, after all, as good as it is going to get. Things will get better—just not as quickly as we would like.
6 Responses to “More Weak Job Data: Have we Reached the Natural Rate? Is this as Good as it Gets?”
sort of, all of the above plus a few not mentioned.
"the skills of some unemployed workers have become obsolete and they are unlikely ever to find work."
Most "job training" in the US happens on the job. The unemployment rate among young recent college graduates (presumably high-skill and mobile) is still about 1.5x normal. That's the purest measure of cyclical unemployment i know of. When demand for labor picks up employers will be more willing to train employees.
second, what is holding back jobs gains: Overly cautious monetary policy is partly to blame, not in the way you mention though. A balance sheet recession requires deleveraging (read: foreclosures), which will happen naturally or will be facilitated through monetary policy (or fiscal policy like principal writedowns). As it is we are unlikely to see more Fed help, they seem determined to keep inflation well below 2%, but the process will happen naturally and we will see a return to growth in the construction market in spite of the Fed, in the next 12 months or so. Not all the 2.2 Mil construction jobs will be back, but probably 3/4 of them. The key states to watch are the ones where the foreclosure pipeline has cleared, like NV and AZ. new construction boomlet is already starting there. When the FL foreclosure pipeline clears, we will see growth again there too.
"why has it taken so long for joblessness to return to its equilibrium level" well the answer there is that the "deleveraging process" aka mortgage foreclosures takes a really really long time. The way i like to analogize is to think about a classical Calvo / Taylor type sticky price model with contracts: you know that intuitively, the time it takes to "reset" the price contracts is roughly the time it takes for unemployment in the model to return to the natural rate. Lots of mortgages are still outstanding from 2005,2006,2007 etc., and we still have about 1.6-2 mil homes in residential "shadow inventory" in the delinquency/foreclosure process. It takes 700 days to work out a foreclosure, on average. distressed sales are roughly 25% of existing sales (which themselves are about 4.6 mil annually). At which rate, we still have over a year (at least) of distressed sales to go through. When you do the math, its pretty evident why it takes so long to "renegotiate" or reset so many residential housing price contracts down to market levels (and by residential housing price contracts, i mean mortgages!).
Overall we have been averaging "deleveraging" or mortgage equity withdrawal of about 2% of the stock of mortgage debt outstanding per year through the last 4 years. This could be helped with better monetary policy, but its not, so it will take much longer to work through.
the good news though is that the housing rebound is here now that we are closer to the end of the housing bust than the beginning, and we should see a pickup in the next 12 -18 months (housing has been in a recession for so long, and we have 15-20 mil new people in the US who need a place to live, that i doubt this will be very much affected by external factors).
The Fed gave up on controlling inflation decades ago.The only time,in recent memory,the Fed has done anything to control inflation was when Paul Volker raised interest rates to double digits in the early 1980's.He did it to prevent the total crash of the Dollar.I wonder what the Fed will do next time the Dollar starts crashing.Going to be much worse.
I have a lot of friends that have been looking in the job market heavily. Most of them have been starting to find jobs pretty easily now. Seems to be a good sign.
The Great Stagnation was man-made and so will its end. What few will do is take the trouble to fully analyze why the GS occurred in the first place. Collective stupidity reigns.
The whole concept of a "natural employment rate" is bogus. There is no simple barrier below which increased demand for employees does not affect inflation and above which increased demand for employees becomes inflationary. It always depends on the sector and the geographic region. For example, at present, hiring RNs in New York inflationary, hiring homebuilders in Nevada not. Unfortunately politicians rarely give much thought to the targeting of stimulus.
If we ended all these govt programs that encourage unemployment,there wouldn't be a problem.Like ending minimum wage.Reducing length of unemployment benefits.Giving vouchers so students could choose schools that would train them in useful skills,instead of all the useless nonsense govt schools attempt to teach.Ending social security and allowing people to invest their savings efficiently.Encourage people to become owners in great companies by ending double taxation like dividends and capital gains.If most Americans owned company stock they wouldn't be so anti business and pro fascist.