Here are updates of a few indicators I've been watching.
Next, is my estimate of the proportion of long-term unemployed workers who exit the unemployment category (more than 15 weeks) over a 3 month period. This indicator had moved strongly higher over the last couple of months, but this month, it pulled back. The trend should continue to move higher, though.
Next is the year-over-year change in average wages. This continues to show strength. Average wages are accelerating, even as inflation remains low. This indicator is quickly entering territory that would normally be associated with rising interest rates.
Quits, Job Openings, and Unemployment
Finally, I want to address quits, job openings, and unemployment. Scott Sumner linked to this post by Evan Soltas. Evan's post includes this graph, comparing quits and unemployment.
If I understand Evan correctly, he's addressing observers who believe that labor markets are in worse shape than the unemployment rate would suggest. He's saying that since there is a pretty stable relationship between quits and the unemployment rate, the unemployment rate is probably a decent indicator of slack in the labor market.
I think Evan should take it even further. The unemployment rate is understating tightness in the labor market. Pro-cyclical labor policies, especially the highly extended unemployment insurance (EUI) which has recently been retracted to normal levels, temporarily and significantly raised the natural unemployment rate by adding a sort of friction into the labor market that caused unemployed workers to re-enter employment more slowly.
The addition of employable workers to the roster of the unemployed caused both the quits rate to fall and the unemployment rate to rise, relative to where they would have moved in a typical business cycle.
The more accurate indicator of economic recovery in this context is the level of job openings. That is why the Quits to Unemployment relationship remains stable - these measures are both being affected in proportionately similar fashion. But, the Beveridge Curve did break down. And, also I have a graph here, comparing quits to openings.
|data are weighted moving averages to reduce noise.|
Note that job openings are back to where they were in 2005 while quits and the unemployment rate remain at or worse than the cycle trough of 2003, when the unemployment rate had topped out at 6%. Wages are increasing at a rate similar to the rate of 2005 (see chart above). Adjusted for consumer prices, wages are as strong as they were in 2006. So wage growth corroborates the signal we are getting from job openings.
There are jobs available, but since unemployed workers have been incentivized to re-enter employment more slowly, these jobs remain unfilled. Employed workers can't safely quit because qualified competition is on the sidelines, and employers aren't filling the jobs with less qualified available workers because potential workers are available, even if those workers aren't being as aggressive about taking the available jobs.
For an employer, it's like the situation an oil company would face if they had access to $60 oil in a $100 market, but they knew that there were countries with closed oil markets that had $40 oil in the ground. As long as those countries had untapped potential reserves, oil supply development would fall somewhere below the level that would be predicted by markets with $100 oil.
(Please, as always, understand, that I am speaking of this in broad terms for narrative ease, but that all of these changes result from marginal subtle changes in behavior among many diverse and reasonable workers and employers. I am not making some boogeyman out of unemployed EUI recipients. And, we are talking about maybe 1% of the labor force. These changes are very subtle.)
So, with the end of EUI, we will see the Beveridge Curve and the Openings vs. Quits relationships move back toward their normal levels. We will see unemployment decline, to more accurately reflect the strong demand in the current labor market. And, we will see a boost in real output resulting from the return to higher efficiency in the labor market. In the last few months, coincident with the termination of EUI, we have already seen the beginning of this movement.