A couple months ago, I was a little worried about trends in the JOLTS data. Here is a graph of the monthly change in the 12 month moving average of Quits, Job Openings, and Hires.
These indicators tend to move up and down together, and since a decline of labor churn is one of the symptoms of a recession, these indicators might prove to be a useful leading indicator for economic headwinds. In June, all three indicators were testing declines that they had been flirting with for a few months. Most other indicators seemed to still be signaling a recovering economy, but JOLTS might be an early signal. Since then, the JOLTS indicators appear to have recovered, and are again growing from month to month. This suggests that there could be tailwinds in the coming labor market.
Unemployment has been peculiar in this cycle. This graph shows the total unemployment rate (blue), which has been declining at a pretty linear rate of about 0.8% per year since early 2010. But, the green line is the unemployment rate after subtracting workers on Emergency Unemployment Insurance (EUI). It has been basically flat for 4 years. All of the reduction in unemployment is coming from EUI. There are only about 1.3 million workers still on EUI, and its rolls are still dropping by nearly a million workers a year, so it appears that, regardless of whether Congress renews it in 2014, it will be a less relevant part of the picture. Nonetheless, nonrenewal would probably help to bring down the unemployment rate a little more quickly.
Among the other 6.4% of unemployed workers, about 4.6% have been unemployed for less than 26 weeks. About 1.8% have been unemployed for more than 26 weeks. Both of these levels have been relatively stable for several years. In a healthy economy, where the UE rate might dip below 5%, the short duration unemployment rate would be between 3.5-4.5%, plus about 0.75% of workers unemployed for more than 26 weeks. So, the excess unemployment is mostly related to the long-duration unemployed.
I would blame much of the excess unemployment duration on EUI and demographics. Older, more educated workers tend to have longer unemployment duration. The EUI problem will work itself out as the recovery continues, but I expect the demographic factor to buoy the unemployment rate well into the recovery phase, for another decade, at least. (Here is a link to some of my previous posts on the topic.)
This graph is the long-term level of initial and continued unemployment insurance claims, as a percentage of the labor force. Three notable pieces of information from this graph are:
1) new claims are at a level historically associated with full employment (UER of 5% or less).
2) In terms of initial claims, the 2009 labor market was roughly as bad as the 1991 labor market. All of the additional labor market problems were related to unemployment duration.
3) the effect of demographics on unemployment duration are evidenced by the relative growth of continued claims in the last 15 years, as baby boomers have entered to the older age groups. The currently high relative level of continued claims might also result from the EUI policy. This measure does not include EUI recipients, but EUI appears to also increase the unemployment duration of those unemployment for less than 26 weeks.
This graph reinforces the idea that normal employment levels are basically recovered. Short duration unemployment is probably near a long term bottom, which with a typical level of long duration unemployment would put us at an UER of about 5.3%. Depending on the behavior of the workers currently listed as long term unemployed, this could lead to inflationary pressures even when unemployment is somewhat above 5%.
This graph compares the unemployment rate to continued unemployment insurance claims. Here, we can especially see the significant amount of unemployment that is due to the long duration unemployed, since the UER is much higher relative to standard UEI recipients than it has been in the past. The labor recovery over the next couple of years will be a process of bringing that green line down to the level of the red line. The question is, how quickly will it happen.
The number of long term unemployed once reached 6.7 million, and is now down to 4 million. That leaves about 3 million additional workers who would need to leave the rolls of the long-term unemployed to bring us back to a normal labor market. Workers have been leaving the ranks of the long term unemployed at a much higher sustained rate than one might have guessed, with an exit rate staying strong at about 2 million a quarter. This is in spite of the fact that the total number of workers in this group has declined by about 40% from the peak and in spite of the fact that a normalized short-duration labor market has meant that we are seeing fewer new long-term unemployed. Reasons for this include:
1) The proportion of long-term unemployed workers covered by EUI has been shrinking, so it has had a decreasing effect on durations over time.
2) A large number of the long term unemployed are marginally attached to the labor force - for instance many are in the older age groups, where they may be near retirement or may have the flexibility to wait for a more robust job market. So, there are an unusually high amount of transfers between workers classified as unemployed versus not in the labor force. Some of this reflects the arbitrary status of some workers, especially among the older age groups, which makes trends in the unemployment rate difficult to predict. (Here is an earlier post about why the decreasing labor force is generally demographic in nature.)
If the linear rate of unemployment reduction continues, we could hit 6.0% unemployment by the summer of 2015, and labor markets may become inflationary earlier than normal because of structural and demographic issues. This graph suggests that we are a long way from worrying about any inflationary problems, though.
The blue line is the annual change in the CPI adjusted amount of currency in circulation and the red line is real GDP. Drops in inflation adjusted currency seem to pre-date drops in real GDP. The current high rate of increase in currency suggests that current increases in currency are not inflationary and that a negative shock in real GDP is not imminent.
PS. I'm not sure what this last chart is really measuring. Could this be a product of the Fed's inflation targeting policy? When inflation adjusted currency growth stops, that means that any real GDP growth has to be related to increased velocity. We would expect that to happen if real interest rates are rising as part of an accelerating economy, so this wouldn't necessarily make that indicator a leading indicator of a decline in real GDP.
Do these drops in inflation adjusted currency signal times when a relatively larger portion of NGDP growth is coming through inflation? If that is the case, and the Fed reacts to that development by pulling back currency growth even more, then could the inflation targeting policy be creating a causal retationship between momentarily higher inflation and subsequent recessions? If that is the case, this would be an example of how inflation targeting causes unnecessary economic contractions that could be avoided with NGDP targeting.
There are a lot of moving parts here. Please comment if you have insight into this relationship. Especially comment if you know of some technical error I am making or if the graph is useless in some way I don't understand.