Friday, January 17, 2014

Long Duration Unemployment As We Begin 2014

Here is a chart of unemployment, by duration, each December, for the past two recessions.  Most of the damage from labor contractions comes, not from layoffs, but from a seizing up of labor churn.  Thus, there is only a slight increase in short-term unemployment at the height of the contraction.  Most of the excessive unemployment comes from increasing long-duration unemployment, due to a lack of new hiring.
In both of the last two recessions, long-duration unemployment didn't peak until 2 years after the peak in short-duration unemployment.  This is typical.  The unusual issue with this contraction has been the enormous size of long-duration unemployment compared to short-duration.
I have fingered Emergency Unemployment Insurance (EUI) for much of this anomaly.  Now, if the termination of EUI holds, I would expect to see some downward acceleration in the long-term unemployment rate.
However, it will probably be a long unwinding process, in any case.  In this graph, I compare the Unemployment Over 14 Weeks to the Unemployment Over 26 weeks with a 3 month lag.  This gives an estimate of the proportion of long term unemployed workers who are leaving unemployment every 3 months.  In a healthy economy, this is around 45-50%.
Here is a longer version of this measure, just for kicks.  The recent low turnover out of long-duration unemployment was clearly without precedent.  There is a caveat.  My concern might be overblown.  There is a clear long-term trend toward lower turnover in long-duration unemployment.  The trend at the peaks has declined by about 15% since the 1970's.  If we draw a similar trendline at the troughs, the current low level of long-duration unemployment would not be significantly below that trend.  So, it is possible that some of the seemingly unusual long-term unemployment comes from difficult comparisons to the previous two contractions, where long-duration unemployment churn was higher than normal, but was not immediately noticeable because it was fighting this long-term downward trend.
In any case, I would expect to see an acceleration of turnover in the long-duration unemployment measure with the termination of EUI.  But, even if I forecast a rebound of turnover to 40% by next quarter and 45% for the remainder of the year, the unemployment rate for duration over 26 weeks would look like this over the course of the year:
As can be seen in the first graph, there isn't much unemployment left to lose among the short-duration unemployed.  So, even if we are optimistic about a rebound in long-duration unemployment, an unemployment rate at 5.5% by the end of 2014 is probably the lower bound on what we could expect.  I don't know.  I guess we'd all be pretty happy with that.
A Side Note:
Here is the unemployment duration for the past 8 months:
We can see the consistent decline across durations that has led to the healthy decline in the overall unemployment rate.  The high short-duration unemployment in October was probably due to the government shutdown.  The low short-duration unemployment in December seems anomalous.  If that rebounds in January, we could see a pop back to 6.9%.  This is a very low level for short-duration unemployment.  On the other hand, long-duration unemployment dipped strongly in December.  This might have been in anticipation of the end of EUI.  I am looking for this to continue to fall by about 200,000 per month (reflecting the improved turnover discussed above.)


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