Friday, April 11, 2014
In the first graph, which shows all the main flows since 1995, we can see three pairs of flows that tend to move together:
Flows between employment and not-in-labor-force (NLF)
Flows between employment and unemployment
Flows between unemployment and NLF.
These pairs basically move in proportion to the number of workers in the common category. So, flows between E and NLF move up and down with the employment rate. Flows between U and E move up and down with the unemployment rate. And, flows between U and NLF move up and down with the number of workers marginally attached to the work force.
What we currently have is the E/NLF and the E/U flows basically back at levels we would see during the mature phase of a recovery.
The one pair that is not healthy is the U/NLF pair, reflecting the large number of workers who are marginally attached to the labor force. How this recovery phase matures comes down to how this pair of flows behaves. The trend will definitely be down for both directions of the flow. The thing to watch will be how quickly it trends down, together with the relative movement of each flow in the pair.
There seems to be some acceleration down, which I would have expected after the end of EUI, but the acceleration downward has come from U to N movement. I would have expected it to come from N to U movement. The best case scenario here, which I think there is some hope for, is that N to U flows decline quickly to catch up to recent movement in the U to N flow. If that happens, the unemployment rate will drop quickly. Everything is moving in a healthy direction now, so there doesn't appear to be a scenario in the wings that reflects a slowdown in the recovery.
Here also, I believe is evidence for my claim that the portion of the decline in the labor force participation rate (LFP) that we can attribute to cyclical factors is as much a product of an unusually high LFP in 2007 as it is of an unusual decline in 2009 & 2010. There was a little bit of both. But, the strong net flow from N to E throughout 2005-2007 relative to the flow from U to N, looks like a sign that there was significant opportunistic employment during that period for marginally attached workers. So, the net flow to NLF we see in 2009-2010 is partially just an unwinding of this opportunistic cyclical employment.
In very recent flows, there is evidence again of unusually high flows from NLF to E. This is likely to reflect some noise in the data. But, if this proves to be persistent, it could reflect coming positive pressures on employment, wages, production, interest rates, etc.
PS: One final graph, showing the relationship between the unemployment rate and the level of continued regular unemployment claims, with beginning and end of EUI noted in each cycle.