Previously I had modeled long term unemployment by comparing long term unemployment durations to short term unemployment durations. Here I have modeled long term unemployment rates as a linear combination of the shorter duration unemployment rates, to compare the results to the other model. The results turn out to be similar.
Here is the 66 year history of the model. The specification is based on the relationship from 1948 to 1991. The deviations of the model in 1992 and 2002 coincide with the previous two recessions and the previous two EUI episodes, which were much less generous than the recent episode.
Next is the difference between the modeled Long Term Unemployment Rate (over 26 weeks) and the actual LT Unemployment Rate. This is similar to the numbers I have arrived at through other methods. And, I believe the story is similar for the current labor market. The very long term unemployed seem to have a linear behavior that is not related to EUI policy at this point, because this group had probably mostly already timed out of the program. As with my previous estimates, this estimate suggests that this group is shrinking by about 0.05% of the labor force each month. So, if this continues, the unemployment rate should continue to decline by about 0.6% over the next year.
I think that this method does help show how the end of EUI has filtered through to recent declines in the unemployment rate. Beginning in the fall of 2013, unemployment durations of 5 to 26 weeks acquired a new, sharply declining trend, which has continued through April.
Durations from 15 to 26 weeks might continue to decline by about 300,000 (about 0.2%) over the next few months, but that would bring it near to probable trough levels. These recent declines in short term unemployment should filter through to long term (>26 week) unemployment, with 0.1 - 0.2% in future declines already in motion and another 0.2 - 0.3% decline possible if the 15-26 week category continues to decline.
I think this realistically adds up to declines by the end of 2014 of about a 0.4% UE decrease from the VLT group and another 0.4% UE decrease from the trends that began in late 2013 in shorter duration categories and the expected declines those trends should produce in the long term category. That puts us at 5.5% unemployment by the end of 2014.
It is possible that these trends will dissipate, but there is no evidence of that happening now. And there might be some snap-back from the April number, but I don't see any reason to expect anything above, say 6.4%, even figuring on some noise over the next couple of months as the downtrend continues.
Labor Force Participation
The Employment to Population Ratio has shown some slight momentum over the past couple of years, but labor force participation continues to show weakness. This doesn't quite fit with my amended theory of the EUI. I would have expected some weakness coming out of EUI as some relatively small proportion of long-term unemployed would have exited EUI by exiting the labor force. However, if there is this bifurcation among long term unemployed, and if the end of EUI didn't really affected the behavior of the very long term unemployed, I wouldn't have expected there to have been much LFP weakness. If the end of EUI mostly caused an exit from unemployment among unemployment durations of, say, 5 to 40 weeks, I would have expected a smaller portion of those beneficiaries to have left the labor force. But, there does seem to be some weakness in LFP coincident with the end of EUI.
We might continue to see more of this weakness over the next few months before LFP finally settles back into a direction parallel to (or reverting to) the demographically adjusted trend.