Tuesday, July 22, 2014

Unemployment and JOLTS, with demographic adjustments

I've done quite a few posts on the significant distortions that the baby boomer lifecycle is causing in comparative labor statistics.  There are so many places where we are using time series to assess the state of the economy, and we are using measures that have stable names but that are measuring something whose fundamental character is changing.  In broad terms, for instance, we think we are measuring "Quits" or "Unemployment Rate", a stable set of data regarding an economy over time.  But, really, we are kind of measuring "Quits or Unemployment among a lot of 50 year olds" today compared to "Quits or Unemployment among a lot of 35 year olds" 15 years ago.  We think we are comparing changes in our economy, ceteris paribus, but in some cases, we are being fooled.  The economy is the "ceteris paribus" and we are just measuring how 50 year olds are different than 35 year olds.

Last December, I tried to adjust the Quits rate from the JOLTS survey to account for age demographics.  I haven't revisited the adjustments since then.  Today I thought I'd update this and see where things stand.  The red line in this graph is where we would expect Quits to be if demographics had remained constant.  The trend lines in this graph are parallel.  Growth in Quits has more or less followed the trend from 2003 to 2006, except for the period from the summer of 2011 to the fall of 2012, where it leveled out.  (It might be worth noting that this period of stagnant Quits roughly falls in the time period between QE2 and QE3, with Quits increasing on trend during the QEs.)

Here is a graph of all of the JOLTS indicators, with this demographically adjusted Quits level added.  Note that, with this adjustment, Quits is back to the same level of early 2004, when the Unemployment Rate was at 5.7%.

Job Openings is back to the level of late 2005, when the Unemployment Rate was 5.1%.  Some combination of labor market frictions is probably responsible for the lower Quits rate among older workers.  They tend to have much lower employment churn and longer unemployment durations.  Some of this is probably due to greater specialization as a result of their more mature career development, etc.  These factors would tend to cause Job Openings to be overstated, relative to earlier periods, because employers would require more time to match jobs with workers, given these frictions.  I have a fairly direct way of adjusting the Quits rate by using unemployment and unemployment duration data, by age.  These inputs aren't available for Job Openings adjustments.  If we assume that the scale of the effect is similar between Quits and Job Openings, then adjusted job openings would imply an expected Unemployment Rate of about 5.7%.

The lower churn among older workers could also explain some of the lower hiring levels, so that hiring adjusted in a similar way to quits should also imply an unemployment rate in the high 5's.

Older workers also have lower unemployment, generally.  Adjusting for age, we might expect that the current unemployment rate would be about 0.4% higher than it is if demographics were still equal to what they were in 2000.

Comparing all of these measures to the previous recession, with these rough demographic adjustments, we have:
Stated Adjusted
Quits Rate
1.6% 1.8%
Job Openings Rate
2.7% 2.3%
Unemployment Rate
6.1% 6.5%
UER implied from Quits
6.4% 5.7%
UER implied from Job Openings
5.1% 5.7%

So, the measures, demographically adjusted to compare to the previous recession, give us a picture where Openings and Quits suggest that Unemployment should be nearly 1% lower than it is.  I have separately estimated that about 1.2% of the labor force remain drawn into unemployment because of the unprecedented generosity of Emergency Unemployment Insurance (EUI).  It seems like this group of workers could explain the disconnect between unemployment and the JOLTS data.

About 0.3% of the unemployed labor force is related to lower exit rates of cohorts who became unemployed in 2013 and were generally eligible for EUI.  These workers appear to be actively engaged in the labor market, even though their unemployment exit rates were a little slow.

Another approx. 0.8% of the labor force have very long unemployment durations and would have been expired out of EUI even if it hadn't been terminated at the end of 2013.  The Quits and Openings rates may suggest that these workers have a limited impact on quitting and hiring decisions of other workers and employers.

I have done a lot of posts on Labor Force Participation Rates where I have argued that LFP, once adjusted for demographics, is roughly where we would expect it to be at the end of a deep recession.  But, that LFP level includes these Very Long Duration Unemployed workers in the labor force.  So, these are not workers who would have left the labor force without EUI.  They are probably mostly workers who would have reentered the labor force.

I've been fairly clear that I don't think such long term EUI was a wise policy.  I'm not sure we did these workers any favors by having such generous EUI policy.  If the main point of this policy was to lessen the incentive for them to accept sub-optimal work opportunities in the months following their loss of work, it seems that what we have done is to create about a million and a half workers, who, at the end of the labor contraction, still are in a position where they will need to accept sub-optimal work opportunities, but now have to try to acquire those opportunities with a big red flag on their resumes.  So, they are likely, after having missed two years or more of potential productive work time, to be facing even worse opportunities than they had initially.  In trying to save workers from uncomfortable, but manageable, outcomes, we may have subtly pushed them into desperate outcomes with no obvious, systematic solution.

In any event, these workers are slowly leaving unemployment, though it is unclear where their marginal flow is going - to work or out of the labor force.  The net result may be that we have a labor market that, for the most part, is operating at full employment.  Normally, there would be some segment of opportunistic labor that would cause cyclical fluctuations in labor force participation.  Now there is an additional segment that will also reenter employment cyclically, which might be another reason to expect an exceptionally long recovery period, if we can avoid having all the "bubblemania" jibber-jabber push the Fed into unnecessarily hawkish monetary policy.

The best scenario probably involves short term interest rates hitting 2-3% pretty quickly after their initial lift, and then moving sideways, a la the late 1990's.  My fear, which is probably becoming a broken record, is that this scenario probably includes an equilibrium price of homes 30-40% higher than today's, adjusted for inflation over time, and I don't think the Fed and most everyone else wants to believe me (or the market) over their own lying eyes.

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