The Labor Market Recovery is Weak

I present some evidence that the unemployment rate understates the weakness in the labor market recovery and that a full-time-equivalent (FTE) employment to population ratio is a better measure of labor market activity in a guest post at Modeled Behavior.  This is the approach we take in the Welch Consulting Employment Index.

In the post I calculate that FTE employment is 6.1% below trend.  My calculations of FTE employment relative to trend account for the changing age composition of the population and quite different trends in employment rates within each age group.

One of the most important observations that I make in my post is that over 40% of the shortfall in full-time employment is among adults age 55+.  To non-labor economists this observation may seem surprising because FTE employment rates for adults age 55+ remained steady since 2008.  But employment rates were trending up for this group quite steadily prior to the recession as the following figure shows.

Figure3

If the labor market recovery was typical of most postwar recoveries employment rates for the age 55+ cohort would still be increasing.  The fact that employment rates have remained constant since 2008 is very disappointing.  The natural employment rate for this age cohort is trending up for several reasons: (I) the Social Security retirement age for this age group is now 67 rather than 65 so more seniors will remain employed, (2) increases in life expectancy, (3) the aging of the baby boom cohort means that a higher fraction of the age 55+ group are in the 55-59 and 60-64 age categories that have always displayed higher employment rates, and (4) women now reaching age 55 have much greater labor force attachment throughout their careers than earlier cohorts of women.

The bottom line is that despite the unemployment rate dropping from 10% to 7.3% (which is still quite high) the labor market is much weaker than the official unemployment rate would suggest.  There are millions of adults in part-time work who in previous recoveries would have been working full-time and there are millions more who have given up looking for work and are no longer counted as part of the labor force.

 

 

 

70,000 Workers Displaced by Hurricane Sandy in New Jersey: Unemployment Rate May Reach 11%

Hurricane Sandy had a devastating effect on employment in New Jersey and a fairly large impact on employment in New York, as well.  A leading indicator of unemployment is the weekly report of new unemployment insurance claims.  A spike in new jobless claims means that a large number of workers were displaced from their jobs.  New Jobless claims have quadrupled in New Jersey and doubled in New York in the aftermath of Sandy relative to November 2011.  Using these data I estimate that Hurricane Sandy displaced 150,000 workers in the first two weeks after the storm hit, with 70,000 jobs lost in New Jersey and 50,000 lost in New York.  These job losses could push the November unemployment rate above 11% in New Jersey and above 9% in New York.

During the weeks of November 10th and November 17th (the most recent weeks for which detailed state data are available) about 96,000 jobless workers in New York filed for first-time unemployment insurance benefits, compared to about 48,000 new claims one year ago.  Similarly, almost 92,000 jobless workers in New Jersey filed for first-time unemployment insurance benefits during the weeks of November 10th and November 17th, compared to just over 24,000 new claims one year ago.  In the weeks after Sandy the rate at which workers lost jobs is about four times higher in New Jersey and twice as high in New York compared to November 2011.

The following charts compare the year-to-year change in new unemployment insurance claims the weeks of November 10th and November 17th and the corresponding change in claims for the previous 16 weeks (on average).  The charts indicate that new jobless claims remain very high in New Jersey while they have dropped recently in New York but remain above 2011 levels.  In both states new jobless claims in 2012 were consistently below 2011 levels until Hurricane Sandy hit.

Hurricane Sandy caused about 70,000 people to lose their jobs and file for first-time unemployment insurance benefits in New Jersey and 50,000 in New York during the weeks of November 10th and 17th.  These job losses are measured relative to the declines that would have been expected had the storm not hit the New Jersey coast.  Using similar methods, I estimate that about 30,000 additional jobs were lost in the rest of the country, possibly due to Hurricane Sandy.

The November jobs report (released on December 7th) is the first one after the presidential election and the first to include data gathered after Hurricane Sandy.  The storm’s displacement of 150,000 workers in the past two weeks is enough to increase the U.S. unemployment rate from 7.9% to 8.0%.  Hurricane Sandy is also likely to increase the unemployment rate to 11% in New Jersey (from its current 9.7%) and above 9% in New York (from its current 8.7%).  The November unemployment rate is based on worker’s labor force status for the week ending November 17th.  This means that continued job losses and displacement of workers in the second half of November, especially in New Jersey, will not factor into the November unemployment rate but could possibly cause the unemployment rate to increase further in December.

(Not) Leaving Las Vegas: When Unemployment Happens in Vegas the Jobless Stay in Vegas

Since February 2009 the unemployment rate in Las Vegas has averaged 13.1% and never dropped below 10.1%; it now stands at 11.5%.  Jobless workers have not left the metro area despite the persistently high unemployment rate and lack of job growth since the recession ended.  This stunning lack of out-migration, Las Vegas’ labor force of about 980,000 workers declined by less than 200 people in the past four years, is puzzling because there are better job prospects for the unemployed and underemployed in other parts of the western U.S. 

Every other state has a healthier labor market than Nevada and every major metropolitan area has a lower unemployment rate than Las Vegas.  The unemployment rate in North Dakota is 3.1% and has not been above 4.2% since February 2009.  Unemployment rates in Nebraska, South Dakota, Utah and Wyoming are 3.8%, 4.5%, 5.2% and 5.2% respectively.  The combined labor force in these states is more than 3.5 times larger than Las Vegas, and could easily absorb jobless workers leaving Las Vegas.  The labor forces in these relatively healthy states have grown by an average of less than 1.4% over the past four years.  In other words their labor markets are expanding at a steady but unspectacular rate.

The last four years stand in stark contrast to Las Vegas’ recent history.  Between 2004 and 2008 the Las Vegas labor force grew by 16.8%.  Between 2000 and 2004, a time of relatively slow economic growth for the U.S. overall, its labor force grew by 14.1%.   This means that about one-quarter of the Las Vegas labor force arrived between 2000 and 2008.  These recent arrivals came to a city in the midst of a real estate boom but have persevered through four years of high unemployment and plunging real estate values.

A comparison of Las Vegas and cities on the Gulf and Atlantic coasts that also experienced a real estate boom and bust in the past decade is informative.  Between 2004 and 2008 the labor force grew by 13.4% in Fort Myers-Cape Coral, Florida and by 12.7% in Myrtle Beach, South Carolina.  Since then their labor forces decreased by 1.3% and 4.2% respectively.  If the labor force in Las Vegas contracted at the same rate as it did in Fort Myers or Myrtle Beach, because unemployed workers left the city to find employment elsewhere, the Las Vegas unemployment rate would be 1.3 to 3.9 percentage points lower.

Labor forces have declined in many cities across the U.S., even those that did not experience a real estate boom and bust, but not in Las Vegas.  Much like the gambler who stays at the blackjack table believing his luck will change with the next shoe the people who came to Vegas for economic opportunities are hanging on and hoping that 2013 will be different.

Hurricane Sandy Likely to Increase Unemployment Rate to 8.0% or 8.1%

The November jobs report (released on December 7th) will be the first one to include household and payroll survey data gathered after Hurricane Sandy.  It is likely that November’s unemployment rate will jump from its current level of 7.9% to 8.0% or 8.1% due to Hurricane Sandy.  Sandy had a devastating impact on the tri-state area of New York, New Jersey and Connecticut where about one eighth of U.S. output is produced.  A leading indicator of the unemployment rate is the weekly report of new unemployment insurance claims.  A spike in new jobless claims means that a large number of workers were displaced from their jobs.  As I explain below, Hurricane Sandy displaced 145,000 workers as measured by new jobless claims in the first full week after the storm hit.

During the week of November 10th (the most recent week for which detailed state data are available) over 63,000 jobless workers in New York filed for first-time unemployment insurance benefits, compared to about 21,400 new claims one year ago.  Similarly, over 46,000 jobless workers in New Jersey filed for first-time unemployment insurance benefits during the week of November 10th, compared to just over 12,000 new claims one year ago.  The rate at which workers lost their jobs nearly quadrupled in New Jersey and nearly tripled in New York compared to November 2011.

The following charts compare the year-to-year change in new unemployment insurance claims the week of November 10th, the first report to reflect Hurricane Sandy effects, and four-week moving averages of year-to-year changes in new claims over the previous 20 weeks.  For example, the annual percentage change in new claims for November 3rd is based on a comparison of data for the week of November 3rd and the three previous weeks to the corresponding weeks in 2011.  The charts indicate that, for New York and New Jersey, new jobless claims were consistently below 2011 levels until Hurricane Sandy hit.

Hurricane Sandy caused about 80,000 people to lose their jobs and file for first-time unemployment insurance benefits in one week in New York and New Jersey alone.  Although the effect of Hurricane Sandy on the rest of the country is smaller, it isn’t negligible.  The following chart compares the year-to-year change in new jobless claims the week of November 10th to four-week moving averages of year-to-year changes in new claims for the rest of the United States (excluding New York and New Jersey).  The chart indicates that new jobless claims were up about 12% in the first full week after Hurricane Sandy, or an increase of 65,000 claims.

Hurricane Sandy’s displacement of 145,000 workers in one week is enough to increase the U.S. unemployment rate by 0.1 percentage point, from 7.9% to 8.0%.  The November unemployment rate is based on worker’s labor force status for the week ending November 17th.  That means that one more week of new jobless claims data will factor into November’s unemployment rate.  The preliminary new claims data for the week of November 17th shows a smaller increase in displaced workers, probably half as many as the 145,000 displaced in the prior week.  We will know more on November 29th when more detailed and complete data for the week of November 17th are released.  At this point it is most likely that the November unemployment rate will jump to 8.0% or 8.1%.

Undercounting Very Discouraged Workers

See my guest blog post today at Modeled Behavior discussing how and why the BLS is underestimating labor underutilization.

Stubbornly High Unemployment

The Bureau of Labor Statistics has reported monthly unemployment rates for the past 775 months.  Through the first 733 months of reporting (until January 2009) the unemployment rate was above 8% in only 38 months.  There were 12 months of high unemployment in 1975 and 26 more from 1981 to 1983.  Since then we have experienced 42 straight months of unemployment in excess of 8% of our (shrinking) labor force.  We are in uncharted territory.  Unfortunately, it appears that the unemployment rate will not fall below 8% until some time in 2013.  Only time will tell what the scarring effects of extended periods of unemployment will mean for the future earnings of workers displaced by the 2007-2009 recession.

Unemployment and Democratic Mayors at the DNC

Last week the Los Angeles Times ran an interesting story highlighting the conflict between the messages delivered by Republican governors in the key swing states of Ohio, Virginia, Wisconsin and the theme of Mitt Romney’s presidential campaign.  Governors Kasich, McDonnell and Walker all spoke at the Republican National Convention and emphasized the economic turnarounds experienced by their states under Republican leadership.  The Los Angeles Times reported that the talk of job creation and falling unemployment rates in these three states “delighted” President Obama’s re-election team.

Last night five Democratic mayors, from Charlotte, Chicago, Los Angeles, Newark and San Antonio spoke at the Democratic National Convention.  Four of these five metropolitan areas have unemployment rates above the national average of 8.3%.  The only metropolitan area of the five with an unemployment rate below the national average is San Antonio with an unemployment rate of 7.3%.  (The Bureau of Labor Statistics reports unemployment by metropolitan area not cities themselves.)

Taken together, these five metropolitan areas have a combined labor force of nearly 14.5 million workers, and 1.43 million of them are unemployed.  This puts the aggregate unemployment rate for the metropolitan areas represented by the Democratic mayors who spoke last night at 9.9%.

It wasn’t always this way.  In 2007 the unemployment rate in all of these metro areas was below 5%.  Fewer than 675,000 workers were unemployed in the combined metro areas in 2007, for an aggregate unemployment rate of 4.7%.

Will the Los Angeles Times recognize the conflict between the President’s re-election campaign message and the plight of the millions of unemployed, underemployed and discouraged workers in cities governed by Democratic mayors?  Perhaps not because only one of the cities (Charlotte) highlighted at yesterday’s DNC is in a swing state. 

Given the electoral map, the Presidential campaign is likely to pass by many people suffering from the steep recession of 2007-2009 and the weak recovery of the past three years.  I suspect that voters in these cities and states are looking for solutions from their mayors, governors and elected representatives, whether they are Democrat or Republican, and are less concerned with assigning blame for our economic woes.

President Obama’s Gender Gap

President Obama faces an important gender gap in a key labor market indicator – the unemployment rate.  The unemployment rate in July for women age 25 to 54 was 7.4% while the unemployment rate for men of the same age group was 7.0%.  It is more troubling that the unemployment rate for women age 25 to 54 has increased by 1.2% in the President’s first 42 months in office, while it has dropped by 0.6% for men age 25 to 54.  (Note: I use the unemployment rate for this age group because younger workers may drop out of the labor force to attend school and older workers may drop out of the labor force to retire.)

Over the past 30 years the average unemployment rate for men has been slightly lower than for women (age 25 to 54).  Moreover the annual jobless rate for women has exceeded the men’s rate by more than 0.4% (the current gap) only three times in the past three decades.

The following chart compares unemployment rates for women for President Obama and the previous five presidents who were seeking re-election, 42 months into their first term.  The current unemployment rate of 7.4% for prime working age women is one percentage point higher than the rate for any other first term incumbent.

The increase in the unemployment rate of 1.2% is also unusually high compared to previous presidents seeking re-election.  The only president who held office during a larger increase in women’s unemployment was George Herbert Walker Bush; the unemployment rate for women age 25 to 54 increased by 1.8% from January 1989 to July 1992.

The reason for the poor labor market outcomes for women in the past three and a half years is worthy of more study.  The composition of employment by sector doesn’t explain the gender gap.  Over one million construction sector jobs have been lost since January 2009 and only about one in eight of these jobs were held by women.  In contrast, women hold about four out of five jobs in the health care sector, where employment has increased by 925,000 in the past 42 months.  Much has been made, by some observers, about the decline in government employment since January 2009.  Government employment has dropped by 625,000 in the past 42 months, but 43% of these jobs were held by men.  Finally, government employment is about 16.5% of total employment, or about 0.2% higher than when President Bill Clinton said “the era of big government is over.”  The modest decline in public sector employment over the past few years is simply not large enough to explain the increasing unemployment rate of women.

There will be three more monthly labor reports that will be released by the BLS before election day.  However, it is almost certain that when voters go to the polls the unemployment rate for women will be higher than for men and substantially higher than it was on Inauguration Day.  That could mitigate some of the gender gap Mr. Obama enjoyed in 2008.

The Unemployment Rate is 8.216%

The BLS announced today that 80,000 jobs were created in the U.S. in June, compared to 77,000 in May and 68,000 in April.  Despite the small apparent increase in payroll employment gains from April to June, there is no meaningful difference in the number of jobs created between April, May and June; their difference is well within the statistical margin of error.  Payroll employment gains are reported to a level of accuracy far beyond our ability to count all employees in the U.S. in real-time.  The difference between an employment gain of 80,000 and a consensus forecast of 125,000 is still far below the margin of error for estimated job growth.  While sophisticated labor market observers recognize this fact, the casual consumer of economic news should be more concerned about longer term labor market trends than a single month’s report.

The BLS reports the number of jobs created to the nearest 1,000, even though the standard error of each monthly estimate is approximately 60,000 jobs.  This means that the margin of error for each month’s payroll employment gain is about 100,000.  For non-statisticians, labor economists are only 90% certain that job growth in June was within an interval from a loss of 20,000 jobs to a gain of 180,000 jobs.

The unemployment rate is reported to the nearest one tenth of a percentage point, while the standard error of the unemployment rate estimate is about .12 percentage points.  In other words the BLS reports the unemployment rate to the nearest 0.1 while the margin of error is approximately 0.2.

If the BLS were to report payroll employment similarly to the unemployment rate, payroll employment would be reported to the nearest 50,000 jobs not the nearest 1,000.  If the BLS reported payroll employment rounded to the nearest 50,000 jobs, those without a statistics background would recognize how noisy monthly employment estimates can be.

Put somewhat differently, if the BLS instead reported the unemployment rate to the same level of inaccuracy as payroll employment, it would report the unemployment rate to the nearest two one-thousandths of one percent.  If that were the case the BLS would have reported that the unemployment rate ticked up from 8.206% in May to 8.216% in June.

The labor market recovery is very weak because over three months, where the margin of error is much smaller, employment gains totaled 225,000 jobs.  If the labor market were healthy, the economy would create more than 225,000 jobs per month not per quarter year.  During the recovery in 1983-1984, there were 15 straight months where job growth exceeded 225,000 per month.  We are on a long slow road back to full employment.

The High Take-Up Rate for Unemployment Insurance Signals that Hiring is Weak

The U.S. Department of Labor released the 23rd weekly report of new unemployment insurance claims for 2012.  About 374,000 workers per week, on average, applied for first-time unemployment insurance in 2012.  Bureau of Labor Statistics data also indicate that about 392,000 workers lost their jobs each week due to layoffs in the first quarter of 2012.  These are the workers for whom the unemployment insurance system can provide some relief.  Unfortunately the economy continues to plod along so that 95% of job losers file for unemployment benefits.  This is a clear indication that even experienced workers are struggling to find work.

Five years ago, when the labor market was relatively healthy, about 404,000 workers were laid off each week, but only 314,000 applied for unemployment benefits.  Many of the remaining 90,000 job losers either found a job immediately or expected to find one soon.  In a healthy labor market, as we had in 2007, over 20% of job losers didn’t bother to apply for jobless benefits because they did not expect to be out of work for long.

If today’s labor market was as healthy as in 2007, new jobless claims would be 305,000 per week – almost 70,000 less than the average for 2012.  The high “take-up” rate (95%) for the unemployment insurance system is just one indication of the problem that jobless workers face.  New college or high school graduates are typically ineligible for unemployment benefits but are also struggling to find work.  In addition, there are millions of discouraged workers who have stopped searching for work because of the weak economy.

Conventional wisdom suggests that when new jobless claims fall below 400,000 per week the unemployment rate will decline.  That is no longer true because hiring and new business formation remain sluggish and there are millions of discouraged workers that will re-enter the labor force at the first signs of a recovery in hiring.  The unemployment rate will not fall below 8% until there is a substantial increase in hiring.  A leading indicator for a hiring rebound is when new jobless claims stay well below 350,000 per week for a sustained period.

Follow

Get every new post delivered to your Inbox.

Join 1,229 other followers

%d bloggers like this: