Discouraged Workers

The unemployment rate has declined by 8/10 of one percent in the past five months, but part of this decline is due to an increase in the number of discouraged workers rather than unemployed workers finding a job.  Officially, unemployed workers must be jobless and have looked for work in the past 4 weeks.  During the recession and weak economic recovery many unemployed workers became discouraged, stopped searching for work, and are no longer counted as unemployed.  As the economy gains strength they will resume their job search and this could prevent the unemployment rate from falling in 2012 or even cause it to increase.

The excess fraction of the working age population that is jobless is the employment gap.  This gap should be calculated controlling for age, gender and time trend because of differences in the propensity to work across demographic groups.  Adding the number of jobless workers represented by the employment gap to the natural or typical unemployment rate produces an alternative to the official unemployment rate.

The figure below shows employment/population for men age 35 to 44 and 45 to 54 from 1980 to 2011. The ratios for both groups have trended down by about 1% per decade and are about 4% below their trend values as of January 2012.

The “natural” unemployment rate for men age 35 to 44 is probably close to 3.4%, the average rate during the last half of the 1990s and from 2005 to 2007.  If every jobless worker in the 4% employment gap was added to the “natural” rate the unemployment rate would be 7.9% (rather than 6.4%) in January 2012.  Comparing January 2011 to January 2012 indicates that most of the 1.1% drop in the official unemployment rate was due to an increase in discouraged workers rather than a reduction in the employment gap.  The decline in the employment gap over the past year would have reduced the unemployment rate by just 0.4% (8.3% to 7.9%).

Men age 45 to 54 have a “natural” unemployment rate of about 3.2%, the average during the late 1990s and from 2005 to 2007.  The adjusted unemployment rate, which adds jobless workers from the employment gap to the “natural” rate, is 7.2% (rather than 6.4%) in January 2012.  About 60 percent of the 1.9% drop in the official unemployment rate from January 2011 to January 2012 was due to an increase in discouraged workers rather than a narrowing of the employment gap.

The unemployment rate is normally expected to decline as the economy strengthens but this may not occur in 2012.  It appears that much of the decline in the unemployment rate over the past year was due to workers becoming discouraged rather than finding jobs.  The official unemployment rate could increase by 0.8% to 1.5% if these discouraged workers resumed their job search immediately.  It is more likely that discouraged workers will gradually re-enter the workforce keeping the unemployment rate stubbornly high even as the economy strengthens.

New Jobless Claims Cast Doubt on Recovery Winter

Everyone seems to be impressed by the low levels of new unemployment insurance claims that have been filed in 2012.  I look at the numbers and notice how high new claims are relative to layoffs.  The data suggest that nearly everyone who has lost their job through a layoff or reduction in force files for unemployment benefits.  Before the recession, that was not the case.  Job losers are much more pessimistic about their chances of finding a new job than they should be if the economy was enjoying a recovery winter.

A little over two million new claims were filed in the first four weeks of the year.  That’s about 12% less than were filed over a comparable period in 2011, and 27% less than in 2010.  I am not surprised by this decline because there must be layoffs before there can be new jobless claims.  Unemployed workers must be job losers to be eligible for unemployment insurance.  The BLS labor turnover survey (JOLTS) indicates that layoffs have fallen even more dramatically than new jobless claims since the recession.

The following chart shows new unemployment insurance claims and layoffs each month between 2001 and 2011.  The figures are not seasonally adjusted – layoffs and UI claims spike up in January and are lowest in the fall every year.

Between 2001 and the fall of 2008 there were 19% fewer jobless claims than there were layoffs.  A disturbing pattern has emerged beginning in the fall of 2008.  Since November of 2008 about 11% more people filed for UI benefits than there have been job losses through layoffs.  Some of the excess new claimants were likely deemed ineligible for unemployment insurance.  Even so, the fraction of laid off workers who rely on unemployment insurance is at an all-time high.  This suggests job losers are pessimistic about their prospects of finding a new job and is a leading indicator that, despite what some are saying, it will be a while before hiring picks up.

Turning the Corner

When I saw last Friday’s encouraging jobs report I knew it would be controversial.  An increase in payroll employment of 243,000 is good news, but any January report contains a large seasonal adjustment because it is typically the weakest month of the year for employment.  The Bureau of Labor Statistics generates a new seasonal adjustment factor every month, to allow for changing economic conditions, but it means that no two January adjustments are the same.  Skeptics, such as Zero Hedge, correctly observed that the past two January seasonal adjustments have been especially large which might account for 100k of the job gain reported last week.

The Bureau of Labor Statistics is faced with an incredibly challenging task.  It must generate a near real-time count of the country’s total payroll and report it as if January was no different than June.  I know things are out of hand when Rush Limbaugh and Rachel Maddow are commenting on the appropriateness of the government’s seasonal adjustment process.  It is unfortunate that last week’s solid report was obscured by an opaque statistical methodology.   I prefer a more transparent method for presenting high-frequency changes in payroll employment.  My approach shows slow and steady improvement in the aggregate labor market throughout 2011.

First, I consider average payroll employment over a quarter year to mitigate the noise in any single month’s report.  Second, I compare year-over-year percentage changes in quarterly employment rather than use a confusing and complicated method for removing seasonal effects.  The following figure presents these changes in payroll employment for all of 2011 and January 2012.

Employment grew by 1% annually in the first half of 2011 and by 1.2% and 1.3% in the third and fourth quarters.  The January jobs report is encouraging because it reflects a 1.5% annual employment growth rate.  Of course the next two monthly reports will have to be equally strong to maintain a growth rate of 1.5% for the entire first quarter of 2012.

Quarterly year-over-year changes eliminate some of the noise in monthly reports and their evolving seasonal adjustments.  Conventional wisdom, fueled by noisy monthly reports, is that the labor market recovery sputtered in the second half of 2011.  In fact, the labor market has been improving slowly and steadily.  There are problems to be sure.  Annual employment growth of 1.5% is better than we have seen recently but it’s painfully slow given the deep recession.  More importantly, as I will show in future posts, the labor market remains especially weak for less skilled workers and in areas hit hard by the real estate crisis.

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