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

The November jobs report (released on December 7^th) 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 10^th (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 10^th, 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 10^th, 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 3^rd is based on a comparison of data for the week of November 3^rd 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 10^th 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 17^th.  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 17^th 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 29^th when more detailed and complete data for the week of November 17^th are released.  At this point it is most likely that the November unemployment rate will jump to 8.0% or 8.1%.

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.

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 Long Road Back to Full Employment

It will take years of vigorous sustained economic growth to restore the U.S. labor market to anything close to “full employment”.  Consider the case of young adults age 20-24.  The unemployment rate for this age group has fallen from 15% to 12.9% over the past three years.  Nonetheless, the labor market for young adults is anything but healthy.  The labor force participation rate for adults age 20-24 has fallen from 73.4% to 70.8% since May 2009 because of the weak recovery.  Although there are 264,000 fewer unemployed workers age 20-24 than there were three years ago, there are also 566,000 fewer labor force participants than if the participation rate had remained steady.

As I have written in a previous post to this blog, there is an even more dramatic decline in the rate at which young adults are finding full-time work.  In May, 2000 54.3% of adults age 20-24 were employed in full-time jobs, but last month only 37.1% of adults age 20-24 were employed full-time.  If today’s labor market was comparable to 2000 full-time employment of adults age 20-24 would be higher by 3.75 million.  Some of these 3.75 million workers are currently working part-time while others are unemployed, and still more have left the labor force.

Young adults aren’t the only workers dropping out of the labor force or settling for a part-time job.  When a vigorous economic recovery finally arrives there will be millions of underemployed and unemployed workers and labor force drop-outs looking for full-time jobs.  Given the slack in the labor market and the rate of population growth, two years of employment growth of at least 500,000 full-time jobs per month would be required to restore the participation rate, the employment to population ratio, and the fraction of workers in full-time jobs to pre-recession levels.  In other words 24 straight months of growth about five times faster than what we have seen of late is needed to restore full employment.

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

The U.S. Department of Labor released the 23^rd 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.

A Tale of Two (Types of) Cities

The key to high wages, rapid economic growth rates, and low unemployment is human capital investment.  Economic growth fueled by human capital investment is more durable and stable than growth fueled by real estate speculation.  We need only look across cities, not countries, to understand this fact.

The ten fastest growing metropolitan areas in the U.S experienced population growth of about 40%, on average, between 2000 and 2010.  One typically expects strong economic conditions in cities with large inflows of population.  The promise of better pay and employment prospects is often what causes internal migration.  Today, however, some of our fastest growing cities have the weakest local economies because of the collapse of local real estate markets over the past four years.

The ten fastest growing metropolitan areas between 2000 and 2010 include: Austin TX, Bend OR, Cape Coral-Fort Myers FL, Greeley CO, Las Vegas NV, Myrtle Beach SC, Palm Coast FL, Provo-Orem UT, Raleigh NC, and St. George UT.  Three of these cities: Austin, Provo and Raleigh have a much more educated workforce than the cities whose growth was largely fueled by a real estate boom.  The “human capital” cities have 50% more adults with a graduate degree and 58% more adults with a college degree, per capita, than the “real estate” cities.

The following chart shows the composite unemployment rate between 2000 and 2011 for the three “human capital” cities, the seven “real estate” cities, and the U.S. unemployment rate overall.  The unemployment rate increased sharply in the recession, but less so for cities with a highly educated workforce.

An educated workforce is the key to high wages and rapid economic growth.  The recession took a much greater toll on the economic prospects of less educated workers.  More educated workers are better able to adapt and learn when market conditions change.  Cities that benefited from a real estate and construction boom just five years ago have been unable to generate jobs for all their new residents and now have some of the weakest local economies in the U.S.

Comparing Half-time in America to Morning in America

The Bureau of Labor Statistics just released another solid jobs report, for February.  The labor market is recovering from the recession, but payroll employment is growing much more slowly than it was in early 1984.  Moreover, the unemployment rate remains stubbornly high relative to 1984 and previous recoveries.

Payroll employment grew by:

• 926,000 jobs in the first two months of 1984 or about 1.0 percent
• 511,000 jobs in the first two months of 2012 or about 0.4 percent

Employment grew 2.5 times faster in early 1984 than in early 2011.  Payroll employment needed to increase by 1.33 million jobs rather than 511,000 jobs in the first two months of 2012 to be comparable to 1984.

The current unemployment rate of 8.3% is slightly higher than the unemployment rate of 7.8% in February, 1984.  The natural unemployment rate in 1984 was higher because the workforce was less mature.  Younger and less experienced workers tend to have higher unemployment rates because they are often switching jobs.  It is therefore more accurate to compare unemployment rates by age group.

The table below shows that, age-group by age-group, the unemployment rate in 2012 is 0.7% to 4.4% higher than in 1984.

Age Group	Unemployment Rate February 2012	Unemployment Rate February 1984	Difference
16-19	23.8%	19.4%	4.4%
20-24	13.8%	11.7%	2.1%
25-34	8.7%	7.9%	0.8%
35-44	6.8%	5.3%	1.5%
45-54	6.4%	5.0%	1.4%
55-64*	6.1%	5.4%	0.7%
65-69*	6.5%	3.9%	2.6%
*Not Seasonally Adjusted for these Age Groups

 The unemployment rates of young workers and seniors are much higher today than in 1984.  The unemployment rate of prime working age adults, age 35-54, is about 1.5% higher than in 1984.

Despite a few solid jobs reports, the labor market recovery remains weak by historical standards.  Employment growth is not as robust, unemployment rates are higher, and a higher fraction of the unemployed have been out of work for at least six months compared to earlier recoveries

The Frozen Labor Market

The labor market recovery of the past two years ago has not gained enough strength to rule out the possibility of a lost decade.  The recovery is especially weak for less educated workers and for cities devastated by the housing market collapse.  The economy is in better shape than three years ago but we would need to add 10 million full-time jobs to return to pre-recession employment to population ratios.  It is doubtful that 2012 will be much better than 2011 because the labor market appears much less dynamic than it was just a decade ago.

The recovery is weaker than the headlines suggest.  The unemployment rate has fallen by 1.4% over the past two years but this is largely due to workers leaving the labor force; the labor force participation rate has declined by 1.1% since January 2010.  The participation rate has been trending down for years so a small part of this decline was expected.  Nonetheless we should not be encouraged by declining labor force participation during a recovery.

The following figure presents a disconcerting trend: hires and separations have fallen steadily relative to the size of the labor force over the past decade.  The labor market is much less dynamic than it was prior to the Great Recession.  Although companies are laying off fewer workers, they are also hiring fewer workers, and employed workers are reluctant to quit.  Consequently new labor force entrants and job losers face fewer job opportunities and struggle to find a job.

Gross labor market turnover, measured by the sum of hires and separations per labor force participant, has fallen 25% since 2002.  This indicates a labor market that is more sluggish and less dynamic than it was just a decade ago.  Companies may be reluctant to hire because they are uncertain about: (i) the strength of the economic recovery, (ii) health care costs, or (iii) whether temporary tax code provisions will be extended or curtailed.  Hiring rates may also be weak because jobless workers lack the skills and experience that companies demand, or because start-ups can’t obtain financing for their new ventures.  A robust recovery must include much more hiring so that enough jobs are created to employ new graduates and the long-term unemployed.  This won’t happen if the labor market remains as sluggish as it has been since 2008.

Unemployment and Education Snobs

Steve Rattner presented another interesting set of charts on Morning Joe yesterday.  The charts showed how the unemployment rate and average pay are related to educational attainment.  This is an uncontroversial topic for labor economists; when workers lack marketable skills unemployment is a likely outcome.  For many jobless workers chronic unemployment will continue until they acquire more training and/or education.

The following chart caught my eye.  The current unemployment rate of workers with less than a high school diploma is over 14%, and much higher than the rate for more educated workers.

After seeing this chart and others like it, the guests and hosts on Morning Joe took the easy route and derided Rick Santorum’s comments about education snobs.  I would have been much more interested in a discussion of the following facts:

• The unemployment rate is 17.6% for native-born men age 25 to 64 with less than a high school diploma.
• The unemployment rate is 9.8% for foreign-born men age 25 to 64 with less than a high school diploma.
• Foreign-born men account for 57% of the employment of men age 25 to 64 with less than a high school diploma.

Most unskilled jobs that do not require a high school diploma are now held by immigrants.  About 2 of 3 employed male immigrants who lack a high school diploma were born in Mexico and more than 5 of 6 are from either Mexico or Latin America.

Workers without a high school diploma have a difficult time finding a job and many of the available jobs are unpleasant and involve manual labor.  Although immigrants from Mexico and Latin America are typically less educated than American workers and face language barriers, they have lower unemployment rates than workers who were born and educated in the United States.  This is an indictment of our education system and our opportunities for vocational training.  It’s time to address our poor record of educating and training the next generation of workers, especially for students who are unlikely to receive a college diploma.

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.