Unemployment Insurance Claims: Healing Slowly but Surely.

The following graph compares the 4 week moving average of initial claims from the 2007 peak with the one from the 1981 recession.  As you can see, jobless claims have been much more persistent than in previous recessions.

The blue line is from the 2007 and the dashed red line is from 1981.  The x-axis is in weeks after the peak. As the graph suggests- we still have a ways to go before we get back to normal levels but what it also shows is that much healing has already taken place.  This is undoubtedly good news for fridays Employment Situation.

Keep Dancin'

Steven J.

Civilian Unemployment: Persistence

Today the Civilian Unemployment numbers were released and all they did was verify one thing- that recoveries in the United States since 1990 have been jobless ones.  Check out the following graph which takes every post WW2 recession and averages their numbers from peak to 27 months out. Notice that this one has the greatest persistence of all of them in terms of a high unemployment rate.

Additionally check out the next graph which just uses the recessions from 1990 and beyond. These are all the recessions that have been characterized by jobless recoveries. The thing to notice here is not the level of the unemployment rate, but that in these recoveries the unemployment rate also failed to drop significantly 27 months or so after the peak.  This recession has been deeper (a cyclical factor) which explains why unemployment is so freakin' high, but unemployment being persistent has nothing to do with cyclical factors- yet it seems more structural reforms may be necessary.  This isn't house lock people this is something more than that. This is the structure of unemployment benefits and the nature of profit seeking firms, that want to please shareholders.  Being lean and mean is attractive for companies that face constant uncertainty, especially when growth would be a miracle occurrence.

The last graph shows that while unemployment does still remain stubbornly high at least it is falling.  Although this may be because people are just plain dropping out of the labor force.  A closer look into the Employment Situation would be necessary to reveal the details.

keep dancin'

Steven J.

Job Search Part 3: Modeling A Recession with Unemployment Insurance Benefits

Let's look at what happens in a recession spurred on by an adverse financial shock (most of the search literature would say that recessions are caused by productivity shocks which fits in nicely with labor market dynamics.  I have chosen to instead attribute this recession to a financial shock which is substantially more realistic and at least graphically still consistent within this framework). Say that a financial shock occurs, maybe a series of bank failures makes financial institutions more risk adverse and less likely to lend.  Firms that have to borrow money from commercial banks in the commercial paper market may find themselves in a squeeze as liquidity dries up (Some  companies maintain day to day operations by borrowing from the commercial paper market).
Figure A: Downward shift in Vacancy-Suppy curve Lowers Labor Market Tightness, θ

Businesses have to cut back and hire less people than previously anticipated. This can be witnessed in Figure A where the vacancy-supply curve shifts downward from VS1 to VS2. We move from point A to B and workers face a lower market wage (w* to w1). As Figure B demonstrates the decrease in labor market tightness rotates the job creation curve clockwise from JC to JC1.
Figure B: Downward Rotation of the Job Creation curve increases Unemployment

The rotation happens because the job creation curves slope which is labor market tightness θ, is now less than before so we move along the Beveridge curve from point A1 to B1. The vacancy rate declines from V* to V1 and the unemployment rate increases from U* to U1.

          In recessions, more workers find themselves in the pool of unemployed and tap into unemployment insurance to sustain their consumption levels while searching for new employment. With unemployment insurance benefits workers find themselves in a better position when unemployed which allows them to negotiate a higher wage. As a result, firms have a lower incentive to open vacancies because they would make lower profits off of them. As witnessed in Figure C this results in a rightward shift of the wage-setting curve from WS1 to WS2 and movement along VS2 from B to C. The resulting increase in unemployment benefits increases wages but reduces market tightness from θ1 to θ2. Workers claim a higher wage because the cost of unemployment is lower. Higher wages induce firms to create fewer jobs and lead to reduced labor market tightness. 
Figure C: Rightward Shift of Wage-Setting Curve

As Figure D demonstrates the job creation line rotates clockwise from JC1 to JC2 as we move along the Beveridge curve from B1 to C1 thus reducing vacancies and increasing the unemployment rate. Wages increased from w1 to w2 and the unemployment rate increased from U1 to U2. 
Figure D: Clockwise Rotation of JC curve and an Outward Shift of the Beveridge curve

Increases in the generosity of benefits, either through increases in benefit levels or the duration of benefits, seem to lengthen the unemployment spells of unemployment insurance recipients (for more information on Unemployment Insurances effects on unemployment please refer to Babcock, Congdon, Katz, and Mullainathan (2010)).
          As previously stated, more generous unemployment benefits like extending unemployment insurance to 99 weeks, also slows down the time it takes to match workers and firms. Individuals may not be all too optimistic when they form expectations about wages and consider their possible employment opportunities. This negative bias will cause many unemployed workers to be more lackadaisical when searching for a job and search with a lower intensity because they have more time till their income stream dies out (empirical work by Krueger and Mueller (2008) supports this claim as they find, using time use data, that across the 50 states and D.C. job search intensity is inversely related to the generosity of unemployment benefits with and elasticity between -1.6 and -2.2).
Furthermore, workers tend to set inefficiently high reservation wages in response to more generous unemployment benefits. When given the false sense of confidence and self worth brought on by more generous benefits the unemployed become more selective in terms of the type of job and wage they will accept (although, Krueger and Mueller (2008) find that the predicted wage is a strong predictor of time devoted to job search with an elasticity in excess of 2.5).
          Because of these effects the Beveridge curve BC1 shifts outward to BC2 along the job creation curve JC2.  This means that for the given labor market tightness θ2 we have a greater number of vacancies and a higher unemployment rate.  In Figure D above we move from C1 to D1 as unemployment increases from U2 to U3 and the vacancy rate settles back at its previous level, V2. One important fact to realize is that the shift to BC2 is only temporary because those unemployment insurance benefits can't last indefinitely.  When unemployment insurance benefits get close to expiring, logic would suggest that the unemployed would pick up their searching intensity as they realize that time is running out. In fact, research by Krueger and Mueller (2008) tells us that job search intensity for those on unemployment insurance increases prior to benefit exhaustion. This increase in search intensity would shift the Beveridge curve back to BC1.

Initial Claims for Unemployment Insurance and the Business Cycle

The reliability of initial claims in predicting employment fluctuations depends on the state of the business cycle.  While generally very useful in forecasting employment during recessions, very early on in recovery however, they lose their predictive value.  This is because initial claims for unemployment are an important measure of layoffs, but changes in overall employment depend on both layoffs and hiring. 

Employment can fluctuate for one of three reasons: firms are hiring workers, firms are laying off workers, or workers decide to quit.  Claims provide us with a window into the layoff side of the labor market, but in order to paint the whole picture we need to also analyze the other main component- hiring- over the course of the business cycle.   

During recessions a strong inverse relationship exists as initial claims rise and hiring receeds.  During upturns, however, the systematic relationship between claims and hiring found during recessions virtually disappears, suggesting that layoffs are being driven by factors that differ from those driving hiring decisions.  Since hiring overshadows claims and claims move independently of hiring, claims alone cannot tell us much about the overall direction in employment. 

Thankfully, economic theory does not leave us hanging.  Because training new employees can be expensive, firms are often reluctant to fire workers as a way to cut costs and will tend to do so only when no other option is available.  During expansions, when hiring rates are high, firms are more likely to adjust to a slowdown in economic activity by hiring fewer workers than by laying off existing workers.  In contrast, during recessions, many firms seek to reduce the number of employees on their payrolls.  In implementing such cutbacks, these firms will be forced to hire fewer new workers and to lay off part of their existing workforce.

In light of this information we should be looking at hiring to determine where employment will be heading, not just initial claims.  So even though initial claims came in under 400,000 all that really means is that firms are laying off less workers versus hiring a ton of new workers.  Here is a graph of total private hires (right axis in thousands) vs. a 4-week moving average of initial claims (number on left hand side).  

Although hiring has yet to come up significantly it is important to note the data cuts off after october so it maybe misleading.  Nonetheless even with 'fresher' data we could still assume that we have a long way to go before our precious unemployment rate is brought down.  Another important indicator to look at when deciding whether the employment picture might turn is average weekly hours, but I'm feeling too lazy to put a graph of that up.        

References:

All the data for my graph came from FRED (Duh!).

McConnell , Margaret M. “Rethinking the Value of Initial Claims as a Forecasting Tool”. From the Federal Reserve Bank of New York’s Current Issues In Economics and Finance; November 1998, Volume 4/Number 11. 

Initial Unemployment Claims: Still Super High

Initial claims for unemployment insurance remains super high like Oakland, California:

This is super bad. The number of people filing for unemployment benefits has remained at a high level which is a sign that our economy is still feeling the pain.  Initial claims are still above 400,000 which is indicative of an economy that's still losing steam (womp! womp!). 

The Employment Situation and the Double Dip

Markets reacted wildly to the disappointing employment numbers released by the BLS yesterday. The Dow dropped 323 points to a new year low and mass panic about the stability of the recovery has ensued. Economist reactions included disappointment and fear as the jobs report indicated an extremely weak recovery. The number looked at most was the monthly change in non-farm employment from the establishment data. This data usually does generate excitement in the bond and stock markets because it provides the strongest evidence as to whether the economy is creating jobs. It is important to look at total private job creation as that is the best indicator of the economies true direction. If you looked at just the total non-farm you would have seen that 431,000 jobs were created in May. This is misleading however because 390,000 of those were jobs created by the government (temporary Census workers) and only 41,000 created by the private sector. This number was terribly disappointing because it was down from 218,000 private sector jobs created in April which indicates that the economy is slowing down. The markets should have also looked at the slowly increasing average weekly hours which signals that business may accelerate hiring in the distant future. Delving deeper we see that overtime hours are in fact rising and have broken the 4 hour mark in May. Rising overtime hours is a precursor to new permanent hires because overtime can be quite costly for a company. Traditionally less than 4 hrs a week for a few months has indicated that layoffs may increase while above 4.5 hours usually indicates that increased hiring we be coming around the corner. Another thing to look at is weekly claims for unemployment insurance which has shown an ability to predict when the economy approaches a turning point. Initial unemployment insurance claims have been steadily falling since its peak in early 2009, but has seemed to level off around 460,000 which indicates that the economy is still weak and in danger of slipping back into contraction (possibly a double dip). A general rule of thumb is that when first-time claims stand above 400,000 for several weeks the economy may be in danger of slipping into a recession. A number below 400,000 suggests a recovery in underway and companies are laying off fewer workers.The above graph shows the two recessions of the early 1980's where initial unemployment claims originally leveled off slightly above 400,000 before the economy slipped into another contraction. I have a feeling that maybe the same thing will happen in the most recent scenario given that the economy is still in a very fragile state.