Detroit Unemployment

Todays graph will be highlighting how much this recession has impacted unemployment in Detroit versus the recessions of 2001 and 1990.  As you can see unemployment has risen and remains unholy.

Detroit has been hit particularly hard due to the already struggling automotive industry, so the recession just brought about more reasons of layoffs.  The last four unemployment numbers have been very positive however.

Keep dancin'

Steven J.

Job Search Part 4: Timing Beveridge Curve Movements During A Recession

This economics blogger feels like he would be cheating the reader if he did not include recent work done by Barnichon and Figura (2010) on timing movements in the unemployment rate during recessions. That is why this is part 4 of my special 5 part mini-series on the modern job search and matching theory of unemployment. 
         In recessions there are a series of events that take place in the labor market. Unlike market-clearing models, real life agents are not in fact homogeneous and do react over time rather than instantaneously.  At the beginning of a recession, the Beveridge curve shifts out because of an increase in temporary layoffs.  A quarter later, a clockwise rotation of the job creation curve moves unemployment along the Beveridge curve as firms adjust vacancies. The Beveridge curve also shifts out further because of an increase in permanent layoffs.  One quarter later the labor supply reacts and the Beveridge curve shifts in slightly as quits decline but shifts out further as workers display a stronger attachment to the labor force.  What follows is a graphical representation of the logical pattern of events that takes place during recessions. 
Figure A: Increase In Temporary Layoffs

Figure A describes the very beginning of a recession when there is an increase in the amount of temporary layoffs. The Beveridge curve shifts out from BC0 to BC1 because of an increase in temporary layoffs. The vacancy rate moves from V* to V1 and the unemployment rate increases from U* to U1 as we move from point A to B.
Figure B: Firms Cut Back Vacancies and Job Openings

In Figure B, we are one quarter later in time and see firms adjust to the recession by cutting back the amount of job availability and vacancies. This lowers the amount of tightness present in the labor market which rotates the job creation curve JC0 downward to JC1. The vacancy rate goes from V1 to V2 and the unemployment rate increases from U1 to U2 thus moving from point B to C.
Figure C: Increase in Permanent Layoffs

In Figure C, we are still in the same quarter as Figure B.  Because of an increase in permanent layoffs we see  an outward shift in the Beveridge curve from BC1 to BC2 which results in the unemployment rate increasing from U2 to U3 as we move from point C to D.
Figure D: Slight Decline in Quits

Figure D depicts the 3rd quarter of the recession where labor supply finally reacts to this debacle. The Beveridge curve shifts in slightly from BC2 to BC3 as quits decline.  This is understandable, in recessions uncertainty about the future is elevated, asset prices fall broadly so the wealth effect has a huge say and a job is considered a luxury so people feel the maybe I'll put off retirement until later effect.  The unemployment rate moves from U3 to U4 as we move from point D to E. 
Figure E: Workers have a stronger attachment to the labor force

Figure E is also in the 3rd quarter and shows an outward shift in the Beveridge curve from BC3 to BC4 as workers show a stronger attachment to the labor force. We move from point E to F and the unemployment rate increases from U4 to U5.
          While only suggestive, this chain of events could indicate that labor supply responds to labor demand at cyclical frequencies. When the job creation curve rotated downward it was all labor demand, and since it remained flat shifts in the Beveridge curve translated to almost a full increase in the unemployment rate by the same amount. Although labor supply responds to labor demand when we experience high amounts of volatility (either during expansions or contractions) over the long-run however unemployment is driven by secular changes in labor supply, specifically the aging of the baby boomers and the increasing attachment of women to the labor force.


Modeling The Influence of Labor Demand on Unemployment


In the above section we followed Barnichon and Figura (2010) work and arrived at the conclusion that at cyclical frequencies (during recessions and expansions) labor demand was the prime driver behind movements in the unemployment rate. I sought to test their theory by estimating movements in the Beveridge curve and the job creation curve from 12/01/2007 to 08/01/2009.  Pictured below are my results.
Figure F: Labor demand did dominate any movements in the unemployment rate during the recession

The data in the above figure comes from FRED, JOLTS and the BLS.
The first job creation curve has a slope θ = .5272 which is the mean of labor market tightness observations from 12/01/2007 to 05/01/2008. The second job creation curve has a slope θ = .16194 which is the mean of labor market tightness observations from 03/01/2009 to 08/01/2009. The power function was chosen to estimate the two Beveridge curves. For the complete details on how I derive the job creation and Beveridge curves please refer to my paper which can be found in the first post on the modern job search and matching theory of unemployment. 
Figure F clearly shows that the increase in unemployment quite overwhelmingly stemmed from labor demand conditions as embodied by the downward rotation of the job creation curve.  Notice that the Beveridge curve failed to shift in any significant way over this time period. 

Relationships Don't Last Forever: A Story of Divorce

Economist's View recently pointed out the relationship between capacity utilization and unemployment.  This graph shows the relationship of capacity utilization vs. unemployment:

An increase in  capacity utilization is usually immediately followed by a decrease in unemployment.  Economist's View makes the claim that :

"That is, in past recessions an upturn in capacity utilization was matched by an upturn in employment, there was no delay in the relationship, but in recent recessions there has been about a half year delay before unemployment reacts to changes in capacity utilization (or perhaps even a bit longer)."

We can definitely see this delay in the 2001 recession.  Notice how capacity utilization turns up and unemployment is initially very slow to drop.  The argument is being made that we are going to see the same thing this time around, where capacity utilization rates improve but unemployment won't drop for at least half a year.

A look at housing starts vs. unemployment:

Residential investment usually pick up at the end of a recession but not this time because of excess housing inventory.  There are too many existing properties for sale so we are not going to see strong housing starts data for a while.  This may lead to a slow decline in the unemployment rate as a growing housing sector usually creates jobs.

Calculated Risk explains the following:

"Usually housing starts and residential construction employment lead the economy out of a recession, but not this time because of the huge overhang of existing housing units. After rebounding a little in early '09, housing starts have mostly moved sideways"

Is the Double-Dip Inevitable?

After I posted about the unemployment situation and the possibility of the Great Recession slipping back into contraction, I saw similar sentiment from around the blogosphere. Robert Reich of the RGE Monitor also believes we're heading back into recession. He looked at the job numbers as well, but made the claim that at least 100,000 jobs are needed each month just to keep up with population growth. Reich gives three reasons as to why the U.S. has avoided the double-dip until now:

"the federal stimulus (of which 75 percent has been spent), near-zero interest rates (which can’t continue much longer without igniting speculative bubbles), and replacements (consumers have had to replace worn-out cars and appliances, and businesses had to replace worn-down inventories)."

Another bad sign is that some of the insiders like the super-rich believe that a double-dip will indeed occur. Robert Frank of WSJ's Wealth Report, wrote that the super rich were buying gold again and how troubling that is. For additional support he points to a survey of the rich and super rich which found that 25% of those with a net worth of $15 million or more believed the global economy will deteriorate in the next five years, compared with an average of 17% of respondents with $1.5 million or more. His theory (and i tend to agree with him on all three points) is that:

"First, the wealthy have better information than most Americans, and that information suggests more bad news to come.

Second, the wealthy have more to lose (in pure dollar terms) than the nonwealthy. The risks of losing a fortune right now appear greater than the potential for building a fortune.

Third (and related to the second theory) the wealthy are making conservative bets with their money, avoiding bold trades and preferring to sit on cash. People who hang on their cash to preserve their fortunes are by nature going to be more cautious about the broader economy."

It will be interesting to see if all these rumors will become a self-fulfilling process as the economy's state is all of a sudden highly questionable. Macro Man is skeptical of the markets and economies ability to recover because the negatives seem to be overwhelmingly outweighing any positives, for example pointing to the recovery in manufacturing and how it's unlikely to be the miracle we're looking for. Macro Man is worried about all the problems in Europe becoming even worse as they brace themselves for epic disaster:

"In spite of the authorities the world over seemingly having thrown everything, including the kitchen sink at the problem, the market seems to have gone back to square one in the past couple of days. The panic in the EUR periphery not only continues unabated, but is now spreading to “soft-core” countries (Austria, Belgium, Finland) and France (welcome to the Club Med, Mr. Sarkozy)."

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.