More on the Ins and Outs of Employment

I posted a while back on the ins and outs of employment (here). Today, I took a look the CPS Labor Force Status Flows, a publication of the BLS. This is basically the data Shimer used to compute his employment exit and entrance statistics. These data are timely and are released with the household survey.

The picture below shows the percent of unemployed agents finding a job each month. Think of the number on the vertical axis as giving the job finding probability for an unemployed agent. Using this data in January 1990, about 1/3 of unemployed persons found jobs each month. In the height of the ensuing recession, the odds dropped to about 0.22. During the expansion of the late 1990s, the rate reached 35 percent, only to fall once again in the 2001 recession. In March, this number hit a series low of 16 percent. Not only are people losing their jobs rapidly during this downturn, exiting unemployment is getting increasing difficult.
The next picture shows the number of months an agent can expect to be out of work conditional on unemployment. For most of the series, the average unemployment spell lasted between three and four months. The series reached a high in the 1991 recession and a low just before the end of the tech boom in 2000. The series reached a new record high in March: 6.2 months.

At the moment, one out of every four unemployed persons has been out of work at least six months. This statistic is going to get worse. There are currently 13 million unemployed persons. At current rates, that means 7.5 million of these households will still be unemployed next September. How high the unemployment rate rises depends on how many more people lose their jobs and how many of these workers leave the workforce.

The Relationship with Consumption

Imagine an unemployment spell of 6.2 months. How would you pay your mortgage? How would you feed your family?

High unemployment has a direct effect on consumption because the affected households are poorer than they were. They are poorer today because they don’t have jobs and they are poorer in the future because they are likely to reenter the workforce with a lower wage. The income effect is the obvious channel.

There is, however, a second and likely larger channel through which the jobs numbers effect consumption: there is a precautionary savings motive. Households face both an increased probability of job loss, and conditional on job loss, an extraordinary spell of unemployment. In response to this dual risk, employed households save.

The decrease in consumption is not what Keynes would call animal spirits. Rather, the decline in consumption is an optimal reaction to an increase in risk. The government should not work to change this response.