Separations and Hires: Has the Recovery Stalled?

This post revises and updates my views from this post last March. 

The JOTLS data (find the data here) produced by the BLS gives the best insight into the current state of the job market. As Robert Shimer, a professor at the University of Chicago, showed some time ago, unemployment can go up either because workers become more likely to lose their jobs (the separation rate) or because unemployed workers have a more difficult time finding new jobs (the hires or matching rate). The BLS only began collecting data in late 2000, much too late for us to compare the current downturn to previous episodes. Bob Shimer, however, has computed separation and matching rates going back to 1947 (his data is here). The data is not strictly comparable but I think we can use the lessons from Shimer’s data and apply them to the current episode.

I have spent a lot of time working with his data lately. The cyclical behavior of matching and separation rates is remarkable and should provide the key to the next level of understanding in business cycle research.  The more I work with this data the more I feel like I am beginning to understand consumer behavior during recessions. 

Matching rates, the probability of finding a job conditional on unemployment, begin to fall well before recessions begin and continue to fall well after the recession ends. Separation rates tend to rise at the beginning of recessions and tend to fall well before the end of the recession. Not surprisingly, the worst recessions in the post-war era (1958, 1982) are characterized by large changes in both rates.

In every post-war recession, the separation rate returned to more-or-less its long term average 4-to-6 months before the trough. The fall in separation rates also coincides with a rise in consumption. Apparently, consumption begins to rise once employed households no longer fear unemployment – a rational outcome. Consumption rises before unemployment falls.  Unemployed workers continue to have trouble finding work long after the recession ends.  But, their consumption is small and stable.  Employed worker consumption rises. 

As a result of this research, I am beginning to have more faith in the signals emitted by the JOLTS data. First, take a look at the picture below. The picture shows the number of hires each month in the JOLTS data from late 2000 to January 2009. Amazingly, the number of hires began to fall as early as January 2006, the same month the housing market turned sour.  This data is consistent with the duration of unemployment calculated from the household survey.  The average duration of unemployment is now at a record high, implying a record low probability of finding a job conditional on unemployment. 

 This is the clearest piece of data I have yet come across to indicate that the collapse of the housing market was not a random event. The decline in hire rates reduces the permanent income of households. People realize that conditional on losing their job, new work will be harder to find. Households also seem to know that this trend tends to have long cyclical properties – a decline in the series today is likely to signal a long period of increasingly lower matching rates.

Of course, I want to know if the recession is over, or if the recession has yet to end, when it is likely to end.  Take a careful look at the very end of the hires graph.  Hires spiked upward July but have since fallen back.  Granted the fallback is only two months worth of data, but it is consistent with a labor market that tried to improve and then suffered a setback.  This is consistent with employment data (discussed here) and it is consistent with the picture from the separation rate. 

As I showed in March, the separation rate the total number of separations has been steadily falling since early 2007. This data alone would indicate that flows into unemployment should be falling, quite the opposite of our experience over this period.  Again, note the July bobble in separations.

To understand the labor market, separations must control for the voluntary versus involuntary separations. If I quit my job today, knowing I had a new job in the bag, I would show up first as a separation then as a hire.  We care only about involuntary separation. To get a better picture, subtract the number of monthly quits from total separations.  The resulting picture, shown below, gives a completely different view of the state of the labor market.

The level of separations in January 2009 was 35 percent higher than its 2001-07 average level.  Keeping in mind that half of that time period was during bad labor markets, this statistic is quite stunning.  The labor market has improved since January.  However, the recovery seems to have stalled and over the past 4 or 5 months the number of involuntary separations has achieved a plateau 17 percent above pre-recession average. 

This plateau also indicates a recovery stalled.  While we do not have a sufficiently long time series to know the behavior of this series in previous recessions, Shimer’s separation rates fall sharply before the end of recessions and remain low thereafter.  The high level of involuntary separations is not consistent with recovery.  This data is giving the same signal as initial claims data.  Initial claims are down sharply from their peak but remain extremely high compared to their historic average. 

Casey Mulligan, a Chicago economist, notes in his blog (and more recently here) that consumer spending is rising as is disposable income even as the job market continues to deteriorate.  In particular, he has been keen on noting the ongoing increases in personal income.  He does realize that personal income includes transfers (at record highs) from the government.  I don’t think Casey Mulligan would really believe transfers accompanied by an increase in debt are an actual increase in income. 

Nonetheless, even as current income continues to rise, the high separation and low matching rates have sharply reduced permanent income for households – they are faced with an ongoing high probability of job loss and amazingly low odds of getting a new job if they become unemployed.  And, labor income is far and away the largest portion of permanent income for the vast majority of Americans.