Friday, March 12, 2010

The Labor Market is on the Mend

The labor market in the United State is clearly on the mend.  The number of job losses per month is now negligible (probably—see my post on the effects of the snow storm here). and unless the economic outlook deteriorates substantially we are likely to see outright gains in employment in the months to come.  Nonetheless, detailed labor market continues to point to a tepid recovery in terms of overall growth rates.

The latest JOLTS data from the BLS confirms some healing in the labor market.  The black line in the figure below shows the separation rate adjusted for quits through January 2010.  (See my description of this data here.) The separation rate has now returned to its post-2000 average.  With fewer employees losing their jobs each month, the economy is likely to continue on the path to recovery.
Lower fire rates signal economic growth for two reasons.  First, the decline indicates firms are comfortable with the current size of their labor force.  These firms, at the least, foresee stability in future output.  Clearly, the actions of firms are far more important for assessing their outlook than the responses they give to the various confidence surveys.  Second, the reduction in the fire rate indicates positive consumption growth.  The growth comes through two important channels. 

First, the reduction in the fire rate indicates lower aggregate employment risk.  The lower risk decreases the precautionary motive of households, lowers savings rates, and increases consumption.  Second, and far more important, the number of households involuntarily loosing their jobs declines.  Households with a sharp reduction in income consume less.  So, with fewer households losing their jobs this important drag to growth diminishes.  [Note:  unemployed households do not consume appreciably more.  But the drop in their consumption has already been incorporated in the National Income Accounts.  The fact that they are still not consuming has zero effect on the growth rate of consumption.]

That’s the good news.  The labor market is stabilizing and growth should resume. 

The bad news:  Weak is not strong enough of a word to describe the likely recovery.

The picture below adds the hire rate to the previous graph.  The hire rate has shown no indication of improvement.  The lack of improvement in this rate is quite interesting and is in conflict with the data from initial claims, which have improved from 700 thousand jobs per week to a little under 500 thousand per week.  The current gap between the hire rate and the average hire rate since 2000 represents a shortfall of 1.2 million jobs per month.  This is an unbelievably large number. 

To put this in perspective, the jobless recovery following the 2001 recession was characterized with the separation rate near average and the hire rate near average.  The previous “jobless recovery” had job growth of between 50 and 200 thousand jobs per month.  This leaves room for the current jobless recovery to occur in an environment with only small average job losses per month.  (Small average losses per month imply that the variability in the survey will allow some positive months.)
The low hire rate also implies that firms do not see a particularly strong recovery.  While firms are content with their current workforce, they do not, as yet, see a sufficient increase in demand to warrant an expansion of their labor force.  This bodes ill for investment going forward as well.  Firms that do not need new people also, likely, have little need for new equipment. 

So, the low hire rate implies subdued growth for two reasons.  First, the data implies little or no investment growth going forward.  Typically, during a recovery, investment grows robustly contributing substantially to growth.  Second, the data implies that movement from unemployment/out-of-the-labor-force will be extraordinarily slow relative to typical recoveries.  People who move from unemployment to employment (low income to high) increase their consumption substantially.  This channel is a drag on consumption growth. 


The labor market is healing but is far from normal, even when normal is compared to the weak job market of the last ten years.  The U.S. economy faces serious structural problems going forward.  The number of unemployed people is likely to stay at depression levels for a long period.  [The unemployment rate is still likely to fall.  People will exit the labor force rather than continue to report themselves as unemployed.]

The current social safety network is ill-equipped to handle large numbers of semi-permanently unemployed people.  The United States is going to have to make some hard choices on how to handle this social problem.  The solutions must balance the welfare of the unemployed against the need to maintain incentives to seek employment.  Further, these decisions are going to have to be made in an environment of slow revenue growth.

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