Unemployment rate drops to 8.6%

The unemployment rate hasn't been dropping steadily, but it has been dropping. Today it was announced that it has fallen to 8.6%, from 9.0% a month earlier.

America slowly digging out of economic hole

The Aggregate Weekly Hours Index—one of the best measures of employment—shows that the U.S. is very slowly digging its way out of the recession. In the graph below, the blue line shows an index of the total number of hours that Americans are working per week. The red line shows an index of the growth in the civilian non-institutional population (i.e. civilians not in prison). As long as the blue line rises faster than the red line, it means that America's employment situation is improving.

Thank the government, in part, for the high unemployment rate

Sometimes when politicians try to help people, they hurt people:

The painfully slow rate of job growth can be blamed at least in part on home mortgage modifications that reduce house payments for struggling homeowners, because such policies incentivize people to stay where they are instead of moving to better job markets, according to a new paper by researchers Kyle F. Herkenhoff and Lee E. Ohanian, both at UCLA.

The paper is one among a growing number papers that explore why mobility has decreased so drastically through the recession, and what the effects have been. Most economists would agree that reduced mobility increases unemployment: When people don’t move, they deny themselves the chance to find work in a city or state where jobs are more plentiful.

Government confirms weak job market

As a follow up to yesterday's blog post about the interdependency between employment and housing, today's government employment data confirms a weakening job market:

After several months of strong job growth, hiring slowed sharply in May, raising concerns once again about the underlying strength of the economic recovery.

The Labor Department reported on Friday that the United States added 54,000 nonfarm payroll jobs last month, following an increase of 232,000 jobs in April. May’s job gain was about a third of what economists had been forecasting.

The unemployment rate ticked up to 9.1 percent from 9.0 percent in April.

A recovering economy is dependent on a recovering housing market, and vice versa

The economy and the real estate market are caught in a Catch-22 situation:

Home prices won't rebound until jobs come back. But jobs won't come back until the housing mess gets fixed.

That's a problem because both the housing market and the broader economy are having trouble getting back in gear. Hiring is losing steam, and after home values hit a post-boom low, many are projecting further price declines.

"The economy can move forward without housing," said Mark Zandi, chief economist with Moody's Analytics. "But I don't think it can flourish and create enough jobs to bring down unemployment in a significant way without a revival of the housing market." ...

Housing typically helps lead the way in an economic recovery not only through a surge of construction and the hiring that goes with it, but though demand for goods and services that go into forming a new household. ...

Doug Duncan, chief economist of mortgage finance giant Fannie Mae, is focused on the impact of jobs on housing — and vice versa.

"Our mantra all along has been employment, employment, employment," Duncan said. "Until you see employment growth and then income growth and then household formation, you don't get to the bottom of this." ...

On Wednesday, payroll processor ADP reported that hiring by businesses ground to a halt in May, raising concerns about the recovery in employment.

Here's more on the weak job market:

"The ADP Employment report coughed up a hairball in May," Robert Dye, senior economist with the PNC Financial Services Group, said in a research note, referring to a report by payroll processing company ADP released Wednesday.

That report showed private sector employers added only 38,000 workers in May, far lower than the revised 177,000 jobs added in April and much weaker than economists had expected.

That level of job growth is the weakest number since September. ...

The ADP report followed on the heels of an already disappointing jobs number released by outplacement consulting firm Challenger, Gray & Christmas on Wednesday morning.

According to that report, the pace of planned job cuts edged higher in May, as 37,135 jobs went on the chopping block — a 1.8% increase from April's planned job cuts.

But government sector layoff announcements dominating those numbers.

Yes, the minimum wage causes unemployment

Some math from the Political Calculations blog:

In terms of jobs lost, that means that 2,234,383 of the jobs lost in the U.S. economy since 2006 have been jobs that were directly impacted by the series of minimum wage increases that were mandated by the federal government in 2007, 2008 and 2009.

Interestingly, the average number of employed members of the civilian labor force in 2006 was 144,427,000. In 2010, the average number of employed members of the civilian labor force in the U.S. was 5,363,000 less, standing at 139,064,000.

So, in percentage terms of the change in total employment level from 2006 to 2010, jobs affected by the federal minimum wage hikes of 2007, 2008 and 2009 account for 41.8% of the total reduction in jobs seen since 2006.

Presidential Job Creation

I ran across this old blog post about presidential job creation by Paul Krugman and I thought it was time for an update. We all know that politicians are the ones who create jobs in America, right? Right?!

Well, here is a graph of job creation under four presidential administrations (with Reagan/Bush counted as one to make the graph easier to read).

Click on the graph to see a full-sized version.

Obama - solid blue
Bush, Jr. - solid red
Clinton - speckled blue
Reagan/Bush - speckled red

It's a good thing Barack Obama is saving jobs, because he sure isn't creating them!

In all seriousness, Americans drastically overestimate the influence presidents have on the economy. However, people who are inclined to view everything through a political lens will mistakenly think this graph has actual meaning.

Thoughts on unemployment insurance and the mean duration of unemployment

Harvard economics professor Greg Mankiw provides his thoughts on the optimal duration of unemployment insurance (UI) during an economic downturn:

UI has pros and cons. The pros are that it reduces households' income uncertainty and that it props up aggregate demand when the economy goes into a downturn. The cons are that it has a budgetary cost (and thus, other things equal, means higher tax rates now or later) and that it reduces the job search efforts of the unemployed. To me, all these pros and cons seem significant. I have yet to see a compelling quantitative analysis of the pros and cons that informs me about how generous the optimal system would be.

So when I hear economists advocate the extension of UI to 99 weeks, I am tempted to ask, would you also favor a further extension to 199 weeks, or 299 weeks, or 1099 weeks? If 99 weeks is better than 26 weeks, but 199 is too much, how do you know?

It is plausible to me that UI benefits should last longer when the economy is weak. The need for increased aggregate demand is greater, and the impact on job search may be weaker. But this conclusion is hardly enough to tell us whether 99 weeks is too much, too little, or about right.

The thought I've been kicking around recently is that the length of unemployment insurance should automatically adjust based on either the mean or median duration of unemployment. My hypothesis is that the economic optimum is likely within the range of 1x and 2x the mean (average) duration of unemployment.

The median duration of unemployment is currently 21.6 weeks. That means 50% of all unemployed workers are finding jobs within that span of time. (By comparison, the mean is currently 33.8 weeks.) When half of all unemployed workers find jobs within 21.6 weeks, providing 99 weeks of unemployment insurance seems a bit excessive to me. Sure, some people are naturally more employable than others. The less education people have, the higher their chances of being unemployed. College graduates probably find new jobs quickly while high school dropouts take much longer. For this reason, the mean is probably a better guide than the median.

I'll suggest a simple policy rule:

The length of unemployment insurance should automatically adjust throughout the business cycle. It should provide full benefits until 1x the mean duration of unemployment, then decline [not necessarily linearly] until being discontinued at 2x the mean duration of unemployment.

Because the mean duration of unemployment is considerably longer than the median, this will provide most unemployed workers with full unemployment benefits during the entire time they're unemployed. Those workers who don't find jobs will gradually be given stronger economic incentives to look harder and lower their standards. Workers who are still unemployed after 2x the mean duration of unemployment are significant outliers, and would be cut off, although welfare may still be available to them if they truly need it.

A downside to the rule above as stated is that it will tend to hit poorly-educated workers the hardest, because they are less employable than most workers. I'm not dogmatic about the rule. It's really just a suggestion. A simpler and more generous version would provide full benefits until 2x the mean duration of unemployment, ending with a sharp cutoff point. The key is that the length of unemployment insurance benefits should automatically adjust throughout the business cycle, using mean (preferably) or median duration of unemployment as a guide.

Let me also suggest a second policy rule:

The amount (i.e. dollars per week) of unemployment insurance benefits people receive should also vary throughout the business cycle. The amount they get should automatically go up or down in inverse proportion to the output gap, with the default level assuming an output gap of zero.

With this second policy rule, when the economy is weak payment amounts would go up, providing an extra economic stimulus; when the economy is strong, payment amounts would go down to incentivize the unemployed to take one of the many jobs available.

Update: Bentley University economics professor Scott Sumner writes in:

I favor a self insurance approach. Each worker contributes 10% of their income into a private UI account, which they can draw from when unemployed. Any funds not used can be allocated to retirement. This avoids the problem of UI acting as a disincentive to find work.

Economy continues to slowly improve

The economy continues to slowly improve, but today's payroll numbers were not as good as expected:

A flood of temporary Census workers in May led to the biggest jump in jobs in ten years, the government reported Friday.

Employers added 431,000 jobs in the month, up from 290,000 jobs added in April. It was the biggest gain in jobs since March 2000.

But Census hiring was responsible for 411,000 of May's increase in employment. Private sector employers also added 41,000 jobs in the period, well below the 218,000 private sector job gains in April. Government payrolls other than Census declined by 21,000 jobs in May, due largely to job cuts by state and local governments.

It was a disappointing number for private sector hiring, as economists surveyed by Briefing.com had forecast an overall gain of 500,000 in May. U.S. stocks traded sharply lower on the report, with the Dow Jones industrial average down more than 200 points in midday trading. ...

Despite the spike in hiring, the unemployment rate declined only modestly, to 9.7% from 9.9% in April. Economists had forecast it would decline to 9.8%.

Here is the year-over-year percentage change in payrolls:

Here is the year-over-year percentage change in aggregate weekly hours worked:

Here is the year-over-year percentage change in initial jobless claims:

Here is the official unemployment rate:

Unemployment rate by level of education

In case you can't read the legend, the education categories are:

• Less than high school diploma
• High school graduate, no college
• Some college or associate's degree
• Bachelor's degree or higher
  

Click on the graph to see the full-sized version:

I find it interesting to see that the typical unemployment rate for someone with a college degree is only about 2-3%.

From Calculated Risk.

January 2010 unemployment statistics

The official unemployment rate declined in January. It's still too early to tell for sure, but so far it looks like we're seeing the declining unemployment that occurs after a typical recession, rather than the "jobless recovery" of the previous two recessions. (The typical pattern after a recession is for the unemployment rate to decline. That pattern was broken by the previous two recessions when the unemployment rate rose for quite a while after the recession had ended.)


Payroll numbers suggest we lost 20,000 jobs in January. That's far better than the pace a year ago, but we need 100,000-200,000 job gains just to keep up with population growth. This graph shows the month-over-month change in payrolls as measured by the U.S. Bureau of Labor Statistics:


Here is the month-over-month change in payrolls as measured by Automatic Data Processing, a private payroll-processing company. I'm starting to favor the ADP data over the BLS data due to lower month-to-month volatility. As a reminder for conspiracy theorists, the ADP data does not come from the government.


Some economists consider aggregate weekly hours worked as the best measure of both unemployment and underemployment. For those of you who favor the U6 measure of the unemployment rate over the official rate because it takes underemployment into account, you should love the Aggregate Weekly Hours Index. Here we see that the pace of average weekly hours worked is showing continuing improvement, but it's still below zero:


Finally, some economists like to look at weekly initial unemployment claims because it is updated more frequently than the monthly statistics above. This graph shows the year-over-year percentage change. Notice it's currently below zero, which is a good sign.


For those of you on the east coast, enjoy the snow this weekend.

U6 is not the real unemployment rate

Cato says U6 is not the "real" unemployment rate.

I think U6 is attractive to permabears and "progressives" because it fits their pessimistic view of the world.

I don't think it matters whether you use U1, U2, U3, U4, U5, or U6, because they move in lock step with each other. Just pick one and stick with it. U3 is the official unemployment rate and is most widely reported.

What matters is not the unemployment rate per se, but the unemployment rate compared to the natural rate of unemployment (i.e. NAIRU, "full employment"). For U3, the natural rate of unemployment is about 5%, so when it's above that we know things are bad. If U3 falls much below 5%, inflation cometh. I don't know what the natural rate of unemployment is for U6, and I bet most people who insist on using it don't know either.

Is the economic stimulus effective?

Comparing the Obama administration's projections for unemployment when President Obama proposed the stimulus bill with the unemployment rate we have actually experienced, it's hard to say definitively that the economic stimulus package has "saved or created jobs."

Dark blue: projected unemployment rate with stimulus.
Light blue: projected unemployment rate without stimulus.
Red: actual unemployment rate.

Graph source.

December 2009 jobs data

Pundits are making a fuss about the fact that official December job losses increased from November's unbelievable numbers. Monthly job losses still show a longer-term gradual decline. (Source.)


Perhaps looking at ADP's private job loss numbers does a better job of putting the trend in perspective:


The official unemployment rate remained unchanged at 10.0% in December:


The year-over-year percent change in aggregate weekly hours worked shows an upward trend, although it's still below zero:


The year-over-year percent change in initial unemployment claims is below zero and continuing to improve:


So, while the widely-reported official data didn't look so good in December, other data shows the recovery is continuing.

A reminder for conspiracy theorists: The ADP data (i.e. the second graph) does not come from the government.

October 2009 unemployment and jobless numbers

The unemployment rate has reached the highest level since the early 1980s, rising to 10.2% in October 2009. The last time the U3 (official) unemployment rate was this high was April, 1983. (As a kid back then, it really didn't seem that bad—although I'm doing well now, too.)


Initial weekly unemployment insurance claims continue to improve—or more precisely, they are getting worse at a slower rate. This graph shows year-over-year numbers. Ideally, we'd like the YoY numbers to be below zero for an extended period of time.


The government's job loss numbers show a continuing, but slowing, contraction in the job market. Remember, we need monthly job gains of 100,000-200,000 just to keep up with population growth.


For conspiracy theorists who don't believe the government's numbers, here are the monthly job loss numbers as measured by Automatic Data Processing, Inc.

Unemployment to remain high for years

According to a survey of professional forecasters conducted by the Philadelphia Fed, the unemployment rate is expected to remain abnormally high for at least three more years.

When looking at the graph above, keep in mind that from the mid-1990s until 2007, unemployment generally ranged from 4-6%, with NAIRU (essentially the natural rate of unemployment) being about 5%. Furthermore, since 1947 there have only been three times when the unemployment rate exceeded 8%: the mid-1970s, the early 1980s, and now.

These numbers echo, but are worse than, a recovery prediction I quoted six months ago:

Even if the recession miraculously ended tomorrow, economists estimate that at least three years would pass before full employment returned and output rose enough for the economy to operate at full throttle.

Recession may not be over

Last month, as the unemployment rate took a reprieve from its upward spike, I speculated that the recession might be over. Friday's release of the August unemployment rate showed a resumption of the upward spike, suggesting that the end of the recession may be yet to come.

Here's a graph of the official unemployment rate over the past ten years. Gray bars indicate recessions:


Here's a graph of the official monthly job loss numbers during this recession:


For conspiracy theorists who don't trust the government, here are the job loss numbers from the private ADP Employment Report. Notice that ADP measures job losses in August as being roughly 50% higher than the BLS numbers:

Recession is ending; may be over

The number of new job losses continues to decline. Compare these U.S. Bureau of Labor Statistics job loss numbers with the numbers from Automatic Data Processing, which I published on Wednesday.


The unemployment rate is no longer spiking. It may drift upward at a slower pace if we have a jobless recovery, but the end of a sharp upward spike has historically been a sure sign of the end of a recession.


Weekly initial unemployment insurance claims peaked about a month ago. This graph shows the year-over-year percentage change for emphasis.


Finally, the bulk of the economic stimulus package is yet to be spent. That's a lot of money that will be dumped into the economy over the next year or two.

July 2009 ADP employment report numbers

Source: Automatic Data Processing, Inc.

It looks like the recession is slowly ending, but it will still take a while. Note that job gains need to be positive just to keep up with population growth. The government's numbers come out on Friday.

Has Obama's fiscal stimulus package been effective so far?

Back when President Obama was arguing for the fiscal stimulus package, his economic team created a graph forecasting the effects of the fiscal stimulus. The blue lines below show the expected unemployment rate with and without the fiscal stimulus. The maroon dots show the actual unemployment rate so far.

The fact that the unemployment situation is substantially worse than expected didn't prevent President Obama from bragging back in late May that, "In these last few months, the American Recovery and Reinvestment Act has saved or created nearly 150,000 jobs."

It is impossible to empirically measure how many jobs have been saved, so the "saved or created" numbers Obama uses are complete fabrications based on the White House's own shifting macroeconomic estimates. No matter how bad things get, Obama can always claim—without evidence—that things would have been worse, therefore he saved jobs. The gullible news media have been falling for it.

That said, the bulk of the stimulus package takes effect in late 2009 and in 2010, so we should not expect it to have had much economic impact yet.