How Much Slack in the Labor Market Today?

PGL at Angry Bear points me to Rex Nutting, who summarizes Katherine Bradbury's calculations on what the unemployment rate would be if labor force participation were behaving "normally":

Joblessness understated, Fed study says - Economy - Bond Market: Labor force participation rates have not rebounded By Rex Nutting, MarketWatch: The current low U.S. unemployment rate probably understates the true level of joblessness by 1 to 3 percentage points, the senior economist at the Boston Federal Reserve says. Millions of potential workers who dropped out of the labor force during the recession four years ago have not returned as expected and are thus not counted in the official unemployment statistics, said Katherine Bradbury in a paper published by the Boston Fed. The jobless rate fell to 5% in June the lowest level since the terror attacks of September 2001.

Labor force participation rates "have not recovered as much as usual and the discrepancies are large," she wrote. "Current low rates of labor market participation thus potentially represent considerable slack in the U.S. labor market," she wrote. The amount of slack in the economy is a key variable for Federal Reserve policymakers, who have been raising interest rates for more than a year to return rates to "neutral' levels. All things equal, the more slack in the economy, the lower rates ought to be.

Some policymakers have argued that the economy is close to full employment with the jobless rate at 5%, thus justifying higher rates to pre-empt inflationary pressures from building in a tight labor market. While the official unemployment rate has fallen from a peak of 6.3% in June 2003 to 5% in June 2005, the labor force participation rate remains close to 15-year lows of 66%....

All of the improvement in participation rates during this recovery has come from people over 55, as more relatively healthy Baby Boomers enter this cohort. At the same time, participation rates for teenagers have fallen to 44% after averaging more than 50% during the 1990s boom. If labor force participation rates had improved as much during this recovery as typical, between 1.6 million and 5.1 million more people would be in the labor force, Bradbury concluded. If those people were counted in the labor force but not working, the jobless rate would have been somewhere between 6.5% and 8.7%, rather than the 5.4% reported by the Labor Department in the three months from November 2004 to February 2005. "An 8.7% unemployment rate would represent considerable slack in the labor market," Bradbury said.

http://www.bos.frb.org/economic/ppb/2005/ppb052.pdf

As I say often, the pattern of long-term unemployment, labor force participation, anemic real wage gains, payroll employment numbers, and the behavior of weekly hours all suggest a weak labor market with considerable slack and unused labor resources. Only the unemployment rate tells a different story.

Why the unemployment rate tells a different story remains a great mystery.

Comments

[pgl]

I typed her name as Katherine originally too and then notices she spelled it Katharine. It seems Rex typed it as Katherine. Regardless of how she spells her name, a nice job of charting the data.

[rex]

My apologies to Ms. Bradbury.

[Cassius Chaerea]

>Why the unemployment rate tells a different story remains >a great mystery.

Now, class, can we spell our word for today?

"O U T S O U R C I N G"

[PaulC]

No, silly. Obviously the reason people are out of the labor force is because they're making so much money already buying homes at low interest rates, selling them for a profit, and buying bigger homes.

In the future, there will only be two sectors of the American economy: home developers who continually tear down old housing stock and replace it with bigger, better houses, and homeowners benefitting from leveraged investments in ever-rising real estate prices who keep this sector going. The enormous wealth created this way will allow us to maintain our lifestyle by importing inexpensive consumer goods.

[Mr. Mystery]

I was replaced by two Russian programmers. No mystery for me.

[PaulC]

> The enormous wealth created this way will allow us to maintain our lifestyle by importing inexpensive consumer goods.

Oops, I meant to add "and by outsourcing all other services."

[Movie Guy]

"Why the unemployment rate tells a different story remains a great mystery."

Which is why I keep an eye on U6 unemployment. Seldom discussed, of course.

The rule of thumb I adopted some years ago is to double the "official" unemploymnet percentage. Closer to reality.

[JollyRoger]

Well well, yet another winger talking point is shot to pieces.

And El Shrubbo's lifetime record of 100% professional failure goes on unbroken.

[Electoral Math]

Big Picture's answer for this conundrum is that no one wants to say they're unemployed.

http://bigpicture.typepad.com/writing/2003/10/selfemployed_wo.html

If you're an unemployed software engineer, you're an not unemployed, you're "independent contractor". If you're an unemployed graphic designer, you're a "freelance web developer". If you're an unemployed trial lawyer, you're "putting your cases on hold for a while". If you're an unemployed construction worker, you're an "independent".

et cetera.

Since it would only take about 2% of those surveyed to fit into this bucket, it seems quite plausible to me that this is the case.

[a different chris]

>Well well, yet another winger talking point is shot to pieces.

Not really - check the source,it's from BOSTON!! Ohhhhh (make scary wiggling hand motions). Rick Santorum will be dispatched to show how the libertine atmosphere has affected the orginally born sinless senior economist at the Boston Fed. Hell, I bet we'll find this once-staid economist even participates in "Casual Fridays"!!!

It doesn't take much exposure to liberalism to turn even the most solid pillars of our communities into insensate America-Haters on the level of Hillary Clinton, so we must always be on guard.

At least until PATRIOT ACT II is passed, in which I think the problem is taken care of for us. Ah, the Freedom of Totalitarianism!!

[ken melvin]

I get it; anyone who is unemployed is trying to contract out their labor and is thus a contractor and thus is, of course, not unemployed. Thanks so much for clearing this up.

[Tom N]

I find it a bit odd that under-employent rates are high in the european and the japanese economy where population growth is negative while total gnp in those countries is at least mildly (mico'ly) positive.

I should think that a stable economy (not growing but stable) should at create some labour pricing power in services if the number of workers shrank in relation to the services demanded.

Is the decline in manufactoring outstepping increases in services? (and if so are GNP numbers cooked in those contry's? ). Is the measure of the economy "inflation(as in cpi inflation)" based so that in some way productivty growth accounts for the gap.

While increased good production certainly makes sense in counting gnp I suppose that points to the real issue...that GNP per capita in adjusted by money supply per capita would point more clearly at progress or lack therof.

Ceratinly if population grew quicker than GNP there would be no labour pricing pressure.

Similarly if gnp were overstated due to understatement of monetary debasement due to "inflation" figures that deem "inflation" more in terms of goods than of money per person, the econmy would not produce labour pricing pressure.

It seems to me, given convnetions of today, that only if {population growth= real-gnp growth + producity growth } would you have a balance in labour pricing power.

I am not making an argument against the social goods of productity growth (or arguing for a shorter work week to some odd notion of finite jobs around). It does seem to me that in examining labour issues productivity can't be simply subtracted from the real-wage and real- dollar factors in equations because of the way "real" is defined by baskets of goods.

[anne]

There is relative pricing power of labor in Europe and Japan for many societal reasons, and Japanese unemployment is low and falling. The problem is high unemployment is much of western Europe.

[RP]

Jim Glass - Maybe there wasn't, but given how bad that weak spot was, 8%+ sounds about right. If a tree falls, and no one is there to hear it, did it fall? Well, yes. ;)

[me]

"Hello?? Yet again we see "the late 1990s boom" labor market used as a base line for normal."

I worked my entire life from 14 to 53, never missed a week of work. Then, 3 years ago IBM sent my job to India. There are no interviews and there are no jobs, particularly here in Georgia. Take your participation rate and stuff it where the sun doesn't shine. And don't bother coming back and telling me with 4 years of grad school I need more training.

[anne]

ME

Agreed, the base line for normal is when we are able to wrk as we have prepared to work and given ourselves. I had hoped we set a new base line after 1995, and still imagine we did just that but there was a time of entirely different fiscal policy. Darn, the time was not an abberation.

[me]

Its not just me either. What do people like Jim Glas think is going to happen to the 20 or 25 thousand that are going to lose their jobs at HP Tuesday? And then let'e hear Bill Gates and that group with IBM and all whine about no qualified workers and why doesn't anybody want to study IT. No surprise. The problme is their IS nothing to go into right now.

[anne]

The point about unduly complaining about skilled programmers as programmers positions are lost, is important. I understand.

[ken melvin]

($600billion/yr deficit)/(2million jobs/yr) ~ $300thousand/job. Ain't supply economics grand?

[Tim B]

Actually, I found the labor market for programmers (well, embedded DSP programmers, anyways) to be smoking hot recently. I posted a resume in March and my phone didn't stop ringing for two months (and I have the $270 cell phone bills to prove it - ouch). Many of my former coworkers discovered the same thing - around 20 of them from a group of 80 split for other opportunities.

Tim

[Jussi]

Anne:

"The problem is high unemployment in much of western Europe."

And in eastern Europe.

[Jussi]

"Why the unemployment rate tells a different story remains a great mystery"

It's the most-read 'suffering index', and therefore the most manipulated.

'Low-suffering' = 'good government'.

[cm]

Tim B: Niche skills in current demand is always a good thing to have. At least when they translate to keywords on the resume that recruiters are grepping for. And not being "branded" (or perhaps burnt) with the wrong keywords.

The larger truth is that for most SW jobs, the job description is overspecified & oversold, partially in the attempt to create some glamor to attract candidates or entertaining fantasies about what grandiose future projects will be considered, and any bright, competent, and experienced generalist will be at least an OK fit. Much of things are less rocket science than people would want to admit.

Companies are looking for the mythical cream, thinking they will find it in today's buyer's market, but don't even make the effort to look properly. (Or allow their hiring managers the time to do so.)

[obelus]

I think the high real unemployement is created by the dampening factor employer controlled health care benefits and 401Ks are having on the labor market. If these were shared, fixed expenses, we would see something more resembling a true market. Employers have a God complex. They think they have to administer providence to those in their employ by fiat. They are rightfully cautious in doing so. Where permitting, they seize on the chance to outsource where the loaded costs are easier to budget.

But if U.S. employers had their druthers and were freed from the demands and loaded costs of providing health care, unemployement insurance, defined or deferred benefits, and the whole spectrum of these costs, and instead these costs were shared at the federal, state, and municipal level to some degree, there would be an upsurge in employment as the U.S. would reclaim its rightful place as a world leader in productivity. The productivity, dampened by the growth of ancillary costs, would expand. The world is a ready market for what we have to produce notwithstanding what some would have us believe.

Unless we radically revamp our approach to producing and selling our goods and services, we will continue to recede as a force of industry and productivity on a national scale. We will slowly become a third world entity regardless of our bravura and hubris.

[Peter Waksman]

Not an economist but a person frequently unemployed over the last several years let me ask a simple question: why don't they integrate the unemployment rate, as reported monthly, over time and subtract the integral of hiring numbers? So

Num employed at time B = num employed at time A + integral(new hires) - integral(unemployment rate)

Why cannot someone give us a simple graph of this starting - say- at the beginning of Bush's presidency?

[me]

Tim B.

That is how this economy has operated for the last 5 years. 25,000 people lose there jobs and 20 people find one. That is hardly a ringing endorsement for a booming labor market.

[save_the_rustbelt]

"Why the unemployment rate tells a different story remains a great mystery."

Large numbers of low value retail, food and service jobs.

People take what they can get.

"Do you need a cart today?"

[cm]

Peter Waksman: If everything could be measured perfectly, your model would give us the same information as the establishment survey. Only it would be harder to harder to track the data.

No?

[wally]

Theres a lot of talk here about outsourcing and computer programmers here, but the meat of the report is that most of the action with LFP rates is with young people, teenagers especially, which jibes with my own priors. Lots of people (young men, especially) seemed to be leaving school early to get good jobs in the hot labor market of the late 1990's. That was probably the smart bet if you believed that the wage growth of 1990's was a permanent thing instead of a bubble. But when it turned out to be just another business cycle, a few more years of education, in restropect, would have been the better move. If teenagers are dropping out of the workforce to stay in school, might not be that a GOOD thing?

[Bill]

The last regular IT work I had was 2/01, too bad I never saw the money for the last 6 weeks of work. And, working as a freelancer, I was uneligable for unemployment, so I never made it into those stats.

Things looked like they were starting to pickup 9/01, then 9|11. Since then, I've heard the phase 'Looks like things are starting to pickup' every eight or nine months, but I haven't seen it myself.

One job posting that I was planning on submitting a resume to disappeared. I was able to located it in my systems cache and submitted the resume. I later found out that they had received 300 resumes within hours of the posting and had it removed. I heard someone offered to pay his own way from Toronto to Long Island (~500 miles) to interview.

A friend was able to get me interviews at his company. After my fourth interview, I learned they decided to go with an entry level candidate (instead of my 15 years), apparently that person lasted a month before they were dismissed.

Nothing scientific, but my own observations seem to indicate sales people, unionized civil servants and homeowner seem to be more upbeat about the economy. Although homeowners are now realizing their net worth is on paper, yet their tax increases are real dollars and are becoming less enthusiastic about the economy.

IT, forget about it. Retrain, sure but what industry?

'Good thing the economy is doing so well'

[Rose Anne DeCristoforo]

One subject left out of this discussion is the declining health of Americans, especially, in relative terms, our young people. The autism epidemic (over 500% increase in 10 years) is simply the tip of the iceberg. Young people who work for me, most of them students at one of our country's top universities, are chillingly conversant with the terminology of disability; as in.."oh, he's ocd,"...or, "I'm ADHD,"..or "my boyfriends have all been bipolar." In a twist that serves to make their world work for them, their culture grants a certain status to certifiable abberations.

These kids are also experiencing an epidemic of depression, one that seems to be touching the entire American population. The local university health care center prescribes prozac as if it were aspirin...

A young MD told me his experience of the world, based on the people he sees every day in his family practice, is "nothing but fat, depressed people...I swear, they're lined up from here to New York City." (We're in California.)

I think employers find it is easier to hire healthy, energetic immigrants, some of whom do not show up on payrolls, than to deal with the mental and physical fatigue that many Americans are burdened with. This has got to be about diet and nutrition, ...maybe an economy, like an army runs on its stomach.

[Rose Anne]

One subject left out of this discussion is the declining health of Americans, especially, in relative terms, our young people. The autism epidemic (over 500% increase in 10 years) is simply the tip of the iceberg. Young people who work for me, most of them students at one of our country's top universities, are chillingly conversant with the terminology of disability; as in.."oh, he's ocd,"...or, "I'm ADHD,"..or "my boyfriends have all been bipolar." In a twist that serves to make their world work for them, their culture grants a certain status to certifiable abberations.

These kids are also experiencing an epidemic of depression, one that seems to be touching the entire American population. The local university health care center prescribes prozac as if it were aspirin...

A young MD told me his experience of the world, based on the people he sees every day in his family practice, is "nothing but fat, depressed people...I swear, they're lined up from here to New York City." (We're in California.)

I think employers find it is easier to hire healthy, energetic immigrants, some of whom do not show up on payrolls, than to deal with the mental and physical fatigue that many Americans are burdened with. This has got to be about diet and nutrition, ...maybe an economy, like an army, runs on its stomach.

[me]

"But when it turned out to be just another business cycle, a few more years of education, in restropect, would have been the better move. If teenagers are dropping out of the workforce to stay in school, might not be that a GOOD thing?"

Going along with what bill's post, I would argue that education is a waste of time. Do you belive those 25,000 people being fired at HP are teenagers or college drop outs, or are they in their mid-50s, approaching retirement?

When someone on here says what to get more education in I may change my mind, you will notice in thread after thread when someone says retrain for what, they never receive an answer.

One issue is that the new "contractors" that are doing the same job they used to have as an employee are not counted in the statistics when they are fired.

Another issue is tht companies in China, India, Japan, Ireland, Brazil are creating jobs in their countries. The companies in the US are also creating jobs in thsoe countries and NOT here.

[cm]

me: My understanding is that unemployed contractors should show up in the household survey, at least the unincorporated variety, i.e. who work under their own name and not through a business, which should be true for most of the employee-without-benefits fake-independent-contractor variety. Provided they do classify themselves as unemployed, and not as "between clients".

[cm]

me: Perhaps I misunderstood you, and you meant that employees "converted" to contractors don't show as unemployed. That's true, but then the term employment is somewhat overloaded. They should disappear from the "employee" category of the CES though.

Not a nice fate anyway if it is involuntary. I presume it roughly means same nominal pay rate but no benefits. Perhaps a "generous" adjustment for FICA plus some.

[cm]

Rose Anne: I cannot imagine this is a in any way a significant reason for the widespread use of visa workers in the recent past.

There are more compelling reasons:

* the "indentured servitude" effect with work visas tied to a single employer or else the threat of deportation (as long as the Greencard doesn't arrive)

* qualified people from regions with little opportunity accepting subpar salaries (at least a significant enough part of them)

* enlarging the workforce pool (demand/supply)

* combination with offshoring (cycling people through the domestic office for training)

* ineffectiveness of recruiting departments ("HR == Hiring Roadblock") aka "we cannot find qualified locals"

[DRDR]

Greenspan panned this study yesterday when Rep. Frank brought it up. http://www.boston.com/business/articles/2005/07/21/chief_disputes_labor_study_by_boston_fed_economist/