Different types of unemployment (it’s not the discouraged workers)
The unemployment rate fell by 1.2% in 2013. That doesn’t sound like much, but it’s the third biggest drop in unemployment since records began in 1948 (after 1950 and 1983.) It’s huge. And yet growth was mediocre. What happened? Let’s break it down:
U-1 fell from 4.3% to 3.6%
U-3 fell from 7.9% to 6.7%
U-4 fell from 8.5% to 7.2%
U-5 fell from 9.4% to 8.1%
U-6 fell from 14.4% to 13.1%
At first it looks like U-1 is the outlier, it fell much less than the others. U-1 measures those unemployed for more than 15 months. But in percentage terms it fell about the same as U-3, which is headline unemployment. First conclusion:
1. There is nothing weird about the decline in long term unemployment; it’s falling at the same pace as short term. (Yes, the amount of long term is unusually high, but I’m looking for what explains the huge drop in U-3 this year.)
In percentage terms the drop in U-4 is essentially identical to U-3. U-4 includes discouraged workers.
2. So discouraged workers tell us nothing about the huge drop in unemployment.
U-5 includes unemployed, discouraged workers and other workers who have not looked for work in the past few weeks. Let’s call them cheerful workers. Except they aren’t workers at all, so lets call these groups discouraged unemployed and cheerful unemployed.
3. In percentage terms the drop in U-5 was slightly lower, but nothing significant. That was because the number of cheerful unemployed stayed at 0.9%. Even so, U-5 is telling roughly the same story as U-3. So the big drop in unemployed is not an artifact of the narrow definition of unemployed. The drop in 2013 in the total number of people who want to work but are not working was large by any reasonable criterion. We really are moving toward the natural rate, albeit at a rate that is still too slow. Unemployment fell by 2.5% in 1983, for instance.
I find U-6 to be the most interesting of the categories. It includes everything in U-5, plus unhappy part-time workers. Finally we see something notable.
4. The number of part-timers who wish to work full-time stayed at 5.0%, which is a very large number. Given the big fall in both the short-term unemployed and the long-term unemployed, I find that surprising. It seems to me there is some sort of structural shift in the US economy that is pushing firms to move in the direction of part time jobs to a much greater extent than workers would prefer.
If there are any readers in the business community I’d be interested in hearing any ideas as to why this is. My hunch is that the U-3, U-4, and U-5 unemployment rates will return to normal levels by sometime in 2015, but U-6 will remain unusually high.
This data makes me skeptical that there are many millions of hidden unemployed just waiting on the sidelines to jump in when the recession is over. Maybe a million or so, but probably not many millions. This is one area I agree with Paul Krugman, who has also expressed skepticism about the economic equivalent what you might call “dark matter.”
The only constant in macro is change. And the long term change we are currently experiencing is very slow labor force growth. Not sure what’s causing it (beyond a small portion being explained by boomer retirements) but the fact that this is continuing despite a very rapid fall in unemployment during 2013 tells me that the pattern is unlikely to change anytime soon.
There are cyclical and secular problems. The US has both. Monetary policy primarily impacts just one of them.
PS. It’s quite possible that the recession drove millions of workers into a sort of “structural not in the labor force” stance (disability, early retirement, etc), but that’s not cyclical unemployment. To be unemployed (even under the generous U-5 standard) you have to WANT to work. My claim is that the cyclical problem really is gradually healing. The sticky wage model is still useful.
PPS. I’m willing to give Bryan Caplan $1.17 right now to take over his bet with Tyler Cowen, insuring him a risk-free profit of 17 cents. On the other hand since internet bets involve the danger of being victimized by alpha male-like grandstanding, perhaps Tyler will refuse to transfer his bet from the invariably polite Bryan Caplan to the much more annoying me.
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11. January 2014 at 14:02
There are many cyclical labor force dropouts that even U6 doesn’t account for. I know of two analyses of how many these are as a proportion of the total labor force decline:
http://www.cepr.net/index.php/blogs/cepr-blog/back-to-full-employment – claiming +/- 66% of labor force dropouts are cyclical
http://globaleconomicanalysis.blogspot.com/2012/10/charting-errors-in-bls-participation.html – claiming 76% of labor force dropouts are cyclical
both of which do imply there are millions on the sidelines in addition to the regular U3 unemployed.
11. January 2014 at 15:04
About 1-1.5% of the drop in LFP has been from long term trends and about 1-1.5% has been cyclical.
http://idiosyncraticwhisk.blogspot.com/2013/12/labor-force-participation-trends-and.html
I think it’s hard to describe what’s going on as cyclical or structural, because two policies are responsible for the majority of unusual unemployment and labor force behavior:
1) the 3 minimum wage hikes probably have subtracted 2% from total employment – about 1% as additional unemployed and about 1% as dropped from labor force.
2) I don’t think emergency unemployment insurance affected the labor force that much, but I think that, at least as of October/November, was still adding more than 1% to the unemployment rate.
I would call both of these policies structural issues that add frictions to the labor market. But, they both play out in a pro-cyclical way. Minimum wage creates a cycle by driving low wage workers out of employment, who then re-enter as the real minimum wage slowly retreats. ( http://idiosyncraticwhisk.blogspot.com/2013/12/more-on-minimum-wage-labor-force.html ) EUI inflates the unemployment rate during high unemployment periods.
So, there was some cyclical LFP movement, about what you would expect from a bad recession, and it would have been less (along with unemployment) if we hadn’t had these pro-cyclical policies.
11. January 2014 at 15:15
I strongly suggest you read this article:
http://www.washingtonsblog.com/2014/01/caused-crash-labor-participation-rate.html
The increase in non-participation (and underemployment) is largely concentrated in the under 35, people trying to start a career. Much of this is due to over 65 holding onto jobs as long as they can due to insufficient retirement funding. This is structural. Nor is it just the private sector. My academic friends report the same thing. Tenure grants are down, while tenured employees hang on longer.
Since you asked about hiring practices in the business community, there are many trends that make part time attractive for some jobs. Full time employees have high overhead – not just health insurance (though that is real), but also training. Skilled jobs require a lot of training, and college doesn’t cut it. Businesses prefer to absorb cyclical activity by asking high caliber employees to work harder in peaks, and compensating them extra. It’s more productive to get one employee to put in 60 hours than two to put in 40 hours. You’ve heard the old adage about adding programmers to a project? Yes, it more often than not delays the completion.
Likewise, we try to liberate our valuable employees from skill-less tasks by outsourcing (use temps or interns, if needed – they’re cheap compared to an FTE, and you can let them go when the work ends). (continued next post)
11. January 2014 at 15:27
At the same time, I’m incredibly skeptical of the official numbers. The economy has remained significantly stronger (in terms of retail demand) than the employment data would suggest. This ourperformance of retail demand has remained consistent for the last couple years. I would argue this is because the official employment data is missing large chunks of activity – the black or shadow economy.
http://www.washingtonpost.com/blogs/wonkblog/wp/2014/01/10/the-biggest-question-facing-the-u-s-economy-why-are-people-dropping-out-of-the-workforce/
I frequently read the 2 trillion dollar number bandied around – that’s pretty hefty. And many of us interact with the shadow economy often. Every time we buy something off of craigslist, for example, there’s a chance we’re operating in the shadow economy.
A few weekends back, I hired someone to fix a snowblower and paid cash, I suspect that this will not get reported. I asked the fellow (who had a thick accent) how many jobs he does. 10 to 20 a week. The job cost $150, and at other times of the year he repairs other small engines. Even if he gets 10 jobs a week (at 2 hours a job), he’s pulling in 1.5k for 20 hours of work. If he doesn’t pay taxes, that’s the equivalent to a gross income of 80k to 100k a year.
The cash economy has always existed – the family owned pizza place that only puts every other dollar in the register – but there has been a structural shift – information tech has reduced transaction costs massively and broadened the scope of search.
PS – yet one more reason to move to a VAT and cut income tax.
11. January 2014 at 15:41
Question…
In an NGDPLT world, how would the unemployment rate change over time? Would we have mini-recessions?
http://www.themoneyillusion.com/?p=12362
11. January 2014 at 15:46
I think that’s a risk free profit of $1.17.
11. January 2014 at 20:00
I suspect the part-time economy is a symptom of a shift in the job mix toward services and away from manufacturing. But that’s just a guess.
Doesn’t anyone maintain employment totals indexed by both profession AND part/full time status? That would answer the question immediately.
I do think there’s something to the idea that businesses are self-insuring against economic volatility by maintaining lean full-time staffing and using part-timers as a buffer. This behavior is likely correlated to businesses hoarding cash and paying down debt, which is also still going on. 2008 lives on.
Obamacare is another tempting answer, but probably too pat in this case. It matters, but not as much as the fear of economic volatility.
11. January 2014 at 20:18
The U’s move very closely together. I did a little more rigorous study of that phenomenon here: http://contraryneal.blogspot.com/2012/08/comparing-six-measures-of-unemployment.html
As far as factors causing firms to want to keep employees part-time, well, is there perhaps some new structural program which imposes a massive marginal cost to changing a worker from part- to full-time?
11. January 2014 at 20:40
“It seems to me there is some sort of structural shift in the US economy that is pushing firms to move in the direction of part time jobs to a much greater extent than workers would prefer.”
(Ok, I’ll bite. I try to avoid snark, but here we go.)
Hmm. This reminds me of another mystery from December, when 4-5 million people lost their health insurance policies, which they were willing and able to buy, and insurance companies were willing and able to sell, the year before. Some people suspected that a law that explicitly outlawed these policies might have contributed in some way, but we were told that, no, insurance companies change policy terms all the time, so the fact that the policies became illegal wasn’t necessarily responsible for their cancellation.
We are also told that raising minimum wages doesn’t have any employment effects. So, it would seem to follow that significantly raising the marginal wage of the 30th hour per week, hypothetically speaking of course, wouldn’t be expected to induce employers to shift full-time workers to less than 30 hours per week.
I guess that these are just two mysteries that we may never understand.
11. January 2014 at 23:24
How did you come up with exactly $1.17? 😛
12. January 2014 at 01:14
This data makes me skeptical that there are many millions of hidden unemployed just waiting on the sidelines to jump in when the recession is over. Maybe a million or so, but probably not many millions.–Sumner.
Gotta say, this time I disagree with Scott Sumner–although I am worried about the nearly 12 million Americans who get monthly disability checks from the federal government, and that is 8 million on SSDI and another 4 million vets. Returning vets are claiming disability at a 50 percent rate, and getting it. Disability benefit rolls dwarfs unemployment benefit rolls btw.
That said–and there should be a goal to cut disability rolls by half–there is just huge amounts of slack in the labor force, as will be attested by anyone who runs a want ad. Hundreds of responses are normal.
Not only that, we see that in boom times, more people are attracted into the labor force, as they find a job they can live with. That is a virtuous cycle–a stronger economy breeds workers, who help build a larger economy. The “work habit” become re-ingrained.
The civilian labor force is rough-cut 150 million. I guess 5-10 percent would like to work and can’t.
That roughs out to 7.5 million to 15 million people who want to work.
My guess is another 5-10 million would re-enter the work force in boom times. A great buffer, btw.
So indeed, there are multi-millions on the sidelines.
The upshot of this is that there is even less threat from the inflation bogeyman than MM’ers believe.
Actually, if Scott Sumner’s “only one million” want work estimate is correct, we are on the cusp of unit-labor cost spikes.
I don’t think so.
12. January 2014 at 06:10
We’ll get 30M+ re-rentering job market with GI / CYB:
http://www.morganwarstler.com/post/44789487956/guaranteed-income-choose-your-boss-the-market-based
We have a structural safety net problem. It will get worse, and then we will fix it.
The Internet puts unused assets to work, thats the entire theory of p2p.
The Internet wants to provide a certain kind of safety net, a certain kind of government, don’t fight the Internet.
12. January 2014 at 07:21
Scott – Here’s the prime age (25-54) participation rate. It’s fallen ~200 bps since 2009. Presumably, this should be unadulterated by demographic shifts. But other supply side factors may be influencing it? Or the previous collapse in NGDP? It’s a but of a mystery to me.
12. January 2014 at 07:21
http://research.stlouisfed.org/fred2/graph/?g=qSE
12. January 2014 at 08:34
Rademaker, No, those people are not unemployed because they won’t come back even if jobs were available. If they were available for work they would have gotten at least a tiny share of the 2.2 million jobs created this year. But they got essentially none.
They are permanently out of the labor force.
Kevin, Good point about cyclical and structural. I agree that the two are hard to separate.
Statsguy, Thanks for the info on part time. So you are saying the under 35 don’t want to work?
Michael, Good question. I think we would start having mini-recessions, but am not certain.
Steve and Stasguy, Keep in mind that the shift to unwanted part time has been dramatic and recent.
BC, I’m told by liberals that it’s a myth that Obamacare doesn’t apply to part-timers. Is that myth claim itself a myth?
Saturos, I did a multivariate VAR study.
Ben, Unfortunately those on disability almost never come back into the workforce, no matter how strong the job market.
You said;
“Actually, if Scott Sumner’s “only one million” want work estimate is correct, we are on the cusp of unit-labor cost spikes.”
Not so, there are also millions of unemployed. Still plenty of slack.
Morgan, Cut that estimate by a factor of 10.
Tommy, Every day the evidence gets stronger and stronger that the LFPR will not recover, even when the recession ends. The current rate is at 1978 levels, no reason to assume it won’t stay there. If it was going to recover it would have recovered at least a tiny bit in the year of the 3rd biggest drop in the unemployment rate since records began. But it didn’t recover at all.
12. January 2014 at 08:53
Healthcare law is a possibility.
12. January 2014 at 10:42
Scott, as I understand it, there are (at least) two aspects of the part-time issue with Obamacare. First, the employer mandate will apply to “large” employers, those with 50 or more full-time equivalent (FTE) employees. The calculation of FTEs combines total worker hours so, as far as I know, an employer cannot avoid being classified as “large” by hiring a bunch of part-timers. I think that’s what liberals refer to as the “myth”.
However, “large” employers are required to provide insurance only to full time employees, those who work 30 or more hours per week. So, there is still reason to hire workers for less than 30 hrs/wk.
I think some liberals also claim that we should not expect to see employers shift workers to part time until the employer mandate actually takes effect (in 2015). However, there is a lookback period in determining which workers will count as full time, so employers would actually have to start paring down worker hours prior to 2015. In any event, given the complicated and ever-changing rules, many employers might not want to take chances by waiting until the last possible moment to begin paring down worker hours. See Megan McArdle’s comments here [http://econlog.econlib.org/archives/2013/10/the_obamacare-i_1.html].
Finally, even if an employer knew for certain that they still had time to shift workers onto part time, it seems to me that they might begin doing so now, at least with respect to new hiring, rather than hiring full-time workers and suddenly changing them to part-time one day before the lookback period. When employers downsize, for example, they often choose to do so through attrition if possible, instead of mass layoffs.
12. January 2014 at 11:40
“Hundreds of responses are normal.”
We talked to a high-level Apple employee a few days ago who told us s/he gets 6,000 applications for one open job.
12. January 2014 at 12:01
I agree with Benjamin:
“Not only that, we see that in boom times, more people are attracted into the labor force, as they find a job they can live with. That is a virtuous cycle-a stronger economy breeds workers, who help build a larger economy. The “work habit” become re-ingrained.”
That is absolutely the case. People adapt to badness; they make the best of it. This is a well-known phenomenon, and the reason healthy people’s beliefs about euthanasia and death with dignity aren’t a sound basis for policy.
As Temple (Grandin) always said: “The bad gets normal.” (I’m the coauthor of Animals in Translation & Animals Make Us Human….)
We are now 5 years into a depressed economy, with no end in sight, and the bad has gotten normal. People have found ways to cope, if they can.
In my demographic — upper middle class married people — if one spouse is still working, the other spouse gives up looking for work and …. starts taking online courses to become a college counselor. (I hear that’s ‘hot.’)
I don’t know what young people who should be starting careers are doing — more school? Becoming stay-at-home spouses?
I’m sure it’s something.
As to the argument that people who go on disability ‘never’ come back into the labor force, the period covered by ‘never’ does not include a period analogous to this one as far as I know.
More technically, our desires and goals are shaped by the environment via ‘reward prediction error,’ and reward prediction error has been teaching us, for 5 long years now, that looking for work is an exceedingly painful undertaking.
If and when it’s the employers who are desperately looking for workers, that will change.
12. January 2014 at 12:30
Catherine–
I enjoyed your comments.
12. January 2014 at 12:40
Likewise!
Now you’ll have to excuse me while I sign-on to my online course on How to Become a College Counselor.
12. January 2014 at 12:50
Scott,
Here’s what happened in Japan, which I think is a good example because of the similarities with the US (e.g. extended period of low growth, high employer borne social/health insurance costs for full time workers, rising tax burdens, etc).
Employers tried to avoid hiring full time workers.
People starting taking part time jobs (e.g. at convenience stores, etc).
Entrepreneurship shifted to cash (easy tax avoidance) businesses like restaurants and beauty salons.
People stopped having children.
People stopped getting married.
People stopped moving out of their parents’ homes.
It became normal and socially acceptable to live off unemployment benefits and lie about whether you were actually looking for work.
Businesses started hiring a lot of “consultants” to replace full and part time workers.
Young people lost hope of achieving economic advancement and prosperity through finding long term satisfying employment.
And that’s all in a country where the workforce is generally much more diligent, better educated, more disciplined, and there is a higher level of civic trust than in the US.
12. January 2014 at 13:17
“People stopped having children.
People stopped getting married.
People stopped moving out of their parents’ homes.”
Exactly. Ditto all above.
btw, I have a fabulous black-market story.
Our son got his driver’s license a couple of years ago & then, last summer, commuted to the Bronx for work. (Yes! He has had summer employment and part-time employment during the school year! Woo hoo!)
Anyway, Bronx driving is challenging, and C. banged up the front fender pretty badly one day while attempting a 3-point turn-around in a tiny little Bronx driveway. So we drove around with a dented fender for months because we didn’t feel like paying the Toyota dealer god-knows-what to fix it.
A couple of months ago, my husband was driving out of the Costco parking lot when a guy pulled up beside him and started gesturing to my husband to roll down his window. Turns out the guy runs an auto shop out of his car trunk. (His father and his father-in-law have real, bricks-and-mortar auto body shops.) He used a blow torch to soften up the fender, then used his hands to re-mold it. He said it took him a while to learn exactly how much heat to apply so as not to melt the fender completely.
When he found he didn’t have the right shade of gray to re-paint, he and my husband drove to a shop and picked it up.
The total repair cost $200, compared to what — at least a thousand at a dealer?
Now we have his card, so anything else we need, we’ll be calling him.
12. January 2014 at 13:30
Catherine,
And that reminds me. In Japan in the past, you never saw cars driving around with dings and dented fenders. Now it’s quite common.
12. January 2014 at 13:32
I looked up birth rates a while back: http://irvingtonparentsforum.wordpress.com/factoids/#births
# Births & percent change:
2007: 4,316,233 | +1%
2008: 4,247,694 | -2%
2009: 4,130,665 | -3%
2010: 3,999,386 | -3%
2011: 3,978,000 | -2%
2011 data is provisional
My impression is that the population of people in their 20s & early 30s has been growing during these years, though I haven’t looked it up. I have that impression because my son C. is 19 and his graduating class was the largest across the country. The size of graduating senior classes had been increasing for years.
Now graduating classes are growing smaller.
12. January 2014 at 13:35
“In Japan in the past, you never saw cars driving around with dings and dented fenders.”
Right.
All those ‘little’ things….
12. January 2014 at 13:46
Catherine,
Oh and one other thing, the mobile auto body shop is so typical of the thinking in most of the less developed world, where no one would be deterred by the fact SOMEONE ELSE didn’t provide them with employment. They’d just go out and start selling something. Haircuts using their motor scooter as the barber chair, noodles for breakfast off a pull cart, shoes decorated with spangles, bicycle repair, rice milling service, smoothies off a picnic table outside of their house, hand made shirts, etc.
In the U.S. when people say “they can’t find a job,” it would be a lot more accurate for them to say “they can’t find someone to GIVE them a job.”
13. January 2014 at 05:00
BC, Excellent comment.
Catherine, I don’t think that explains things. The people you refer to would answer “yes” if asked by the BLS whether they’d prefer to be working. So they are picked up in my data.
I predict the LFPR will not recover, even when the unemployment rate returns to the natural rate. It was trending downward even before the recession, and is still falling during the recovery.
dtoh, You make a lot of good points, which I agree with. But this surprised me:
It became normal and socially acceptable to live off unemployment benefits and lie about whether you were actually looking for work.”
I thought very few Japanese live on UI. Is that wrong? And if so then why are people on UI not counted as unemployed in Japan? We know that measured unemployment is quite low in Japan.
Catherine, Your second comment points to the need to deregulate the horribly inefficient auto dealership industry.
13. January 2014 at 09:42
BC is probably right. Between the ACA and the huge increase in the Federal minimum wage, the cost per hour of labor has jumped dramatically. Companies, particularly in the service industry, have been investing heavily in labor-management software that models exactly how and when to dispatch labor so many of these workers are called in for multiple two or three hour shifts in one day instead of working full days. This software didn’t used to be cost-effective but we have, unfortunately, made it so.
In addition to suffering from reduced hours, workers with long breaks between shifts must choose between spending their time idle or spending their tight money on commuting home and back again.
So fellow economists, if you’re interested in fighting a good fight, convince your friends and write your congressman suggesting that we’d be much better off subsiding labor than we are using the minimum wage to fix a above-market prices for labor. While both options may raise wages, the former increases hours while the latter clearly cuts them. Feel free to bust out a supply-and-demand graph and talk about tax incidence.
13. January 2014 at 11:44
Randomize,
I would have suspected all the same things. But, the increase in “employed part time for economic reasons” happened entirely from October 2008 to June 2009, exactly when the labor market was crashing. I don’t see any pattern in the data that associates it with Obamacare or the minimum wage.
http://idiosyncraticwhisk.blogspot.com/2014/01/part-time-employment.html
14. January 2014 at 04:54
ssumner:
“Statsguy, Thanks for the info on part time. So you are saying the under 35 don’t want to work?”
No, just saying that the official labor participation rate for that cohort is lower than a decade ago… There are many ‘why’s.
14. January 2014 at 20:52
Stasguy, If they want to work, why wouldn’t they show up as discouraged workers?
16. January 2014 at 14:35
Software isn’t big enough to be representative in macro terms, but we do see some interesting structural trends. In software, a bad employee, or a very untrained employee, is actually worse than not hiring anyone. However, a good employee is so very profitable, it’s hard to be overstaffed with those.
So what do we get? Lost of companies begging for people with 6+ years of experience, and very few entry level positions. Since skills translate so well from company to company, taking a big loss for a while on a programmer is a silly thing, because then he’ll be poached quickly by a company that doesn’t spend a percentage of their salary pool on entry level positions.
It’s the real secret why H1-Bs are attractive: They might not be good at first, just like a guy out of school, but they are mostly stuck with you until they get a green card, and depending on the nationality of origin, it can all take over a decade.