Employment statistics are the best statistics

Because they can tell any story you like – just the way economists like it.

On Friday, the government will release the latest employment report, which will help clarify whether the economy is slipping into a recession. Wall Street forecasters are predicting that the February unemployment rate will have inched up to 5 percent, from 4.9 percent in January.

Whatever the survey shows, however, you can be sure of one thing: Politicians will be quick to point out that joblessness remains low by historical standards.

Ed Lazear, the chairman of the Council of Economic Advisers of President George W. Bush, said recently that “5 percent is still a low unemployment rate.” He added: “It’s below the average for the last three decades.”

You will note that “the last three decades” conveniently includes one or so in which employment was crap. Hell, we’d do better to compare today’s numbers to the last five decades.

Consider this: The average unemployment rate in this decade, just above 5 percent, has been lower than in any decade since the 1960s.

Yet the percentage of prime-age men (those 25 to 54 years old) who are not working has been higher than in any decade since World War II.

In January, almost 13 percent of prime-age men did not hold jobs, up from 11 percent in 1998, 11 percent in 1988, 9 percent in 1978 and just 6 percent in 1968.

…

There are only two possible explanations for this bizarre combination of a falling employment rate and a falling unemployment rate. The first is that there has been a big increase in the number of people not working purely by their own choice. You can think of them as the self-unemployed. They include retirees, as well as stay-at-home parents, people caring for aging parents and others doing unpaid work.

If growth in this group were the reason for the confusing statistics, there should be no to worry. It would be perfectly fair to say that unemployment was historically low.

The second possible explanation – a jump in the number of people who are not working, who are not actively looking but who would, in fact, like to find good jobs – is less comforting. It also appears to be the more accurate explanation.

Why the latter is more accurate, I don’t know. In fact, the author has conflated the two. We went through this (hilariously) in class: suppose you’re in your mid/late-fifties and you get laid off. The economy has been in a jobless recovery since 2001, and is now in a jobless plateau/decline. What do you do?

First, the hilarity: a student raised his hand and said “I’d get a job”. Even re-stating the question did not help. I believe he ended up taking my word for the fact that ‘getting another job’ isn’t really on the cards for Hypothetical Man (my University is seriously middle-class and up – I doubt my students, overall, really understand unemployment as a lived concept).

The answer, for the rest of the group, is retire. Or call yourself retired. Live off savings until Social Security kicks in – maybe try for that sweet deal their offering. In the UK – and, no doubt, similar countries – people are going onto disability pensions, which is essentially becoming a path to early retirement for many (what would you rather be on: a disability pension, or unemployment benefits?).

It is my belief that retirement numbers contain a lot of the missing people, and are helping mightly to keep the unemployment statistics nice and low (relatively speaking). This is where the conflation occurs – calling one’s self retired and being retired are two different things (just ask Michael Jordan or Jay Z).

We should, of course, also bear in mind how dangerous/difficult tracking a macroeconomy in real-time is, but the unemployment rates indicate, reasonably clearly, the drivers of unemployment. From the latest release by the Bureau of Labor Statistics:

The over-55’s are the only group for whom the unemployment rate has declined:

And somehow I don’t think the Births/Deaths jobs are going to that group first.

The long tail of Monetary policy

This really is a fun time to be teaching macroeconomics.

First, the US:

Employers in the U.S. hired more workers than forecast in November, and the unemployment rate was unchanged, suggesting the labor market may be strong enough to keep the economy from tipping into recession.

Payrolls rose by 94,000 after a 170,000 increase in October, the Labor Department said today in Washington. The jobless rate remained at 4.7 percent for the third month in a row.

…

The jobs report will be “a linchpin” in the Fed’s rate deliberations on Dec. 11, John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, said before the report. Silvia said a payrolls figure between 80,000 and 100,000 would justify a quarter percentage-point cut in the Fed’s benchmark rate next week.

Leaving aside the fact that the forecasts were clearly bad; 94,000 really isn’t much (don’t forget, a hell of a lot of people hit the labour force, every month).

Next: the UK:

The Bank of England, struggling to fend off an economic slowdown, may instead be giving itself a new inflation headache.

…

“There’s a risk the Bank of England is going soft on inflation,” said Dominic White, an economist at ABN Amro Holding NV and a former U.K. Treasury official. “For the last five or six years, the bank has shown willingness to cut rates, but has been slow to raise when the economy had recovered.”

The reduction, the first in two years, may make it harder to keep consumer prices under control. Britons’ expectations for the cost of living are the highest in two years, and inflation accelerated above the central bank’s 2 percent target for the first time in four months in October.

If nothing else we should learn to (i) hate capital funds, (ii) hate central banks for the entropy they allowed idly to occur, in their responsibilities to financial market stability, and (iii) appreciate the Austrian school.

Anyway. This is an example of one of the real tricks with using Monetary policy: it has a long tail. The full effect of a change in the rate of interest can take anything from 6 to 18 months to take effect – this is why Monetary policy is the poorer one (the other being Fiscal) to be used for pushing Aggregate Demand. Specifically (and returning to our textbook): what is being risked is this scenario:

1) An ordinary Business cycle, in which we find ourselves in a slump/recession (i.e. the trough):

Click for bigger versions

2) Our central bank starts lowering interest rates, to spur growth, but they did it too late:

3) As a result, they make subsequent inflation and over-investment worse.

Quite a few people, in fact, are pinning things like this mess, as well as the blippish recession in 2001/2 on Greenspan’s Fed, for doing exactly that. The Brits – particularly those who had to live through Thatcher – are very sensitive to the risk of something like that revisiting them.

HowTo: deal with inflationary economic contraction

This is a shorter-than-intended post. WordPress lost the first one, and I’m just not that into doing it all twice.

I mentioned this in class today (going so fast that I’m not sure anybody heard anything, at all – end of semester dash).

Ben Bernanke put the Federal Reserve on a path towards a December rate cut in a speech on Thursday night in which he said the relapse in financial markets had resulted in a “tightening in financial conditions” that had the potential to harm the real economy.

The Fed chairman also said recent data on household spending had been “on the soft side” and warned that the combination of higher petrol prices, the weak housing market, tighter credit conditions and declines in stock prices seem likely to create some headwinds for the consumer in the months ahead.

Fortunately (for me, and probably only for me, and even then only with respect to having been right all semester), the Fed is, by all appearances, openly addressing its conundrum: Fiscal policy having done very little, it is left to Monetary policy to push along the economy – not one of its better uses – but, worse, trying to boost the economy while also containing inflation. This is something we like to call impossible. The short version: here is a business cycle, from the ever-helpful site tutor2u:

Inflation and Unemployment occupy different spaces. In the Slump/Recession part of the cycle, Aggregate Expenditure is low, i.e.:

Aggregate Expenditure = Consumption + Planned Investment + Government Purchases + Net Exports

is less than

GDP = Consumption + Actual Investment + Government Purchases + Net Exports

We have unplanned investment, or an unplanned increase in inventories. Result: people start getting laid off, as we stop selling/making so many goods and services.

Yes, I still hate Economics’ obsession with ”un”. Oh well.

At the other side of the business cycle, the opposite is true. We are selling more goods and services than intended, with an unplanned decrease in inventories. So we hire more people, we pay overtime, we run our factories longer during the night. We have to compete for factors of production: pay higher wages, pay higher input prices. Here inflation is the problem: higher wages, highe input prices mean higher final prices; higher prices mean higher wage demands, etc.

The government has two basic sets of policy for macroeconomic management: fiscal and monetary. Fiscal is government purchases – increasing expenditure or cutting taxes (for a slump). Having blown the whole thing on tax cuts it couldn’t afford and a war it couldn’t afford (and one that, bizarrely, is doing very little to help the economy), fiscal policy is pretty-well ‘no-go’ for the time being.

This is already a problematic situation, because one prefers not to have only one policy tool. Particularly since Monetary is not nearly as good at direct boosts to economic activity. It has a long tail, can very easily be overdone – thereby causing the next dis-equilibrium to be worse – and is evermore subject to capital market speculation, domestic and foreign.

Monetary policy is interest rates. The Fed buys or sells treasury bills (or makes myriad other interventions, these days), in order to reduce or increase the level of cash in the economy and, by decreasing or increasing the money supply, increasing or decreasing the interest rate (interest rates are the price of money: increase the money supply and the price goes down, and vice versa). So in a slump, the Fed lowers interest rates, increasing consumption and investment – principally investment, which is more variable than consumption anyway. In a boom period, it does just the opposite.

What does it do when it faces both? It wishes it had never taken the job.

Managing inflation and unemployment simultaneously is practically impossible. Managing it with the same policy tool is impossible. Inflation and unemplyment are not supposed to occur at the same time – one can see the current situation as a combination of endogenous factors – bad macroeconomic management, bad financial sector regulation – and exogenous factors – low agricultural yields, declining oil supplies/exports. The economy just cannot be boosted and restrained at the same time.

This, for example, is my idea of why China is so happy with its low Yuan. It cannot deal with unemployment, so it will accept high inflation, so long as it means 150m Chinese people have the surplus jobs.

In the US, the situation may not be that different. One of the advantages of continuing to use core inflation long after it made much sense is that two interest rate cuts with inflation is daft: 2 interest rate cuts with steady core inflation is fine. It is convenient for the Fed to pretend, as long as possible, that one problem just doesn’t exist, because it’s the only way it can attack the other.

Back to the story, then:

… new revised figures showed the US economy grew at its fastest rate in four years in the third quarter. An export surge fuelled by a weaker dollar and global growth more than offset the impact of the deepening slump in housing.

Gross domestic product grew at 4.9 per cent in the quarter, almost twice the Federal Reserve’s estimate of the maximum sustainable rate for the US economy.

However, a sharp rise in inventories reinforced fears of weak fourth-quarter growth.

Working backwards: A ”sharp rise in inventories”: unless that was a planned sharp rise in inventories, I’m going to take that as indicative of further weakness in an already soft economy. Meaning unemployment. Meaning, yes, expansionary macroeconomic policy. Such as it is possible with increasing prices. Hence the next part. A 4.9% increase in GDP: with unplanned increases in inventories, we’re making things but not selling them – so that can’t last.

However. GDP = P x Q. Therefore ΔGDP = ΔP x ΔQ. Some of the change in GDP is ΔQ, but some of it – I’m guessing a significant amount – is ΔP. From the Burea of Economic Analysis:

One can see, first, how Net Exports is becoming more and more important to our economy, these days. This will be why we hear Secretary Paulson always going on about a strong dollar, but never doing anything about it. We’re the new China, you see.

Second, Consumption expenditure is up, but flagging. Given that this includes transport, food, etc., it’s hard to imagine that this decline is that small. My guess is negative ΔQ coupled with positive ΔP – meaning the negative ΔQ will be a lot larger than these numbers appear.

This will be why the Fed is awaiting the latest matching data from the Burea of Labour Statistics: try to figure out how the employment and CPI numbers fit into the GDP data, to see just which of the two problems it should put above the other. Given the way capital markets are acting, and given that corporate profits are still high, overall (i.e. relative to previous history, not just earlier this year), I don’t see why rates should be cut again. Given the need for foreign capital in/by the US, honestly, cutting rates and hitting the dollar a third time is just as likely to hurt the economy, a little farther down the line.

We shall see, I suppose. The next BEA release is in a few weeks. The BLS employment numbers are due in a week (their last employment numbers were hardly positive, though); CPI numbers in a fortnight.

Employment trends and labour supply

This is Australian employment trends and labour supply. I originally came upon the report by the Reserve Bank of Australia (.pdf) over at Crikey.com, who were making light fun of the RBA’s suggestion that our retirees need to get back to work.

Are we at full-employment (trivia: that post, linked, is easily the most popular I’ve ever written. I wish I was earning residuals on the thing)? With unemployment still down at around 4.25 percent, I should think we are. There are some odd quirks in our data, thought, for example:

Labour Force Participation:

Still trending downward for males.

It’s basically up in the things that are driving employment, down in the things we don’t really do anymore (or that we do with ever fewer people: agriculture and manufacturing).

Remember that’s on a log scale (i.e. differences in logs, not of numbers – this means ratios rather than differences. Basically it just makes looking at growth rates easier for our brains).

The advances made in types of hiring (i.e. more part-time and casual work at the expense of full-time work) also have moved participation around for males and females. While participation is steadiliy increasing for females (here according to birth cohort)

It is declining for males

Typically a product of decling access to permanent full-time (i.e. one job = one family, car, mortgage) employment. The other quirk surrounds those older people – who are retiring in greater numbers, earlier:

and, along the way, in greater numbers than the OECD:

Which gives the RBA it’s final word:

The demand for labour has grown strongly since the early 1990s. This demand has in part been met by a large decline in the unemployment rate, especially for young persons seeking full-time employment and the long-term unemployed. In recent years, the strong labour demand has also been met by a rise in the participation rate of older workers, although the stabilisation of participation by prime working-age males and continued increase in participation by females has also been important.

Given the current low rate of unemployment, a continuation of the recent trends that have underpinned the rise in the national participation rate would help meet ongoing labour demand. The fact that the participation rate of older persons in Australia remains below that of other OECD countries suggests that further increases may be possible.

There are, of course and as usual, multiple explanations for the participation rates of older people:

• They’re retiring early because they can afford to (a good thing), or
• They’re “retiring” because they can’t get hired (a bad thing).

The disability statistics suggest at least some of this is happening (retirement due to ill-health is an avenue for older people who can’t find employment):

In which case the RBA’s assessment is probably not worth pursuing, and the reasons are not complicated:

• People retiring early because they can afford to retire early are unlikely to perform the tasks wanted by a NAIRU economy
• People “retired” as disabled or unemployed are unlikely to possess the skills demanded for most of such jobs.

The only real job I ever held, after my first degree, was as statistician for a government rehabilitation service. All I really learned there was the practicality of the interest by government in moving people from disability pensions (costing tax money) to jobs of any kind (paying tax money).

Given the pounding budget surpluses our economy is already paying in, I would suggest that any decision to properly lean on older people and push them back into jobs they (more or less certainly) do not want to do would be a political decision, rather than an economic one.

I do object, more than a little, to the suggestion that, because other countries in the OECD have higher participation in these age groups, we should push for it. In the US older people work because they need the medical benefits – it’s a bad thing, not a good thing, that the US workforce contains a significant number of people made slaves to employer-provided health insurance.

Sweden is another extreme. Formerly home to incredibly low unemployment rates, they suffered such a recession in the early 90s that they’re still recovering (and with quite high unemployment rates). However the Swedish government’s attendance to the activation principle is, for want of a better word, mighty. In the mid-90s fully half of government expenditure went to such programmes, rather than cash benefits. The participation of women in the Swedish labour economy is also quite high (related to a point to be made in just a minute).

My point, I guess, is that we can’t/shouldn’t seek to emulate the participation rates of labour economies that, themselves, we cannot properly emulate. Or, in the case of the US, should not seek to emulate. I’m sure it would be very easy to withhold access to PBS drugs by people aged 55-64 if they won’t work, but good luck winning the election on that platform.

Meanwhile, the problem observed in – I believe – the first post I ever made here, persists. We still have a labour economy built against the participation of mothers, and we still have a political economy built against the introduction of immigrants. I’ve an idea: the Ba’athists in Iraq were all fired, and they (a) had to join the party to work (like communists), and (b) ran the country. Why don’t we invite them all to Australia?