Tag Archives: unemployment

Slower Job Hiring is the Result of Lower Unemployment (Final Revised Post)

Thesis: The longer time to fill job vacancies is caused by a decrease in unemployment, rather than other factors such as job personality tests.

A recent article published by the Wall Street Journal titled, “Today’s Personality Tests Raise the Bar for Job Seekers” highlights the growing importance of personality tests for hiring new candidates. “In 2001, 26% of large U.S. employers used pre-hire assessments. By 2013, the number had climbed to 57%, reflecting a sea change in hiring practices that some economists suspect is making it tougher for people, especially young adults and the long-term unemployed,  to get on the payroll.” I have personal experiences with these personality tests in applying for finance related jobs. The growth in popularity of theses assessments is surely a positive as it enables employers to better screen candidates for culture fit and to verify the candidate possesses the characteristics for that job function i.e. customer service must be able to communicate well with people. The last phrase of that excerpt I disagree with, however. Personality tests themselves do not discourage against young workers or individuals who have been unemployed for a while. The authors’ viewpoint on this aspect is very shortsighted and fails to take into consideration the type of candidate a young person or unemployed individual is compared to someone with potentially more active experience.

Furthermore, the author goes on to explain how the time it takes to fill job vacancies has been on the rise since the Recession. The author claims that personality tests make it harder for job seekers and are the cause of this issue. However, the author fails to point out how unemployment has also been on a steady decline since the Recession. We have a classic case of cause vs. correlation, and I feel like the author is badly mistaken in the claims drawn in the article. Furthermore, I would go on to make the argument that employment and time to fill job vacancies are directly correlated. Therefore, when there is higher unemployment, there are more available workers in the market, and open job positions can be filled quickly. When there are less people actively seeking a job, the time to fill those open positions will be greater. My proposed solution seems to be a more realistic logistical model than personality tests accounting for the dramatic change in time to fill job vacancies. For more information on personality tests that employers use to hire new candidates as well as what some of the largest U.S. companies look for in these results click here. I view the topic of personality tests as intriguing, but not a separator between age of potential employees or the rise in time to fill job vacancies.

Revised Post #2 Unemployment Numbers: The Real Story

There has been a lot of talk lately about the unemployment numbers as they have been decreasing and point to a country recovering from the Great Recession as they have fallen to 5.7%. As Josh Mitchell writes in his Wall Street Journal article Job Market Looks Ripe for Liftoff, “The best three-month stretch of hiring since 1997 has positioned the U.S. labor market to start delivering stronger wage growth for a wider swath of Americans after more than five years of sluggish recovery from a deep recession.” While these numbers may look like things are all merry for Americans, they hide the real story. The real story is that a lot of Americans have taken themselves out of the job market because they are either too distraught about their job prospects, or are hidden behind the numbers of what is considered employed. To not be counted in the unemployment number, you just have to have been out of the work force and not looking for work over the past 28 days. These people who are so depressed from how long they have been looking for work, and not found anything, that they remove themselves from the work force are still as unemployed as before, but they actually IMPROVE the unemployment rate. Another hidden loophole of the official unemployment statistic provided by the U.S. Department of Labor is that if you are working part time, only 10 hours per week, you are considered employed and reduce this official statistic. There are millions of Americans who cannot find fulltime employment and are forced into working only part time, but are considered employed by the US government. Another loophole that Jim Clifton is trying to bring awareness to with his highly publicized article, The Big Lie: 5.6% Unemployment, “There’s another reason why the official rate is misleading. Say you’re an out-of-work engineer or healthcare worker or construction worker or retail manager: If you perform a minimum of one hour of work in a week and are paid at least $20 — maybe someone pays you to mow their lawn — you’re not officially counted as unemployed in the much-reported 5.6%.” This little discrepancy was unbeknown to me before I read his article. This is just further proof that “The official unemployment rate, which cruelly overlooks the suffering of the long-term and often permanently unemployed as well as the depressingly underemployed, amounts to a Big Lie.”

This problem could have long-term consequences by making our economy appear better than it truly is because the Federal Reserve uses this statistic (among many, many others) when they decide whether or not to raise interest rates. We need a better statistic to rely on, which more thoroughly represents the entirety of the United States population than this current method. This is of pressing concern so that we don’t overestimate the health of our economy just to have it crumble again.  This can be accomplished by having the Fed set policy based off of the underreported U-6 Unemployment rate which takes into account “Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force” (from the Bureau of Labor Statistics). This number better covers the entire population of workers and better represents the entire job force as a whole. This number is currently 11.3%, significantly higher than the 5.7% reported officially. The Fed should tie all of its monetary policy and economic gauge measurements to this U-6 number so that more of the unemployed are represented. This 11.3% is still significantly higher than it has been in over 20 years (see figure below). Let’s hope that Janet Yellen realizes this and uses this, more useful, U-6 unemployment statistic when she moves to rise rates this summer.

Screen Shot 2015-02-13 at 4.58.26 PM

Interpretations of Unemployment

There has been a lot said on the topic of unemployment in recent months. On the one hand, unemployment numbers have been incredibly positive. In its last policy meeting, the Fed boasted a 5.7% unemployment rate, and “Net hiring during the November-to-January stretch, at more than 1 million, accelerated to its faster pace for a three-month period since 1997,” according to the WSJ. Those numbers would seem to indicate a boost in wages, as well as a boost in inflation, which has simply not been the case. First, we need to address the definition of unemployment. As Barry Ritholtz plainly states in his editorial, it is incredibly easy to look up the definition of unemployment. There are four main concepts that define employment/unemployment he writes:

  • People with jobs are employed.
  • People who are jobless, looking for a job, and available for work are unemployed.
  • The labor forceis made up of the employed and the unemployed.
  • People who are neither employed nor unemployed are not in the labor force

In his editorial, Ritholtz ridicules prominent figures in the business world that call the unemployment figures a conspiracy. For example, Jim Clifton, CEO of Gallup, recently wrote an essay entitled “The Big Lie,” in which he explains to the American public that the low unemployment numbers are a hoax because they do not include people who stopped looking for work. Ritholtz destroys Clifton, claiming that the definition of unemployment is a basic economic concept that anyone can lookup. He writes, “the technical definition of unemployment is well known, and easily discoverable. The only reasons anyone who wants to understand this but does not are: a) ignorance b) laziness c) bias and d) some combination of all three.”

I think Ritholtz is coming down too hard on Clifton. While there is no denying that the definition of unemployment can easily be looked up and understood, it doesn’t mean that Clifton doesn’t have a point. In economics, it is taught that there is an inverse relationship between unemployment and inflation:

“At the heart of the challenge facing the Fed is a notion in economics that there is a short-run trade-off between unemployment and inflation. At some low rate of unemployment, the thinking goes, slack in the job market disappears; if unemployment goes below this point then wage and inflation pressures build as firms compete for a dwindling supply of workers.”

So in response to Ritholtz, if the unemployment numbers really are what the government claims they are, then wouldn’t we have seen an increase in inflation or a rise in wages? While Clifton’s claims might not be revealing some big secret, we can interpret his essay as broader statement about the bias of the labor participation rate, and how that may be an explanation for the fact that inflation has run below the Fed’s 2% target for 32 straight months.

 

 

Unemployment Numbers: The Real Story

There has been a lot of talk lately about the unemployment numbers as they have been decreasing and point to a country recovering from the Great Recession as they have fallen to 5.7%. As Josh Mitchell writes in his Wall Street Journal article Job Market Looks Ripe for Liftoff, “The best three-month stretch of hiring since 1997 has positioned the U.S. labor market to start delivering stronger wage growth for a wider swath of Americans after more than five years of sluggish recovery from a deep recession.” While these numbers may look like things are all merry for Americans, they hide the real story. The real story is that a lot of Americans have taken themselves out of the job market because they are either too distraught about their job prospects, or are hidden behind the numbers of what is considered employed. To not be counted in the unemployment number, you just have to have been out of the work force and not looking for work over the past 28 days. These people who are so depressed from how long they have been looking for work, and not found anything, that they remove themselves from the work force are still as unemployed as before, but they actually IMPROVE the unemployment rate. Another hidden loophole of the official unemployment statistic provided by the U.S. Department of Labor is that if you are working part time, only 10 hours per week, you are considered employed and reduce this official statistic. There are millions of Americans who cannot find fulltime employment and are forced into working only part time, but are considered employed by the US government. Another loophole that Jim Clifton is trying to bring awareness to with his highly publicized article, The Big Lie: 5.6% Unemployment, “There’s another reason why the official rate is misleading. Say you’re an out-of-work engineer or healthcare worker or construction worker or retail manager: If you perform a minimum of one hour of work in a week and are paid at least $20 — maybe someone pays you to mow their lawn — you’re not officially counted as unemployed in the much-reported 5.6%.” This little discrepancy was unbeknown to me before I read his article. This is just further proof that “The official unemployment rate, which cruelly overlooks the suffering of the long-term and often permanently unemployed as well as the depressingly underemployed, amounts to a Big Lie.” This is a problem that has long term consequences by making our economy appear better than it is because these statistics (among many, many others) are used by the Federal Reserve when they decide whether or not to raise interest rates. We need a better statistic to rely on that more thoroughly represents the entirety of the United States population than this current method. This is of pressing concern so that we don’t overestimate the health of our economy just to have it crumble again. Let’s hope Janet Yellen uses a different, more useful, unemployment statistic when she moves to rise rates this summer.

Why Keystone XL Should Be Stopped

The Keystone XL pipeline extension is a 1,664-mile bad idea that would carry almost 1 million barrels of crude oil a day from Canada’s oil sands to Texas. Putting environmental issues aside, the possibility of the Keystone XL pipeline fuels a heated debate. Proponents of the pipeline, namely oil companies, the Canadian government, and many Republicans, argue that the Keystone XL pipeline would generate thousands of jobs. Whereas opponents, namely environmentalists and landowners along the route, argue that the Keystone XL pipeline will make it harder for the U.S. to shift away from fossil fuels in addition to the environmental harm from such a monumental project.

As Paul Krugman explains in an op-ed for The New York Times, the Keystone XL pipeline “is a sick joke coming from people who have done all they can to destroy American jobs.” The Keystone XL pipeline is the first move from the new Republican Senate. Republican support should come as no surprise considering the oil and gas industry gave 87% of its 2014 campaign contributions to the G.O.P. Consider the Keystone XL pipeline support a thank you for the oil and gas industry’s generous contributions. In order to successfully gain support, Republicans decisively choose their slogan of increasing jobs. While there is some truth behind this allegation, the number of jobs mobilized is only for a temporary period. Once the pipeline construction is complete, the number of remaining jobs would be less than one hundred. In addition, the jobs gained from the pipeline would still only be less than 5% of the jobs that were lost from the sequestration. The same amount of government spending could be used for roads, bridges, and schools – not only a more stable form of employment, but less controversial as well.


Employment issues aside, environmental issues continue to fuel the debate. A proponent of a pipeline, Senator Tim Kaine agrees that the Keystone XL pipeline project cannot move forward. Kaine’s argument stems from the difference between tar sands and conventional petroleum. Tar sands, which would be the main oil source for the pipeline, is not only dirtier than conventional petroleum, but also the process of extracting the oil grows more difficult. There is an abundance of safer and cleaner alternatives that resorting to tar sands as a fuel source is not necessary and far from ideal. As NASA climate scientist James E. Hansen said, “if all the oil was extracted from the oil sands it would be ‘game over’ when it came to effort to stabilize the climate.”

Short-Term Fiscal Policy: Copping Out or Stepping Up?

Are President Obama’s recent short-term fiscal proposals the brave radicalism this country needs?

Are austerity policies to address long-term debt and deficit problems the answer? Or should countries like the U.S. and Europe implement policies that provide solutions to fix problems that we face today like stagnant economic growth rates and chronic unemployment or, at least underemployment. And do short-term solutions address today’s problems in a significant way or do they only provide a Band-Aid and make it harder to fix longer term problems?

Paul Krugman says in his op-ed for The New York Times that U.S. economic policy should become much more near-sighted if we want to solve the most important problems we face. Especially in the face of “the aftermath of a once-in-three-generations financial crisis,” now is not the time to fret over long-term issues. He attributes this behavior to “intellectual laziness and lack of moral courage.” Krugman refers to John Maynard Keynes’ thoughts on the long run, particularly the context in which Keynes wanted us to consider his words. He compares long-run economists to meteorologists who tell us the water is calm long after everyone knows the storm has passed. In the end, Krugman applauds Obama’s courageous willingness to “break with the long-termers and focus on the here and now.”

Sheila Blair, past Chairman of the Federal Deposit Insurance Corporation, cautioned Americans of the other extreme in 2011. Blair calls short-term monetary policy response a Band-Aid on a bullet hole “that feels good for awhile but does nothing to enhance the long-term performance of our economy.” Blair calls for short-term sacrifices to support long-term reforms in social security and healthcare, exactly what Krugman laments has been ineffective as well as “craven and irresponsible”. Blair explains that (even back in 2011), “In a world obsessed with instant gratification and lightening-round debates, we are in dire need of leadership, both public and private, that will champion patience and sacrifice now in return for a brighter and more stable future for us and our progeny.”

Gilles Saint-Paul, program director for the Centre for Economic Policy Research in France, writes about the importance of long-term fiscal policy because “(i) deficits and surpluses are useful in stabilising macroeconomic activity and (ii) tax rates should be smoothed over time in order for the tax system to be efficient.”

Personally, I identify over-correction as one of the greatest risks of short-termism in economic policy. Because monetary policy and (especially) fiscal policy take time to implement and even more time to see the effects of. Controlling for what is best in the short-run may not always be the best solution because by the time the effects of policy changes can be observed we have overcorrected for the problem and then face the opposite setback.

Low Unemployment Rates is misleading

The Federal Open Market Committee’s latest press release after its January 28 meeting reveals that it will maintain its 0% to 0.25% federal funds rate to achieve its targeted 5.2% to 5.5% unemployment rate and 2% inflation rate. The report states that economic conditions are improving, with increases in household spending and business investments. The labor market have further improved, but inflation rate have declined in light of plummeting oil prices. According to employment statistics, unemployment rates have dropped to 5.6% in December, meaning that the target unemployment rate is almost within target levels. The decline in inflation is attributed falling oil price, but this is temporary and the Committee expect that inflation will gradually rise after the transitory effects of low oil prices dissipate. The FOMC will closely monitor market conditions to determine when to raise the federal funds rate, adding that even after employment rate and inflation are near its target levels, it will keep the federal funds below normal levels in the long run. A slow but gradual increase in the federal funds rate is appropriate as it will allow the economy to slowly adjust.

The job market seems to be doing well, as unemployment rate is reaching optimal levels. However, this data is deceiving as the labor force participation rate have continued to decline.

Capture

 

According to the Federal Reserve Economic Data, the civilian labor force participation rate have hit lows not seen since 1978. This reflects that more and more people are still dropping out of the work force, causing unemployment rate to decrease. While there have been job gains in the economy, the decline in participation should be of more pressing concern. This data was left out of the press release, which seemed to have been overly positive about the state of our economy. In the future, the FOMC should also include this data so to not be misleading. This also raises the question of whether we have to decrease the 5.2% to 5.5% target unemployment rate. In any case, this evidence supports the FOMC’s decision to keep the federal funds rate low, as this will facilitate economic activity.

In the near future, however, inflation will remain low, while unemployment may further decrease. Factoring in the decrease in labor force participation, it might actually be good for the unemployment rate to decrease below 5% in the short run, though this would reduce competitiveness in the job market. Which is why more emphasis should be put into increasing the labor force participation rate, and should take a higher priority in policy-making.

Blog Post #8: Predicting Increase in Unemployment Rate: Volker Style

Before I would write about Fed’s decision for Saturday’s post (which Fed must have made their decision to rather increase the interest rate or not as I am writing this), I want to write about something that needs our attention. Disinflation, the idea that first struck me when I was taking ECON 402, may be on our horizon. I am going to use this and make an educated guess as to what will happen to our unemployment rate.

The most famous case of disinflation happened during Reagan’s administration and Volker was at the helm of Fed (hence, where the term “Volker Disinflation” comes from). To explain this phenomenon, we can start with Phillips Curve. The basic idea is, with the Phillips Curve (with high variability), there is a negative relationship between inflation (percentage price change, positive or negative) and unemployment rate. It is mainly caused by the change of expectation of market by the economic agents (in this case, people like me purchasing goods and working to earn money) based on “economic condition,” in this case unemployment rate. Of course there is a Business Cycle theory that justifies inflation with business cycle, but I am just going to respectfully set it aside for the sake of argument. To sum up, what this means is that (increase) in unemployment rate is necessary to bring down the inflation (Milton Freedman defined inflation as a monetary phenomenon). The key point is the INCREASING rate of unemployment to permanently (and surgically) change the expectation. Some of the concept here is (myself) learned from Krugman’s blog plost in NYTimes.

To be clear, unemployment rate right now is (slowly) decreasing, and current inflation rate is next to zero. Now, Lets look at plot generated from FRED with unemployment rate and inflation rate percentage changes, which this plot is part of the article of Krugman’s.

Volker Disinflation

The disinflation that I am looking at is shaded region, where there is increase in unemployment rate (notice y-axis and what they represents, which is a percentage change [semi-elasticity, in econometrics term]). I want to pay attention to the period in between the shaded region, where unemployment rate is decreasing in slower rate. And then, they merge. Unemployment rate spikes up and inflation rate decreases.

Now, I want to turn our attention to FRED plot that I generated.

unemp and inflation growth

We can observe that the percentage change in unemployment rate and inflation rate is merging, like it did before disinflation around 1982. So, we may expect the disinflation this year or next.

The Wall Street Journal’s Pedro Nicolaci Da Costa has similar vision. According to his article, inflation has not even close to 2% target rate. Now, comparing it to Inflation Expectations measured by University of Michigan Survey’s of Consumers, the expected inflation rate of beginning of 2015 is decreasing below 2.5%. What that means is, if Fed manages to get the inflation rate back up to 2~2.5%, and consumer’s expectation is going below 2.5%, that is the perfect definition of disinflation. Some experts according to Nicolacia Da Costa is expecting disinflation for first quarter or so this year with this evidence. However, the question that I am trying to answer is what will happen to unemployment rate. That goes back to the introduction with Phillips Curve. The prediction: it will go (spike) up like it did during Volker’s days.

If my analysis is correct, then (increase) growth rate of unemployment rate will spike up very soon. The question is, how much our expectation would change after the disinflation, and how much it (percentage change of unemployment rate) will change?

Why the Legal Standard of Full-Time Employment Should Remain at 30 Hours

Congress should not change the legal standard of full-time employment from 30 hours to 40 hours. Ben Casselman explains in his article for FiveThirtyEight titled “Yes, Some Companies Are Cutting Hours In Response To ‘Obamacare’” that a survey conducted by the Bureau of Labor Statistics demonstrates that “the share of part-timers working just below 30 hours a week has been rising for roughly the past two years, while the share working just over 30 hours has been falling.” (http://fivethirtyeight.com/features/yes-some-companies-are-cutting-hours-in-response-to-obamacare/). However, this section of employees who work between 25 and 35 hours per week is in the minority as 80% of people report their work hours as at least 35. This means that this provision of Obamacare has no impact on 80% of employees in the United States workforce. Casselman’s conclusion is that “the health law has likely led a few hundred thousand workers to see their hours cut or capped. That’s small in the context of an economy with 150 million workers” (http://fivethirtyeight.com/features/yes-some-companies-are-cutting-hours-in-response-to-obamacare/).

While this is still something that majorly impacts this small percentage of the population, it is not worth changing the definition of full-time employment to 40 hours and impacting far more Americans whose work hours are slightly above or below 40. Casselman concludes that this provision to the healthcare law does not deem it a good policy or a bad policy, simply one aspect of the policy, an opinion with which I agree.

In his article titled “Obamacare and the GOP’s Full-Time ‘Fix’” for The INDsider, author Patrick Flanagan quotes Steve Spires, a health care policy analyst for a nonprofit called the Louisiana Budget Project, that changing the definition of full-time to 40 hours “could have a damaging effect on the middle class and lead to lower wages” (http://theind.com/article-19974-Obamacare-and-the-GOP%E2%80%99s-Full-Time-%E2%80%98Fix%E2%80%99.html)

Personally, I think executives and business leaders should be focusing on the success of their organizations, not cutting valued employees’ hours to avoid being required to provide them with health insurance. When it comes down to it, this should really not be such a polarizing issue. I believe that now, even with a GOP-controlled congress, Obama would use his veto power to strike down this legislation, should the House of Representatives approve it. This is the type of bipartisan nonsense the bureaucrats of our country use to divide constituents down party lines. Our legislators must look at the facts and band together to legislate with a goal of economic recovery, not with a goal of re-election. Wasting time debating unhelpful policy is not what is best for our country.

The Mystery of Long Term Unemployment Rates

Current long-term unemployment rates are a mystery to economists. Long-term unemployment is defined as unemployment that lasts more than six months. Salim Furth writes in his article the Wall Street Journal, titled “What’s Causing the Increase in Long-Term Unemployment?” that although short-term unemployment has recovered to a normal level, long-term unemployment remains as high as 2%. Furth rules out extended unemployment benefits and lingering effects of the Great Recession as causes, explaining that few people considered long-term unemployed have been jobless for two years. Many have only been jobless for one year.

In their article for the Center for American Progress titled “The State of the U.S. Labor Market: Pre-January 2015 Jobs Release”, Michael Madowitz & Danielle Corley note that the long-term unemployement rate is “almost 50 percent higher than its highest prerecession level on record” (https://www.americanprogress.org/issues/economy/news/2015/01/08/104030/the-state-of-the-u-s-labor-market-pre-january-2015-jobs-release/). The long-term unemployed make up 30% of all unemployed persons.

Ben Casselman writes in his article for FiveThirtyEight titled “More Of The Long-Term Unemployed Are Finding Jobs” that the long-term unemployed should be hopeful as he indicates there is reason to believe things will improve (http://fivethirtyeight.com/datalab/more-of-the-long-term-unemployed-are-finding-jobs/). He brings up a good point about the vicious cycle of timing and the job search pursuit. The longer a person is unemployed, the more difficult their job search becomes. Employers are skeptical about blank spaces in resumes and this becomes more and more difficult to explain as time unemployed increases.

My hope is that as Baby Boomers age and retire, more jobs will be made available. In particular, some of these jobs may be high skilled and require even two or three people to do the job an older, more experienced Baby Boomer would have had. The Baby Boomers’ ages in 2015 will range from 51 to 69. According to a 2014 Gallup Poll conducted by Rebecca Rifkin titled “Average U.S. Retirement Age Rises to 62” Rifkin finds just that (http://www.gallup.com/poll/168707/average-retirement-age-rises.aspx). 62 is the highest reported retirement age by Gallup polls in the past 23 years. This increase in retirement age for the Baby Boomers could explain a lack of job vacancies. If this figure is accurate, the Baby Boomers will not be gone from the labor force for at least 11 more years. If the growth in average retirement age continues to grow, it will take even longer.

Employers need to be more aware of the state of our economy and sensitive to the fact that this cycle could keep the long-term unemployed from ever being hired. Instead of scrutinizing time spent unemployed, employers should review applicants skills and the value they could add.