Sunday, September 9, 2012

Economists have underestimated the severity of structural shift in US employment dynamics

Continuing on the topic of the US labor markets, it's worth taking another look at the concept called the Beveridge curve. Per Wikipedia "a Beveridge curve is a graphical representation of the relationship between unemployment and the job vacancy rate (the number of unfilled jobs expressed as a proportion of the labor force)". In the previous post on this topic we discussed the structural shift in the US employment dynamics that took place since the Great Recession. Unfortunately the analysis performed by Barclays (as well as most economists, including the Fed) compares job openings ratio to the official unemployment rate. But we know that this rate is not a good measure of the true state of unemployment in the US because it does not include those who have stopped seeking employment altogether.

A more relevant measure of US unemployment dynamics is the so-called "Employment Population Ratio" (not to be confused with labor force participation rate). It is defined as (per Wikipedia) "a statistical ratio that measures the proportion of the country's working-age population that is employed" (see discussion). The chart below compares the two measures, showing a clear divergence as fewer people who are out of work are counted in the official unemployment statistics.

Source: U.S. Bureau of Labor Statistics

Now we plot the Beveridge curve using the Bureau of Labor Statistics Employment Population Ratio on the x-axis (reverse order) and the JOLT Job Openings Ratio (% of jobs not filled as percentage of all jobs) on the y-axis. This tells us how the labor market in the US responds to job openings. In a healthy job market one wants to see increasing employment-population ratio as more jobs become available - which was the case prior to the Great Recession.

Modified Beveridge Curve
Source: U.S. Bureau of Labor Statistics

As the chart above shows, not only has the curve shifted since the recession, but the slope rose dramatically as well - something that is not visible in the traditional Beveridge curve. In the post-recession environment, the employment-population ratio is no longer responsive to increases in job openings. This is a severe structural shift driven by a spike in the length of unemployment (see further discussion). People don't have the skills, the mobility, or the will to fill those job openings. The problem is significantly worse than what economists have been estimating by using the official unemployment rate.

Which takes us back to the issue of monetary expansion. Even if the Fed somehow manages to increase the number of job openings (a highly unlikely outcome in this environment), the structural shift that has occurred makes it unrealistic to expect the overall employment picture improving.
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