November Employment Crushes Estimates

by: Zach Bethune, Thomas Cooley, Peter Rupert

The Employment Situation released Friday by the Bureau of Labor Statistics reported that payroll employment increased 321,000 in November, beating the “best guesses” by roughly 100,000 jobs! This represents the largest gain since May, 2010. Moreover, the number of jobs have been revised up for the previous two months: 23,000 more in September and 29,000 more in October. Indeed, revisions to employment have been positive for almost all of the last year!


According to the household survey the unemployment rate was unchanged at 5.8%; however, the unemployment rate actually rose from 5.67% to 5.82% as there were only 4,000 more employed according to the household survey while the labor force expanded by 119,000. The employment to population ratio was unchanged at 59.2 and the labor force participation rate was also unchanged, remaining at 62.8. The number of persons working part time for economic reasons (PTER) fell by 177,000 and most of that decline (150,000) came from a reduction in those reporting slack work or business conditions. However, while the latest report is the strongest in some time, the transition rates we calculate from CPS microdata illustrate that these part-time workers are still having trouble finding full-time work. There are still 6.9 million PTER workers that would like to be working full-time; nearly two million more than there where pre-Great Recession. Given that the transition rates slow little signs of improvement, we expect the number of PTER workers to decline slowly.





pter-2014-12-05 rate-pter-fter-2014-12-05 rate-pter-unmp-2014-12-05

Further evidence that the labor market is strengthening is that average hours of work increased as did average hourly earnings.



The stronger labor force was a reflection of the stronger economy overall that we discussed in our last report.  The fall in people working part time for economic reasons is another sign that constraints are easing. The strength of the report adds strength to the argument for the Fed to begin increasing rates sooner rather than later.

Q3 GDP: Continued (Sporadic) Recovery

by Zach Bethune, Thomas Cooley and Peter Rupert

GDP Report

The BEA announced in the advance estimate that real GDP increased at a s.a.a.r. of 3.5% for 2014 Q3. The estimate is down over a percentage point from the 4.6% growth rate in the second quarter, although it is still in line with the average pace of growth during the current recovery of 2.16%.




The growth in GDP was led by an increase of 1.8% in personal consumption expenditures which also cooled off from its 2.5% rate in the second quarter. Other components contributing to the increase were exports (7.8%), nonresidential fixed investment (5.5%), and both federal (10.0%) and state and local (1.3%) government spending. The increase in federal defense spending (16.0%) was the largest since 2009 Q2. Defense spending and inventories have a habit of reversing in subsequent quarters so it is not necessarily a robust improvement in the outlook.



Real personal income increased at an annual rate of 3.2%, up slightly from its second quarter growth rate of 2.9%.


ahe-2014-11-01 eci-2014-11-01






A day before the BEA release, the FOMC released this statement on October 29. The FOMC ended Q3, but kept the possibility that if things deteriorated they could drag it out again. The statement was guarded when talking about recent conditions (highlighted text is ours):

…economic activity is expanding at a moderate pace. Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing. Household spending is rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow.


The most significant early signal of improvements in the labor market came from the employment cost index ( abroad measure that includes benefits) which, after months of staying flat, showed a sharp spike up in recent months.  Average hourly earnings are also moving higher in recent months.  Fed watchers will be watching this closely in the coming months to see if it portends increasing price pressure elsewhere in the economy. Nevertheless, the most likely outcome for the near future is that inflation will continue to be below target and interest rates will continue at their current level.

Slack in the Labor Market: Who are the involuntary part-time workers and what are their outcomes?

by: Zach Bethune, Thomas Cooley, Peter Rupert

The establishment data issued this morning by the BLS showed continued gains in the labor market with establishments reporting an increase in payrolls of 209,000 workers. While it is slightly lower than the last few months, with slower growth in the service sector (140,000), goods producing performed better than the last few months, increasing 58,000. The diffusion index, however, fell from 65.3 to 61.9, meaning slightly fewer firms reporting employment gains as compared to last month.


Average weekly hours has remained unchanged over the past three months, sitting at 34.5.


The household data revealed a slight increase in the unemployment rate, from 6.1% to 6.2%, with the number of unemployed persons rising 197,000 and the civilian labor force increasing by 329,000. So while the labor force expanded, the hiring did not keep pace, leading to an overall increase in the unemployment rate.

It is also worth noting that, even though employment is increasing, it is not creating upward pressure on wages. Average hourly earnings remained essentially stagnant the past month and have increased very little over the past year.  This is an important reason why the Fed doesn’t see increased inflation pressure coming from the labor market.

Slack in the Labor Market: Who are the involuntary part-time workers and what are their outcomes?

A couple of weeks ago, the Federal Reserve submitted their semiannual Monetary Policy Report to congress in which they outline their current stance on the state of the economy and how that weighs on their decisions about monetary policy.

Following several months of positive reports on the labor market , tepid first quarter GDP growth and strong second quarter GDP growth, the central question for policy makers remains: Is ‘liftoff’ of the federal funds rate near?

The answer to that question in June was no. The answer in July is also no. The expectation appears to be to keep the target for the federal funds rate between 0 and 1/4 percent “for a considerable period after the asset purchase program ends”. You don’t have to read very far into the report to Congress or this week’s FOMC announcement to see why the Fed is so hesitant to move rates. From the first paragraph of the summary (emphasis added):

The overall condition of the labor market continued to improve during the first half of 2014. Gains in payroll employment picked up to an average monthly pace of about 230,000, and the unemployment rate fell to 6.1 percent in June, nearly 4 percentage points below its peak in 2009. Notwithstanding those improvements, a broad array of labor market indicators—such as labor force participation, hiring and quit rates, and the number of people working part time for economic reasons—generally suggests that significant slack remains in the labor market. Continued slow increases in most measures of labor compensation also corroborate the view that labor resources are not being fully utilized.

The July statement from the FOMC highlights the continued concern about labor market conditions (emphasis added):

Information received since the Federal Open Market Committee met in June indicates that growth in economic activity rebounded in the second quarter. Labor market conditions improved, with the unemployment rate declining further. However, a range of labor market indicators suggests that there remains significant underutilization of labor resources.

The July statement adds:

The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

While it is true that unemployment has come down substantially since 2009 and workers are finding jobs, they aren’t the kind of jobs you (or the FOMC) would expect from a healthy labor market. A large fraction of those finding work are those that find part-time jobs despite the fact that they would like to be working full-time, known as “involuntary part-time workers,” that is, employed part-time for economic reasons.

It is not uncommon in any state of the labor market to find a fraction of part-time workers to be involuntarily working part-time. Not all workers that want full-time work will get it–at least not right away; a part-time job may serve as a stepping stone to full-time work.

However, during the last recession the number of involuntary part-time workers more than doubled. There currently remains a historically high number of involuntary part-time workers. We use data from the CPS monthly survey to ask who composes this group, what types of jobs they hold, and how they transition out of part-time work.

Who are the involuntary part-time workers?

Below we compare the composition of involuntary part-time workers (jobs) across time. To do so, we use micro data from the monthly Current Population Survey (CPS) from 1997 to June 2014. For each month, we identify those workers that are currently working part-time and indicate that they would like to work full-time but cannot because of economic reasons. We ask how the pool of involuntary part-time workers has changed during the recession across 4 characteristics: sex, age, weekly hours, and weekly wages.


The figure above plots the percentage change in each variable (e.g., age) from its 2007 value for 2009 and 2014. Notice the first ‘bar’ of each variable is set at 0 to represent the values in 2007. We show each variable’s actual value next to the columns. Before the recession, the involuntary part-time workers were equally represented between men and women, were on average 39.8 years of age, worked about 22.5 hours a week, and made $7,570 a week.

At the depth of the recession, in 2009, the pool of involuntary part-time workers shifted towards men (the share of men increased to 53%) and older workers. Hours decreased slightly to 22.36. Average wages increased to $8,490 a week, potentially representing a shift in the types of part-time jobs.

Since 2009, the composition of involuntary part-time workers has mostly returned back to normal. The exception is the average age of these workers which remains elevated.

Do involuntary part-time workers eventually find full-time jobs?

The answer is, on average, yes. However, since the recession the incidence of finding a full-time job has fallen and remains low. The longitudinal aspect of the CPS survey allows us to follow households over a little more than a year. Below we plot the fraction of all workers who were working part-time for economic reasons a year ago, that reported working full-time in the current period. This represents the probability, or transition rate, of leaving part-time work and finding a full-time job.


In normal times this transition rate is around 0.45, meaning that 45% of all workers who work part-time but want a full-time job will find one over the year. During the recession, this rate plummeted to 0.35 and has stayed close to 0.38 since. It’s taking much longer for the labor market to clear these involuntary workers into full-time. (If we interpret these rates as Poisson, the average length of time it takes has increased from 2.2 years to around 2.8 years, or 1/.45 to 1/.35.)

Along other margins, the transition rates of involuntary part-time workers have returned to normal, which is good news. They aren’t going into unemployment as quickly as in 2009. While the rate jumped up during the recession it has since returned to around 0.06.


There is also no discernible trend of these workers dropping out of the labor force. The transition rate from part-time for economic reasons to out of the labor force has remained close to 0.1.

The considerable time it is taking for part-time workers to find a full time job is precisely the ‘slack’ the FOMC is thinking about when it is deciding to stay firm on monetary policy. While the unemployment rate has returned to more acceptable levels, there are many measures that continue to suggest the labor market is not ‘healthy’ and keeps the FOMC on the fence.

A Dismal^2 Q1 Final GDP Report

by Zach Bethune, Thomas Cooley and Peter Rupert

Final Revision to Q1 GDP: UGH!

Yesterday the BEA announced another large downward revision to first quarter GDP growth from -1.0% to -2.9%. The final estimate was primarily attributed to downward revisions in consumption (3.1% to 1.0%) and exports (-6.0% to -8.9%). In addition, there was a major hit to the late-2013 inventory overbuild and construction.



All of this, obviously, leaves the FOMC and the administration in a tough position. While many analysts recount weather-related setbacks and changes in depreciation allowances (such as I.R.C. 179), there is certainly real concern that the weakness is, well, weakness.  Before the downward revisions, the weak Q1 GDP figures were already on the Fed’s mind. From Janet Yellen’s congressional testimony on May 8 (emphasis added):

“Although real GDP growth is currently estimated to have paused in the first quarter of this year, I see that pause as mostly reflecting transitory factors, including the effects of the unusually cold and snowy winter weather. With the harsh winter behind us, many recent indicators suggest that a rebound in spending and production is already under way, putting the overall economy on track for solid growth in the current quarter. One cautionary note, though, is that readings on housing activity–a sector that has been recovering since 2011–have remained disappointing so far this year and will bear watching.”

Real private domestic investment, after having just reached its levels from December, 2007, has been stagnant of late.  Both nonresidential and residential investment are culprits, though both had upward revisions from -1.6% to -1.2% and -5.0% to -4.2%.  The numbers are nothing to cheer over, but there is also nothing in today’s report should change the Fed’s reading on the housing market from May.





More recently from Janet Yellen’s June 18th press conference (again emphasis added):

Although real GDP declined in the first quarter, this decline appears to have resulted mainly from transitory factors. Private domestic final demand—that is, spending by domestic households and businesses—continued to expand in the first quarter, and the limited set of indicators of spending and production in the second quarter have picked up. The Committee thus believes that economic activity is rebounding in the current quarter and will continue to expand at a moderate pace thereafter.

With yesterday’s large downward revisions to consumption, private domestic final demand is now estimated to have fallen in the first quarter, though more recent data are still in line with higher spending in the second quarter.

It’s not at all clear how much the revision will alter the Fed’s economic outlook or their stance on policy accommodation. The focus is still largely on improvements in the labor market, but a -2.9% Q1 growth rate is far from the FOMC’s latest central tendency projections for 2014 of 2.1%-2.3% growth. So what exactly does the growth rate of real GDP have to average over the next three quarters to be in line with the FOMC’s projection? The answer is 3.77-4.03%. While those rates are not impossible, it remains highly unlikely given the average growth during the recovery, as the figure below makes apparent.


The September Jobs Report

The BLS (after reopening from the government shutdown) released the Employment Situation report for September, leaving the broad landscape of the economic recovery pretty much unchanged. The Great Recession is still casting a long shadow over the labor market as employment growth continues to be anemic and the employment/population and labor force participation remain at the lowest levels in more than thirty years. As we noted in an earlier blog, the weakness in the labor market continues to play against the Federal Reserve’s earlier attempts to provide forward guidance about asset purchases and interest rates based on thresholds for the unemployment rate.

Non-farm employment increased by 142,000, below most economist’s expectations. The private sector added only 126,000 jobs, of which 100,000 came from the service sector: the largest gains in Transportation and Warehousing (23.4k), Retail Trade (20.8K) and Temporary Help Services (20.2K). Given that the next report will come out on Friday November 8  (less than a month from this report) and that it will be influenced by the shutdown, it is unlikely to be very informative.



While a 142,o00 monthly employment gain is well below ‘normal recovery’ standards, the pace of improvement in the labor market has been consistent now for several years. Most labor market indicators have either returned to their pre-recession levels or are slowly nearing them. Consider the growth in non-farm employment:


While the level of employment has not yet reached its pre-Great-Recession peak in nearly six years, it has been climbing steadily. The monthly net employment gain has averaged 179,000 since January 2011.

The unemployment rate in September ticked down slightly from 7.3% to 7.2%. Initial claims, obviously affected by the recent shutdown spiked up, but the trend down is also indicative of an consistently improving labor market.



Interestingly, labor productivity measured by total output divided by the total number of labor hours looks very similar to all previous recoveries except for the 2001 cycle. Even as employment fell 5% below its peak level, productivity continued to rise.


As has been the case for some time now, the Taylor Rule indicates that the federal funds rate should be significantly higher than its current level. The rule prescribes an interest rate policy given the how far unemployment and inflation are from their long run stated targets of 6.5 and 2 percent, respectively. If the targets are hit exactly, the Taylor Rule gives a 4% fed funds rate. Currently, the rule suggests a rate of around 2%, well above the zero bound where the fed funds rate has been since 2010.


The question is what exactly the Fed is looking at that suggests that there continues to be a sufficient need to keep interest rates near zero and the rate of asset purchases high. One labor market indicator that might be particularly worrisome is the employment to population ratio. The employment to population ratio compared to all other recoveries looks much different, it fell nearly twice as much and has shown very little recovery.


Indeed, the ratio is now about what is was back in the early 1980’s. Unfortunately, we do not have any way of really knowing what this ratio “should” be! The reason is that female labor force participation, baby-boom retirees, schooling decisions and a host of other things determine the numerator, not just how many get employed given they choose to work. In other words, it is by no means clear that it is expected to rise back to its level in the year 2000 or even 2007. Note, though, it appears to have stabilized over the past few months.


Another possible troubling trend is the relationship between unemployment and job vacancies, referred to as the Beveridge Curve.  Below we plot the vacancy-unemployment relationship since 2000. The variables moved down and to the right during the previous recession as job vacancies fell and unemployment rose. During the recovery it has shown a counter-clockwise loop as it moves back up to the left. This movement is not unexpected as noted by the Diamond-Mortensen-Pissarides workhorse model of search unemployment. The vacancy data in this graph come from JOLTS, however, these data only started in December of 2000.


The graph below uses a different data set (now defunct), the help wanted advertising index from the Conference Board, but we have only used the data from 1951-1998. This is the series that was formerly used by those looking at job vacancies before the advent of JOLTS. The colors indicate different decades. Ok, just as a quick quiz: Where are the 1950s on the graph and where are the 1990s?


The answer to the quiz can be found here. The point is that the outward shift in the  Beveridge Curve might come about for different reasons. First, as noted in the standard labor search framework, the counterclockwise movement comes about since firms can quickly post vacancies, yet matching firms to workers takes time. However, outward shifts can occur due to skill mismatch, here is an example, or changing demographics. It’s not clear which factor is causing the trend in the Beveridge curve since 2010, as it is also not clear what the role of monetary policy is in correcting the outward movement.


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