The San Francisco Fed’s earlier expectation in May was that unemployment could peak at 11 percent in mid-2010 -- significantly higher than the consensus forecast of 10 percent by early 2010. Given the accelerating pace of joblessness, an updated analysis based on the factors cited by the San Francisco Fed would suggest that the peak might be even higher at 11.5 percent or 12 percent.
By Robert Stowe England
July 1, 2009
(Updated July 2 with new unemployment data)
An analysis of labor market data suggests that this recession may be followed by a jobless recovery like the one following 1991 rather than a sharp rebound in hiring that occurred after the recession in the early 1980s, according to an Economic Letter from the Federal Reserve Bank of San Francisco.
A jobless recovery is a term used by economists to describe a weak economic recovery that does not produce sufficient jobs quickly enough to prevent continuing increases in unemployment well into the economic growth cycle.
The FRBSF Economic Letter, authored by Mary Daly, Bart Hobijn, and Joyce Kwok, can be found at this link: http://www.frbsf.org/publications/economics/letter/2009/el2009-18.html
In its analysis, the San Francisco Fed examined the evidence from historic and current flow patterns of workers moving into unemployment (firings) and workers moving out of unemployment (hirings) in the current recession. They also examined trends in temporary layoffs and involuntary part-time employment.
Current trends were then compared to historic trends to look for guidance on how the recovery from the current recession is likely to unfold.
The authors identify two distinct flow patterns in hirings and firings that have shaped past recessions and recoveries since World War II.
One pattern is from the recessions in the 1970s and 1980s, which were marked by “nearly equivalent relative increases” in both the rate at which workers were fired and the decrease in the rate at which people were hired. In the recovery that followed these recessions, hiring and firing levels returned quickly to normal, and unemployment fell.
By contrast, there was a different pattern in the 1991 and 2001 recessions, when unemployment rates rose more as a result of the rate of decrease in hirings than by the rate of increase in firings.
In the recovery after the 1991 and 2001 recessions, the pace at which hiring and firing returned to normal levels was slower. There was not a quick rebound in hirings or a quick decline in the rate of firings as occurred in the 1970s and 1980s. This, in turn, led to a jobless recovery where unemployment remained high.
During the current recession, which began in December 2007, the pattern of inflows and outflows has been more like those of the 1970s and 1980s. That is, the pace at which firings have risen has been matched by a similar pace at which hirings have declined.
The authors lay out three scenarios for the recovery.
In one scenario, if the rate of hirings and firings were to remain the same as they have been through April 2009, then unemployment would be expected to rise to a peak around 10 percent in early 2010, roughly in line with the current Blue Chip consensus forecast, whose publisher can be found at this link: http://www.aspenpublishers.com/Product.asp?catalog_name=Aspen&product_id=SS01934600&cookie%5Ftest=1.
The authors then considered two additional alternative scenarios. One is a rapid rebound, as occurred in the 1982-1983 recovery. The other is a jobless recovery like the one in the 1991-1992 recovery, where the unemployment rate peaked much later in the cycle than it did in the 1982-1983 recovery.
The authors then examine two other labor market trends to further their analysis: the rate of temporary layoffs and the rate of involuntary part-time employment. Information on these trends is reported by households in the Current Population Survey. Data from the CPS can be found at this link: http://www.bls.gov/cps/.
In the current recession, the share of workers laid off is very low compared to the past. This means that there are fewer workers waiting to be called back to their jobs than in prior recessions.
Indeed, the share of workers temporarily laid off in this recession has fallen from 12.8 percent in December 2007 to 11.9 percent in April. (For May 2009 data see this link: http://www.bls.gov/web/cpseea32.pdf.)
By contrast, the share of workers temporarily laid off rose from 16.1 percent in July 1981 to 20.7 percent in November 1982.
A similar contrast exists with data on involuntary part-time workers. In the current recession, the share of workers employed part-time against their wishes rose from 3.0 percent in December 2007 to 5.8 percent in April 2009, an all-time high.
“This increase has been broad-based, occurring in a wide range of occupations,” the Economic Letter states. (For May 2009 data see this link: http://www.bls.gov/web/cpseea18.pdf and look for data under part-time employment for economic purposes.)
The authors combine data on involuntary part-time workers with the standard unemployment rate to arrive at an alternative measure of labor underutilization, which can be seen in the figure accompanying this article.
For the month of April, the combined total of the unemployment rate and the rate of involuntary part-time employment was 14.7 percent. This measurement “shows that the labor market has considerably more slack than the official unemployment rate indicates.” In other words, the labor situation is worse than indicated by the unemployment rate alone.
On June 5 the Department of Labor announced that the unemployment rate rose from 8.9 percent in April to 9.4 percent in May. (See the press release at this link: http://www.bls.gov/news.release/archives/empsit_06052009.pdf .)
Since the San Francisco Fed’s analysis was completed ahead of this jump in joblessness, it was not reflected in its review and projected scenarios. Indeed, the jump in the May unemployment rate added fuel to the argument for a higher peak in unemployment for this recession and recovery.
Update July 2: The unemployment rate rose from 9.4 percent in May to 9.5 percent in June, the highest level since August 1983, almost 26 years ago. See press release at this link: http://www.bls.gov/news.release/empsit.nr0.htm Since the recession began, the unemployment rate has almost doubled, rising 4.6 percentage points from its 4.9 percent level in December 2007.
Importantly, job losses rose to 467,000 from the prior month's 345,000 loss (revised downward to 322,000), dashing expectations job losses were decelerating. The increase in payroll job losses was the first in four months. The higher loss number spooked the market and increased speculation the onset of a recovery could be further delayed.
The July 2 report also showed anemic wage growth. Average hourly earnings of production and nonsupervisory workers on private nonfarm payrolls were unchanged at $18.53. The report further showed a decline in the average workweek for production and nonsupervisory workers on private nonfarm payrolls, which fell by 0.1 hour to 33.0 hours--the lowest level on record for the series, which began in 1964.
Given the uptick in the pace of rising unemployment, the question now is this: If the jobless recovery scenario unfolds, as expected by the San Francisco Fed, will unemployment still peak at 11 percent or will it rise closer to 11.5 percent or 12 percent before it peaks? And if rises higher, will the peak come later than mid-2010?
Note: The San Francisco Fed authors cite the following labor market studies that guided their analysis:
Robert E. Hall, “Job Loss, Job-Finding, and Unemployment in the U.S. Economy over the Past Fifty Years,” National Bureau of Economic Research, Macroeconomics Annual, 2005. pp. 101-137.
Robert J. Shimer, “The Cyclical Behavior of Equilibrium Unemployment and Vacancies,” American Economic Review 95(1) (2005): pp. 25-49.
Robert J. Shimer, “Reassessing the Ins and Outs of Unemployment,” National Bureau of Economic Research Working Paper 13421 (2007).
Copyright 2009© by Robert Stowe England