The Outlook for Employment and Unemployment

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The Outlook for Employment and Unemployment Rob Valletta* Federal Reserve Bank of San Francisco *The views expressed are solely my own and are in no way

1 The Outlook for Employment and Unemployment Rob Valletta* Federal Reserve Bank of San Francisco *The views expressed are solely my own and are in no way attributable to the Federal Reserve Bank of San Francisco or the Board of Governors of the Federal Reserve System. I thank Katherine Kuang for outstanding research assistance.

2 Overview Long-term unemployment: is it structural? Recent pickup in job loss Look for modest job growth ahead

3 Long-term unemployment at historic high Percent 12 Unemployment Rate and Duration Percent (all unemp) 50 Sep/ Unemp. Rate (left axis) Unemp 27 weeks+ (right axis) Source: Bureau of Labor Statistics 0

4 Average duration still rising Measures of unemployment duration Percent 5 Weeks 50 Sep/ % LT Unemployed (left axis) 30 2 Average Median Source: BLS and FRBSF calculations. Percent of long-term unemployed is the number unemployed for >6 months as a share of the labor force.

5 Is it Structural? Multiple variations on structural unemployment (1) Often equated with persistent (long-term) unemployment; but this can be cyclical (disappears as economy recovers) (2) mismatch between skills/location of workers and jobs (common definition) (3) sources of unemployment (other than frictional ) that contribute to a higher equilibrium natural rate of unemployment or NAIRU ( non-accelerating inflation rate of unemployment ). My view: moderate amount of type 3 (currently about 1 percentage point), will largely dissipate (see Daly-Hobijn-Valletta 2011; FRBSF WP )

6 Beveridge Curve suggests mismatch U.S. Beveridge Curve Monthly, December 2000 to August 2011 Vacancy Rate % points 2.4% points 7/11 1/11 8/11 4/10 3/ / Unemployment Rate Source: BLS, JOLTS, and CPS data. Dotted blue series indicates fit of values from December 2000 to June /09 1.5

7 Cross-industry dispersion has declined Dispersion Across 15 Major Industries Percent Employment Growth Aug/ Unemployment rate Sep/ Source: Bureau of Labor Statistics and FRBSF calculations

8 Cross-state dispersion also down Dispersion Across States Percent Employment Growth Aug/ Unemployment rate Source: Bureau of Labor Statistics and FRBSF calculations. Series include 50 states plus DC.

9 Little or no house lock effect Unemp Duration by Home Ownership (MSAs with large price declines) Weeks Renters 20 Owners Note: FRBSF calculations from monthly CPS micro data. Duration measured in expected completed form. MSA house prices from FHFA, change measured over Q2. 0

10 Moderate effect of UI extensions UI extended up to max of 99 weeks in Nov (Effect on unemp duration and rate: maxed ~ p.p.) Unemployment Durations, by UI Eligibility 3-month averages, seasonally adjusted Weeks Quits/entrants (UI ineligible) 20 Job losers (UI eligible) Note: FRBSF calculations of expected completed duration from CPS micro data. Dashed vertical lines indicate effective dates for expansions of maximum UI duration under EUC08 and EB. 0

11 Main cause of LT unemp: huge job loss Nonfarm Payroll Employment: 4 Recessions (relative to pre-recession peak) Peak= Months since employment peak Source: Bureau of Labor Statistics 92

12 .followed by jobless recovery Nonfarm Payroll Employment: 4 Recessions (relative to recession trough) Trough= Months since employment trough Source: Bureau of Labor Statistics 98

13 Net labor demand still weak Ratio of Unemployment to Vacancies Ratio Aug Source: Bureau of Labor Statistics and FRBSF calculations 0

14 Bottom line re structural: should be able to re-attain 5-6% unemployment How about recent developments?

15 Recent increase in job loss Monthly Layoff Rates (% of payroll employment) 3-month moving averages, seasonally adjusted Percent New UI Claims (thru Sep.) 1.5 Job Losers (CPS; thru Sep.) Source: Department of Labor, Bureau of Labor Statistics, and FRBSF calculations 0.5

16 S&L government layoffs up recently CPS Layoff Rates 3-month moving averages, seasonally adjusted Percent 2.0 All workers Aug/ State & Local Gov Source: FRBSF calculations using CPS micro data 0.0

17 Modest net job growth Payroll Employment % change over 12 months Percent 8 6 Private Sep/ Government Source: Bureau of Labor Statistics. Government excludes temporary Census employees. -8

18 Conclusions Elevated long-term unemployment largely due to weak aggregate demand Short-term employment outlook eased, but moderate growth in private sector jobs expected Offset by government job losses

FRBSF ECONOMIC LETTER

FRBSF ECONOMIC LETTER 1- January, 1 Why Is Unemployment Duration So Long? BY ROB VALLETTA AND KATHERINE KUANG During the recent recession, unemployment duration reached levels well above those of past