12 February 2013

Long Term Unemployment Still High

Short term unemployment has recovered; long term unemployment hasn't.
The rate of short-term unemployment—six months or less—is almost back to normal. In January it was 4.9 percent of the labor force. That’s only 0.7 percentage point above its 2001-07 average.  
But the rate of long-term unemployment, 3 percent in January, is precisely triple its 2001-07 average, according to a Bloomberg Businessweek calculation based on Bureau of Labor Statistics data. (Those two rates—4.9 percent and 3 percent—add up to the overall unemployment rate of 7.9 percent.) A striking statistic: The long-term unemployed make up 38 percent of all workers without jobs, double the average share and just a few notches down from the 2010-11 peak of 45 percent.
From here (see also here).

College graduates are much less likely to be unemployed, however.

The employment recovery has been very slow by historical standards

The big picture graphic, found here is that five full years after peak pre-financial crisis employment, the total number of people employed is still down 2.4% from the peak and has been that low for four full years. 

Three post-war recessions (including the 1990 and 2001 recessions) never had that much of a reduction in employment from the peak at their worst points - although the 2001 recession from which it took four years to return to peak employment was the recession that took the longest time to return to pre-recession peak employment. 

No other post-World War II recession had such greatly reduced employment for even a full year (it was almost this low for more than a year in 1948 and 1981).

Employment levels have been recovering steadily for the past three years from 6.4% below peak (a post-Great Depression record) to 2.4% below peak now, although month to month, the payroll job gains have been somewhat erratic.  But, at the current rate, employment won't have recovered to pre-financial crisis levels until about December of 2014, leaving us with almost seven full years of reduced employment.

This is quite discouraging.  In almost every other post-World War II recession, the employment recovery has been about the same length of time as the period in which employment declined.  In this recovery, it took two years for employment to hit bottom, so we might reasonably have expected employment to have recovered already a year ago.  But, in fact, employment is on track to take five years to return to pre-recession levels.

Young college graduates earn much less but have fairly low unemployment

A possibly related trend is that the average earnings of college graduates aged 25-34 has fallen.  The peak was about $65,000 in 2005 and it has steadily dropped to about $55,000 in 2011, a decline of about 15% for an entire generation's middle class.

What factors drove financial crisis unemployment?

A technical analysis of the employment losses arising due to the financial crisis using econometric methods shows that declining sales (a.k.a. declining aggregate demand), rather than government regulation and taxes (including uncertainty regarding these factors), and a reduced availabity of credit, were virtually irrelevant by comparison.  The decline is consumer spending, in turn, has its source in the housing market collapse and high levels of consumer debt.

This shouldn't be surpising.  But, it is important to pay attention to the empirical data in the course of distinguishing economists who are telling a story that is credible and reality based, from economists who are operating on ideological and theory that have proved to be out of touch with the facts.

The irrelevance of the availability of funds for investment to economic growth at the moment is further corroborated by the remarkable hoards of cash that big business are accumulating and not spending.
According to the Federal Reserve, as of the third quarter of 2012 nonfinancial corporations in the United States held $1.7 trillion of liquid assets – cash and securities that could easily be converted to cash. By any measure, corporate cash holdings appear to be high and rising.

According to the Federal Reserve, nonfinancial corporations historically held liquid assets of 25 to 30 percent of their short-term liabilities. But this percentage began rising in 2001 and now tends to be in the 45 to 50 percent range. In the third quarter of 2012, it was 44.9 percent.
A recent study by Juan Sánchez and Emircan Yurdagul of the Federal Reserve Bank of St. Louis looked at the ratio of cash to assets at all publicly held nonfinancial, non-utility corporations. They found that, historically, such corporations held cash equal to about 6 percent of their assets, but that began rising in 1995 and is now more than 12 percent, as seen below.
Tax incentives are part of the reason that they are hording cash.  Retained earnings are subject to corporate incomes taxes, but not shareholder level taxes on dividends, creating an enduring incentive to hoard cash (that has been magnified since 1986 when changes in the tax law repealed the General Utilities doctrine that provided a way to avoid this result with a tax loophole).  The tax rules for multinational corporations likewise encourage companies to delay repatriating profits from foreign subsidiaries to the United States because this triggers additional U.S. taxes of those profits.

But, much of the cash hoarding is simply fundamental.  Big businesses have failed to identify business opportunties in which it make sense to invest their capital (also here).

Why has the recovery from the financial crisis been so remarkably slow?

Too Little Stimulus Spending and Too Many Government Spending Cuts

One of the key mistakes that was made in responding to the financial crisis from a policy perspective was a resort to austerity measures when increased government stimulus spending would have been more appropriate.  As one economics blog paraphrases the key observations of Federal Reserve Vice Chair Janet Yellen in a research speech:
Even as the Federal government provided some stimulus, state and local governments cut back significant for four consecutive years. And for the last couple of years, we've also seen austerity at the Federal level - and that will probably continue.
It turns out that President Obama is the only President in the period from the Nixon administration to the present under whom there has been a reduction in annualized real, per capita, federal government spending

Despite Republican charactizations of President Obama as a socialist spendthrift, government spending has fallen by more than 0.5% per year, while it increased by more than 2%-2.75% per year under the Republican Presidential administrations of Nixon-Ford, Reagan, Bush I and Bush II.  Government spending grew by about 2% per year under President Carter and by a bit less than 1% per year under President Clinton (both Democrats).  Contrary to conventional wisdom, Democrats grow federal spending much less rapidly than Republicans do, on average.  President Obama's regime has been particularly austere.  This was not good for the econmic recovery after the financial crisis.

The federal budget deficit is falling.

Enduring Income and Inventory Effects Of The Housing Bubble Collapse

Yellen also noted in her speech income effects and the lack of a recovery in residential real estate construction (because the problem in the first place was that too much of it had been built in the housing bubble):
During this recovery . . . residential investment . . . has contributed very little to growth since the recession ended. The reasons are easy to understand, given the central role that housing played in the Great Recession. Following an extended boom in construction driven in large part by overly loose mortgage lending standards and unrealistic expectations for future home price increases, the housing market collapsed--sales and prices plunged and mortgage credit was sharply curtailed. . . . the extraordinary collapse in house prices resulted in a huge loss of household wealth--at last count, net home equity is still down 40 percent, or about $5 trillion, from 2005.
As an aside, hotel occupancy rates have now recovered to almost pre-recession levels.

The Eurozone Crisis

Yellen finally noted the negative impact that the Euro-area recession and sovereign debt crisis has had on the economic recovery in the United States.

Bottom Lines

Stimulus spending mattered; interest rates and the money supply didn't.

My observations of a week ago that government fiscal policy (i.e. stimulus spending) matters to the course of business cycles, but that interest rates and the money supply do not, within reason, still stands.

Employment recovery is slow because many peak employment construction jobs aren't coming back.

On the other hand, I think that a focus entirely on federal government policy as the factor that has made the recovery from the financial crisis so slow is misplaced. 

This recovery has been slow, and the financial crisis was so deep, for reasons that are primarily economic rather than policy driven.  The housing bubble created artificially high levels of employment pre-recession that will not be and should not be restored because those employment levels involved jobs that were devoted to building housing that we didn't need.  Statistically, this shows up in the slow state of the housing market recovery.

The long term job losses in this recession are more like the employment losses associated with the declining employment in the United States manufacturing industry that destroyed jobs that will never come back, than it was like a mere "ordinary" cyclical wave in the business cycle.

An employment recovery to housing bubble peak levels is only going to be possible when vast numbers of construction and real estate industry workers retrain themselves and find new customary occupations in fields where the economy is not sated.

Employment recovery is slow because of a one time wealth reduction and debt paydown

Another factor that may be delaying the restoration of aggregate demand and with it employment may be a permanent deleveraging of the U.S. economy.  The financial crisis hit at a point where the U.S. economy had historically high debts levels.  Since then, consumer and business debt levels have fallen dramaticallly. 

On the consumer side, this is to a great extent due to written off mortgage debt the housing bubble collapse devalued collateral for mortgage loans that the borrowers were either not required to pay or were unable to pay upon foreclosure.  To a lesser extent, other kinds of consumer debts have been written off or have been paid off (in part because tightened credit limits have prevented them from incurring charges to make up for the amounts paid off).

On the business side, risk averse businesses in a weak economic climate have refrained from borrowing for new investment until the prospects for a real economic boom are manifest.

To the extent that the loans have been paid, payment of loan principal is a form of savings in lieu of consumption, weakening demand on a one time basis until the amount of debt in the economy has returned to more normal levels.

The Great Depression compared

A global heuristic is to imagine a normal business cycle as something that pushes down a spring with the weight of bad news, after which the spring bounced back.  But, the spring has a maximum load it can handle.  If pushed too hard, it deforms and loses its spring to some extent. 

The Great Depression and the post-financial crisis Great Recession, can be intepreted as instances when the economy exceeded its breaking point, and thus exceeded the range of circumstances in which it could recover as quickly as it declined.  The economy is only so robust, and we have in these two natural experiments empirically determined its breaking point.

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