David Andolfatto and Marcela M. Williams of St Louis Fed have written a superb essay in Annual Report -2010 of the Regional Fed.
They look at this labor market as a whole and then disaggregate it to show different patterns in the market post-crisis.
Disagreements over what should be done to stimulate the labor market stem, in part, from its complicated nature. The labor market has many moving parts, and policies frequently have unintended consequences. The purpose of this essay is to describe a few of these moving parts and to explain why it is sometimes difficult to interpret the ups and downs we experience in the labor market. One theme that emerges is that the big picture, as seen in the aggregated data, is not always representative of what is happening up close, as seen in the data that have been dissected.
We begin by looking at the timeline of U.S. employment since World War II. Employment, measured as a ratio of population size, remains relatively stable over time. This overall behavior, however, masks several underlying trends. For example, employment rates have generally been rising for women and falling for men. We look next at the share of employment across different sectors of the economy. Again, we see sharp differences in the evolution of employment over even relatively short periods of time. These different behaviors suggest, among other things, a degree of caution in the use of a “one size fits all” policy affecting the labor market.
We will then turn to the issue of unemployment. Contrary to common belief, unemployment is not technically a measure of joblessness. It is, instead, a measure of job search activity among the jobless. Millions of unemployed people find jobs every month, even in a deep recession. Millions of workers either lose or leave their jobs every month, too, even in a robust expansion. The large and simultaneous flow of workers into and out of employment suggests that the labor market plays an important role in reallocating human resources to their most productive uses through good times and bad.
The authors say – Labor Markets = Employed + Unemployed + Non participants. It is important to look at each of these three markets.
The categories of employment, unemployment and nonparticipation represent snapshots of labor market activity at a point in time. But workers belonging to a given category will not necessarily remain in that category for long. Over a given interval of time, a number of workers will make transitions from one labor market category to another. These transitions are called “worker flows.”
An analogy may be of some use here. Imagine a bathtub of water, with its drain unstopped, and the faucet turned on. The level of water at a point in time corresponds to the level of employment. The water draining from the tub corresponds to the flow of workers losing or leaving their jobs. The water pouring in from the faucet corresponds to the flow of workers finding jobs. Whether the water level rises or falls depends on the relative size of the inflow and outflow. And so it is with the level of employment, unemployment and nonparticipation.
They look at average US labor flows between 1996-03 and find people move quite a bit across the three. This is pretty natural as US economy is dynamic. Such flows are natural process. The problem is if people remain unemployed longer than earlier times. In 2007 recession this is what has happened. % of people unemployed for 27 weeks and more has increased from 17% in 2007 to 42% now:
The right-hand panel in Figure 7 depicts the distribution of unemployment spells in August 2010. It still remains true that the majority of unemployment spells are of short duration, but the fraction is now much lower than it was prior to the recession. The fraction of unemployed workers who have been out of work longer than 26 weeks has risen to 42 percent. For policymakers, this post-recessionary increase in the fraction of long-term unemployment is disconcerting. If unemployment durations are short, at least the pain of unemployment is short-lived. But long-duration unemployment is more of a concern. This will certainly be the case if, as some fear, long unemployment spells lead to a deterioration of skills, rendering workers unemployable when the job market recovers.
Then there is a superb essay at the end comparing labor markets of G-7 economies. US unemployment is unusually bad in most aspects:
- First US is placed third in GDP decline from peak. Still its rise in unemployment is clearly the worst For instance, Germany GDP decline is more but unemployment is much lower.
- In Civilian Employment in G-7 Countries, US has shredded most jobs
- Labor productivity for US has risen whereas in others it has fallen. This is again unusual:
Employment normally contracts during a recession. Moreover, real GDP usually declines proportionately more than employment. The implication is that labor productivity—measured as output per worker—tends to decline during a recession. This commonly observed behavior was evident among all the G-7 economies during the past recession, with the notable exception of the U.S.; see Figure 4.
As usual, there are several ways to interpret the data. First, it may be possible that the productivity of labor rose in the U.S. and that this event allowed U.S. firms to economize on labor. It is hard, however, to imagine a recession being the consequence of some random force that increased economy-wide labor productivity.
An alternative explanation is that low-skilled workers are affected disproportionately during a typical recession: They are the first ones to be let go. If this is the case, then the average quality of employed workers tends to rise during a recession. Perhaps this accounts for the increase in measured average labor productivity in the U.S. If this hypothesis is correct, then to explain the data, one must be willing to entertain the idea that business managers are somehow more willing or able to lay off lower-skilled workers (or workers in general) in the U.S. relative to other G-7 economies.
Hmmm…What was seen as the strength of US labor market- its flexibility has become its weakness in this recession.
Superb research. Very well done. A primer on US labor markets…