macroblog

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The Atlanta Fed's macroblog provides commentary on economic topics including monetary policy, macroeconomic developments, financial issues and Southeast regional trends.

Authors for macroblog are Dave Altig and other Atlanta Fed economists.


February 05, 2016


Introducing the Refined Labor Market Spider Chart

In January 2013, Atlanta Fed research director Dave Altig introduced the Atlanta Fed's labor market spider chart in a macroblog post.

In a follow-up post that June, Atlanta Fed colleague Melinda Pitts and I introduced a dedicated page for the spider chart located at the Center for Human Capital Studies (CHCS) webpage. It shows the distribution of 13 labor market indicators relative to their readings just before the 2007–09 recession (December 2007) and the trough of the labor market following that recession (December 2009). The substantial improvement in the labor market during the past three years is quite evident in the spider chart below.

As of December 2012, none of the indicators had yet reached their prerecession levels, and some had a long way to go. Now, many of these indicators are near their prerecession values—and some have blown by them.

To make the spider chart more relevant in an environment with considerably less labor market slack than three years ago, we are introducing a modified version, which you can see here. Below is an example of a chart I created using the menu-bars on the spider chart's web page:

In this chart, I plot the May 2004 and November 2015 percentile ranks of labor market indicators relative to their distributions since March 1994. As with the previous spider chart, indicators such as the unemployment rate, where larger values indicate more labor market slack, have been multiplied by –1. The innermost and outermost rings represent the minimum and maximum values of the variables from March 1994 to January 2016. The three dashed gray rings in between are the 25th, 50th, and 75th percentiles of the distributions. For example, the November 2015 value of 12-month average hourly earnings growth (2.26 percent) is the 23rd percentile of its distribution. This means that 23 percent of the other monthly observations on hourly earnings growth since March 1994 are lower than it is.

I chose May 2004 and November 2015 because they had the last employment situation reports before "liftoffs" of the federal funds rate. November 2015 appears to be stronger than May 2004 for some indicators (job openings, unemployment rate, and initial claims) and weaker for others (hires rate, work part-time for economic reasons, and the 12-month growth rate of the Employment Cost Index).

The average percentile ranks of the variables for these two months are similar, as the chart below depicts:

Also shown in the chart is the Kansas City Fed's Level of Activity Labor Market Conditions Indicator. It is a sum of 24 not equally weighted labor market indicators, standardized over the period from 1992 to the present. In spite of its methodological and source-data differences with the average percentile rank measure plotted above, it tracks quite closely, especially since 2004. However, as shown in the spider chart that I referred to above, there is quite a bit of variation within the indicators that may provide additional information to our analysis of the average trends.

We made a number of other changes to the spider chart to ensure it reflects current labor market issues. These changes are documented in the FAQs and "Indicators" sections of the new spider chart page. Of particular note, users can choose not only the years for which they wish to track information, but also the period of reference that provides the basis of the spider chart. The payroll employment variable is now the three-month average change rather than a level. Temporary help services employment has been dropped, and two measures of 12-month compensation growth and the employment-population ratio (EPOP) for "prime-age workers" (25 to 54 years) have been added.

Some care should be taken when comparing recent labor market data values with those 10 or more years ago as structural changes in the labor market might imply that a "normal" value today is different than a "normal" value in, say, 2004. The variable choices for the refined spider chart were made to mitigate this problem to some extent. For example, we use the prime-age EPOP as a crude adjustment for population aging, putting downward pressure on the labor force participation rate and EPOP over the past 10 years (roughly 2 percentage points). This doesn't entirely resolve the comparability issue since, within the prime-age population, the self-reporting rate of illness or disability as a reason for not wanting a job has increased about 1.5 percentage points since 1998 (see the macroblog posts here and here and the CHCS Labor Force Participation Dynamics webpage). If this increase in disability reporting is partly structural—and a Brookings study by Fed economist Stephanie Aaronson and others concludes it is—some of the decline in the prime-age EPOP since the late 1990s may not be a result of a weaker labor market per se.

Other variables in the spider chart may have had structural changes as well. For example, a study by San Francisco Fed economists Rob Valleta and Catherine van der List concludes that structural factors explain just under half of the rise in the share of workers employed part-time for economic reasons over the 2006 to 2013 period.

To partially account for structural changes in trends, we allow the user to select one of 11 time periods over which the distributions are calculated. The default period is March 1994 to present, which is what was used in the example above, but users can choose a window as short as five years where, presumably, structural changes are less important. A trade-off with using a short window is that a "normal" value may not produce a result close to the median. For example, the median unemployment rate is 5.6 percent since March 1994 and 7.3 percent since February 2011. The latter value is much farther away from the most recent estimates of the natural rate of unemployment from the Congressional Budget Office and the Survey of Professional Forecasters (both 5.0 percent).

In our June 2013 macroblog post introducing the spider chart, we wrote that we would reevaluate our tools and determine a more appropriate way to monitor the labor market when "the labor market has turned a corner into expansion." The new spider chart is our response to the stronger labor market. We hope users find the tool useful.


February 5, 2016 in Data Releases, Economic conditions, Employment, Labor Markets | Permalink | Comments (0)

January 29, 2016


Shrinking Labor Market Opportunities for the Disabled?

The labor force participation rate (LFPR) among prime-age (25–54 years old) people averaged 80.8 percent in 2015, down 1.8 percentage points (2.6 million people) from 2009, according to the U.S. Bureau of Labor Statistics. According to our calculations from the Current Population Survey (CPS), a drop in LFPR among individuals with disabilities accounts for about a fifth of that decline.

Many people with disabilities are active in the labor force, working or looking for work. But the disabled LFPR has fallen a lot in recent years—it's down from 39.3 percent in 2009 to 34.5 percent in 2015. In other words, for some reason, more prime-age individuals with disabilities have opted out of the labor market.

A rising share of the prime-age population with a disability is not the culprit. In fact, the 2015 average disability rate was 6.4 percent, the same as in 2009. It is possible that the severity rather than incidence of disabilities has increased in recent years; labor market attachment does vary with type of disability, as this report shows.

But we suspect that the relatively large decline in disabled labor market attachment probably has also to do with shifts in employment opportunities for those with a disability. Some insight into this issue can be seen by looking at the change in employment shares in occupations that tend to have relatively low pay.

Workers with a disability tend to make less than nondisabled workers. We estimate the median wage of a worker with a disability in 2009 to have been 76 percent that of a nondisabled worker. In 2015, the relative median wage had declined to 74 percent. This drop is partly related to a relative increase in the share of employment for workers with a disability in low-paying occupations (which we define as jobs in personal care, food services, janitorial services, etc.), as the chart shows. The employment news has not been all bad for workers with a disability, however. There has been a rise in the share of employment of people with disabilities in higher-paying occupations since 2009, although they do tend to earn less than other workers in those types of occupations.

160129a

For some workers with disabilities, the financial return to employment versus nonemployment may have become somewhat less attractive in recent years. One factor related to the decision to engage in the labor market is the ability to collect Social Security Disability Insurance (SSDI). SSDI claims rose notably when the unemployment rate was high, which is consistent with the idea that the expected return to labor market activity for some individuals with a disability declined.

Job seekers with a disability have also struggled to find jobs offering the hours they desire. For example, the share of unemployed people finding full-time or voluntary part-time employment within a month, or "the hours-finding rate," is much lower for the prime-age disabled than for the nondisabled, and this share has improved relatively less over the recovery. Between 2009 and 2015, the average disabled hours-finding rate improved 4.7 percentage points, from 9.5 to 14.2 percent. During the same period, the nondisabled hours-finding rate increased 6.3 percentage points, from 13.0 to 19.3 percent.

The incidence of disability among prime-age individuals has not increased in recent years. But the labor market attachment of the disabled has declined, and this decline accounts for about one-fifth of the 1.8 percentage point fall in prime-age labor force participation between 2009 and 2015. Those with disabilities already have a harder time finding well-paying jobs, but that difficulty appears to have increased in that time span.

Photo of John RobertsonBy John Robertson, a senior policy adviser in the Atlanta Fed's research department, and


January 29, 2016 in Employment, Labor Markets | Permalink | Comments (0)

January 15, 2016


Are Long-Term Inflation Expectations Declining? Not So Fast, Says Atlanta Fed

"Convincing evidence that longer-term inflation expectations have moved lower would be a concern because declines in consumer and business expectations about inflation could put downward pressure on actual inflation, making the attainment of our 2 percent inflation goal more difficult."
—Fed Chair Janet Yellen, in a December 2, 2015, speech to the Economic Club of Washington

To be sure, Chair Yellen's claim is not controversial. Modern macroeconomics gives inflation expectations a central role in the evolution of actual inflation, and the stability of those expectations is crucial to the Fed's ability to achieve its price stability mandate.

The real question on everyone's mind is, of course, what might constitute "convincing evidence" of changes in inflation expectations. Recently, several economists, including former Treasury Secretary Larry Summers and St. Louis Fed President James Bullard, have weighed in on this issue. Yesterday, President Bullard cited downward movements in the five-year/five-year forward breakeven rates from the five- and 10-year nominal and inflation-protected Treasury bond yields. In November, Summers appealed to measures based on inflation swap contracts. The view that inflation expectations are declining has also been echoed by the New York Fed President William Dudley and former Minneapolis Fed President Narayana Kocherlakota.

Broadly speaking, there seems to be a growing view that market-based long-run inflation expectations are declining and drifting significantly away from the Fed's 2 percent target and that this decline is troublingly correlated with oil prices.

A problem with this line of argument is that the breakeven and swap rates are not necessarily clean measures of inflation expectations. They are really better referred to as measures of inflation compensation because, in addition to inflation expectations, these measures also include factors related to liquidity conditions in the markets for these securities, technical features of the inflation protection in each security, and inflation risk premia. Here at the Atlanta Fed, we've built a model to separate these different components and isolate a better measure of true inflation expectations (IE).

In technical terms, we estimate an affine term structure model—similar to that of D'Amico, Kim and Wei (2014)—that incorporates information from the markets for U.S. Treasuries, Treasury Inflation-Protected Securities (TIPS), inflation swaps, and inflation options (caps and floors). Details are provided in "Forecasts of Inflation and Interest Rates in No-Arbitrage Affine Models," a forthcoming Atlanta Fed working paper by Nikolay Gospodinov and Bin Wei. (You can also see Gospodinov and Wei (2015) for further analysis.) Essentially, we ask: what level of inflation expectations is consistent with this entire set of financial market data? And we then follow this measure over time.

As chart 1 illustrates, we draw a very different conclusion about the behavior of long-term inflation expectations. The chart plots the five-year/five-year forward TIPS breakeven inflation (BEI) and the model-implied inflation expectations (IE) for the period January 1999–November 2015 at a weekly frequency. Unlike the raw BEI, our measure is quite smooth, suggesting that long-term inflation expectations have been, and still are, well anchored.

160115a

After making an adjustment for the inflation risk premium, we term the difference between BEI and IEs a "liquidity premium," but it really includes a variety of other factors. Our more careful look at the liquidity premium reveals that it is partly made up of factors specific to the structure of inflation-indexed TIPS bonds. For example, since TIPS are based on the non-seasonally adjusted consumer price index (CPI) of all items, TIPS yields incorporate a large positive seasonal carry yield in the first half of the year and a large negative seasonal carry yield in the second half. Chart 2 illustrates this point by plotting CPI seasonality (computed as the accumulated difference between non-seasonally adjusted and seasonally adjusted CPI) and the five-year breakeven inflation.

160115b

Redemptions, reallocations, and hedging in the TIPS market after oil price drops and global financial market turbulence can further exacerbate this seasonal pattern. Taken together, these factors are the source of correlation between the BEI measures and oil prices. To confirm this, chart 3 plots (the negative of) our liquidity premium estimate and the log oil price (proxied by the nearest futures price).

160115c

Our measure of long-term inflation expectations is also consistent with long-term measures from surveys. Chart 4 presents the median along with the 10th and 90th percentiles of the five-year/five-year forward CPI inflation expectations from the Philadelphia Fed's Survey of Professional Forecasters (SPF) at quarterly frequency. This measure can be compared directly with our IE measure. Both the level and the dynamics of the median SPF inflation expectation are remarkably close to that for our market-based IE. It is also interesting to observe that the level of inflation "disagreement" (measured as the difference between the 10th and 90th percentiles) is at a level similar to the level seen before the financial crisis.

160115d

Finally, we note that TIPS and SPF are based on CPI rather than the Fed's preferred personal consumption expenditure (PCE) measure. CPI inflation has historically run above PCE inflation by about 30 basis points. Accounting for this difference brings our measure of the level of long-term inflation expectations close to the Fed's 2 percent target.

To summarize, our analysis suggests that (1) long-run inflation expectations remain stable and anchored, (2) the seemingly large correlation of market-implied inflation compensation with oil prices arises mainly from the dynamics of the TIPS liquidity premium, and (3) long-run market- and survey-based inflation expectations are remarkably close in terms of level and dynamics over time. Of course, further softness in the global economy and commodity markets may eventually drag down long-term expectations. We will continue to monitor the pure measure of inflation expectations for such developments.

By Nikolay Gospodinov, financial economist and policy adviser; Paula Tkac, vice president and senior economist; and Bin Wei, financial economist and associate policy adviser, all of the Atlanta Fed's research department


January 15, 2016 in Forecasts, Inflation, Inflation Expectations | Permalink | Comments (1)

January 07, 2016


What Occupational Projections Say about Entry-Level Skill Demand

On December 8, 2015, the U.S. Bureau of Labor Statistics (BLS) released its latest projections of labor force needs facing the U.S. economy from now until 2024.

Every two years, the BLS undertakes an extensive assessment of worker demand based on a number of factors: projected growth in the overall economy, dynamics of economic growth (such as which industries are growing fastest), labor force demographics (for example, the aging of the labor force), and expected changes in the labor force participation rate. Total worker demand includes both the number of workers needed to meet economic growth as well as the number of workers needed to replace current workers expected to retire.

A number of observations about these projections have already been identified. For example: overall employment growth will be slower, health care jobs will continue growing, and computer programmer jobs will lose ground.

In addition to the number of workers that will be in demand in different occupations in the U.S. economy, the BLS reports the skills that are needed for entry into those occupations—skills pertaining to both education levels and on-the-job training. As I perused this report, I was surprised at how much attention the press pays to the growth in high-skilled jobs at the expense of attention paid to those occupations requiring less skill but actually employ the greatest number of workers.

To be clear, the BLS does not project the educational requirements that will be needed for entering each occupation in 2024. It merely reports the most common education, training, and experience requirements needed to enter each occupation in the base year (in this case, 2014). Also it's important to note that these estimates of education needed to enter an occupation do not necessarily (and almost surely do not) match the average education of workers in that occupation at any given time, as those averages will reflect workers of many different ages and experience. The BLS gives a detailed description of how it identifies the entry-level educational and training requirements for each occupation. With those caveats in mind, let's take a look at the current distribution of jobs across the most common educational requirement for entering occupations.

The chart below tells us that, together, the typical entry-level requirement of a high school degree or less corresponds to nearly 64 percent of all jobs in the U.S. economy in 2014, while those typically requiring at least a bachelor's degree for entry represent 25.6 percent of jobs. The projected distribution of jobs in 2024 looks nearly identical: entry-level requirements (based on 2014 assessments) for 63 percent of all jobs requiring a high school degree or less and 26.2 percent requiring a bachelor's degree or more.

160106a

To be sure, the growth in higher-skill jobs far outpaces that for low- or middle-skill jobs. The number of jobs requiring a bachelor's degree or more for entry (in 2014) is expected to grow by 34 percent, whereas the number of jobs requiring less than a bachelor's degree is expected to grow by only 6 percent. This difference in growth rates reflects, in part, an expected continuation of the phenomenon of declining middle-skill jobs that my Atlanta Fed colleagues (and others) have discussed previously. Although labeled "middle-skill," entry into these occupations (such as office support and many manufacturing occupations) is not likely to require more than a high school degree.

However, even though the growth in low- and middle-skill jobs is expected to be slower than in higher-skill jobs, the total number of job openings based on predicted growth and replacement needs between 2014 and 2024 is expected to be nearly 32 million for jobs requiring less than a bachelor's degree for entry (based on 2014 assessments), with 30 million of those requiring only a high school degree or less. The total number of job openings requiring at least a bachelor's degree is expected to be about 12 million. In other words, the number of jobs requiring a high school degree or less in order to enter is twice as large as the number of jobs that require a college degree to enter.

The other side of this story, however, is that those jobs typically requiring less education at entry don't pay nearly as much as jobs requiring higher levels of education. The dollar figures in parentheses on the chart reflect the median annual salary of jobs with the different entry-level educational requirements. What we see is that while the majority of U.S. jobs require a high school degree or less at entry, those jobs pay less than half of what a job requiring at least a college degree pays.

So let's say a worker wants good job prospects (with a large number of job openings over the next decade), doesn't want to go to college, and wants to optimize chances for the highest salary possible. What is this worker to do? Fortunately, some of my colleagues at the Atlanta Fed, Cleveland Fed, and Philadelphia Fed have produced a report identifying what they call "opportunity occupations," which they define as those paying salaries higher than the geographically-adjusted national median for at least 70 percent of adults who have less than a college education. Some jobs among their top opportunity occupations are nurses, bookkeepers, first-line supervisors of retail workers, truck drivers, computer user support specialists, police officers, and electricians and workers in several other construction trades. Their report also identifies the U.S. metropolitan areas possessing a high share of opportunity occupations.

Even though the share of jobs in the U.S. economy requiring less than a college degree at entry is getting smaller (very slowly), the largest number of jobs in the economy is, by far, jobs requiring less than a college degree at entry, and those jobs offer a wide range of options that pay above the national median wage.

January 7, 2016 in Education, Employment, Labor Markets | Permalink | Comments (0)

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