February 05, 2013
2013 Business Hiring Plans: Employment, Effort, Hours, and Fiscal Uncertainty
How much is fiscal uncertainty holding back hiring? The answer seems to depend on whom you ask. Early in January, the Atlanta Fed spoke to 670 businesses in the Southeast about employment. Conditional on the respondents’ 2013 hiring plans (expand, hold steady, or contract), the following set of charts summarizes the results for how the businesses viewed activity relative to their own interpretation of “normal” along three dimensions: their current employment level, the amount of effort required from their staff per hour, and the average hours worked per employee. These questions were modeled on questions asked in the Atlanta Fed’s December 2012 Business Inflation Expectations Survey. In the following three charts, the green bars represent firms that said they planned to expand employment in 2013. The grey bars represent firms that said they did not plan to change their employment level in 2013, and the red bars represent firms that planned to reduce employment in 2013.
The first chart shows the results for current employment. Regardless of hiring plans over the next 12 months, most firms said they were currently at or below normal employment levels. Those planning on increasing employment over the next 12 months were a bit more likely to say they have already surpassed normal levels of employment than other firms, while those looking to shed employees were very likely to say their employment level is below normal employment levels.
Chart 2 shows that businesses are generally pushing hard along the effort dimension. Firms were quite likely to say that their staff’s effort per hour worked was currently at or above normal, whether or not they were planning to change employment in 2013.
Chart 3 shows that firms planning to expand were very likely to say that average hours worked were at or above normal (28 percent said hours were above normal, 60 percent about normal), whereas firms planning to contract were more likely to say that hours were at or below normal (48 percent about normal, 39 percent below normal).
Taken together, these results suggest that some firms are approaching the limit of how far they can go along the intensive margins of effort and hours before they have to hire more workers. With effort elevated, as more firms increase average hours worked to above-normal levels, one might expect more hiring to follow.
Each business was also asked how uncertainty about future fiscal policy was affecting its hiring plans. Firms planning to reduce employment tended to cite fiscal uncertainty as having a negative impact on their hiring plans. However, for those firms, hours also tended to be well below normal, so it is unlikely that removing fiscal uncertainty would move many of those firms into expansion mode (although it may help stabilize their outlook).
In contrast, fiscal uncertainty was generally viewed as having less impact by those planning to expand employment and those planning to hold employment levels steady. Presumably, reducing fiscal uncertainty would move some of the firms planning to hold steady into expansion mode, and those planning to expand would do so a bit more. To get some idea of this potential, Chart 4 shows the responses by firms who reported above-normal effort per hour and above-normal average hours worked. About 40 percent of those businesses said that fiscal uncertainty had caused them to scale back their hiring plans.
It is unclear whether eliminating fiscal uncertainty would have a big impact on the hiring plans of these firms. But these results suggest that it sure couldn’t hurt.
By John Robertson, vice president and senior economist, and
Ellyn Terry, a senior economic analyst in the Atlanta Fed's research department
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November 05, 2012
Reading Labor Markets
When the September employment report was released on October 5, the top-line payroll employment gain for the month, as reported in the U.S. Bureau of Labor Statistics' (BLS) establishment survey, logged in at 114,000. Under standard assumptions, a number of this magnitude would be barely enough to absorb the growth of the labor force and keep the unemployment rate constant. In contrast, in that same October 5 report we learned from the BLS household survey that the measured unemployment rate fell from 8.1 percent in August to 7.8 percent in September.
According to Friday's BLS report on the employment situation for October, the top-line payroll employment gain for the month from the establishment survey was 171,000. At that pace—which is also the current average gain for the past three months—the Atlanta Fed jobs calculator suggests the unemployment rate should fall another one-half of a percentage point over the next year. At the same time, according to the BLS household survey, the unemployment rate rose from 7.8 percent in September to 7.9 percent in October.
This is as good an illustration as any to explain why, on November 1, Atlanta Fed President Dennis Lockhart said the following in a speech to the Chattanooga Tennessee Downtown Rotary Club:
In its post-meeting statement on September 13, the FOMC said, "If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability."...
For policy purposes, I think it's appropriate to be cautious about relying on a single indicator of labor market trends—for example, the unemployment rate—to determine whether the condition of "substantial improvement" has been met.
As the FOMC went into its September meeting, the official BLS statistics indicated that net U.S. job creation in August was a mere 92,000. That number is below the “all else equal” threshold of about 100,000 jobs required to keep the unemployment rate from rising, and that information is what Fed policymakers had in hand when they met on September 12–13 and decided on the policy action described by President Lockhart.
On Friday, after two revisions, the BLS told us jobs expanded by 192,000 in August, well above the average for the jobs recovery that started in early 2010, 100,000 jobs (more than double) above the initial estimate.
Looking through month-to-month variations is not a lot of help in real-time tea-leaf reading. Here is the 12-month moving average of employment gains, the blue line indicating the way things looked in September, the red line showing the way they look today:
Over time, it remains the case that monthly employment gains are pretty consistently coming in at 150,000 to 160,000 jobs created per month, and that rate has been enough to generate relatively steady declines in the unemployment rate:
That could change, of course, and the last four months of data have generally shown an acceleration in the job-growth trend. But the data definitely were not indicating that trend as it was happening, an unfortunate reality that isn't likely to change. One way to soften the blow of that problem, emphasized in the Lockhart speech, is to keep an eye on as a broad a set of signals as possible:
... let me share a qualitative framework for defining "substantial improvement."
The starting point certainly should be the headline unemployment rate and the payroll jobs number. The interpretation of movements in these two statistics would be enriched and reinforced by a review of additional data elements.
I added the emphasis there, as I think the point bears highlighting. President Lockhart goes on to give examples of what he would look for in determining whether the substantial improvement threshold has been met. Things like reductions in the numbers of marginally attached and discouraged workers, growing labor force participation rates, declining numbers of people who want full-time work but have to settle for part-time, and positive forward indicators like falling initial claims for unemployment insurance.
The Calculated Risk blog continues to be a one-stop shop for a lot of this information—here and here, for example—and overall nothing much overturns the picture of steady, but slow, progress. That would suggest the acceleration of the past several months is probably not a new trend, but a continuation of the same-old same-old. But then again, the track record painfully demonstrates how hard that is to know in real time.
By Dave Altig, executive vice president and research director at the Atlanta Fed
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October 10, 2012
Divergent Jobs Reports: Will the Real State of the Labor Market Please Stand Up?
The September employment report from the U.S. Bureau of Labor Statistics (BLS) was predestined to create a significant amount of buzz. But the confluence of headline jobs growth at a modest clip of 114,000 and a surprisingly large 0.3 percentage point reduction in the unemployment rate has made the report more buzz-worthy than we (here at macroblog) expected. Although some of the commentary has been more heat than light, there have been some particularly good reminders of the difference between the establishment survey data, from which the headline jobs figure is derived, and the household survey data, from which come the unemployment statistics. The discussions on Greg Mankiw's blog and by Catherine Rampell (at The New York Times's Economix blog) are especially useful. Or, perhaps even better, you can go to the source at the BLS.
It's important to remember that both surveys are subject to error and, because of its much smaller sample size, the household survey can be subject to particularly sizeable swings. Specifically, the standard error of the household survey's monthly change in employment is 436,000(!). Based on the most extreme assumptions about flows in and out of unemployment and in and out of the labor force, understating or overstating actual employment by 436,000 would imply a measured unemployment rate ranging from 7.5 percent to 8.1 percent. (The BLS estimate of the standard error for unemployment puts a range on September's number of 7.6 percent to 8 percent.)
In his post, Greg Mankiw makes reference to a Brookings Institution paper by George Perry from a few years back that offers what is probably good advice: since both the payroll and household surveys are subject to error, and since the errors in each are likely unrelated to one another, the clearest picture about what is happening to employment in real time can be gleaned by combining information from both.
In fact, in a directional sense, both the household and payroll surveys are giving the same signals. In the table below, we compare the recent trends in monthly job gains measured in both surveys. The coverage in the two reports is slightly different. Unlike the payroll count, the household survey includes the self-employed and counts multiple jobs held by a single person as a single instance of employment. Because of this, the BLS also reports an adjusted version of the household survey, called the payroll concept adjusted employment measure. This payroll-consistent measure is designed to control for definitional differences across the household and establishment reports and also makes statistical adjustments for changes to the population controls in various years. So we include the data from this measure in the last column of the table.
Overall, all three measures suggest a weaker trend over the last six months than over the last nine months. All three measures also indicate that things were somewhat stronger on average in the last three months than in the prior three months. The bottom line in our view is that, though the employment levels can be quite different across the three measures, all suggest that the jobs picture has improved somewhat in the past three months.
The suggestion in George Perry's Brookings paper—combining the household and establishment data—can be implemented by constructing a weighted average of the two surveys. In our variation we put weights in proportion to the inverse of the sampling variability of the payroll and household surveys, which would roughly imply an 80 percent weight on the establishment measure and 20 percent on the payroll-consistent household measure. The estimates using these weights are reported in the last column of the table above. Because the component employment measures display directionally similar trends in recent months, the weighted average does as well.
In a speech given a few weeks ago, Atlanta Fed President Dennis Lockhart, our boss here, offered the opinion that
Taking a two-year view, the trend rate of gains in employment has been roughly 150,000 per month. This pace would be sufficient, at current levels of participation in the workforce, to sustain a steady, gradual reduction of the unemployment rate.
As the September employment reports show, predicting the unemployment rate month to month can be tricky business, and there may be better ways than just extrapolating from the jobs data. But thus far we are inclined to think that slow but steady progress on the jobs front is still the best story.
By Dave Altig, executive vice president and research director at the Atlanta Fed
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September 20, 2012
Examining the Recession’s Effects on Labor Markets
Four years after the onset of the Great Recession, labor market outcomes in the U.S. remain depressed. The fraction of 16- to 64-year-old individuals who are employed fell from above 72 percent in 2007 to less than 67 percent in 2009 and remains stuck there. The unemployment rate rose from 4.5 percent to 10 percent and still hovers above 8 percent. And the fraction of unemployed workers who have been looking for a job for more than six months has increased to a share not seen in the United States in at least 60 years. The Atlanta Fed's Center for Human Capital Studies hosted a conference last weekend, organized by Richard Rogerson (Princeton University), Robert Shimer (University of Chicago) and the Atlanta Fed's Melinda Pitts that explored why the employment losses were so large and why the labor market recovery has been so weak. Examining these questions is important because different hypotheses about the nature of the recession suggest that different policy interventions may help to accelerate the recovery.
The paper "On the Importance of the Participation Margin for Labor Market Fluctuations" by Michael Elsby, Bart Hobijn, and Ayşegül Şahin offered some suggestions on how to think about the disparate behavior of the unemployment rate and labor force participation rate during the last couple of years. While the unemployment rate has steadily fallen back towards its historic levels, labor force participation has fallen, keeping the employment-population ratio constant. At some level, this movement suggests that the decline in labor force participation has acted as a relief valve for the unemployment rate. Using evidence on the gross flows of workers between employment, unemployment, and out-of-the-labor-force, Elsby and his coauthors question that interpretation. Instead, relatively few unemployed workers have dropped out of the labor force during the recovery, reflecting the high desire to work among the current stock of unemployed individuals.
A number of papers offered specific hypotheses about the reason for the large and persistent deterioration in labor market outcomes and tested those hypotheses using a variety of methodologies and datasets. For example, the paper "What Explains High Unemployment? The Aggregate Demand Channel" by Atif Mian and Amir Sufi explored the implications of the negative shock to household balance sheets that followed the collapse in house prices. They document that employment in the nonconstruction, nontraded sector declined most in U.S. counties that experienced the largest adverse shock to house prices, while the decline in the traded goods sector occurred equally nationwide. If wages and prices were flexible, we would expect the balance sheet shock to reduce the demand for nontraded goods and raise the supply of labor and hence employment in the traded good sector. The fact that this did not happen is evidence that wages and prices have not adjusted. They infer that roughly two-thirds of the total employment losses can be attributed to the balance sheet shock, in combination with wage and price rigidities.
A second hypothesis is that the recovery has been so weak because of underlying adverse trends in the U.S. labor market. "Manufacturing Busts, Housing Booms, and Declining Employment: A Structural Explanation" by Erik Hurst, Matt Notowidigdo, and Kerwin Charles shows how the ongoing decline in the demand for less educated men in manufacturing has generated a negative trend in labor market outcomes for these workers for three decades. This trend continued unabated during the years after the 2001 recession but was masked by the housing boom, which lifted employment for less-skilled workers for another five years. This observation is relevant for how one interprets the time series changes in labor market outcomes. If we view the housing boom as an aberration that is unlikely to resume, it is inappropriate to compare current labor market outcomes with those just preceding the onset of the Great Recession.
The paper "The Trend is the Cycle: Job Polarization and Jobless Recoveries" by Nir Jaimovich and Henry Siu focuses on a related but distinct long-term phenomenon in the U.S. labor market: job polarization. This refers to the fact that the U.S. labor market increasingly consists of low- and high-paying jobs with relatively few middle-income jobs. While this ongoing change has been noted by other researchers, Jaimovich and Siu show that this long-term evolution has not been occurring at a slow and steady rate but rather has been concentrated during aggregate downturns. They argue that the recent phenomenon of jobless recoveries is simply a reflection of the fact that these are the periods in which middle income jobs are disappearing, never to be brought back.
On the other hand, "The Labor Market Four Years Into the Crisis: Assessing Structural Explanations" by Jesse Rothstein explores and finds little direct evidence for a number of specific structural channels that might explain the weak recovery. For example, there are no identifiable sectors of the U.S. economy with strong wage growth, which suggests that the shortage of suitable workers is probably not a large constraint on employment growth.
A third hypothesis is that the weak recovery reflects an increase in economic uncertainty, which induces firms to wait rather than hire and invest. "Measuring Economic Policy Uncertainty" by Scott Baker, Nicholas Bloom, and Steve Davis proposes a novel methodology for quantifying the overall level of economic uncertainty and the portion of uncertainty that is induced by economic policy. They show that both measures of uncertainty have been elevated since the onset of the Great Recession and have scarcely recovered during recent years. "Uncertainty, Productivity and Unemployment in the Great Recession" by Edouard Schaal examines how an increase in uncertainty affects labor market outcomes in the context of a job search model. He focuses on one measure of uncertainty, the cross-sectional variability of sales growth rates across business establishments, which increased sharply in 2008 but has since subsided. Because of this finding, Schaal finds that the model can account for a large deterioration in labor market outcomes at the time of the shock but that it cannot explain why the deterioration has been so persistent.
A final hypothesis is that the weak recovery reflects disincentive effects of new tax and transfer programs that have been introduced since the onset of the recession. One aspect of this that has attracted particular attention is the extension of unemployment benefits. "The Effect of Unemployment Insurance Extensions on Reemployment Wages" by Johannes Schmieder, Till von Wachter, and Stefan Bender uses evidence from Germany to explore this hypothesis. They show that extending unemployment benefits by six months causes approximately a one-month increase in the amount of time it takes an individual to return to work. This extension has two effects on the wage of workers when they return to work. On the one hand, the additional time to look for a job allows workers to find better jobs. On the other hand, workers' skills tend to decline during an unemployment spell. On net, these effects roughly cancel so extended benefit programs do not have a large impact on average wages.
The framework that most economists use to study the behavior of unemployed workers is search theory. Robert Hall's paper "Viewing the Observed Acceptance Decisions of Job-Seekers through the Lens of Search Theory" analyzes detailed data on the job finding process for a sample of unemployed workers in New Jersey from 2009 in the context of this theory to assess how well the theory can provide a consistent explanation for observed behavior. Previous work had suggested that this framework has problems in accounting for observed job acceptance decisions, but Hall shows that with a few simple modifications, the framework offers a consistent explanation of how workers behave given labor market conditions.
The discussions at the conference questioned the usefulness of labels like deficient demand, structural unemployment, and cyclical unemployment. These terms mean different things in different contexts and do not clarify the key causal factors. Explanations such as "employment is slow because uncertainty is high" could easily fit under any of these banners. Instead, isolating the key changes that have taken place in the U.S. economy, and then scrutinizing the factors that have influenced how those changes have affected the labor market, would be more conducive to arriving at answers.
By Richard Rogerson of Princeton University and Robert Shimer of the University of Chicago, both advisers to the Atlanta Fed’s Center for Human Capital Studies, and Melinda Pitts, a research economist and associate policy adviser in the Atlanta Fed's research department
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June 07, 2012
The skills gap: Still trying to separate myth from fact
Peter Capelli has looked at the skills gap explanation for labor market weakness and sees more myth than fact:
"Indeed, some of the most puzzling stories to come out of the Great Recession are the many claims by employers that they cannot find qualified applicants to fill their jobs, despite the millions of unemployed who are seeking work. Beyond the anecdotes themselves is survey evidence, most recently from Manpower, which finds roughly half of employers reporting trouble filling their vacancies.
"The first thing that makes me wonder about the supposed 'skill gap' is that, when pressed for more evidence, roughly 10% of employers admit that the problem is really that the candidates they want won't accept the positions at the wage level being offered. That's not a skill shortage, it's simply being unwilling to pay the going price."
To some extent, the issue is semantic:
"But the heart of the real story about employer difficulties in hiring can be seen in the Manpower data showing that only 15% of employers who say they see a skill shortage say that the issue is a lack of candidate knowledge, which is what we'd normally think of as skill. Instead, by far the most important shortfall they see in candidates is a lack of experience doing similar jobs. Employers are not looking to hire entry-level applicants right out of school. They want experienced candidates who can contribute immediately with no training or start-up time..."
In the language of economists, Capelli is defining skill as the possession of generalized human capital, while businesses are defining skill as the possession of firm- or job-specific human capital. In more familiar language, Capelli appears to be focused on innate skill levels and education, while businesses are looking for the types of skills that would be attained through past on-the-job training. In even more colloquial language, Capelli wants businesses to appreciate book-learning, and businesses prefer those who have already survived the school of hard knocks.
We have recently completed our own version of the Manpower survey Capelli references. Our results are based on the responses of about 100 businesses in the Sixth Federal Reserve District represented by the Atlanta Fed, and we do not claim that they are conclusive. But we do think they are instructive.
Of those firms that said they experienced an increase in hiring difficulty over the last year, our poll respondents confirm the notion that businesses are looking for candidates with specific skills:
The lack of technical skills is the only factor that really jumps out as an issue that businesses have with the pool of job applicants. We often hear anecdotal complaints about job seekers' lack of "soft skills," or the difficulty in finding applicants who can pass required background checks. But only 14 percent of all selections indicated too few applicants with required interpersonal skills, and only 7 percent indicated a problem with applicants passing screening requirements like drug-use or credit checks.
On the other hand, our poll found scant support for Capelli's claim that businesses are "unwilling to pay the going price." Only 9 percent of respondents reported that too few applicants would accept the offered compensation package.
Despite the fact that we see some evidence consistent with skill mismatch, it is far from clear that this issue is the smoking gun that explains the current anemic state of job growth. When asked if a dearth of skilled applicants is a persistent problem, our survey respondents overwhelmingly answer "yes." But when asked if they have had more difficulty hiring over the past 12 months, the overwhelming majority answered "no":
Even among the minority of businesses that report recent hiring difficulties, only half indicate that this difficulty is restraining growth:
We infer a couple of lessons from all of this information. First, it does appear that there is a long-term skill level problem in the U.S. economy. Adopting Capelli's definition of skill does not mean the existence of skill mismatch is a myth.
But turning to the short run, we've been pretty sympathetic to structural explanations for the slow pace of the recovery. Nonetheless, we have yet to find much evidence that problems with skill-mismatch are more important postrecession than they were prerecession. We'll keep looking, but—as our colleagues at the Chicago Fed conclude in their most recent Chicago Fed Letter—so far the facts just don't support skill gaps as the major source of our current labor market woes.
By Dave Altig, executive vice president and research director at the Atlanta Fed, and
John Robertson, vice president and senior economist in the Atlanta Fed's research department
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June 01, 2012
Will labor force participation continue to rise?
The labor force participation rate ticked up in May, as did the rate of unemployment. As we have noted in the past, the near-term trajectory of the unemployment rate depends critically on what happens to the participation rate. So the question is, can we expect further upward changes in the participation rate? The answer depends a lot on the labor market attachment of those that are currently out of the labor force.
A few weeks ago, my frequent coauthor, Julie Hotchkiss, wrote about what we can gain from detailed labor market data about the activities of people who have exited the labor force. In her posting, she discussed the overall increase in exits from the labor force, with a focus on 25–54 year olds. Her work concluded that while people identified "Household Care" as the dominant activity for those not in the labor force, there has been a significant upward shift since the recession in those indicating "School" or "Other" as their primary reason for not being in the labor force. A supposition is that at least those that indicated they were in school would reenter the labor force at some point, doing so with a higher level of skills or, at least, with skills that are better aligned with labor demand. However, because we know little about those in the Other category, the future labor market attachment for them is less clear.
This post explores data on transitions into the labor force, primarily for those in the Other category. As in the earlier blog, the focus is on individuals aged 25–54, as retirement dominates the activity of older individuals not in the labor force and schooling dominates the activity of younger individuals not in the labor force.
One indicator of whether those in the Other group are planning to reenter the labor force is whether the individuals in this group are classified as marginally attached to the labor force. A nonparticipant who is marginally attached indicates they want employment or are available for employment. Also, they indicate having looked for a job in the previous year but not actively looking for a job at present. Using monthly data from the Current Population Survey (CPS) that are matched year over year, we see that the marginally attached workers do transition back into the labor force at twice the rate of all individuals who are not in the labor force, as chart 1 illustrates. These rates are relatively stable over time.
As chart 2 shows, a much higher proportion of individuals in the Other category are marginally attached to the labor force, compared to other types of nonparticipants. Moreover, the percentage of these marginally attached nonparticipants has increased from around 20 percent to 30 percent over the last three years.
This higher probability of marginally attached workers returning to the labor force combined with the significantly increased share of marginally attached workers in the Other category suggests that we should expect to find a higher share of those in the Other group returning to the labor force than we've seen in the past. But it turns out that this expected development is not what has happened. The Other group also includes individuals who are not marginally attached to the labor market, and their transition rates into the labor market have declined. On net, while the transition rate to employment is highest for the Other category (reflecting the large of share of marginally attached), the transition rate into the labor force does not fully reflect the increased level of marginal attachment to the labor force.
The group with the next highest transition rate to employment is in the School category, which reflects the inherent transitory nature of that activity. However, it is noteworthy that the school transition rate is lower than it was before the recession. This development reflects an increase in the share of individuals continuing to indicate that school is their primary reason for not participating in the labor force from one year to the next. And it suggests that the lower opportunity cost of attending school is influencing the decision to remain in school longer.
While these trends suggest that we could expect to see higher rates of return to the labor force going forward, this potential development will likely require a much better showing of jobs numbers than were seen today before kicking in.
By Melinda Pitts, research economist and associate policy adviser