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September 17, 2013

The ABCs of LFPR

As the Federal Open Market Committee (FOMC) meets amid much speculation about the next steps for monetary policy, it does so in in the context of an August 2013 Employment Situation report that was generally viewed as a mixed bag. The employment numbers undershot the consensus among most market observers, while the unemployment rate edged down again. But even the drop in the unemployment rate—a cumulative 0.8 percentage point over the past 12 months—failed to impress everyone. Martin Feldstein, for instance:

The official unemployment rate has declined sharply (to 7.3% last month from 10% in October 2009) only because so many people have stopped looking for work or are working part-time.

Part of what Professor Feldstein is referring to, of course, is the labor force participation rate (LFPR), which measures the share of the adult population that is in the labor force. LFPR includes those who are employed and those who are unemployed but looking for a job, but not those who are unemployed and are not looking for a job (which includes retirees and discouraged workers).

We generally refrain from direct commentary about issues related to monetary policy in the time surrounding FOMC meetings. I won't break with that tradition but am more than happy to highlight a resource that can help you draw your own conclusions about all things having to do with the labor market, including the LFPR.

Our Center for Human Capital Studies' Federal Reserve Human Capital Compendium is a collection of Federal Reserve System research published on topics related to employment, unemployment, and workforce development. Our latest update offers several entries that address the LFPR and its implications for the labor market. Two recent additions:

Will a Surge in Labor Force Participation Impede Unemployment Rate Improvement? Researchers at the Richmond Fed concluded that, in the short run, the LFPR and the unemployment rate are negatively correlated. This conclusion is derived from the fact that unemployed participants in the labor force are more likely to leave the labor force than those who are employed. Also, movement from unemployed non-participant to employed participant (basically skipping the unemployed-participant phase) is more likely in an improving labor market. They concluded that movements in the LFPR lag six months behind movements in the unemployment rate.

Cyclical versus Secular: Decomposing the Recent Decline in U.S. Labor Force Participation. Researchers at the Federal Reserve Bank of Boston found that since 2008, the decline in the LFPR largely reflects demographic effects of an aging population. Furthermore, the cyclical response of the LFPR during the latest recession and recovery period has been smaller than expected, so the unemployment rate would have been three-quarters of a percent lower if the LFPR had followed historical norms. They conclude that going forward, the unemployment rate should give an accurate read on labor market conditions and that further cyclical declines in the LFPR are unlikely if the labor market continues to improve.

But much more information on the LFPR and other topics including wages and earnings, outsourcing, and productivity is available. If you're looking for something to do while you await the FOMC's decision, one option is building a little human capital of your own with our Human Capital Compendium.

Photo of Whitney MancusoBy Whitney Mancuso, a senior economic analyst in the Atlanta Fed's research department


September 17, 2013 in Employment, Labor Markets | Permalink

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"Researchers at the Federal Reserve Bank of Boston found that since 2008, the decline in the LFPR largely reflects demographic effects of an aging population" Is this a joke? Take a look at CR's graph of the participation rate of those in the 25-54 year-bracket. The rather sudden and steep decline since 2008 isn't oldsters retiring. What am I missing here?

Posted by: Fred | September 26, 2013 at 04:44 AM

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September 13, 2013

Job Reallocation over Time: Decomposing the Decline

One of the primary ways an economy expands is by quickly reallocating resources to the places where they are most productive. If new and productive firms are able to quickly grow and unproductive firms can quickly shrink, then the economy as a whole will experience faster growth and the many benefits (such as lower unemployment and higher wages) that are associated with that growth. Certain individuals may experience unemployment spells from this reallocation, but economists, starting with Joseph Schumpeter, have found that reallocation is associated with economic growth and wage growth, particularly for young workers.

Recently, a number of prominent economists such as John Haltiwanger have expressed concern that falling reallocation rates in the United States are a major contributor to the slow economic recovery. One simple way to quantify the speed of reallocation is to examine the job creation rate—defined as the number of new jobs in expanding firms divided by the total number of jobs in the economy—and the destruction rate, defined likewise but using the number of jobs lost by contracting firms. Chart 1 plots both the creation and the destruction rates of the U.S. economy starting in 1977. These measures track each other closely with creation rates exceeding destruction rates during periods of economic growth and vice versa during recessions. The most recent recession saw a particularly sharp decline in job creation (you can highlight the creation rate by clicking on the line), but it is clear this decline is part of a larger trend that far predates the current period. A decline in these rates could indicate less innovation or less labor market flexibility, both of which are likely to retard economic growth. Feel free to explore the measures for yourself using the figure’s interactivity.

To better understand these important trends we create a common variable called reallocation, which is defined as total jobs created plus total jobs destroyed, divided by total jobs in the economy. This formula creates one measure that describes how quickly jobs are moving from shrinking firms to expanding firms. Using data from the U.S. Census Bureau’s Business Dynamic Statistics, we examine differences in this variable across sectors and across states. Furthermore, using some basic data visualization tools, we can see how reallocation has evolved over time across these dimensions.

Chart 2 plots reallocation rates by industry from 1977 to 2011. The plot highlights the reallocation rate for all industries, but you can also select or deselect any industry to more clearly view how it has changed over time. Scrolling over the lines allows you to view the exact rates by industry in any time period. A few interesting patterns emerge. First, sectors have different levels of job reallocation in the cross section. Manufacturing stands out as having particularly low reallocation rates, probably the result of the large fixed-cost capital requirements required in production. Second, not all industries experienced sharp declines during this period. If you highlight the finance, insurance, and real estate sector, it is evident that reallocation rates actually increased for this sector until the most recent recession. Retail and construction, on the other hand, have experienced steady and significant declines during the past 35 years.

Chart 3 maps reallocation rates across states for the year 1977. This figure provides us with a cross sectional view of geographical differences in reallocation rates. States with the highest reallocation rates are dark brown, and states with the lowest rates are light brown. You can click through the years to visually capture how these rates have changed overtime for each state. Compare the color of the map in 1977 with the color in 2011. Scroll the mouse over any state to view that state’s reallocation rate in the particular year.

As with industries, states display clear cross sectional differences in their reallocation rates. The highest rates are found in western states, Florida, and Texas, and the lowest are in the Midwest. Scrolling through the years shows that the decline in reallocation rates is common to the entire country.

Overall, these figures display a stark trend. The economy is reallocating jobs at much slower rates than 20 or even 10 years ago, and this decline is, with only a few exceptions, common across states and industries. Economists are just now starting to explore the causes of this trend, and a single, compelling explanation has yet to emerge. But some explanation is clearly in order and clearly important for economic policymakers, monetary and otherwise.

By Mark Curtis, a visiting scholar in the Atlanta Fed's research department

Please note that the charts and maps in this post were updated and improved on November 27, 2013.


September 13, 2013 in Economics, Employment, Labor Markets | Permalink

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August 16, 2013

GDP, Jobs, and Growth Accounting

The latest on productivity, from the Associated Press via USA Today:

U.S. worker productivity accelerated to a still-modest 0.9% annual pace between April and June after dropping the previous quarter.

The second-quarter gain...reversed a decline in the January-March quarter, when the Labor Department's revised numbers show productivity shrank at a 1.7% annual pace.

Labor costs rose at a 1.4% annual pace from April through June, reversing a revised 4.2% drop the previous quarter.

Productivity measures output per hour of work. Weak productivity suggests that companies may have to hire because they can't squeeze more work from their existing employees....

Productivity growth has been weaker recently, rising 1.5% in 2012 and 0.5% in 2011.

Annual productivity growth averaged 3.2% in 2009 and 3.3% in 2010. In records dating back to 1947, it's been about 2%.

Though not quite in the category of spectacular—and coming off revisions that if anything made things look weaker than previously thought—last quarter's uptick is a welcome development. Earlier this week, in a speech to the Atlanta Kiwanis club, Atlanta Fed President Dennis Lockhart laid out several scenarios with materially different implications for how the GDP and employment picture might play out over the next several years:

As a matter of arithmetic, healthy employment growth coupled with tepid GDP growth implies weak labor productivity growth. And in fact, productivity growth in recent quarters has been significantly below historical norms.

[I] believe that the recent low growth of productivity is probably just a temporary downdraft after the rather strong productivity growth when the economy emerged from recession.

If productivity growth rebounds to more typical levels, the coincidence of job gains at a pace of around 190,000 per month in recent months and GDP growth below 2 percent cannot persist. Again, it's a matter of arithmetic. Either GDP growth will rise to levels consistent with recent employment growth, or employment growth will fall to levels more consistent with the weak GDP data we've been witnessing.

I've got a working assumption on this question, and it is captured in the Atlanta Fed's baseline forecast for the second half of this year and 2014. This outlook calls for a pickup in real GDP growth over the balance of 2013, with a further step-up in economic activity as we move into 2014.

You can get a sense of this outlook by considering the output of one particular model that we use here at the Atlanta Fed. The model, which is purely statistical, gives us a view into how productivity, GDP, employment, and the unemployment rate might move together (along with other labor market variables like labor force participation and average hours worked). Here is the bottom line of an exercise that assumes GDP growth through 2015 comes in at about the central tendency of the projections from the Federal Reserve's June 2013 Summary of Economic Projections.

For this exercise, we have adjusted the 2013 growth forecast down slightly due to the weaker-than-expected growth in the first half of the year. Additionally, we have plugged in assumptions for productivity growth—1.5 percent per quarter (SAAR), the average gain over the past eight years—and nonfarm business output growth. We then let the model forecast the remaining variables, all of which are for the labor market:

130816a

The model forecasts employment gains in the neighborhood of what the economy has been generating over the past several years, and a steadily declining unemployment rate.

Now consider two "stall" scenarios in which GDP growth fails to get beyond 2.3 percent. The first of these scenarios is the one noted in the Lockhart Kiwanis speech, with productivity recovering but job growth falling off the pace:

130816b

From a policy perspective, this one may not cause too much handwringing about the appropriate course of action. The weak GDP growth is accompanied by a failure to make the type of progress on the unemployment rate that the FOMC has clearly articulated as the necessary condition for adjustments in policy rates:

[T]he Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.

Absent unforeseen issues with inflation, staying the course would seem to be in order.

But there is a second stall scenario in which productivity and GDP growth remain tepid, even as labor market indicators improve:

130816c

The difference in this experiment is that the expectations of those that President Lockhart referred to in his speech as the "innovation pessimists" are correct. Recent weakness in productivity growth reflects a fall in trend productivity growth. In this case, essentially identical labor market outcomes would nonetheless correspond to an economy that can't seem to hit "escape" velocity.

If it is clear that this configuration of outcomes is associated with a structural break in productivity growth, an argument against monetary policy stimulus would have some weight. After all, in most cases we don't expect the tools of monetary policy to fix structural efficiency problems.

But, alas, such clarity rarely arrives in real time. The experiments above give some sense of how difficult it can be to discover the right branch to follow on the policy decision tree.

Photo of Dave AltigBy Dave Altig, executive vice president and research director of the Atlanta Fed


August 16, 2013 in Data Releases, Employment, GDP, Labor Markets, Productivity, Unemployment | Permalink

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The fundamental challenge with income statistics is that we are being confused by the terrible impact of a completely left tailed incomes distribution prior to the crisis with a job growth that is happening at the bottom of the pyramid, which effectively means that even though the job numbers look good, its impact on the GDP growth would be minuscule.

Posted by: Procyon Mukherjee | August 17, 2013 at 07:01 AM

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August 09, 2013

Myth and Reality: The Low-Wage Job Machine

In the wake of the July employment report released last week, an interesting graphic appeared in a Wall Street Journal article with the somewhat distressing title "Low Pay Clouds Job Growth." The graphic juxtaposed average wages by sector (as of July 2013) with changes in the numbers of jobs created by sector (from July 2011 through July 2013). I've reproduced that chart below, with a few enhancements:


For the 17 sectors, the red circles represent the five sectors with the lowest average wage as of July. The green circles represent the five sectors with the highest average wages, and the blue circles represent those with average wages between the high and low groups. The size of each of the circles in the chart represents the share of employment in that sector during the July 2011 to July 2013 period.

The clear implication of the article is that things are even worse than you think:

Employers added a seasonally adjusted 162,000 jobs in July, the fewest since March, the Labor Department said Friday, and hiring was also weaker in May and June than initially reported. Moreover, more than half the job gains were in the restaurant and retail sectors, both of which pay well under $20 an hour on average.

That situation may indeed be something worth worrying about, but if so it is nothing new. The following chart shows the percentages of job gains sorted by low-wage, middle-wage, and high-wage sectors for each of the U.S. expansion periods dating back to 1970:


I've dated the current recovery from March 2010: the month that employment gains turned positive. It should also be noted that the cross-recovery comparisons are not quite apples-to-apples given changes in the way sectoral employment is reported by the U.S. Bureau of Labor Statistics. (There are only 11 sectors, for example, in the recovery periods prior to 1991.)

But I don't think this materially alters the basic picture: The lowest-wage sectors have consistently produced 40 percent to 50 percent of the job gains in recent recoveries. Though the percentage was slightly higher in July, it was not materially so. And this recovery does not look at all unusual when taken as a whole.

What is more striking—at least relative to the earlier recoveries in the chart—is the growing disparity between the average wages across sectors, as this animation clearly illustrates:


Importantly, the animation also clearly illustrates that the growing wage disparity is a trend, not a unique feature of the postcrisis period. There are lots of interesting things being written about the reasons for this trend, and it is a vitally important topic. But I'm pretty sure the answers to the important policy questions lie well beyond the current business cycle.

Photo of Dave AltigBy Dave Altig, executive vice president and research director of the Atlanta Fed


August 9, 2013 in Employment, Labor Markets | Permalink

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Can you remake your animated gif adjusted for inflation? I think it's hard to see the distribution changes from the initial data that are all compressed at the low end of the scale. Using a percentage scale relative to the max would also do it.

Posted by: Tom in MN | August 10, 2013 at 11:28 AM

We have 11M workers completely unaccounted for, since they are forced into the underground economy by tax codes and work visa necessities. Also, many folks, even legal residents, are independent contractors, perhaps with income off the books, another way of avoiding things such as the 12.5% payroll tax and now the health care issues. 12.5% is $1.25 at $10 an hour, a quite substantial amount to many at that level. Adding these in would likely raise the actual wages in the lower end. Many skilled construction workers and landscapers are making far abover $10 an hour off the books.

Posted by: pete | August 14, 2013 at 05:00 AM

I was think the same as Tom: I think an inflation-adjusted scale would be more useful. Another option is showing percentage pay-increase in each sector.

Posted by: BTN | August 30, 2013 at 10:00 AM

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August 02, 2013

What a Difference a Month Makes? Maybe Not Much

By most accounts, the July employment report released this morning was something of a disappointment, perhaps more because it fell short of expectations than for any absolute signal it sends about the state of the economy. To be sure, the 162,000 net jobs created in July were below June’s 12-month average, which itself ticked down a bit as a result of negative revisions to the May and June statistics.

“Ticked down a bit” is the operative phrase, as the average monthly jobs gain from May 2012 through June 2013 now registers at 189,000 as opposed to the 191,000 reported last month. With this month’s new data, the 12-month average gains (from June 2012 to July 2013) clock in at 190,000 jobs per month, still right on the trend that has prevailed over the past couple of years. In other words, not much has changed in the longer view of things.

Our interests here at macroblog run to the policy implications, of course. Not too surprisingly, focal points are 1) the 7 percent unemployment rate neighborhood that Chairman Bernanke has associated with Federal Open Market Committee forecasts of what will prevail around the time that the Fed’s current asset purchase program might be ending and 2) the benchmark 6 1/2 percent unemployment that the statement following this week’s FOMC meeting continued to identify as the earliest possible point at which adjustments to the Committee’s interest rate target will be considered.

Following last month’s employment report I offered up calculations from the Atlanta Fed’s Jobs Calculator™ regarding the dates at which these unemployment thresholds might be reached, under the assumptions that jobs gains average 191,000 per month going forward, the participation rate remains constant at the reported June level, and there will be no change in the relationship between employment statistics from the payroll (or establishment) survey (whence comes the headline jobs number) and the employment statistics from the household survey (statistics used to calculate the unemployment rate). All of these figures change month to month, so it may be useful to update that exercise with current statistics (with last month’s calculations noted parenthetically):

Job growth and unemployment rates as of July 2013 (June 2013) employment reports


Not much change there. In fact, the unemployment rates in these calculations fall a little faster than last month’s calculations suggested, in part due to the ancillary assumptions on participation rates and the payroll-employment /household-employment ratio.

In the spirit of pessimism—an economist’s university-given right—I’ll ask: what if the latest 162,000-job-gain number is closer than the trailing 12-month average to what we will experience going forward? Easiest enough to explore:

Unemployment rates under the assumption of 162,000 jobs created per month going forward


I will leave it to you to decide whether the differences imply important policy distinctions.

Side note: For a broader look at labor market conditions, take a look at the Atlanta Fed’s spider chart, updated as of today’s employment report.

Photo of Dave AltigBy Dave Altig, executive vice president and research director of the Atlanta Fed


August 2, 2013 in Data Releases, Employment, Labor Markets, Monetary Policy | Permalink

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July 05, 2013

A Quick Independence Day Weekend, Post-Employment Report Update

From what I gather, a lot of people took notice of this statement, from Chairman Bernanke’s June 19 press conference:

If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year. And if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear. In this scenario, when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7 percent, with solid economic growth supporting further job gains, a substantial improvement from the 8.1 percent unemployment rate that prevailed when the Committee announced this program.

That 7 percent assessment to which the Chairman was referring comes, of course, from the outlook summarized in the Summary of Economic Projections, published following the June 18–19 meeting of the Federal Open Market Committee.

Here are the unemployment forecasts specifically:

Macroblog_2013-07-05A

The highlighted numbers represent the “central tendency” projections for the average fourth quarter unemployment rate in 2013, 2014, and 2015 (in blue) and the “longer run” (in green). Naturally enough, getting to a 6.5 percent to 6.8 percent unemployment rate in the fourth quarter of 2014 is pretty likely to imply the unemployment rate crossing 7 percent sometime around roughly the middle of next year.

So, how do things look after the June employment report? As is our wont, we turn to our Jobs Calculator to answer such questions, and come up with the following. If the U.S. economy creates 191,000 jobs per month (the average for the past 12 months), and the labor force participation rate stays at 63.5 percent (its June level), and all the other important assumptions (such as the ratio of establishment survey to household survey employment) remain the same, then the economy’s schedule looks like this:

Macroblog_2013-07-05B

Note also the implication of this statement...

[T]he Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent , inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.

...which certainly aids in understanding this information, from the last Summary of Economic Projections:

Macroblog_2013-07-05C

I will leave it to the principals to articulate whether today’s report materially changes anything contained in last month’s projections. In the meantime, enjoy your weekend.

Photo of Dave AltigBy Dave Altig, executive vice president and research director of the Atlanta Fed


July 5, 2013 in Economics, Employment, Federal Reserve and Monetary Policy, Forecasts, Labor Markets | Permalink

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The analysis describing the decline in the unemployment rate to 6.25-percent in July 2015 assumes that "the labor force participation rate stays at 63.5 percent."

Other than spring 2013, the last time the LFPR was lower than 63.5-percent was in May 1979 ... 34 years ago.  So I don't challenge your arithmetic, but find it highly improbable that the LFPR will stabilize at current levels as the economy expands. People flood into the labor market when jobs become easier to find.

The last time the unemployment rate was at (about) 6.25-percent was in October 2008, at which time the LFPR stood at 66-percent.  In the previous business cycle, the LFPR remained above 67-percent for an extended period between 1997 and 2001.

According to the Jobs Calculator, monthly job growth of 190,000 and a LFPR of 66% would bring the unemployment rate down to 6.25-percent about 94 months from now ... in mid-2021.

Posted by: Thomas Wyrick | July 08, 2013 at 09:33 PM

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June 10, 2013

Casting a Web over Jobs Data

Writing in the Wall Street Journal prior to the U.S. Bureau of Labor Statistics' Friday release of the May employment data, Ed Lazear (Stanford professor and former chair of George W. Bush's Council of Economic Advisers) made a plea for an expansive interpretation of labor market conditions:

...when Friday's jobs report is released, the unemployment rate and the number of new jobs will come in for close scrutiny. Then again, they always attract the most attention. Even the Federal Reserve focuses on the unemployment rate...

Yet the unemployment rate is not the best guide to the strength of the labor market, particularly during this recession and recovery. Instead, the Fed and the rest of us should be watching the employment rate. There are two reasons.

First, the better measure of a strong labor market is the proportion of the population that is working, not the proportion that isn't…

Second...There is another highly relevant measure that captures what is going on in the economy. "U6" counts those marginally attached to the workforce—including the unemployed who dropped out of the labor market and are not actively seeking work because they are discouraged, as well as those working part time because they cannot find full-time work...

The striking deficiency in jobs is borne out by the Bureau of Labor Statistics' Job Openings and Labor Turnover Survey. Despite declining unemployment rates, the number of hires during the most recent month (March 2013) is almost the same as it was in January 2009, the worst month for job losses during the entire recession (4.2 million then, 4.3 million now).

Faithful readers of macroblog will recognize that, contrary to the narrow focus that Professor Lazear suggests preoccupies the Federal Reserve, one of the Fed's consistent themes has been to cast our intellectual nets over a broad swath of labor market indicators. In fact, one of our favorite blog topics over the past six months has been the construction of "spider charts" to visualize the status of the labor market beyond what can be gleaned from simply looking at the standard unemployment and employment statistics.

Internally, these spider charts have become one of our primary tools for evaluating the status of the labor market. Because we have also found this tool to be an effective means of communicating the overall labor market picture, we are pleased to announce that the labor market spider chart has been added to our portfolio of labor market tools available on the Atlanta Fed's Center for Human Capital Studies' web pages (a portfolio that includes the Jobs Calculator and the Human Capital Compendium, which is a repository of human capital-related products from throughout the Federal Reserve System). The spider chart is presented both in simple levels that were first introduced in macroblog on January 13, 2013, as well as in rates, which were discussed in macroblog last April.

As we have mentioned before, the spider chart contains four groups of labor market indicators:

  • Employer behavior includes indicators related to the hiring activities of employers.
  • Confidence includes indicators of employer and worker confidence in the labor market.
  • Utilization includes measures related to available labor resources.
  • Leading indicators shows data that typically provide insight into the future direction of overall labor market activity.

The inner circle of the chart represents the labor market conditions that existed when the unemployment rate peaked in the fourth quarter of 2009. The outer circle represents the labor market conditions that existed just before the recession began.

A section on the website titled Indicators explains the details behind each of the variables included in the groups noted above, and another section, Surveys, details the data sources. A Frequently Asked Questions section offers details on the construction of the indicators and the reference points, as well as the rationale for this approach and answers to other questions that have arisen.

The spider chart allows one to chart the progress on all these dimensions using the most recent three months of data, compared to that level (or rate) for the same time period over the last three years, while the reference points remain fixed. So one could have a spider chart that shows just the data for the three-month period ending in May 2013, or a chart that encompasses the data for May 2013, May 2012, and May 2011.

The increase in the unemployment rate in last Friday's jobs report, amid an otherwise strong report that included a 175,000 increase in payroll employment, supports this strategy of using a variety of indicators to monitor labor market conditions rather than to simply focus on the unemployment rate. The increase in the labor force participation rate this month worked to drive up the unemployment rate, but by all other accounts this was a solid report. In fact, all seven of the indicators from the employment situation report release increased from the April readings in both the "levels" and "rates" spider charts.

Our current focus is still on the recovery of the labor market, and as long as this is the case, we will use the information in these charts to help us determine if the labor market has achieved substantial improvement. When the labor market has turned a corner into expansion, we will reevaluate our tools and determine a more appropriate way to monitor the labor market. But, for now, rest assured that our policy deliberations are not stuck in a single-indicator rut.

Photo of Melinda PittsBy M. Melinda Pitts, director, Center for Human Capital Studies, and

Photo of Pat HigginsPatrick Higgins, senior economist, both in the Atlanta Fed's research department

June 10, 2013 in Employment, Labor Markets | Permalink

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I really like the labor market spider chart  (frbatlanta.org/chcs/labormarket)

I believe Ed Lazear's comments about the Fed focusing on the unemployment rate can be traced to the statement --- reported to have been issued by the FOMC --- that QE would continue until the unemployment rate has fallen to 6.5%.  That might cause him and other observers to believe that other labor market indicators are of academic interest to the Fed but not directly relevant to policy makers.

Do you use spider charts for other purposes?  For example, one could be used to graph the status of all 10 leading indicators for different reference periods.  Perhaps a spider chart could also be used with various inflation measures, with the orange and green rings defining the Fed's targets (say 1-3%).  A third could include 'bubble' indicators (gold price, CPI inflation, PCE inflation, housing price index), with the outer ring reflecting the value of each indicator in January 2008 (or some other reference date). 

Tables of data or a series of bar charts could convey the same information, but the spider chart makes it far easier to spot trends and make comparisons.

Thanks.

Posted by: Thomas Wyrick | June 11, 2013 at 11:12 PM

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June 07, 2013

The Hiring Forecasts of Small Firms: Will the Pace of Employment Growth Pick Up?

The U.S. Bureau of Labor Statistics (BLS) announced today that the U.S. labor market added 175,000 payroll jobs in May, continuing a trend of steady but disappointingly slow employment growth. The employment recovery has been even slower among small firms. Will it pick up in the coming 12 months? Results from the Atlanta Fed's latest survey of small businesses in the Southeast suggest that employment growth among small firms will continue but not necessarily at a faster pace.

Since the recession began, changes in employment have been asymmetric across firm size. In contrast to large firms, employment at small and medium sized businesses began decreasing earlier, declined more, and, by last March, was a little further from its prerecession level. As of the first quarter of 2012, employment at firms with fewer than 500 employees was 5 percent below prerecession levels, compared to just 2 percent for firms with more than 500 employees. So why is employment at small firms not recovering as quickly as employment at large firms? Is it poised to accelerate and perhaps catch up?

Employment to Firm Size; Indexed to Q1-2008=1

While the Business Employment Dynamics data series from the BLS only go through first-quarter 2012 (chart 1), we can use our semi-annual survey of small business in the Southeast to find out a little more about the experiences of small firms through first-quarter 2013 as well look at their forecasts through the first quarter of 2014. Four-hundred-seventy-eight firms across the industry and age spectrum participated in the first-quarter 2013 survey, which was conducted during the first three weeks in April. Although the survey is not a random sample, the results are weighted to make them more representative of a national distribution.

When asked about changes in employment over the period Q1 2012 to Q1 2013, employer firms on net said there was almost no change. Slightly more than 40 percent of firms said they had not altered employment levels. The remainder of the responses were distributed pretty evenly between "expansion" and "contraction". As you can see in chart 2, the distribution of firms creating jobs was almost a mirror image of the distribution of firms shedding jobs in terms of the magnitude of change.

Changes in Size of Workforce--Q1 2012 to Q1 2013

In addition to asking about changes during the past 12 months, the survey probed small firms about their expectations for the coming 12 months. Using the power of our panel data set, we can compare the expectations of firms that took the survey exactly one year ago with their actual hiring activity during that time period to determine how accurately firms predict what the future holds and whether these hiring plans are indeed good forecasts of future activity.

As it turns out, the 184 firms participating in both surveys came pretty close to meeting their hiring expectations. However, they did tend to overestimate the extent to which employment would increase (or underestimate the extent to which it would decrease), regardless of how well firms were performing at the time they made their forecast (see chart 3). For example, firms that had recently experienced reductions in their workforce expected the greatest positive change in the pace of hiring, and in fact went on to report the highest actual change during this period. Firms that had not changed their employment levels recently or had changed them by up to 10 percent expected very little growth—on average, they achieved just slightly less than expected. Regardless of how well the firm had recently performed (in terms of employment growth in the previous period), the degree to which hiring increased or downsizing decreased was less pronounced than anticipated.

Actual Pace of Hiring and Expected Pace of Hiring

Small firms are reasonably good at predicting the direction and relative magnitude of their employment growth, but on average tend to overestimate. For this reason, it might be useful to examine changes in the hiring expectations index (as opposed to changes in the pace of employment growth) when trying to understand how the forecast of firms participating in the survey might translate into actual employment growth of small firms in the Southeast.

Chart 4 shows the hiring index of firms across four broad industry groups. In the first quarter of 2013, the index for hiring in the coming 12 months was essentially unchanged from the Q3 2012 survey, and significantly below that of the Q1 2012 survey. The only industry whose employment forecast was notably positive was the construction and real estate industry. Firms in that category have been steadily increasing their hiring forecasts since the third quarter of 2011.

MHiring Expectations Diffusion Index

The fact that hiring expectations did not improve in the first-quarter survey leads to another, perhaps more important question: Why didn't they?

One contributing factor that could be having a particularly large impact on hiring expectations is rocky sales. Firms may be less willing to hire if they are uncertain about the future or if they do not expect consistent sales growth. Indeed, by looking at the experiences of firms in the past 12 months, we can tell that there is a clear correlation between rising sales and rising employment. As chart 5 shows, half of employer firms reported a recent rise in sales, and the more sales had risen, the more likely firms were to have increased their workforce.

Change in Sales

A couple of questions that arise from chart 5 are: What about the firms that recently experienced sales growth but didn't hire? Are they planning to hire in the coming 12 months? About one-third of firms say "yes". One driving factor in that decision appears to be sustained sales growth; another is reduced uncertainty. As chart 6 makes apparent, the sales expectations of firms in this group is higher on average for the one-third of firms that say they do plan to hire in the coming 12 months than for the two-thirds who do not. All the firms in the hiring group also expect sales growth to continue, with the most common response being greater than 10 percent growth. In contrast, while 77 percent of firms in the not-hiring group anticipate sustained sales growth, the group’s most common response was lower than that of the hiring group: 1 percent to 5 percent.

Q1 2013 Sales Forecasts of Firms

Another factor that may be related to hiring is reduced uncertainty. Employer firms experiencing sales growth in the past 12 months are more likely to anticipate hiring if they perceive a decrease in uncertainty compared to six months ago. Seventy percent of firms that had a recent increase in sales and decreased uncertainty concerns relative to six months ago anticipate hiring in the coming year. In contrast, 46 percent of those who had experienced a recent increase in sales but also perceived heightened uncertainty anticipate hiring.

For now, the results suggest that uncertainty and rocky sales growth are negatively affecting the hiring plans of small firms and, unfortunately, that small firms are not likely to increase their rate of hiring in the next 12 months. However, if uncertainty eases and sales growth continues, small firms will likely revisit their hiring plans and the pace of hiring just might improve.

By Ellyn Terry, a senior economic analyst in the Atlanta Fed's research department

June 7, 2013 in Data Releases, Employment, Labor Markets, Small Business | Permalink

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While expected "sales" may be a hender in hiring for small firms, the "Affordable Healthcare Act" is having a far more dramatic effect than anyone will admit. Why, is a mystery.

Posted by: Tom Damson | June 10, 2013 at 03:39 PM

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May 23, 2013

A Subtle View of Labor Market Improvement

In a speech delivered Tuesday to the Japan Society in New York City, Federal Reserve Bank of New York President William Dudley offered his view on how he might assess the appropriate pace of the Federal Open Market Committee's (FOMC) current $85 billion per month asset purchase program:

Let me give a few examples of how my own thinking may evolve. In terms of our asset purchase program, I believe we should be prepared to adjust the total amount of purchases to that needed to deliver a substantial improvement in the labor market outlook in the context of price stability. In doing this, we might adjust the pace of purchases up or down as the labor market and inflation outlook changes in a material way. For me, the base case forecast is not the sole consideration—how confident we are about that outcome is also important.

Because the outlook is uncertain, I cannot be sure which way—up or down—the next change will be. But at some point, I expect to see sufficient evidence to make me more confident about the prospect for substantial improvement in the labor market outlook. At that time, in my view, it will be appropriate to reduce the pace at which we are adding accommodation through asset purchases. Over the coming months, how well the economy fights its way through the significant fiscal drag currently in force will be an important aspect of this judgment.

My own boss, Atlanta Fed President Dennis Lockhart, expressed a similar view in a speech to the Birmingham, Alabama, Kiwanis Club last month:

The key word in the phrase "substantial improvement in the outlook for the labor market" is outlook. For my part, a critical consideration in judging how much longer asset purchases should continue will be confidence in the positive outlook. Confidence that is solidly grounded in improving economic data, accumulated over a sufficient span of time, will help me conclude that the work of the large-scale asset purchase program, as a temporary supplement to conventional interest-rate policy, is complete.

And there is this, from the minutes of the latest meeting of the FOMC (emphasis added):

Participants also touched on the conditions under which it might be appropriate to change the pace of asset purchases. Most observed that the outlook for the labor market had shown progress since the program was started in September, but many of these participants indicated that continued progress, more confidence in the outlook, or diminished downside risks would be required before slowing the pace of purchases would become appropriate.

Neither President Dudley nor President Lockhart (nor the minutes) indicates where we are on the confidence scale at the moment. But at least outside the Fed, there is some evidence confidence in the labor market forecast is increasing. The following chart shows year-over-year averages of the interquartile range of four-quarter-ahead unemployment rate forecasts from the Federal Reserve Bank of Philadelphia's Survey of Professional Forecasters:

130523

The interquartile range is essentially the difference between the most optimistic one-fourth of the forecasts in the Philadelphia Fed's panel and the most pessimistic one-fourth of forecasts. It is thus a measure of dispersion, or forecast disagreement.

The trend in this measure of forecast disagreement is clearly—very clearly—downward. That doesn't exactly say that each individual forecaster is becoming more confident about his or her individual outlook (though this type of dispersion measure is often used as a proxy for overall uncertainty). Even less does it mean that forecast uncertainty has fallen to the level President Dudley, President Lockhart, or any other Fed official would deem sufficient to alter policy in any way. The FOMC minutes, for example, include this...

A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth; however, views differed about what evidence would be necessary and the likelihood of that outcome.

... and following his congressional testimony Wednesday, Chairman Bernanke engaged in a Q&A, and ABC News summed up the state of the policy discussion this way:

When asked by Kevin Brady, the Panel's chairman, whether the Federal Reserve could start winding it back before before September's Labour Day holiday, Mr Bernanke responded, "I don't know. It's going to depend on the data."

It really need not be emphasized that I don't know either. But the narrowing of opinions of where things are headed must signify some sort of progress.

Photo of Dave AltigBy Dave Altig, executive vice president and research director of the Atlanta Fed

 

May 23, 2013 in Employment, Federal Reserve and Monetary Policy, Labor Markets, Monetary Policy | Permalink

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The units in your chart are not displayed correctly. The "10" should be "1.0"

Posted by: glenn | May 24, 2013 at 10:52 AM

Thanks Glenn. Actually this is a case of not labeling/explaining things precisely. I used the Philadelphia Fed's D3 measure of dispersion, which is the log difference of the levels. So the units are the percent differences between the 75th percentile and the 25th percentile.

Posted by: Dave | May 30, 2013 at 03:19 PM

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May 16, 2013

Labor Costs, Inflation Expectations, and the Affordable Care Act: What Businesses Are Telling Us

The Atlanta Fed’s May survey of businesses showed little overall concern about near-term inflation. Year-ahead unit cost expectations averaged 2 percent, down a tenth from April and on par with business inflation expectations at this time last year.

OK, we’re going to guess this observation doesn’t exactly knock you off your chair. But here’s something we’ve been keeping an eye on that you might find interesting. When we ask firms about what role, if any, labor costs are likely to play in their prices over the next 12 months, an increasing proportion have been telling us they see a potential for upward price pressure coming from labor costs (see the chart).



To investigate further, we posed a special question to our Business Inflation Expectations (BIE) panel regarding their expectations for compensation growth over the next 12 months: “Projecting ahead over the next 12 months, by roughly what percentage do you expect your firm’s average compensation per worker (including benefits) to change?”

We got a pretty large range of responses, but on average, firms told us they expect average compensation growth—including benefits—of 2.8 percent. That’s about a percent higher than the average over the past year (as estimated by either the index of compensation per hour or the employment cost index). But a 2.8 percent rise is also about a percentage point below average compensation growth before the recession. We’re included to read the survey as a confirmation that labor markets are improving and expected to improve further over the coming year. But we’re not inclined to interpret the survey data as an indication that the labor market is nearing full employment.

We’ve also been hearing more lately about the potential for the Affordable Care Act (ACA) to have a significant influence on labor costs and, presumably, to provide some upward price pressure. Indeed, several of our panelists commented on their concern about the influence of the ACA when they completed their May BIE survey. So can we tie any of this expected compensation growth to the ACA, a significant share of which is scheduled to go into effect eight months from now?

Because a disproportionate impact from the ACA will fall on firms that employ 50 or more workers, we separated our panel into firms with 50 or more employees, and those employing fewer than 50 workers. What we see is that average expected compensation growth is the same for the bigger employers and smaller employers. Moreover, the big firms in our sample report the same inflation expectation as the smaller firms.

But the data reveal that the bigger firms are a little more uncertain about their unit cost projections for the year ahead. OK, it’s not a big difference, but it is statistically significant. So while their cost and compensation expectations are not yet being affected by the prospect of the ACA, the act might be influencing their uncertainty about those potential costs.



Photo of Mike BryanBy Mike Bryan, vice president and senior economist,

Photo of Brent MeyerBrent Meyer, economist, and

Photo of Nicholas ParkerNicholas Parker, senior economic research analyst, all in the Atlanta Fed’s research department


May 16, 2013 in Business Inflation Expectations, Economics, Health Care, Inflation Expectations, Labor Markets, Pricing | Permalink

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Maybe we're finally reaching the point where firms can no longer expropriate productivity gains. If you look at the total hourly compensation for non-supervisory workers vs. productivity, the last 40 years have more or less seen the gains made during the Great Compression utterly obliterated. Now that we're back to Gilded-Age levels of income distribution, it may be that we've reached an equilibrium.

Posted by: Valerie Keefe | May 19, 2013 at 12:22 PM

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