The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.
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September 22, 2015
The ZPOP Ratio: A Simple Take on a Complicated Labor Market
In her press conference following the latest FOMC meeting, Federal Open Market Committee (FOMC) Chair Janet Yellen emphasized that she still sees cyclical weakness in the labor market, even as the headline unemployment rate has moved close to FOMC participants' median estimate of its longer-run normal level.
She also noted that FOMC participants look at many different indicators of labor utilization, because the headline unemployment rate (commonly known as the U-3 rate) is overstating the health of the labor market. One alternative measure that has received some attention is the employment-to-population (EPOP) ratio. However, a well-recognized problem with the EPOP ratio is that because it defines utilization as employment, trends in demographic and behavioral labor force participation can affect it.
This problem is partially addressed by looking at the EPOP ratio for the prime-age population, or by making adjustments for demographic changes as suggested by Kapon and Tracy at the New York Fed and further analyzed by our Atlanta Fed colleague Pat Higgins. Here, we propose an alternative approach that uses a broader definition of utilization that makes it less affected by labor supply trends.
The Current Population Survey does not ask the question "are your labor services being fully utilized?" Therefore, we have to use our judgment to classify someone as fully utilized. The figure below shows the choices we make. We assume that everyone who says they are working fewer hours than they want is underutilized (the red boxes). This includes those in the labor force but unemployed, those not in the labor force but wanting a job, and those working part-time but wanting full-time hours (similar to the treatment of underutilization in the broad U-6 unemployment rate measure).
Everyone working full-time, working part-time for a noneconomic reason, and those who say they don't want a job are considered fully utilized (the green boxes). Of course, this takes the "don't want a job" classification at face value. For example, someone who is retired is counted as fully utilized, irrespective of the (unknown) reason they chose to retire.
As shown in the Chart 1 below, the share of the population 16 years or older that is fully utilized—what we call the utilization-to-population (ZPOP) ratio—is currently about 1.5 percentage points below its prerecession level, after having fallen by 6 percentage points during the recession.
Notice that because the ZPOP ratio treats those who are not employed and don't want a job as fully utilized, it is less affected by demographic and behavioral trends in labor force participation than the EPOP ratio. (You can learn more on our website about how demographic and behavioral trends are affecting labor force participation.) When compared with the EPOP ratio, the ZPOP ratio paints a somewhat rosier picture of labor market conditions (see chart 2).
In sum, the utilization-to-population (ZPOP) ratio is the share of the working-age population that is working full time, is voluntarily working part-time, or doesn't want to work any hours. According to this measure, about 91 percent of the working-age population is considered fully utilized. The remaining 9 percent are "underutilized" and are a roughly even mixture of the unemployed, those not in the labor force but wanting to work, and those working part-time but wanting full-time hours.
The headline U-3 unemployment rate is very close to its prerecession level but is thought to overstate the health of the labor market. At the same time, we think that the EPOP ratio overstates the amount of remaining labor market slack. The ZPOP ratio is in the middle; approaching its prerecession level but still with some way to go.
September 21, 2015
What Do U.S. Businesses Know that New Zealand Businesses Don't? A Lot (Apparently).
A recent paper presented at the Brookings Institute, picked up by the Financial Times and the Washington Post, suggests that when it comes to communicating their inflation objective, central banks have a lot of work to do. This conclusion is based primarily on two pieces of evidence.
The first piece is that when businesses in New Zealand are asked about their expectations for changes in "overall prices"—which presumably corresponds with their inflation expectation—the responses, on average, appear to be much too high relative to observed inflation trends. And the responses vary widely from business to business. According to this survey, the average firm in New Zealand expects 4 to 5 percent inflation on a year-ahead basis, and 3.5 percent inflation over the next five to 10 years. Those expectations are for the average firm. Apparently, about one in four firms in New Zealand think inflation in the year ahead will be more than 5 percent, and about one in six firms believe inflation will top 5 percent during the next five to 10 years. Certainly, these aren't the responses one would expect from businesses operating in an economy (like New Zealand) where the central bank has been targeting 2 percent inflation for the past 13 years, over which time inflation has averaged only 2.2 percent (and a mere 0.9 percent during the past four years).
But count us skeptical of this evidence. In this paper from last year, we challenge the assumption that asking firms (or households, for that matter) about expected changes in "overall prices" corresponds to an inflation prediction.
The second piece of evidence regarding the ineffectiveness of inflation targeting is more direct—the authors of this paper actually asked New Zealand businesses a few questions about the central bank and its policies, including this one:
What annual percentage rate of change in overall prices do you think the Reserve Bank of New Zealand is trying to achieve? (Answer: ______%)
The distribution of answers by New Zealand firms is shown in the chart below. According to the survey, the median New Zealand firm appears to think the central bank's inflation target is 5 percent. Indeed, more than a third of firms in New Zealand reported that they think the central bank is targeting an inflation rate greater than 5 percent. Only about 12 percent of the firms were able to correctly identify their central bank's actual inflation target of 2 percent (actually, the New Zealand inflation target is a range of between 1 and 3 percent, centered on 2 percent).
If this weren't embarrassing enough for central bankers, the study also reports that New Zealand households (like U.S. households) don't seem to know who the head of the central bank is. In fact, the authors show that there are more online searches for "puppies" than for information about macroeconomic variables.
OK, to be honest, we don't find that last result very surprising. Puppies are adorable. Central bankers? Not so much. But we were very surprised to see just how high and wide-ranging businesses in New Zealand perceived their central bank's inflation target to be. We're surprised because that bit of information doesn't fit with our understanding of U.S. firms.
In December 2011, the month before the Fed officially announced an explicit numerical target for inflation, we wanted to know whether firms had already formed an opinion about the Fed's inflation objective. So we asked a panel of Southeast businesses the following question:
What we learned was that 16 percent of the 151 firms who responded to our survey had no opinion regarding what rate of inflation the Federal Reserve was aiming for. But of the firms that had an opinion, 58 percent identified a 2 percent inflation target.
But perhaps this isn't a fair comparison to the recent survey of New Zealand businesses. In our 2011 survey, firms had only six options to choose from (including "no opinion"). It could be that our choice of options biased the responses away from high inflation values. So last week, we convened another panel of firms and asked the question in the same open-ended format given to New Zealanders:
What annual rate of inflation do you think the Federal Reserve is aiming for over the long run? (Answer: ______%)
The only material distinction between their question and ours is that we substituted the word "inflation" for the phrase "changes in overall prices." (For this special survey, we polled a national sample of firms that had never before answered one of our survey questions.) The chart below shows what we found relative to the results recently reported for New Zealand firms.
Our survey results look very similar to our results of four years ago. About one in five of the 102 firms that answered our survey was unsure about the Fed's inflation target. But almost 53 percent of the firms that responded answered 2 percent. (On average, U.S. firms judged the central bank's inflation target to be 2.2 percent, just a shade higher than our actual target.)
Furthermore, the distribution of responses to our survey was very tightly centered on 2 percent. The highest estimate of the Fed's inflation target (from only one firm) was 5 percent. So again, our results don't at all resemble what has been reported for the firms down under.
Why is there a glaring difference between what the survey of New Zealand firms found and what we're finding? Well, as noted earlier, we've got our suspicions, but we'll keep studying the issue. And in the meantime, have you seen this?
Editor's note: Learn more about inflation and the consumer price index in an ECONversations webcast featuring Atlanta Fed economist Brent Meyer.
September 04, 2015
5-Year Deflation Probability Moves Off Zero
Since 2010, our Bank has regularly posted 5-year deflation probabilities derived from prices of Treasury Inflation-Protected Securities (TIPS) on our Deflation Probabilities web page. Each deflation probability, which measures the likelihood of a decline in the Consumer Price Index over a fixed five-year window, is estimated by comparing the price of a recently issued 5-year TIPS with a 10-year TIPS issued about five years earlier. Because the 5-year TIPS has more "deflation protection" than the 10-year TIPS, the implied deflation probability rises when the 5-year TIPS becomes more valuable relative to the 10-year TIPS. (See this macroblog post for a more detailed explanation, or this appendix with the mathematical details.)
From early September 2013 to the first week of August 2015, the five-year deflation probability estimated with the most recently issued 5-year TIPS was identically 0 as the chart shows.
Of course, we should not interpret this long period of zero probability of deflation too literally. It could easily be the case that the "true" deflation probability was slightly above zero but that confounding factors—such as differences in the coupon rates, maturity dates, or liquidity of the TIPS issues—prevented the model from detecting it.
Since August 11, however, the deflation probability has had its own "liftoff" of sorts, fluctuating between 0.0 and 1.3 percent over the 16-day period ending August 26 before rising steadily to 4.1 percent on September 2. Of course, this rise off zero could be temporary, as it proved to be in the summer of 2013.
How seriously should we take this recent liftoff? We can look at options prices on Consumer Price Index inflation (inflation caps and floors) to get a full probability distribution for future inflation; see this published article by economists Yuriy Kitsul and Jonathan Wright or a nontechnical summary in this New York Times article. An alternative is simply to ask professional forecasters for their subjective probabilities of inflation falling within various ranges like "1.0 to 1.4 percent," "1.5 to 1.9 percent," and so forth. The Philly Fed's Survey of Professional Forecasters does just this, with the chart below showing probabilities of low inflation for the Consumer Price Index excluding food and energy (core CPI) from each of the August surveys since 2007.
Although the price index, and the horizon for the inflation outcome, differs from the TIPS-based deflation probability, we see that the shape of the curves is broadly similar to the one shown in the first chart. In the most recent survey, the probability that next year's core CPI inflation rate will be low was small and not particularly elevated relative to recent history. However, the deadline date for this survey was August 11, before liftoff in either the TIPS-based deflation probability or the recent volatility in global financial markets. So stay tuned.
September 01, 2015
Should I Stay or Should I Go Now?
A recent article by Jason Faberman and Alejandro Justiniano at the Chicago Fed shows that there is a strong relationship between quit rates—as a proxy for the pace of job switching—and wage growth. Movements in the quit rate and wage growth are both procyclical. A tighter (weaker) labor market implies workers are more (less) likely to find better employment matches, and employers are more (less) willing to offer higher wages to attract new workers and retain existing workers.
To get some idea of the different wage outcomes of job switching versus job staying, we can use microdata underlying the Atlanta Fed's Wage Growth Tracker from the Current Population Survey. The following chart plots the quarterly private-sector quit rate (orange line) from the Job Openings and Labor Turnover Survey using Davis, Faberman, and Haltiwanger (published in 2012 in the Journal of Monetary Economics) estimates before 2001. Also shown is the median year-over-year wage growth of private-sector wage and salary earners who switched jobs (blue line) or stayed in the same job (green line). Job stayers are approximated by the restriction that they are in the same broad industry and occupation as 12 months earlier and have been with the same employer for each of the last four months. Job switchers do not satisfy these restrictions but were employed in the current month and 12 months earlier.
The correlation between the quit rate and median wage growth is strongly positive and is slightly higher for job switchers (0.91) than for job stayers (0.88). In most periods, the median wage growth of job switchers is higher than for job stayers. This difference is consistent with the notion that job switching tends to involve moving to a better-paying job. However, during periods when the quit rate is slowing, median wage growth slows for both job stayers and switchers (reflecting the correlation between quits and wages), and the wage-growth premium from job switching tends to vanish.
Since the end of the last recession, the quit rate has been rising and a wage-growth premium for job switching has emerged again. Interestingly, during the last year, the wage growth of job stayers appears to have strengthened as well, consistent with a general tightening of the labor market.
- What the Wage Growth of Hourly Workers Is Telling Us
- Making Analysis of the Current Population Survey Easier
- Mapping the Financial Frontier at the Financial Markets Conference
- The Tax Cut and Jobs Act, SALT, and the Blue State Blues: It's All Relative
- Improving Labor Force Participation
- Young Hispanic Women Investing More in Education: Good News for Labor Force Participation
- A Different Type of Tax Reform
- X Factor: Hispanic Women Drive the Labor-Force Comeback
- Tariff Worries and U.S. Business Investment, Take Two
- Trends in Hispanic Labor Force Participation
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