Analysis and Commentary by Roosevelt Fellow Mike Konczal
Leave aside for a moment the difficulty that the long-term unemployed, those who were unlucky and have been looking for a job for more than 52 weeks, have in finding a job. Even those who have been unemployed zero weeks are having trouble finding jobs in this economy. And this is important evidence against the idea that the labor market is doing better than people realize if you just ignore the long-term unemployed.
Here’s a data point that I’m particularly interested in: how often are employed people going straight to another job, rather than leaving their job and enduring a period of unemployment before finding new work?
Though most people think of the employed spending some time in unemployment before starting a new job (an idea that was central to the recent theory that quit rates predicted a healthy job market), a substantial number of people move directly from one job to another without ever counting as unemployed. Since our statistics (and most of the economic models) are set up to observe people who are looking for work but are unable or unwilling to accept a job, these steadily employed workers can go missing in the discussion. That’s a shame, because historically they comprise almost half of all those who accept a new job.
The Rortybomb blog has long been a fan of the job flows data, or the statistics that show who is moving between employment and unemployment and in and out of the labor force. However, the easiest way to access this data didn’t distinguish between those who stayed employed with a single employer and those who stayed employed but moved between different employers.
Luckily, someone pointed me in the direction of the Employer-to-Employer Flows in the U.S. Labor Market , compiled by the Federal Reserve, which breaks out those who move from one employer to another without being unemployed (described as “EE transitions” for the rest of this post). This data is current through the end of 2013.
If the economy is heating up significantly and the long-term unemployed aren’t capable of taking jobs, then the EE transition rate should be increasing. So how is it doing?
This is the percentage of the employed who are in EE transition (the results are the same for EE transition as a percentage of the labor force). As we can see, it declined during the crisis and hasn’t recovered even as of 2013.
Let’s also look at this from a different point of view: what percentage of those taking jobs are currently employed? If the economy was heating up and the unemployed or those out of the labor force couldn’t take jobs, we would expect this to increase. Taking EE transitions as a percentage of all those who are transitioning into new jobs, we see the following:
New hires are increasingly coming from the ranks of the unemployed and those not in the labor force rather than the currently employed. Where the employed were 40 percent in the 1990s, and 35 percent in the pre-crisis 2000s, it’s down to 30 percent now.
Why does this matter? First off, these quits also create a new job opening, which the unemployed can take. There’s a significant labor economics literature that argues that job-to-job transitions are a major driver of wage growth for workers (starting here and continuing to this day, h/t Arin Dube). If the number of people moving directly from one job to another is in decline, that’s a bad sign for wage growth, as well as inflation and monetary policy. This appears to be undertheorized and not discussed enough in academic or policy discussions.
But why is this happening? The American Time Use Survey hasn’t been able to tell me whether the employed are spending more or less time searching for other jobs since the recession started; the sample size is too small to make conclusive predictions about changes. If potential wage gains are a primary motivation of job-to-job transitions, then lack of wage growth or even inflation could be contributing to less churn in the economy.
When it comes down to it, the problems of those who aren’t working and want a job are similar to the problems of those who are working but want a new job. As Alan Krueger found in this chart in his recent paper (also see Ben Casselman’s chart here), the rate of successful job searches is down not just for the long-term unemployed, but also for the short-term unemployed, when compared to 2007. It appears the same holds true for those with an unemployment duration of zero. The page indicates that it was last updated in 2004, or perhaps 2011. But the excel document has data through the end of 2013. Sneaky.
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Alan B. Krueger, Judd Cramer, and David Cho of Princeton recently released a Brookings paper on the state of the labor market titled “Are the Long-Term Unemployed on the Margins of the Labor Market?” Their big headline result is that the long-term unemployed are going to have trouble finding steady work, both as a historical matter and from what we’ve seen in the Great Recession. It’s fascinating work we’ll revisit here.
But what does that mean for the job market right now, with its mix of short-term and long-term unemployed? The second takeaway is that if we only look at short-term unemployment, the economy makes more sense than if we look at total unemployment. As Tim Hartford wrote, this research shows that if “we replotted the Phillips curve[‘s mix of inflation and unemployment]… using statistics on short-term unemployment… it turns out that the old statistical relationships would work just fine.” Some are arguing that we should just focus on short-term unemployment for the moment as an indicator of how the economy is doing.
Is that the case? Not really. We should be careful with this argument now, because this is really a matter of 2009-2012. Back then, the question was why inflation was as steady as it was given very high unemployment. In 2014 the question is very different: why is inflation so low given high unemployment and the relationship of the past several years? We need to explain a different problem.
Let’s look at a key chart from the Krueger paper (green boxes my addition):
This is the change in core inflation versus unemployment. (There’s a similar dynamic with wage inflation in a different chart.) The left graphic is the change in core inflation versus overall unemployment, and the right graphic is the change versus short-term unemployment. As the paper’s authors argue, it’s a much tighter relationship if you just look at short-term unemployment. But there are three things to note here.
First, as flagged in the green box in the left graphic, the outliers are the years 2009-2012. Looking at their wage inflation version of this in particular, the authors note that they get a higher R-squared and better predictive value using short-term unemployment. But replicating this chart (data), if you simply take out 2009-2011, you also end up with the higher R-squared and better predictive value.
More importantly, as a second matter look at where we are now via the 2013 data point. The total unemployment number for 2013 is right on the line in the left graph. However, as we can see from the green circle on the right, using short-term unemployment shows inflation much lower than anticipated. This is not surprising; one of the more important economic stories of 2013 was the collapse of inflation. Note that if the labor market were actually getting much tighter, inflation should have been increasing during this time period. More broadly, if the problem were the preponderance of long-term unemployed in the general labor market, we wouldn’t expect 2013 to go into freefall and hop over the trendline as it did.
I’m very interested in why we didn’t collapse into deflation from 2009 to 2011. I imagine the Fed has something to do with it. But as a third point I’d be a little cautious about using just short-term unemployment during that time as an important indicator about the labor market, as job separations collapsed during the crisis. A low short-term unemployment rate reflects people simply not leaving their jobs more than it reflects the idea that the economy was doing better than we’d expect.
But this question is also a historical one. Krueger and his co-authors acknowledge this, using phrasing like “since 2009” as the basis of their paper. But other people might not catch this, and assume that the short-term unemployment rate is crucial for right now. But that doesn’t reflect our current situation of low inflation, a falling rate of long-term unemployment, and an unemployment rate that is going to be stuck in the mid-6% range for some time. We shouldn’t use a way of adjusting data to examine what was going on in 2010 to argue there’s less slack than there actually is out here in 2014.
I helped edit (curate might be a better word) the latest New Inquiry issue on Money and Finance. Their editor Robert Horning wanted to get some of the vibe of the older financial blogs, when the thing was still a wild west, and so we got a ton of our favorite old-school finance writers like Steve Waldman, Izzy Kaminska, and the Epicurean Dealmaker to contribute. I also helped edit a good explainer of MMT from Rebecca Rojer, and a definitive “disgorge the cash” piece on the rentier takeover of the economy by JW Mason, both which are definitely worth your time. I have my own piece in the article, now also online, about buying the future.
These pieces will eventually be rolled out and available online over the next month, but for now you can read it by subscribing. Hope you check it out!
My recent Voluntarism Fantasy piece (pdf) for Democracy Journal has gotten a fair amount of coverage. So I’m going to use this post, which will be updated, to keep track of the links to other people engaging, if only so I can respond in the future.
The piece was also reprinted at The Altantic Monthly.
Reddit thread with comments.
In favor of the piece:
Matt Bruenig notes that the way we discuss this reflects a deep status quo bias at The Week.
Elizabeth Stoker, channeling Niebuhr, makes the strong Christian case that charity and government social insurance go together at The Week.
Sally Steenland of Center for America Progress also addresses the fantasy in this article.
Erik Loomis makes an excellent point that in addition to the rest of the 19th century state, the “federally subsidized westward expansion was also part of this welfare state, as Republicans especially explicitly saw the frontier as a social safety net that would alleviate poverty without directly giving charity to people.”
James Kwak agrees that there’s “No Substitute for the Government” here.
Jordan Weissmann argues that “Charity Can’t Replace the Safety Net” over at Slate.
Less in favor:
Marvin Olasky, author of the Tragedy of American Compassion (which is one focal point of the article), responds in World.
Philathrophy Daily ran two articles critical of the piece, both at the forefront of the voluntarism fantasy’s worldview. The first is from Hans Zeiger and the second from Martin Morse Wooster, who breaks out the paralipsis “I could argue that Mike Konczal and the Roosevelt Institute has a hidden agenda: to force the U.S. to accept Soviet-style communism … I won’t make that argument because I know it isn’t true.”
Rich Tucker at Townhall says that I do “a better job than Barack Obama did explaining the president’s ‘You didn’t build that’ philosophy,” which I’ll take as a compliment.
Reihan Salam has a set of responses at The Agenda.
Howard Husock argues that charitably-funded, non-governmental programs are better than government at helping help individuals thrive at Forbes.
Don Watkins at the Ayn Rand Institute has a five part (!) critical response; you can work backwards from the fifth part here.
Anarchist Kevin Carson sees “the welfare state nevertheless as an evil necessitated by the state-enforced model of capitalism, and ultimately destined to wither away along with economic privilege and exploitation” in his response.
I’ll add any more as they happen. (Last updated April 11th.)
I have a piece on the Tea Party and Wall Street up at the New Republic. The Tea Party’s theory of the financial crisis has absolved Wall Street completely, and this has serious implications for how the policy framework will evolve if the Tea Party gains in power in 2014 and 2016. I also got a chance to reference two pieces explaining various theories of the crisis which I recommend: Dean Starkman on the falsehood that Everyone Is To Blame and Adam Levitin’s review of recent financial crisis books.
I hope you check out the new piece.
I had a piece at The New Republic last week I haven’t share here yet. It’s a response to Adolph Reed’s long Harper’s piece about liberalism at this moment. You should check it out.
I wanted to clarify one thing because several historically-minded people asked me about it. I have a general rule that after I write something I should immediately delete the most “clever” thing I included, or at least go back and carefully edit it. In this piece I didn’t do that or make my point clear, and the glib results caused some confusion.
I opened the piece with a New Republic essay from 1940 criticizing Franklin Roosevelt from the left for leaving the economic problem unresolved. I had just read the essay in the (excellent, recommended) collection of New Deal Thought by Howard Zinn from the 1960s, and really thought it would be clever to include it in a current New Republic piece. What I ideally wanted the piece to reference was (i) pointing out that Reed’s golden period of the late 1930s, where he has things working out well for the left, was more problematic at the time than he lets on, and in ways similar to where we are now.
But also (ii) point out that historical shifts often happen even when Presidents are floundering, as the “second New Deal” was formalizing an order that would reign for 40 years even though Franklin Roosevelt was making a mess of the late 1930s with his disastrous turn to austerity. As a result we can’t answer the most important question about President Obama – is he the beginning of a longer-term shift, or someone that forecloses the potential of that longer-term shift – by pointing to individual actions by him, which is the core of Reed’s argument. Also (iii) to reference the 1940 piece at the end of mine, with their smart observation about self-enforcing reform and the open question over whether Obamacare, etc. will ever have those dynamics.[And as a personal fun point, I also like (iv) pointing out that the New Republic was pretty lefty back when within its own online pages.]
However I botched the intro, cutting for space, and wrote it in a glib manner that referenced it to dismiss valid criticism now and then. Some thought I was excusing the screwups of 1937, others comparing President Obama to FDR. And since it introduced the piece, it hung over the rest (which I’m pretty happy with). I’ll try better next time.
This is not an issue as to whether people shall go hungry or cold in the United States. It is solely a question of the best method by which hunger and cold shall be prevented. It is a question as to whether the American people on one hand will maintain the spirit of charity and mutual self-help through voluntary giving and the responsibility of local government as distinguished on the other hand from appropriations out of the Federal Treasury for such purposes. My own conviction is strongly that if we break down this sense of responsibility of individual generosity to individual and mutual self-help in the country in times of national difficulty and if we start appropriations of this character we have not only impaired something infinitely valuable in the life of the American people but have struck at the roots of self-government. Once this has happened it is not the cost of a few score millions, but we are faced with the abyss of reliance in future upon Government charity in some form or other. The money involved is indeed the least of the costs to American ideals and American institutions.
1931. This is when food riots were breaking out in American cities. Unemployment would be over 15 percent that year, climbing to 25 percent the next. In 1932 you’d also see Douglas MacArthur, Dwight Eisenhower and George Patton leading an army to destroy the encampments of thousands of people occupying Washington DC demanding relief.
The world was falling apart, liberal democracy was facing its worst challenge in decades, and Hoover wouldn’t budget on the idea that there was any role for the public or the federal state in meeting the challenges of mass economic insecurity. This is what many conservatives still believe, and it’s important to dissect why it fails and what we can do about it.
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(Wonkish. Part One of Two. This part covers theory, part two some data.)
Can the number of people quitting their jobs tell us anything useful about slack in the labor market? No. At most, it tells us to focus even more on the stuff we already knew to be watching.
Evan Soltas has argued that the rate at which people quit their job tells us all we need to know about the unemployment rate, in particular how likely it is that the long-term unemployed and people who have left the labor force could be brought back into the labor force. There were several responses from Dean Baker, Jared Bernstein, and Cardiff Garcia.
As a reminder, there are currently 2.5 million Americans who want a job but aren’t looking, and as such are counted as “marginally attached to the labor force” instead of unemployed. There’s a major debate about how much of the collapse in the labor force participation rate is due to de facto unemployment, or people who will come back into the labor force if it gets better (with much of the research pointing to about half).
We should distinguish between what quit rates can tell us about the employed and what they can tell us about the status of the unemployed. What’s the theory of quits in which they tell us what the “true” unemployment rate is? Soltas: “Think about the decision to quit. It’s a function of your confidence that you’ll find a better job quickly — which embodies some unobserved but holistic measure of labor-market tightness.” If quits go up, then the long-term unemployed, in this view, “no longer [have] the power to restrain wage growth or discourage the employed from quitting and switching jobs.”
If I understand this correctly, this assumes that quits are a measure of people first becoming unemployed and then looking for a new job (trying to “find a better job quickly”).[i] But I don’t think this is right. A very large percentage, perhaps half, of quits are people moving job-to-job rather than becoming unemployed.[ii]
Under Soltas’ view, quits make it more difficult for the existing unemployed to find jobs by increasing unemployment. But doesn’t a quit create a job opening? As such, doesn’t it create an opportunity for an unemployed person, rather than a limitation? Also, even if the employed became unemployed, would that mean that the long-term unemployed couldn’t find work, or just that they are at the end of a very long line?
Let’s try to develop a more firmly grounded theory of quits. What can quits tell us about unemployment as a matter of economic logic? Well, first off, every person who quits his or her job creates a job opening. Someone has to do the work that person was doing. So we should think of “vacancy chains” — a term made famous by George Akerlof, Andrew Rose, and Janet Yellen (!) back in 1988 — and their characteristics.
Suppose Amy works at Acorp, and she leaves her job to take a new one. Acorp now has a job opening. They hire Bill away from Bcorp. Now Bcorp has a job opening. So they hire Charlotte from Ccorp. Now Ccorp has a job opening. They hire Dan from Dcorp. Now Dcorp has a job opening.
Note: Amy, Bill, Charlotte and Dan are all counted as “quits,” though they wouldn’t count as having been unemployed.
So Dcorp hangs a sign that says “help wanted.” They can do one of three mutually exclusive things. They can (1) hire an employed person, which will create another quit, which will create another vacancy, which Erin from Ecorp will fill. Thus the vacancy chain is extended one more step. They’ll likely have to pay the employed person a higher wage than that person currently makes to change jobs (or at least in aggregate this will happen). Or they can (2) hire an unemployed person, which will not create another job opening, but instead just close the vacancy chain.[iii] Or, if they can’t fill the job with an employed person or an unemployed person, they (3) leave the job opening unfilled.
So let’s rephrase that. The only thing interesting about the quits rate in this context is what it is implying about the length and conclusion of vacancy chains. If the length of the vacancy chain is infinitely increasing, then wage growth must be skyrocketing. And if the unemployed aren’t capable of taking jobs and closing the vacancy chain, then the number of job openings must rise relative to the unemployment rate.
Which means the interesting things the quits rate tells us about unemployment are entirely captured in wage growth or the number of job openings relative to unemployment (i.e. the Beveridge Curve).
So where are we? Wage growth is still weak, and nowhere near what it was in the late 1990s. Meanwhile, the Beveridge Curve shifted at the height of the crash, but has been remarkably consistent since. The shifting of the Beveridge Curve has been thoroughly debated, with the complicating issues of circularity and endogenous firm search at the forefront. What stands out for me is that the Beveridge Curve hasn’t deteriorated in the past several years, which implies that the increasing duration and prominence of the long-term unemployed in the labor market isn’t showing up in increased job openings.
The quits rate is important. It hints at the lived experience of working throughout the Great Recession and points to the stagnating wages workers face. But from the point of view of the status of the unemployed, it doesn’t tell us the “true” unemployment rate. Rather, it is important because it flags the things we should be watching — things that are slowly improving, as long as the Fed doesn’t put a stop to it.
[i] Soltas also has a statistical relationship between the two based over the past two business cycles, but if we can’t think of a good theory of what quits tell us about unemployment I’m not sure what weight we should put on this relationship.
[ii] The Census will start releasing job-to-job transition data in late 2014. Hurry Census! We need this data to be publicly digestible.
[iii] This is why Akerlof, Rose, and Yellen believe quits to be counter-cyclical to unemployment, as opposed to the pro-cyclicality predicted by search models. There are more unemployed hanging around to close chains earlier in a recession, reducing the number of quits necessary to close a vacancy chain.
I have a piece in the new Boston Review on seven ways of looking at a higher minimum wage increase. I wanted to step back from the denser statistical arguments (though those are included) and get a sense of why the minimum wage is popular and an important feature of our economy. The diversity of reasons is remarkable. The seven ways I focus on are inequality, poverty, policy, feminism, conservatism, republicanism, and Catholicism’s living wage. I hope you check it out.
Recent Rortybomb enterprise updates:
– My last weekly column at Wonkblog went up a week ago. It’s a review of Melissa Gira Grant’s book Playing the Whore.
– I wrote about the minimum wage twice at the New Republic. The first time was on the Silicon Valley wage fixing scandal, and what it says about how labor markets work. (it’s a nontechnical introduction to “dynamic monopsony” theory, if you are familiar with that.)
If you haven’t read about the Silicon Valley scandal I highly recommend it. (I had assumed, falsely, that more people knew about it when I wrote my piece.) Mark Ames had the most comprehensive version when it broke; Josh Harkinson just did another piece on it. It’s worth it just for the quotes you’ll see from the digital Masters of the Universe.
– I also wrote about the CBO report that just came out on the minimum wage at the New Republic too.
– I also wrote a piece at Al-Jazeera America about what is at stake when liberals, including President Obama, replace a focus on inequality with a focus on opportunity.