pick up steam as a result?
In February and March of this year, several economists – and in turn, finance Twitter/blogosphere – had a spirited debate on the meaning of short-term unemployment. A study by Princeton’s Alan Krueger, Judd Cramer, and David Cho, titled Are the Long-Term Unemployed on the Margins of the Labor Market, argued that short-term unemployment is a better indicator of inflation and real wage growth than the headline unemployment rate. They wrote,
The long-term unemployed, whose share of overall unemployment rose to an unprecedented level after the Great Recession, are on the margins of the labor force and therefore exert very little pressure on the job market and economy.
Because the short-term unemployment rate has returned to its pre-recession average, one important implication—if the hypothesis that the long-term unemployed are largely on the margins of the labor market is correct—is that further declines in short-term unemployment would be expected to be associated with rising inflation and stronger real wage growth.
So has this trend continued to play out as expected over the past few months?
To define terms, short-term unemployed are those who have been unemployed for less than 27 weeks. The long-term unemployed are those who have been unemployed for greater than 27 weeks.
The job market for the short-term unemployed is shockingly robust.
The short-term unemployment rate has been relatively flat over the past six months, and stands at 4.2% as of June 2014. This is well below the long-term average of 4.9%, which would be indicative of mounting wage growth and inflation pressure – if the hypothesis of Krueger, et al., is indeed correct. In action, however, we haven’t seen any significant wage or inflation pressure actually show up in the data.
Wage growth and inflation growth have not yet followed along with the hot short-term unemployment rate.
Inflation is well below the Fed’s target 2.0% level, and wage growth has been virtually nonexistent, bouncing around 0.5% for the first half of the year.
But the real question is…
Does Janet Yellen think this is an acceptable labor market situation? In short, no. The Fed’s stand is that too much slack still remains in the labor market, according to the July release of the Monetary Policy Report:
Various labor market indicators suggest that a significant degree of slack remains in labor utilization. For instance, measures of labor under-utilization that incorporate broader definitions of unemployment are still well above their pre-recession levels, even though they have moved down further this year (figure 4). The proportion of workers employed part time because they are unable to find full-time work has similarly declined but remains elevated, and hiring and quit rates are still below their pre-recession norms. Moreover, the median duration of unemployment is still well above its long-run.
Encouragingly, the long-term unemployment rate of 1.9% as of June 2014 is the lowest level since January 2009. However, that rate still has to nearly halve to reach its long-term average of 1.0%. Long-term unemployment has been described as a “grave concern” by Fed Chair Yellen.
This article is brought to you courtesy of Jonathan Todd.