Bad News from the SF Fed
The last thing we want right now is a study from a regional federal reserve bank with the headline, "Jobless Recovery Redux?" and a subhead, "Reasons for pessimism," but that's what we have from the SF Fed, and it's hard to argue with their logic.
Researchers Mary Daly, Bart Hobjin, and Joyce Kwok consider three labor market indicators–flows in and out of unemployment, involuntary part-time employment, and temporary layoffs–to project how the unemployment rate may behave when the anticipated recovery begins.
They point out that before the 1991 recession, increases in the inflow rate, the speed at which workers move into unemployment, and decreases in the outflow rate, the pace at which they find jobs, were nearly equivalent in relative terms during recessions. The resultant sharp increases in the unemployment rate were followed by rapid recoveries as firms hired back workers in improved conditions.
Increases in the unemployment rate in the 1991 and 2001 recessions, however, were driven by disproportionate declines in the outflow rate, making lack of hiring the primary culprit. And recoveries diverged from the established pattern as well: outflow rates recovered much more slowly than they had in pre-1990 recoveries. In fact, the authors cite several studies showing that current business-cycle fluctuations in the unemployment rate are driven primarily by the outflow rate.
The current recession is particularly nasty because the outflow rate is at an historic low and the inflow rate is rising in line with the recessions of the 1970s and 1980s-actually, it's shooting straight up at present-both contributing to an extremely weak labor market.
The authors evaluate several possibilities for the future. Their benchmark, no change in the outflow/inflow rates, would bring us to 10% unemployment by 2010. The "Blue Chip" consensus included in the paper posits an employment recovery slightly weaker than that of 1983 and a bit stronger than that of 1992, bringing the unemployment rate to 10% in early 2010, from where it would begin to decline. But if inflow/outflow rates behave as they did in 1992, unemployment would peak around 11% by summer of 2010, and remain above 9% through 2011.
And that's where temporary layoffs and involuntary part-time work come in. In the current recession those working part-time for economic reasons has risen dramatically and to an historical high, from 3.0% in December 2007 to 5.8% in April 2009, with significant reductions in hours across broad sectors. At the same time the share of workers on temporary-as opposed to permanent-layoff is very low. In fact it actually fell from 12.9% in Dec-07 to 11.9% in April-09. (Generally the share of workers on temporary layoffs rises during recessions: it increased from 16.1% to 20.7% between July 1981 and November 1982.) So with few workers on temporary lay-off waiting in the wings, and a large number working part-time against their wills, it seems logical that employers will expand the hours of partially-idled workers instead of taking on new employees. The authors formulate their forecast for the unemployment rate by adding the linear relationship between part-time employment and the unemployment rate between Dec-07 and April-09 to the Blue Chip consensus. This suggests labor market slack will be higher by the end of the year than at any time since WWII, the outflow rate will be historically low, and the unemployment rate will be sticky. In other words, Jobless Recovery III.
Full report here:
