Many analysts have been scratching their heads over the combination of a sharp drop in unemployment over the last few months alongside rather tepid job growth. The discrepancy is partially caused by the two different surveys from which the numbers are derived, surveys that often march to their own drummer in the short term. The BLS’s data on job flows offers additional clues.
Graphed below are some histories based on the flows numbers. The top graph shows where the formerly employed go from one month to the next. Between December 2010 and January 2011, 1.5% of the employed became unemployed, and 2.6% of the employed dropped out of the labor force. (There was a break in all the household survey numbers, because of the annual adjustments to the population controls, but the effect on these flows numbers looks to be very small.) The three-month moving averages of those two series are 1.7% and 2.7% respectively. The share becoming unemployed has been drifting lower since early 2009, but still remains rather high; the share leaving the labor force is up over the last few months, but isn’t out of line with historical averages.
The bottom graph is striking, however. The share of the unemployed finding work is very close to the recently set all-time low, and has barely improved over the last year. The share of the unemployed dropping out of the labor force, however, has been rising for more than a year, and now has exceeded those finding work for two years.
When you make a point like this, some skeptics are quick to blame excessively generous unemployment benefits and a labor force unfit for today’s demanding employers rather than a still-sick macroeconomy, suggesting that there’s less slack in the labor market than might appear at first glance.
There’s not much evidence for that. As newly minted San Francisco Fed president John Williams pointed out in a recent speech, the “natural” rate of unemployment—the one below which inflationary pressures rise—has probably risen from 5.0% before the financial crisis to 6.7% now. About half the increase is the result of extended unemployment insurance benefits (which will wane soon enough). The balance is the result of severe shocks that have hit the labor market, notably in the construction sector. Williams and his staff estimate that these increases in the natural rate are temporary, and likely to dissipate over the next few years. In any case, the unemployment rate is still considerably above 6.7%, and likely to stay there for quite a while. (Full text here: http://www.frbsf.org/economics/speeches/2011/john_williams0222.php)