The Easter bunny, once again, will not be visiting the long-term unemployed

Ben Casselman at FiveThirtyEight Economics has an interesting piece on long-term unemployment – The Biggest Predictor of How Long You’ll Be Unemployed Is When You Lose Your Job:

One characteristic distinguishes the long-term unemployed from the rest of America’s jobless. It isn’t how many hours they worked at their old job, or what industry they came from, or even their level of education.

Its bad timing.

A FiveThirtyEight analysis shows that by far the single biggest predictor of whether someone will be out of work for a year or more is the state of the economy when he or she loses his or her job.1 Over the past 15 years, a period spanning two recessions, a one-point increase in the unemployment rate increased an individual’s odds of remaining unemployed for at least a year by about 35 percent. No other characteristic — age, sex, race, marital status, education or occupation, among others — had even close to that big an effect.

Americans who had the misfortune of losing their jobs during the height of the most recent recession in 2009 were more than four times as likely to end up out of work for a year or longer than those who lost their jobs during the comparatively good economy of 2007. Extended unemployment benefits, which are often cited as a driver of the persistently high levels of long-term joblessness, don’t appear to be a major cause of the pattern.

More than 2.5 million Americans have been out of work for a year or more. That’s down from more than 4.5 million in 2010 but nonetheless represents a crisis of long-term unemployment that’s unprecedented in the U.S. since World War II. The plight of the long-term jobless has gotten renewed attention in recent weeks in part due to mounting evidence that they are being left out of the economic recovery.

After a long discussion (with data), they arrive at the following conclusion:

Taken together, these are discouraging findings. A weak economy can cause long-term unemployment, but a stronger economy can’t fix it. That suggests policymakers’ top priority needs to be preventing the kind of long, slow recovery that leads to high levels of long-term unemployment in the first place. A stronger economic rebound in recent years would likely have put many of the recession’s victims back to work before they became long-term unemployed. That lesson won’t do much to help today’s jobless, but it might help prevent a similar crisis in the future.

I´ll concentrate on their conclusion.

I have no beef with “a weak economy can cause long-term unemployment” (it sure can and does), but what exactly is meant by “but a stronger economy can´t fix it”?

That´s Alan Krueger´s view, not theirs. They really believe a stronger economic rebound would have done wonders.

But is it really too late? No matter what people say, write and theorize, we´ll only know for sure if we (rather the policymakers) try.

The charts below may help give a feeling for the loss that´s been imposed on the economy by monetary procrastination.

I compare four different cycles for a period of twenty four quarters following the cycle peak. There´s one cycle in the 1970s (the oil-shock induced recession of 1973/75), one cycle in the 1980s (the Volcker “get-rid-of-inflation” induced recession of 1981/82) and two in the 2000s (the “growth-is-too-high” induced recession of 2001 and the “inflation-obsession” induced recession of 2007/09).

I´m just giving easily understandable “inducements”, but monetary policy errors of different nature was the real culprit, although I´ll not go into that to keep the focus on the plight of the long-term unemployed. In fact, as will become clear, it was only when monetary policy was “eased up” (by which I mean getting nominal spending (NGDP) to grow faster) that long-term unemployment subsided.

You´ll also see the behavior of long-term unemployment gives a good characterization of type of recovery: if it was V-shaped, U-shaped or L-shaped. For reasons that will become clear, the 2007 recession had a long “drop” and an also long “base”, mimicking the shape of an L.

I also show the behavior of inflation during the different cycles. The one in the 1970s is characterized by a jump in core inflation, something that “naturally” happens when there´s a significant negative supply shock (oil and commodity prices in this case). But that´s “natural” only in the case you already are in an inflationary environment and one in which the Fed has no credibility.

There was a significant rise in the price of oil in 2003/05 and again in 2007/08, but no jump, or even significant increase in core inflation. That´s because the Fed had earned credibility. By becoming obsessed with the inflationary effects of oil prices the Bernanke Fed got “trigger-happy”, with the consequence being the long drop in the vertical part of the “L”.

Observe that the recovery from the 1981 recession was strong (“V” shaped) with inflation on a downtrend, a sure sign that the Volcker Fed quickly earned credibility.

The recovery from the 2001 recession is mediocre. The recession itself was “shallow” but the Fed took its time to act. Only in the second half of 2003 did it become more “proactive”, introducing forward guidance (FG). Note how the NGDP trend becomes steeper and how long-term unemployment eases up from that point. Unfortunately the rise in nominal spending was not strong or quick enough to get something like the V-shaped recoveries obtained in the 1970s and 1980s. What is truly amazing is that this happened with the Fed being afraid of inflation getting too low! (Remember Bernanke´s 2002 “Helicopter Ben” speech?).

But that was just the “warm-up” for the real screw-up that would come a few years later and, which never ceases to amaze me, under the leadership of Mr. Ben (“Great Depression”) Bernanke! The QE´s augmented by thresholds and forward guidance cocktails were only effective in stopping the “spread of the cancer”, but there´s been no real remission.

Enough words. Let the pictures tell the story. For ease of comparison all the NGDP-Long-term Unemployment charts have the same scale both on the left side axis (NGDP) and right side axis (LTU-inverted scale). The same for the inflation charts. (Note: the top right hand side NGDP-LTU chart should read 2001-2007 (not 2006)).

Easter Bunny_1

Easter Bunny_2



4 thoughts on “The Easter bunny, once again, will not be visiting the long-term unemployed

  1. Hi Marcus!

    I asked Scott Sumner the following question and thought I’d run it by you as well:

    Prof. Sumner,

    Clark Johnson wrote the following (in the paper you linked to):

    “I believe Bernanke means that QE would lower real long-term rates. According to market participants, Fed QE announcements tend to raise inflationary expectations, thereby raising nominal rates on 10- and 30-year bonds.”

    I think this deserves more discussion from you. In particular:

    (1) Do you personally believe that QE3 has put downward pressure on real long-term interest rates (seems doubtful to me)?

    (2) Has Bernanke or anyone else on the FOMC EVER distinguished between the effect of QE on nominal rates vs. its effect on real rates?

    It sure seems like there’s very little actual evidence supporting Clark Johnson’s argument above. Why do Bernanke and Yellen keep saying that QE lowers long-term rates even though the truth is closer to the opposite? My theory: they say it because it sounds more appealing than “increase expectations of future inflation.” It’s all about selling the QE approach in a way that the general public feels like they understand (even though they don’t).

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