Chart of the Day: Quits and Layoffs Show Labor Market's Return to Health

The unemployment rate, which stood at 4.7 percent in December 2016, is the most commonly cited indicator of the health of the labor market. The Fed considers an unemployment rate of 4.6 to 4.8 percent to be equivalent to full employment (or, to use the term favored by economists, the non-accelerating-inflation rate of unemloyment.) By that measure, the economy is in good shape.

Some economists, however, consider quits to be an even better measure of labor market health. Quits measure the number of workers each month who voluntarily leave their jobs. Quits fall during a recession because, when new jobs are scarce, few people want to give up a job they have. They rise during times of prosperity, because people are willing to leave their jobs when they think there is a good chance of finding another one.

As the following chart shows, as of October 2016 (the most recent available data), the number of quits had returned to the peak reached before the Great Recession began. Meanwhile, the number of layoffs and discharges had fallen below the prerecession low.

Chart of the Day: How Badly have Real Wages Stagnated?

It is well known that wages in the United States have stagnated in recent decades, but how badly? We know that nominal wages, expressed in current dollars at the time they are paid, have risen dramatically. In 1965, production and nonsupervisory workers averaged just $2.60 an hour. Now they average nearly $22 an hour. But what really matters is real wages, that is, nominal wages adjusted to show the effect of inflation. Are real wages actually lower now than in the past? Have they increased, but just not very rapidly? As this chart shows, it depends on exactly how you do the inflation adjustment.

Both lines in the chart show the real hourly wages of production and nonsupervisory employees stated in constant 2016 dollars. The red line is adjusted using the consumer price index (CPI) from the Bureau of Labor Statistics. The government uses the CPI to adjust Social Security benefits and the value of the Treasury's inflation adjusted securities (TIPS). The blue line is adjusted using the personal consumption expenditure (PCE) index from the Bureau of Economic Analysis. The Federal Reserve uses the PCE index as the principal indicator of inflation when setting monetary policy.

The difference is dramatic. According to the CPI, real wages have increased just 8 percent in half a century. According to the PCE index, they have increased 40 percent. Even that is not very impressive over such a long period, but 40 percent is a lot better than 8 percent.

If you measure from 1972 instead of 1965, real wages have actually fallen by 4 percent, as measured by the CPI. Even by the PCE, they have increased by just 19 percent.

Which is right? Frustratingly, we can't really say that either measure is right or wrong. The two indexes simply make different choices when it comes to the thorny technical issues that bedevil the measurement of inflation—how to adjust for changes in the basket of goods that consumers purchase, how to adjust for quality, and how to adjust for the substitution of cheaper goods for more expensive ones when relative prices change.

For more on the problems of measuring inflation, see these earlier posts:

What Does the Consumer Price Index Measure? Inflation or the Cost of Living? What's the Difference?   (Also available in a classroom-ready slideshow version). 

Deconstructing Shadowstats: Why is it So Loved by its Followers but Scorned by Economists?
 

Chart of the Day: The Output Gap

Potential real GDP is the real output that an economy can produce when it is operating at a level that can be sustained without excessive inflation. Output falls below its potential level during a slump and can temporarily rise above its potential level during a boom.

The output gap is equal to the economy's actual real GDP minus its potential GDP. The gap is negative when the economy is in a slump an positive when it is in a boom. The following chart shows the output gap for the US economy from 2000 to 2016 as a percentage of potential GDP. The chart is based on actual real GDP as reported by the Bureau of Economic Analysis and potential real GDP as estimated by the Congressional Budget Office. (Data for Q4 2016 are the author's own preliminary estimates.)

 

 Related content: What is the Nairu and Why Does It Matter? An explainer slideshow from Ed Dolan's Econ Blog

Is US Fiscal Policy About to Go Procyclical, Again? How Can We Tell?

As 2017 begins, the US economy is in the middle of a boom, or at least a boomlet. The official unemployment rate is at or below its target level, stock market indicators are hitting all-time highs, and the Fed is starting to get serious about raising interest rates. All this is reflects the expectation of an orgy of tax cutting and infrastructure spending by the incoming Trump administration and a new Republican Congress.  If such a turn in policy comes to pass, will it be a good thing, or too much of a good thing?

Too much, in my opinion.  Republicans like to portray themselves as the party of fiscal responsibility, but their record says otherwise. In practice, GOP budget policy so far this century has been consistently procyclical—expansionary when it should show constraint, contractionary when it should support a weak economy. All signs point to another procyclical episode in the making.

Patterns of Fiscal Policy

To set the stage, here is a little background on patterns of fiscal policy—the good, the bad, and the ugly. Economists of all political views show surprisingly broad agreement on the general principles. Good fiscal policy should moderate the business cycle (or at least not make it worse) and should do so in a way that avoids unsustainable increases in public debt. Bad policy amplifies booms and busts. Ugly policy can lead to major crises.

First, some essential  terms and concepts:

What Is the Nairu and Why Does it Matter?

In December 2016, after a year-long pause, the Fed resumed its tightening of monetary policy. As usual, the action took the form of a quarter point increase in the target range for the federal funds rate (a key rate that banks charge  on short-term loans to one another).

Is still more tightening in store?  Most observers think the answer is “yes,” but the Fed is leaving its options open. Its most recent projections, released immediately after its December meeting, hint at the possibility of as many as ten more quarter-point increases over the next three years—or perhaps none at all. So what will actually happen?


The wonkiest number in all of economics

What actually happens will depend , in large part, on what may be the wonkiest number in all of economics—the Nairu. Nairu stands for Non-Accelerating Inflation Rate of Unemployment—such a mouthful that no one ever says it out loud. Often, it is spelled out as an acronym, NAIRU, but increasingly, it is written as an actual word, with only the first letter capitalized. In the 1960s, Milton Friedman used the more civilized term, natural rate of unemployment. Today, many economists treat “Nairu” and “natural rate” as synonyms.

The basic idea behind the Nairu is simple. It is widely accepted that as the economy moves through the business cycle from recession to expansion to boom, shortages develop in labor and product markets that put upward pressure on prices and wages. The Nairu is supposed to capture the sweet spot—the lowest level to which the unemployment rate can safely fall before inflation starts to accelerate.

The Nairu is a natural fit with the Fed’s statutory objectives for the conduct of monetary policy. Under its so-called dual mandate, the Fed is supposed to aim for “maximum employment and stable prices.” The Nairu captures both parts of the dual mandate, being the maximum employment (or minimum unemployment) that is consistent with prices that are stable in the sense that the inflation rate does not accelerate from month to month.

In order actually to implement its dual mandate, the Fed needs to fill in some numbers. In recent years, it has maintained an inflation target of 2 percent per year, as measured by the personal consumption expenditure (PCE) index published quarterly by the Bureau of Economic Analysis. Putting a number on the Nairu, however, has posed more of a challenge.

Why the Nairu is so hard to pin down

Back in the 1960s, things seemed simpler. Consider the following chart, which shows the pattern of unemployment and inflation that prevailed during the Kennedy-Johnson years, 1960-1969:

The points in this chart fit closely around a trendline that economists call a Phillips curve—a curve that shows an inverse relationship between inflation and unemployment over the course of the business cycle. Taken literally, the value of the Nairu would be 6.7 percent, the level at which inflation started to accelerate after reaching its low of 0.6 percent in the fourth quarter of 1961. If, instead, we interpret the Nairu as the value of unemployment beyond which inflation begins to rise above  the 2 percent target, then the chart suggests an unemployment target of about 4.3 percent.

Does Paul Krugman Really Want to Say Hillary Could Have Won Only by Keeping the Truth from Voters?

Paul Krugman says the election was hacked. He thinks Hillary Clinton would have won the presidency, but for two problems:

I’m talking about the obvious effect of two factors on voting: the steady drumbeat of Russia-contrived leaks about Democrats, and only Democrats, and the dramatic, totally unjustified last-minute intervention by the F.B.I. . .

Does anyone really doubt that these factors moved swing-state ballots by at least 1 percent? If they did, they made the difference in Michigan, Wisconsin and Pennsylvania — and therefore handed Mr. Trump the election, even though he received almost three million fewer total votes. Yes, the election was hacked.

I’m not sure Krugman has any hard statistical evidence to back this up, but he may very well be right. Is so, what is the implication? 

Krugman wants us to focus on the fact that the people who did the hacking were “bad guys.” Vladimir Putin is a devious authoritarian who arguably had no business trying to tilt the US election to his favored candidate. The FBI may really, as he says, “have  become a highly partisan institution, with distinct alt-right sympathies” (although I find that a bit of an overstatement.) 

In my view, though, we should not allow the fact that “bad guys did it” to distract our focus from one key fact: What we learned from the Russian hackers and the FBI was true.

Yes, Clinton really did have a private email server. At a minimum, by her own admission, that showed bad judgement. It seems to have been at least a technical violation of State Department rules, even if the FBI was right to recommend against criminal prosecution. The server, and Clinton’s handling of the issue, really did turn off some voters.

Yes, the DNC, as revealed by Wikileaks, really did put its thumb on the scale in the primaries, contrary to its professed neutrality. Without the DNC’s covert aid—or with a more timely revelation of that aid—a fairer primary process might well have resulted in the nomination of Bernie Sanders.

Yes, Clinton’s paid speeches to banks really did contain material that could have swayed undecided primary voters, had it come out earlier in the year — her embrace of free trade and open borders, her offer to give Wall Street executives a larger role in crafting regulations, her casual willingness to say one thing behind closed doors and another in public.

None of this was false news. It was true news. I agree, it would have been more  palatable if it had been revealed by an earnest, all-American whistle blower within the DNC campaign rather than by the Russians, but that does not change the fact that the material released was true.

So here is my question: When Krugman says that Clinton would have won the presidency of only the election had not been hacked, isn’t that exactly the same as to say that she could have won only if she had been able to keep the truth safely under wraps?

If it is, then the blame for Clinton’s defeat lies with the message, no matter how much effort Krugman makes to shift our focus to the messengers.

Just About Managing: How the "Jams" Elected Donald Trump

Hillary Clinton famously characterized Donald Trump’s voters as a “basket of deplorables,” but she was wrong. Our friends, the British, have figured it out: Trump was elected not by deplorables, but by jams.

“Jams,” short for “Just About Managing,” is the new term has swept British political discourse. They are defined as a social class consisting of people who have jobs and a home, but little by way of savings or discretionary income; people who see themselves as precariously comfortable at best, with nothing to fall back on if adversity strikes.

The instant popularity of the term may have something to do with the way it echoes another typically British political expression, “jam tomorrow,” meaning an often made but never fulfilled promise.

James Frayne of the British think tank Policy Exchange has written a thorough and thoroughly wonky report on jams. For statistical purposes, he equates jams with the middle half of the British class structure, sandwiched between professional and managerial classes above, and unskilled workers and those who live on social benefits, below.

What Frayne says about jams certainly makes them sound a lot like Trump voters. They work hard, pay their taxes, and play by the rules. What they want is to see “society run in a fair way.” American translation: They want to see that the system is not rigged.