Unemployment rate and employment growth: Reasonable expectations

Stephen Williamson wrote a fantastic post, where he bounds reasonable numbers for employment growth and the unemployment rate, in the U.S., in coming months.

Takeaways:

-200k jobs added per month, which many observers find normal, is more than we can reasonably expect.

-Recent trends and the current level of labor force participation suggest that employment can't grow faster than 0.5% for too long. 200k jobs per month imply a 1.7% growth rate, given the current level of unemployment.

-The unemployment rate can't probably get much lower than 4.6%.

-Going forward, monthly employment growth should be closer to 60k (population growth) than the "normal" 200k.

Notable pictures: Japan's female employment rate

I was surprised by this chart, a version of which I originally saw on FT Alphaville:
 

It shows the impressive rise of the female employment rate in Japan, both in absolute terms and relative to the U.S. The participation employment-population ratio is now higher in Japan than in the U.S., which is something I didn't expect.

The article is perhaps too quick to chalk up this rise to Abenomics. The timing is right, but I'm skeptical that the handful of policies introduced by Abe have overcome Japan's cultural biases and institutional barriers so quickly.

Among OECD countries in 2013, Japan's female employment rate (62.5) is near the median (60), and clearly above the average (57.5).

How about the gap between the male and female employment rates? The FT article highlights the "20 percentage-point difference" in Japan. Is that normal?

For the OECD as a whole, the male-female gap is 15.7 percentage points; in Japan it's 18.3. The largest gender gaps in the employment ratio are for Turkey (39.8), Chile (22.8), Korea (21), Italy (18.6), and Greece (18.4). Next was Japan. The smallest gaps are in the Nordic countries, followed by Portugal (!), and Canada.

I was also surprised to learn about the low correlation between the male participation employment rate and the gender gap in participation employment rates.

So, the female participation employment rate in Japan is now in line with that of other rich countries, but the gap between men and women is still quite higher.

Edited on 8/14/14, at 4:15pm CT, to replace "participation rate" with "employment-population ratio" (or simply, "employment rate"). They're not the same thing. Sorry about that.

Chart of the week

On the shiny employment report published today, the only dark spot was the composition of the decline of unemployment. The jobless rate fell because the labor force participation (LFP) rate plunged, even though the employment-population ratio (EPR) fell a little too (from 58.94% to 58.87%).

The chart shows that, of the 0.437 percentage point decrease of the jobless rate, 0.552 was attributed to a decline of the LFP; while the fall of the EPR contributed to a rise of 0.115 percentage points of the unemployment rate. The last bar of the chart shows that, over the past 12 months, most of the accumulated decline of the jobless rate is attributable to a lower LFP (the "bad" kind of decline of unemployment).

That's been the norm since at least 2010.

The unemployment rate (UR) and the LFP and the EPR as related as follows:

UR = 1 - EPR / LFP

A little algebra will take you from that expression to the decomposition of the change of the unemployment rate between period t and period t-1:

Δ UR [t] = UR [t] - UR [t-1] = -(Δ EPR[t])*((1/LFP[t])+(1/LFP[t-1]))/2 +

                                                              0.5*(EPR[t-1]+EPR[t])*(Δ LFP[t]) / (LFP[t]*LFP[t-1]) 

The first (second) line on the right-hand side is the contribution of the change of the employment-population ratio (the labor force participation) to the change of the unemployment rate. An increase of the EPR (LFP) decreases (increases) the unemployment rate, and vice versa.

Well worth reading

1. Housing bubble department: Switzerland, Australia.

2. Deflation, the zero-lower-bound, and multiple inflation equilibria, eurozone edition (this is a straight application of James Bullard's earlier paper, which in turn is an application of a paper by Benhabib, Schmitt-Grohé, and Uribe). Hat tip to Gavyn Davies, at the FT, for the link.

3. Puerto Rico will default (most likely), by Felix Salmon.

4. U.S. labor market spider chart. Great visual tool by the Atlanta Fed. Don't miss the jobs calculator, and the inflation dashboard!

5. U.S. small businesses don't create jobs any more, from BloombergBusinessweek.

Iran; the price of rice; U.S. employment report

1. Sanctions on Iran; 2. The price of rice; 3. U.S. employment report.

1. The new round of U.S. sanctions on Iran, by Al-Jazeera.

Also, this just reminded me of the upcoming presidential elections. BBC reports that all eight of the candidates are hardline conservatives, and that the progressive candidates were banned from running.

2. How Vietnam and Thailand try to stabilize the price of rice. According to data from the World Bank, in April the price of Thai A.1 rice was down 9.1% from last year, and the price of Vietnamese 5% rice was down 10.7%.

3. U.S. employment report.

The good: 
1. The change in nonfarm payrolls was decent (175k), even good in this post-2007 era.
2. Local and state government payrolls keep going up, albeit slowly, a sign that the fiscal consolidation at the local and state level is probably over.
3. Payrolls in the temporary help services industry ("temps") went up again, and the one-month diffusion of payrolls by industry was almost 60%.
4. The labor under-utilization rate (U6) went down, even though the unemployment rate went up, a sign that discouraged workers and people working part-time for lack of a better option dwindled in number.

The bad:
1. Nonfarm payrolls for March and April were revised down by a net -12k.
2. Manufacturing payrolls have been declining for three months in a row. It is not clear whether this is a broad cyclical signal, or merely a sector story.
3. Federal government payrolls went down (although this was expected, given the fiscal consolidation under way).
4. The employment-population ratio is stagnant. It's been stuck at 58.5-58.6 since November 2012.
5. The six-month diffusion of nonfarm payrolls by industry declined in both April and May.

The increase in the unemployment rate has both good and bad elements. On one hand, the labor force participation (LFP) rate went up, which might mean that more people are looking for jobs. But an increase in the LFP pushes up the unemployment rate, ceteris paribus. On the other hand, the employment-population ratio (EPR) stayed level, which means that employment grew just as much as the population did. An increase in the EPR would have brought down the unemployment rate, ceteris paribus.

Overall:
A fairly positive report, indicating that employment keeps growing, albeit slowly, and that the slack in the job market is shrinking, slowly. However, the markets will probably zero in to the slight increase in the unemployment rate and hope for a delay of the Fed's tapering of QE. Clutching at straws, if you ask me.

I will leave you with this chart.

It shows what part of the change in the unemployment rate is attributable to the change in the LFP and which part is attributable to the change in the EPR. The sum of the two add up to the change in the unemployment rate. So, for instance, in May the unemployment rate went up by 0.04% (even though in the BLS report the reported rounded number is 0.1%). The increase in the LFP made the unemployment rate go up by 0.18%, whereas a slight increase in the EPR brought the unemployment rate down by 0.13%. The last column in the chart shows that over the last 12 months unemployment has gone down by 0.63%: 0.1% is attributable to an increase of EPR, and 0.53% is due to a decrease of the LFP.