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February 4, 2013

Latest Posts from Economist's View

Latest Posts from Economist's View

Posted: 06 Jan 2013 12:06 AM PST
Posted: 05 Jan 2013 08:41 AM PST
From Vox EU, William Dickens and Rand Ghayad argue skills mismatch is not what's driving high levels of unemployment:
It's not a skill mismatch: Disaggregate evidence on the US unemployment-vacancy relationship,by William Dickens, Rand Ghayad, Vox EU: The Beveridge curve – the empirical relationship between unemployment and vacancies – is thought to be an indicator of the efficiency of the functioning of the labour market. Normally when vacancies rise, unemployment falls following a curved path that typically remains stable over long periods of time. When vacancies rise and unemployment does not fall (or falls too slowly) this may be an indication of problems of structural mismatch in the labour market leading to an increase in the lowest unemployment rate that can be maintained without increasing inflation (the Non-Accelerating Inflation Rate of Unemployment (NAIRU). Key contributions to this strand of work were progressively made by Dow and Dicks-Mireaux (1958), Lipsey (1960), Holt and David (1966), Hansen (1970), and Bowden (1980).
More jobs, more jobless
The unemployment-vacancy relationship has received much attention among economists and policymakers over the past few years. Since the end of the Great Recession, we started seeing the Beveridge curve shifting out toward the upper right, reflecting a decrease in labour market efficiency. The outward shift means that firms can't fill their available job openings as readily as we would have expected in light of the high unemployment rate (Kocherlakota 2010).
Controversial interpretations of the data
The basic fact that recent 'job vacancy, unemployment' points lie outside the locus of points that seemed to define the Beveridge curve in the 2000s is not in dispute, but its interpretation has been controversial. Interpretations of the recent data range from a temporary cycling around a stable Beveridge curve due to the prolonged slow recovery from the Great Recession to a quasi-permanent shift of the Beveridge curve due to pervasive mismatch between the qualifications of job applicants demanded by employers and the qualifications offered by unemployed job searchers.
Figure 1 plots vacancy-unemployment points from 2001 on. The curved relationship between unemployment and vacancies depicted in Figure 1 is often called the Beveridge curve. Over the recession of the early 2000s, and the recovery from that recession, the vacancy-unemployment relationship remained remarkably constant, as it has for long periods of time in the past. However, in the recovery from the most recent recession we see that vacancies have grown considerably without producing the normal decline in unemployment. It looks as if the Beveridge curve may have shifted out. The figure displays an empirical relationship combining data on vacancies from the Job Openings and Labour Turnover Survey (JOLTS) with the aggregate unemployment rate obtained from the Bureau of Labor Statistics' monthly household survey. The data span the period January 2001 through June 2012 and are seasonally adjusted. The solid line in Figure 1 reflects a stylised Beveridge curve that was estimated using data on unemployment and vacancy rates for the period prior to the start of the recession. The plot reveals that by September 2009, the vacancy-unemployment points started to deviate away from the fitted curve in an anti-clockwise direction indicating a higher unemployment rate at any given level of job openings.
Figure 1. Total vacancies and unemployment rates by unemployment duration
Source: CPS and JOLTS. Data are monthly rates, span the period 2001m1-2012m6, and are seasonally adjusted.
The seasonally adjusted BLS series of monthly unemployment rates for all employees, 16 years and over is disaggregated to examine the vacancy-unemployment relationship at different durations of unemployment. We do this to see if the unemployed with different durations benefit differently from the recent increase in the vacancy rate. We use data from the BLS's Job Openings and Labour Turnover Survey (JOLTS) for the aggregate vacancy rate and plot that against the fraction of the labour force unemployed at different durations. Figure 2 presents that relationship for those unemployed for less than five weeks.
Figure 2. Monthly vacancy and unemployment rates, using unemployed persons with duration less than five weeks
Source: CPS and JOLTS. Data are monthly rates, span the period 2001m1-2012m6, and are seasonally adjusted.
The relationship between the vacancy rate and the very short run (less than five weeks) unemployment rate is essentially vertical: around 2% of the labour force is in the first five weeks of a spell of unemployment regardless of the level of job vacancies. There does not appear to have been any change in the relationship in 2009. Hence, individuals with unemployment spells less than five weeks do not explain what we see in the aggregate plot.
Figures 3 and 4 illustrate the vacancy-unemployment relationships using unemployed persons with duration 5-14 weeks and 15 -26 weeks respectively.
Figure 3. Monthly vacancy and unemployment rates using unemployed persons with duration of 5-14 weeks
Source: CPS and JOLTS. Data are monthly rates, span the period 2001m1-2012m6, and are seasonally adjusted.
Figure 4. Monthly vacancy and unemployment rates using unemployed persons with duration of 15-26 weeks
Source: CPS and JOLTS. Data are monthly rates, span the period 2001m1-2012m6, and are seasonally adjusted.
Figure 5 combines all those unemployed for less than 27 weeks and compares their fraction of the labour force to the aggregate vacancy rate.
Figure 5. Monthly vacancy and unemployment rates using unemployed persons with duration less than 27 weeks
Source: CPS and JOLTS. Data are monthly rates, span the period 2001m1-2012m6, and are seasonally adjusted.
Evidence of an outward shift
As with the graphs for each of these durations individually, there is no evidence of an outward shift. However, when the relationship is plotted using the fraction of the labour force that has been unemployed for more than 26 weeks, a number of interesting features are immediately apparent. First, the pattern in Figure 6 reveals a counter-clockwise outward shift that is consistent with what we see when we use the aggregate unemployment rate.
Figure 6. Monthly vacancy and unemployment rates using unemployed persons with duration greater than or equal to 27 weeks
Source: CPS and JOLTS. Data are monthly rates, span the period 2001m1-2012m6, and are seasonally adjusted.
In addition to the shift, the pattern in Figure 7 shows that the vacancy and unemployment points for the long-term unemployment group starts shifting out at the same time the aggregate vacancy-unemployment relationship breaks down.
Implications of an outward shift of the Beveridge curve
Disaggregating the vacancy-unemployment relationship reveals some interesting new facts that may shed light on the implications of what appears to be an outward shift of the Beveridge curve in recent years. While the Beveridge curve for all workers appears to be shifting out starting in 2009, data on vacancy and unemployment rates for individuals who have been unemployed for less than 27 weeks reveals the usual downward sloping relationship with no sign of any outward shift. Interestingly, a dynamic plot of the vacancy versus short-term unemployment rates shows clockwise cycling of the vacancy-unemployment points for those unemployed. In contrast, we see a large anti-clockwise movement when the vacancy rate is plotted versus the unemployment rate for those unemployed for more than 26 weeks. Taken together this suggests that the short-term unemployed are benefiting more than the long-term unemployed from increases in vacancies during the recovery.
Other than the contrast between the long- and short-term unemployed, we break down the vacancy-unemployment relationship by industry, education levels, age groups, and among both blue and white collar workers. In these decompositions we notice a similar pattern to what we see in Figure 1: there appears to be a breakdown in the vacancy unemployment relationship sometime at the trough of the recession.
We conclude that any explanation for the change in the vacancy unemployment relationship must account for its pervasiveness across different industry, blue-white collar occupations, age, and education groups, its concentration among the long-term unemployed and its absence from the short-term relationship.
  • One reason that the Beveridge curve relationship for the long-term unemployed shifted may be a shift in the desirability of the long-term unemployed to employers.
It is possible that the long-term unemployed are increasingly made up of workers whose skills are not suited to available jobs. However, if this were the case why wouldn't we see some outward shift in the short-term relationship as well? Furthermore, the fact that the vacancy-unemployment relationship has shifted in all industries when only the workers who were previously employed in those industries are considered calls the mismatch hypothesis into question as well.
  • Another possibility is that the long-term unemployed in this recession may be searching less intensively, either because jobs are much harder to find or because of the availability of unprecedented amounts and durations of unemployment benefits.
This seems like a more likely explanation, though if a drop in search intensity is due only to difficulty finding jobs it again raises the question of why we wouldn't see that at shorter durations as well.
Ghayad, Rand and William Dickens (2013),"What Can We Learn by Disaggregating the Unemployment-Vacancy Relationship?", Prospective article, Federal Reserve Bank of Boston, Working Paper.
Bowden, R (1980), "On the existence and secular stability of the u‐v loci", Economica, 47, 35–50.
Dow, J and Dicks‐Mireaux, L (1958), "The excess demand for labour. a study of conditions in Great Britain, 1946–56", Oxford Economic Papers, 10, 1–33.
Hansen, B (1970), "Excess demand, unemployment, vacancies and wages", Quarterly Journal of Economics, 84, 1–23.
Holt, C and David, M (1966), "The concept of vacancies in a dynamic theory of the labour market", in ibid. (eds.) Measurement and Interpretation of Job Vacancies, NBER, New York, Columbia University Press.
Kocherlakota, Narayana (2010), "Inside the FOMC", Speech delivered in Marquette, Michigan., 17 August, Federal Reserve Bank of Minneapolis.
Lipsey, R (1960), "The relation between unemployment and the rate of change of money wage rates in the United Kingdom, 1862–1957: a further analysis", Economica, 27, 1–31.
Posted: 05 Jan 2013 08:40 AM PST
Tim Duy:
Bullard and the "Fiscalization" of Monetary Policy, by Tim Duy: I am struggling with the latest speech by St. Louis Federal Reserve President James Bullard. The speech is titled "The Global Battle Over Central Bank Independence," but in the process confuses fiscal policy stabilization as necessarily a threat to central bank independence, travels down a bizarre road that appears to be a misunderstanding of European monetary policy, and misses the obvious example of recent events in Japan.
Bullard begins with a description of the conventional wisdom of the relationship between fiscal and monetary policy. Basically, the former should focus on the medium- and long-run but is poorly suited for short-run stabilization. Such stabilization is the purview of monetary policy, or, more accurately, an independent monetary authority. Bullard quickly goes off the rails:
  • The central banks in the G-7 encountered the zero lower bound on nominal interest rates.
  • This led many to talk about the need for fiscal authorities to step up and conduct macroeconomic stabilization policy.
  • However, the usual political hurdles asserted themselves and led to a hodgepodge of fiscal policy responses not particularly well-timed with macroeconomic events.
By itself, the zero bound did not give rise to increased interest in stabilization though fiscal policy. Instead, it was the inability of central banks to stabilize activity that raised the focus on fiscal policy. Consider the gap between private saving and investment:
Further, consider the gap across the era of the Great Moderation:
So, what's difference? The magnitude of the dislocation. While it is reasonable to believe that monetary policy is the preferable stabilization tool for relatively small perturbations in economic activity, it is not evident that the same is true for large perturbations, especially when the economy is at the zero bound. Indeed, it is the persistence of significant output gaps that triggered the interest in fiscal policy, not the zero bound itself. Does Bullard really believe that the US economy would be in better shape in the absence of a fiscal response?
It is also not clear what "political hurdles" Bullard is referring to, but I would say that the chief hurdle to effective fiscal policy is the rise of the austerians, those that believe that growth is achieved only by reducing deficits. One would think that by now the events in Europe had discredited this opinion as it is increasingly evident that fiscal multipiers are greater than anticipated, but Bullard is not about to be dissuaded.
Bullard cites evidence that monetary policy still provides effective stabilization policy:
  • Inflation has generally stayed near target instead of falling dramatically.
Wow, really? He completely ignores evidence that inflation will not fall dramatically in the presence of downward nominal wage rigidities. Moreover, he completely ignores high unemployment or the persistent output gap. And even if you believe that monetary policy can effectively stabilize the economy, you probably are appalled that Bullard believes that the economy has been stabilized in spite of the inability of the Federal Reserve to stabilize the path of nominal GDP.
Bullard then takes a bizarre turn:
  • Nevertheless, many see fiscal stabilization policy as desirable in the current context.
  • One idea: Suggest that the central bank take actions that are cumbersome to accomplish through a democratically-elected body.
What are these actions? Bullard tries to further his case with recent European monetary policy:
  • The European Central Bank recently announced an "outright monetary transactions" (OMT) program.
  • This program has been widely interpreted as a promise to buy the sovereign debt of individual nations.
  • A key element of the program is that purchases, should they occur, are conditional on the nation meeting certain fiscal targets.
  • Purchases would be sterilized, so that the program is not the same as U.S.- and U.K.-style quantitative easing.
  • The program has been regarded as "successful" so far.
Now Bullard seems to be saying is that when fiscal policymakers fail (as he assumes they will), then we will turn to monetary policymakers to enact fiscal policy. Now we have apples and oranges. I thought we were on the topic of whether or not fiscal policy can be used as a short-run stabilization tool. Only in an austerian fantasy-land is fiscal policy stabilizing the European economy. This isn't easy to sort out, but Bullard is saying that monetary policymakers in Europe are becoming fiscal policymakers. Bullard seems to be trying to make the argument that monetary policymakers are losing their independence in the process.
The problem is that if anything the opposite is true. It is the fiscal policymakers who are at the mercy of the European Central Bank. Bullard made a turn into the surreal world of European economic policy, where up is down. Bullard continues:
  • This is "fiscalization" of monetary policy: Asking the central bank to take actions far outside the remit of monetary policy - The analog in the U.S. would be a promise to purchase, or even monetize, state debt in exchange for the state maintaining a fiscal program considered prudent by the central bank.
  • Assistance like this from a central authority to a region is best brokered through the political process in democratically-elected bodies.
  • In Europe, the ECB is in essence substituting for a weak pan-European central government.
Yes, the ECB is substituting for a fundamental structural problem in Europe, the lack of a fiscal authority (and doing it poorly, for that matter). This shouldn't happen in the US, where the Fed can pass the buck to Congress and the President. And I agree that monetary policymakers should resist crossing into fiscal policy. But Europe is a whole different world. The ECB acted kicking and screaming because if they didn't the whole European experiment would have collapsed at this point. The ECB was forced to actually do the job of a central bank by acting as lender of last resort of the fiscal authorities, and then only at the cost of insane austerity policy, the complete opposite of the needed European policy. Bullard goes further astray:
  • Ordinary monetary policy provides or removes monetary accommodation in response to macroeconomic developments.
  • There has been a large macroeconomic development in Europe: Eurozone recession.
  • Yet, little direct action has been taken by the ECB in response to the recession.
  • One could argue that the monetary policy response to the European recession has been muted compared to more ordinary circumstances.
  • Why? By nearly all accounts, the monetary policy process has been bogged down by political wrangling over the OMT and other programs.
So Bullard is arguing that the ECB failed to focus on monetary policy, instead focusing on fiscal policy, and as a consequence Europe is in recession. But nothing prevented the ECB from enacting sane policy; fiscal authorities did not force them to raise interest rates. They chose poor policy time and time again by themselves. Indeed, I don't think Bullard shows any appreciation for the complexity of European economic policy. The ECB wasn't pulled into a role as fiscal policymakers as much as they were pulled into their role as monetary policymakers. The European experiment begins with major structural errors: A lack of fiscal authority, the central bank that does not believe that serving as a lender of last resort is within its mandate, and a bias toward fiscal austerity even in the face of deepening recession. The outcome was chaos. With no clear fiscal counterpart, standard analysis of central banks does not make any sense. Europe has simply been plagued by bad policy across the board.
Also, I am pretty sure that European central bankers will bristle at the implication that their response has been muted. Even I have to admit that they made great strides this year.
I am not even sure why Bullard went down the European road to begin with. The standard argument is that when fiscal policymakers encroach on monetary policy, the path of economic activity becomes unstable and inflationary. Europe is the case of monetary policy encroaching on fiscal policy. Why not take the more obvious example of the Bank of Japan, where monetary policy is looking poised to become a tool of fiscal policy?
In short, I find this to be a confusing speech. The title implies a threat to central bank independence, but he gives little reason to believe such a threat exists. The implementation of fiscal policy does not necessarily imply the lost of monetary independence. The monetary authority could still choose to lean against fiscal policy. That loss of independence would only be evident if monetary policymakers sustained an easy policy at the behest of fiscal policymakers in such a way that fostered higher inflation. Bullard gives no example of a monetary policymaker forced to act in such a way. Instead, he offers up the example of the ECB, which I would say has stripped fiscal policymakers of their independence, not vice-versa. Finally, he misses the obvious example of the potential loss of monetary independence, the Bank of Japan.

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