Friday, June 06, 2008

How to parse a jobs report 

Let's begin at the beginning. What did we expect?
  1. The Bloomberg economic calendar page tells us we expected a loss of 60,000 jobs; we got a loss of 49,000. (WSJ carried the same number this morning.) Not good at all, but not a blow-out bad month.
  2. We expected hourly wages to rise 0.2%, they went up 0.3%. Average workweek came in right where we expected.
  3. We expected the unemployment rate to be 5.1%, but we got 5.5%. Whoa! How did that happen? The answer, quite simply, is that the level of people entering the job market went up.
Have a look at Table A-8 from the report. We can decompose the 5.5% unemployment rate into the reasons by which they are unemployed. Here are the numbers for May, with April numbers in parentheses.
So had we had the same behavior of people entering the labor force as we had for April (which was the same as for the entire first quarter), the unemployment rate would have come in at 5.2% rather than 5.5%. So the employment-population ratio, which many have used in the past to account for what's happened in the labor market when the unemployment rate didn't provide them the gloom and doom they wanted, only dropped by 0.1 to 62.6%, virtually unchanged since February.

200,000 new teens are in the labor force in May 2008 vs May 2007 (table A-2, with a nod to Paul who spotted it while I was writing this.) That's one source of the new workers into the workplace, but not all of them, as the number of people not in the labor force fell by 369,000.

That last number is the surprise, the reason we will end up talking about the unemployment rate all weekend long. The rest of the data should have come as no surprise. The job market is weak but not in free fall; an oil shock and a housing contraction should do what we're seeing here, but so far the loss of jobs in the first five months 2008 has been 324,000, not much different than the first five months of 2001. That's about what we grow in two good months.

UPDATE: Ed Morrissey ties the increase in teen unemployment to the minimum wage increases:
In summer, teenagers and college students enter the marketplace looking for seasonal and part-time work. This accounts for the significant rise in job-seekers and the 0.4% increase in unemployment. Otherwise, an overall job loss of 49,000 jobs would account for a 0.0004% increase in a market of 138 million workers.

Why have these new job seekers found it difficult to get jobs? One reason is that Congress made jobs costlier just in time for this economic slowdown. Congress raised the minimum wage last year by seventy cents an hour, from $5.15 to $5.85. It will rise again in July to $6.55 an hour, and next year will hit $7.25 per hour. That makes entry-level labor as much as 27% more expensive this summer, when consumers have already slowed down their spending. The natural loss of work from the slowdown amplifies the effect of the minimum-wage increase, because businesses now cannot afford to raise prices to maintain their entry-level positions.

When the minimum wage increase was under debate last year, many of us warned that it would have precisely this effect. Now we see it unfolding before our eyes.
Aside what I think is a math error in that first paragraph (I think he means 0.04%, not 0.0004%), what he is proposing is that the higher minimum wage is inducing a large increase in the supply of labor. Setting aside the timing issue (did really all the teenagers wait until May to decide "hey, let's get a job"?), we still have a 12% increase this summer, which is to have led to a 3.7% increase in labor supplied by teens two months prior to the change in wages. And most of these teens will give those jobs up by Labor Day. I don't have a very good feel for teen labor supply elasticities, but Ed's suggesting that the short run elasticity here is above 0.3, which feels high to me. In the long run, it would certainly be higher than that.

In terms of teen unemployment rates, though -- which involves both supply and demand -- the jump is quite large but not necessarily unbelievable if you think demand shifted down due to recession and then moved along the new, lower demand to reflect the minimum wage increase.