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Wonking Out: A Jobs Survey Full of Good News Wonking Out: A Jobs Survey Full of Good News
(about 1 hour later)
For as long as I’ve been paying attention to economic news, pundits and investors have waited anxiously for the monthly report by the Bureau of Labor Statistics on the employment situation. That’s still true, and there was some important news in today’s report. More on that later.For as long as I’ve been paying attention to economic news, pundits and investors have waited anxiously for the monthly report by the Bureau of Labor Statistics on the employment situation. That’s still true, and there was some important news in today’s report. More on that later.
But another report from the bureau, which came out on Tuesday, was a real eye-opener. It was, in particular, the best news about inflation we’ve seen in a long time — even though it never mentioned inflation.But another report from the bureau, which came out on Tuesday, was a real eye-opener. It was, in particular, the best news about inflation we’ve seen in a long time — even though it never mentioned inflation.
JOLTS — the Job Offerings and Labor Turnover Survey — tracks, um, job offerings and labor turnover. That is, it asks employers how many unfilled positions they have, how many workers have quit or been fired and so on. It may seem obvious that this information is useful, but these days many economists believe that it’s even more so.JOLTS — the Job Offerings and Labor Turnover Survey — tracks, um, job offerings and labor turnover. That is, it asks employers how many unfilled positions they have, how many workers have quit or been fired and so on. It may seem obvious that this information is useful, but these days many economists believe that it’s even more so.
Some background: Standard macroeconomics relies a lot on an updated version of the Phillips curve. The original version of that theory asserted (based on historical evidence) that there was a downward-sloping relationship between unemployment and inflation: The higher the unemployment rate, the lower the inflation rate, all else being equal. Since the 1970s, almost everyone has assumed that expectations of inflation also play a big role. If the public expects a lot of inflation, as it did at the end of the 1970s, this will push up actual inflation for any given rate of unemployment.Some background: Standard macroeconomics relies a lot on an updated version of the Phillips curve. The original version of that theory asserted (based on historical evidence) that there was a downward-sloping relationship between unemployment and inflation: The higher the unemployment rate, the lower the inflation rate, all else being equal. Since the 1970s, almost everyone has assumed that expectations of inflation also play a big role. If the public expects a lot of inflation, as it did at the end of the 1970s, this will push up actual inflation for any given rate of unemployment.
So what explains the recent surge in inflation? The mystery is that while unemployment is low, it’s roughly the same as it was on the eve of the pandemic, yet inflation is much higher. This is true even if you focus on “core” inflation, which excludes volatile food and energy prices:So what explains the recent surge in inflation? The mystery is that while unemployment is low, it’s roughly the same as it was on the eve of the pandemic, yet inflation is much higher. This is true even if you focus on “core” inflation, which excludes volatile food and energy prices:
Are we having a ’70s-type problem, with inflation driven by self-fulfilling expectations? Well, we have a lot of direct evidence on expected inflation, from both surveys and financial markets — and it isn’t especially high. Everyone seems to expect that the Federal Reserve will get inflation down, and fairly soon. So expectations aren’t the story.Are we having a ’70s-type problem, with inflation driven by self-fulfilling expectations? Well, we have a lot of direct evidence on expected inflation, from both surveys and financial markets — and it isn’t especially high. Everyone seems to expect that the Federal Reserve will get inflation down, and fairly soon. So expectations aren’t the story.
What many economists have been suggesting, instead, is that the unemployment rate is an inadequate measure of how hot the economy is running. And some have argued that the best measure is the so-called Beveridge curve: the ratio of vacancies — unfilled job openings — to the number of unemployed workers. This is the basis of an influential recent paper by Laurence Ball, Daniel Leigh and Pankaj Mishra that offers a pessimistic take on inflation based on the fact that the vacancy-to-unemployment ratio is very high, even though unemployment isn’t all that low. Here are some of their charts: What many economists have been suggesting, instead, is that the unemployment rate is an inadequate measure of how hot the economy is running. And some have argued that the best measure is the so-called Beveridge curve: the ratio of vacancies — unfilled job openings — to the number of unemployed workers. This is the basis of an influential recent paper by Laurence Ball, Daniel Leigh and Prachi Mishra that offers a pessimistic take on inflation based on the fact that the vacancy-to-unemployment ratio is very high, even though unemployment isn’t all that low. Here are some of their charts:
Another recent paper, by Olivier Blanchard, Alex Domash and Larry Summers, showed that as of early summer, the relationship between unemployment and vacancies had greatly deteriorated, which they argued implied that the unemployment rate consistent with stable inflation is now well above its current level — roughly 5 percent versus its current 3.5.Another recent paper, by Olivier Blanchard, Alex Domash and Larry Summers, showed that as of early summer, the relationship between unemployment and vacancies had greatly deteriorated, which they argued implied that the unemployment rate consistent with stable inflation is now well above its current level — roughly 5 percent versus its current 3.5.
But then came the latest JOLTS report, which showed a large drop in job offerings in August, even though unemployment didn’t rise significantly.But then came the latest JOLTS report, which showed a large drop in job offerings in August, even though unemployment didn’t rise significantly.
Let me offer a quick-and-dirty, though nerdy, way to understand that report’s implications. The following picture shows unemployment versus vacancies — the Beveridge curve — with each point representing that relationship at intervals over the past 15 years and with unemployment truncated at 8 percent to exclude the depths of the pandemic slump:Let me offer a quick-and-dirty, though nerdy, way to understand that report’s implications. The following picture shows unemployment versus vacancies — the Beveridge curve — with each point representing that relationship at intervals over the past 15 years and with unemployment truncated at 8 percent to exclude the depths of the pandemic slump:
Until August, vacancies were much higher than prepandemic experience suggested they should be for any given rate of unemployment. The red line represents eyeball econometrics — not a formal statistical estimate but my rough take on the apparent trade-off between unemployment and job offerings during the recovery from the pandemic slump.Until August, vacancies were much higher than prepandemic experience suggested they should be for any given rate of unemployment. The red line represents eyeball econometrics — not a formal statistical estimate but my rough take on the apparent trade-off between unemployment and job offerings during the recovery from the pandemic slump.
The green dotted line offers a rough way to understand where Blanchard, Domash and Summers were coming from. It shows combinations of unemployment and vacancies that would yield the same vacancy ratio that prevailed in 2019, when inflation wasn’t a problem. (For sticklers: It shows the ratio of vacancy to unemployment rates, which isn’t exactly the measure Ball et al use, but that’s a trivial difference.)The green dotted line offers a rough way to understand where Blanchard, Domash and Summers were coming from. It shows combinations of unemployment and vacancies that would yield the same vacancy ratio that prevailed in 2019, when inflation wasn’t a problem. (For sticklers: It shows the ratio of vacancy to unemployment rates, which isn’t exactly the measure Ball et al use, but that’s a trivial difference.)
What you can see (from the intersection of the solid red and dotted green lines) is that until very recently, it looked as if restoring the prepandemic vacancy ratio would indeed require something like 5 percent unemployment.What you can see (from the intersection of the solid red and dotted green lines) is that until very recently, it looked as if restoring the prepandemic vacancy ratio would indeed require something like 5 percent unemployment.
But August was significantly below the red line. It’s only one month’s data, but it suggests that the trade-offs may be improving as the economy recovers from Covid disruptions. A high unemployment rate may not be necessary after all.But August was significantly below the red line. It’s only one month’s data, but it suggests that the trade-offs may be improving as the economy recovers from Covid disruptions. A high unemployment rate may not be necessary after all.
I can’t resist pointing out that Blanchard et al declared, back in July, that “it is highly unlikely that the [required] decrease in the vacancy rate can be achieved without a substantial increase in the unemployment rate.” But that’s exactly what seems to be happening. In fact, more than 40 percent of the apparent excess in vacancies has vanished over the past few months, with no significant rise in unemployment.I can’t resist pointing out that Blanchard et al declared, back in July, that “it is highly unlikely that the [required] decrease in the vacancy rate can be achieved without a substantial increase in the unemployment rate.” But that’s exactly what seems to be happening. In fact, more than 40 percent of the apparent excess in vacancies has vanished over the past few months, with no significant rise in unemployment.
Again, most of this is just one month’s data, and monthly data can be noisy. But the notion that labor markets are looking better got some further reinforcement from today’s employment report. Unemployment is still low. But wage increases have been slowing. Over the past three months, average wages have risen at an annual rate of 4.4 percent, compared with 3.1 percent in the last three months of 2019. That suggests some excess underlying inflation, but not all that much.Again, most of this is just one month’s data, and monthly data can be noisy. But the notion that labor markets are looking better got some further reinforcement from today’s employment report. Unemployment is still low. But wage increases have been slowing. Over the past three months, average wages have risen at an annual rate of 4.4 percent, compared with 3.1 percent in the last three months of 2019. That suggests some excess underlying inflation, but not all that much.
So we got a JOLTS of good news. And yes, it adds to the case that the Fed is behind the curve on its fight against inflation.So we got a JOLTS of good news. And yes, it adds to the case that the Fed is behind the curve on its fight against inflation.