Strong Job Gains in 2014 Thanks to Ending Subsidized Job
Search
According to the National Bureau of Economic Research, the official arbiter of US business cycles, the “great recession” ended in June 2009. But in the half decade since then, the US economy has experienced the feeblest recovery on record with real GDP growing at a rate of just 2.4%. Not surprisingly, the job market has also recovered slowly. Total employment did not recover to its pre-recession peak (January 2008) until last May. Against this backdrop, it is not surprising that the business press was delighted to report earlier this month that business establishments added more jobs (nearly 3 million) than in any year since 1999 and that the unemployment rate dipped to 5.6%, the lowest since June 2008. Nonetheless, as encouraging as the job gains were last year, the rate of job growth was some 16% slower than its average rate from 1993-1999. Moreover, sluggish wage growth accompanied the impressive employment gains as average hourly earnings edged up at rate of just 1.7%, matching 2010’s early-recovery pace.
But an important labor supply development that can go a long way to explain both sluggish wage growth and strong employment gains. Specifically, the termination of the federal emergency unemployment compensation (EUC) program at the end of 2013 unleashed a labor supply response whose effects would predictably increase employment and restrain wage growth. The now expired EUC program, which had been established as an “emergency” response to the 2008 recession, had provided federal funding for the extension of unemployment benefits beyond the 26 week limit typical in most states. This program, meant to cushion the blow of unemployment, provided a subsidy that encouraged thousands of unemployed workers to search longer for new work. However, the prolonged job search arising from this subsidy also impeded discovery of the “new normal” market-clearing wage structure that the recession necessitated. Whether the result of this subsidized job search or an unusually weak labor market or some combination of the two, “the median length of time an unemployed person searched before finding a job increased sharply” after 2007 (before the EUC program and its multiple extensions were enacted (see the April 2012 BLS report at http://www.bls.gov/opub/ted/2012/ted_20120424.htm).
The abrupt end of the EUC program at the end of 2013, heightened the urgency for jobless workers to find new employment and, in effect, increased the supply of workers ready for immediate employment. Details from the latest employment report support this thesis. Data from the BLS’s “household” survey (the source for labor force, employment and unemployment data) show that 1.7 million (61%) of the 2.8 million who gained employment over the last 12 months came from the ranks of the unemployed. Moreover, nearly two-thirds of those formerly jobless workers who found jobs in 2014 had been unemployed for more than 27 weeks, precisely the workers who had been collecting EUC benefits while prolonging their job search. Absent the EUC job search subsidy, a heightened urgency to find work is likely to have lowered the reservation wage for the long-term unemployed.
Other, often over-looked macroeconomic data from the monthly Local Area Unemployment Statistics (LAUS) also suggest that job search efforts may have intensified after the EUC program ended. The lapsed EUC program had allowed for up to 14 weeks of added jobless compensation in all states (Tier 1), and for longer periods in states suffering higher unemployment rates (Tiers 2, 3, and 4). When the program ended last December, some 35 of 51 states (includes the District of Columbia) satisfied Tier 2, 3, or 4 criteria including 19 meeting the Tier 3 or 4 conditions. Although the states do not report statistics on the duration of unemployment episodes, it is reasonable to infer that these states where workers where benefits were potentially extended for the longest would also have a relatively large share of long-term unemployed workers. It seems likely that the unemployed in these states, facing the sudden loss of benefits would adjust their job search efforts. Some could be expected to search for new employment more vigorously, some might settle for lower-paying jobs they had previously shunned in hopes of eventually landing a better job, and some might simply give up looking and leave the labor force. But all these actions would begin to nudge the unemployment rate down more rapidly. Hence, it should not be surprising that these states ranked among those with the biggest declines in unemployment since the EUC program ended. And, indeed, the unemployment rate across those 19 states fell an average of 1.4 percentage points in the 12 months ending in December – more than double the average decline in all other states. To be sure, the high rates of unemployment in these states at the end of 2013 meant they needed to fall further to align with the national average. Labor market exit appears to have played a role in the some of the declines in state unemployment rates since the employment ratio fell in 13 states including six of the 19 states where jobless workers were eligible for benefits over longer spans. But in eight other long-duration EUC eligible states, labor force participation rose by an average of about 0.8 pp, a statistically significant larger rise than in the other 22 states where the participation rate did not fall. Overall, the evidence looks to be consistent with the notion that the EUC’s abrupt end encouraged more aggressive job search and, in many states, less attrition from the labor force when workers had fully exhausted their benefits. Even if some deem the drop in the jobless rate to be primarily a consequence of strengthening labor demand, the termination of the EUC program also facilitates a faster pairing of jobs and workers.
Fears that termination of the EUC program might leave many workers worse off economically also seem to have been misplace. Aggregate wage and salary income over the three quarters since the EUC program ended has risen by $250 billion (an annualized growth rate of 4.7%) nearly 12 times more than the drop in unemployment benefits. With more income coming from employment rather than transfer payments, it should not be surprising that consumer confidence is rising and that spending, especially on big ticket items has strengthened. It is especially encouraging that workers at the low end of the income distribution are increasing their discretionary purchases.
These salutary developments since the EUC program ended ought to raise doubts about the efficacy of economic models that legislators rely on to enact policy. Analysis by the Congressional Budget Office (CBO) at the time Congress enacted the EUC program, and in the subsequent renewals, contended the EUC would boost economic activity. For instance, just before legislators opted to let the program lapse, the CBO advised Congress in December 2013 that renewing the EUC program would add about $19 billion to the FY2014 federal budget deficit but would also “increase inflation-adjusted GDP by 0.2 percent and increase full-time-equivalent employment by 0.2 million in the fourth quarter of 2014.” Thus, by the CBO’s reckoning, terminating the EUC program should have had detrimental effects on growth and employment of about the same magnitude. In fact, employment gains from the pronounced declines in unemployment among those who had been jobless for more than 26 weeks were more than FIVE times larger than the CBO’s predictions of the jobs that would be created by extending the ECU program. Moreover, ending the EUC reduced the deficit in line with CBO analysis. Labor Department outlays FY2014 were more than $15 billion lower than in FY2013 and nearly $24 billion less that Treasury estimated they would be before the EUC program was terminated. But contrary to the CBO’s analysis, the termination of the EUC program was associated with faster growth, saved taxpayers money and restored to the unemployed, the rewards of more aggressive job search. Stronger employment growth and slower growth in average earnings are both the consequence of employers drawing on a large pool of unemployed workers who no longer are subsidized to stretch out their job search. The tragedy would appear to be that that Congress did not let this program expire sooner.
According to the National Bureau of Economic Research, the official arbiter of US business cycles, the “great recession” ended in June 2009. But in the half decade since then, the US economy has experienced the feeblest recovery on record with real GDP growing at a rate of just 2.4%. Not surprisingly, the job market has also recovered slowly. Total employment did not recover to its pre-recession peak (January 2008) until last May. Against this backdrop, it is not surprising that the business press was delighted to report earlier this month that business establishments added more jobs (nearly 3 million) than in any year since 1999 and that the unemployment rate dipped to 5.6%, the lowest since June 2008. Nonetheless, as encouraging as the job gains were last year, the rate of job growth was some 16% slower than its average rate from 1993-1999. Moreover, sluggish wage growth accompanied the impressive employment gains as average hourly earnings edged up at rate of just 1.7%, matching 2010’s early-recovery pace.
But an important labor supply development that can go a long way to explain both sluggish wage growth and strong employment gains. Specifically, the termination of the federal emergency unemployment compensation (EUC) program at the end of 2013 unleashed a labor supply response whose effects would predictably increase employment and restrain wage growth. The now expired EUC program, which had been established as an “emergency” response to the 2008 recession, had provided federal funding for the extension of unemployment benefits beyond the 26 week limit typical in most states. This program, meant to cushion the blow of unemployment, provided a subsidy that encouraged thousands of unemployed workers to search longer for new work. However, the prolonged job search arising from this subsidy also impeded discovery of the “new normal” market-clearing wage structure that the recession necessitated. Whether the result of this subsidized job search or an unusually weak labor market or some combination of the two, “the median length of time an unemployed person searched before finding a job increased sharply” after 2007 (before the EUC program and its multiple extensions were enacted (see the April 2012 BLS report at http://www.bls.gov/opub/ted/2012/ted_20120424.htm).
The abrupt end of the EUC program at the end of 2013, heightened the urgency for jobless workers to find new employment and, in effect, increased the supply of workers ready for immediate employment. Details from the latest employment report support this thesis. Data from the BLS’s “household” survey (the source for labor force, employment and unemployment data) show that 1.7 million (61%) of the 2.8 million who gained employment over the last 12 months came from the ranks of the unemployed. Moreover, nearly two-thirds of those formerly jobless workers who found jobs in 2014 had been unemployed for more than 27 weeks, precisely the workers who had been collecting EUC benefits while prolonging their job search. Absent the EUC job search subsidy, a heightened urgency to find work is likely to have lowered the reservation wage for the long-term unemployed.
Other, often over-looked macroeconomic data from the monthly Local Area Unemployment Statistics (LAUS) also suggest that job search efforts may have intensified after the EUC program ended. The lapsed EUC program had allowed for up to 14 weeks of added jobless compensation in all states (Tier 1), and for longer periods in states suffering higher unemployment rates (Tiers 2, 3, and 4). When the program ended last December, some 35 of 51 states (includes the District of Columbia) satisfied Tier 2, 3, or 4 criteria including 19 meeting the Tier 3 or 4 conditions. Although the states do not report statistics on the duration of unemployment episodes, it is reasonable to infer that these states where workers where benefits were potentially extended for the longest would also have a relatively large share of long-term unemployed workers. It seems likely that the unemployed in these states, facing the sudden loss of benefits would adjust their job search efforts. Some could be expected to search for new employment more vigorously, some might settle for lower-paying jobs they had previously shunned in hopes of eventually landing a better job, and some might simply give up looking and leave the labor force. But all these actions would begin to nudge the unemployment rate down more rapidly. Hence, it should not be surprising that these states ranked among those with the biggest declines in unemployment since the EUC program ended. And, indeed, the unemployment rate across those 19 states fell an average of 1.4 percentage points in the 12 months ending in December – more than double the average decline in all other states. To be sure, the high rates of unemployment in these states at the end of 2013 meant they needed to fall further to align with the national average. Labor market exit appears to have played a role in the some of the declines in state unemployment rates since the employment ratio fell in 13 states including six of the 19 states where jobless workers were eligible for benefits over longer spans. But in eight other long-duration EUC eligible states, labor force participation rose by an average of about 0.8 pp, a statistically significant larger rise than in the other 22 states where the participation rate did not fall. Overall, the evidence looks to be consistent with the notion that the EUC’s abrupt end encouraged more aggressive job search and, in many states, less attrition from the labor force when workers had fully exhausted their benefits. Even if some deem the drop in the jobless rate to be primarily a consequence of strengthening labor demand, the termination of the EUC program also facilitates a faster pairing of jobs and workers.
Fears that termination of the EUC program might leave many workers worse off economically also seem to have been misplace. Aggregate wage and salary income over the three quarters since the EUC program ended has risen by $250 billion (an annualized growth rate of 4.7%) nearly 12 times more than the drop in unemployment benefits. With more income coming from employment rather than transfer payments, it should not be surprising that consumer confidence is rising and that spending, especially on big ticket items has strengthened. It is especially encouraging that workers at the low end of the income distribution are increasing their discretionary purchases.
These salutary developments since the EUC program ended ought to raise doubts about the efficacy of economic models that legislators rely on to enact policy. Analysis by the Congressional Budget Office (CBO) at the time Congress enacted the EUC program, and in the subsequent renewals, contended the EUC would boost economic activity. For instance, just before legislators opted to let the program lapse, the CBO advised Congress in December 2013 that renewing the EUC program would add about $19 billion to the FY2014 federal budget deficit but would also “increase inflation-adjusted GDP by 0.2 percent and increase full-time-equivalent employment by 0.2 million in the fourth quarter of 2014.” Thus, by the CBO’s reckoning, terminating the EUC program should have had detrimental effects on growth and employment of about the same magnitude. In fact, employment gains from the pronounced declines in unemployment among those who had been jobless for more than 26 weeks were more than FIVE times larger than the CBO’s predictions of the jobs that would be created by extending the ECU program. Moreover, ending the EUC reduced the deficit in line with CBO analysis. Labor Department outlays FY2014 were more than $15 billion lower than in FY2013 and nearly $24 billion less that Treasury estimated they would be before the EUC program was terminated. But contrary to the CBO’s analysis, the termination of the EUC program was associated with faster growth, saved taxpayers money and restored to the unemployed, the rewards of more aggressive job search. Stronger employment growth and slower growth in average earnings are both the consequence of employers drawing on a large pool of unemployed workers who no longer are subsidized to stretch out their job search. The tragedy would appear to be that that Congress did not let this program expire sooner.