Standard rant on standard errors

September 2nd, 2015 at 7:00 am

I keep hearing this strange refrain about this Friday’s jobs numbers and it’s freaking me out a little. Important people pulling important levers seem to have decided that August’s job growth is really decisive in some cosmic way that’s going to resolve any lack of clarity regarding job market slack and the Fed’s plans for rates.

I yield to no one on my obsession with the monthly jobs numbers. Once, when I was in China adopting one of my daughters, I stopped the proceedings to check the release (and I named her U-6, in honor of that important indicator of underemployment–JK! Who would name their kid after a slack measure? Maybe “Wage Growth” or “Full-timer”). But I well know that one month does not a trend make and that given the volatility and revisions history of a high-frequency indicator like this, you should never weight a monthly result too heavily.

Then there’s the standard error. The confidence interval for the monthly change in payrolls is plus or minus 105,000 jobs. Let’s say we get another on-trend report of 220K net jobs added in August. The 90-percent confidence interval on that change ranges from 115K to 325K, i.e., there’s a 90-percent chance that the true August change is within this interval. Think a bit about how these different extremes would change the discussion on Friday.

Don’t get me wrong–there’s important info in the jobs report, which is why I and others blather on about it on jobs day. And if August is another month in what’s been a pretty steady string of solid reports, that will legitimately signal that the job market appears to remain on track. But the idea that it’s a deal maker or breaker for big decisions like the Fed’s liftoff strikes me as downright weird.


It’s all in the hat!

September 1st, 2015 at 5:31 pm

This whole time I’m crunching numbers, holding events, publishing papers, trying to elevate full employment to the national goal it deserves to be, when I should have just worn a hat.

From an interview with someone at a focus group of Trump supporters:

“We know his goal is to make America great again,” another woman said. “It’s on his hat. And we see it every time it’s on TV. Everything that he’s doing, there’s no doubt why he’s doing it: it’s to make America great again.”

Anthony M crushed it on the design, I thought:


Source: From Anthony Martinez’ House of Progressive Hats.


You think I’m kidding?! Wait til I show up in your neighborhood sporting one of these babies. Or maybe I’ll just take a stroll down Independence Ave. in front of the Fed building…Stan F will be looking out his window, and not realizing why, he’ll ask himself: “Why would I want to raise rates…what was I thinking?!”

Remember folks, the Donald might be crazy, but he’s crazy like a fox, if not a Fox.



Two up-to-date pictures of labor market slack

September 1st, 2015 at 1:13 pm

[by JB and Ben Spielberg]

Earlier today, Jared wrote:

“Look at the employment ratio; look at Andy Levin’s all-in slack measure (I’ll post something on this later)—they’re still signaling a job market that is unquestionably improving but is still far from full employment.”

In this post, we briefly explain some of the evidence that there’s far more labor market slack than is apparent from the unemployment rate alone.

The unemployment rate doesn’t capture workers who, because of a difficult job market, have stopped looking for work.  The labor force participation rate – the share of the population that is either working or actively looking for work – dropped off sharply during the recession, from about 66 percent to about 63 percent.  While some of those folks left for retirement, others–maybe a third to a half by some measures–can be enticed back into a more welcoming job market.

A number of prime-age workers (those between age 25 and age 54), for example, have dropped out of the picture. The figure below shows the employment-to-population ratio for workers in this age group.  Notice the five-percentage-point plunge it took during the recession; while it has nudged back up to just over 77 percent, it is still three percentage points beneath its pre-recession level.


Source: BLS

Source: BLS

The “total employment gap,” developed by economist Andy Levin, is another indicator of the amount of labor market slack.  The total employment gap accounts for three populations of potential workers: the unemployed (who are actively looking for jobs), those who have left the labor force but could potentially come back into it, and the number of workers with a part-time job who would rather have a full-time position.  Using high-end estimates of the “natural” number of workers in each category (see data note below), we estimate that the total employment gap is at least 2.4 percentage points.

Source: Our estimate of Levin's gap measure.

Source: Our estimate of Levin’s gap measure.

It is therefore unsurprising that we’ve yet to see much in the way of wage growth–while the job market is steadily improving, we aren’t yet at full employment. It is essential that policymakers keep these broader measures of labor slack in mind.

Data Note: The Levin gap measure relies on estimates of the size of the “potential” labor force and the “natural rate” of unemployment from the Congressional Budget Office, as well as an estimate, based on the pre-recession trend, of the “natural” number of full-time-equivalent involuntary part-time workers.

Pressures on the Fed

September 1st, 2015 at 11:09 am

There are so many interesting threads in this Bin Appelbaum piece about the various pressures on the Fed right now, I’m not sure where to start!

Re their interest rate liftoff, there’s a lot of angst around what’s likely to be a tiny move—25 basis points. Whussup with that?

Economist Alan Blinder, a former Fed vice-chair his-own-self, put it this way: “There shouldn’t be this intense interest in a quarter-point increase, and there shouldn’t be this intense interest in whether it comes in September or December.”

Certainly a fair point, even more so given that everyone believes its coming in one of those months (I just saw Moody’s report saying if not at the Sept meeting, than at the October one).

But I thought Josh Bivens hit me with a compelling answer when I put this question to him the other day:

Bernstein: Do you really think it would make that much of a difference if they just bumped the Fed funds rate up 25 basis points and left it there for a while?

Bivens: No, my best guess for that is probably not. That probably wouldn’t do all that much to slow the economy, but I don’t think the economy needs to be slowed! You could flip that question on its head and say: If raising by 25 basis points and holding there has little impact on the economy, why do it at all? There seems to be some sort of pressure that I don’t understand about “the need to get off of zero.” I do economics, not psychology, and to me the economics say that while 25 basis points is not a big move in the wrong direction, it’s still the wrong direction!

Is there something off in the core of the Fed’s model?

Appelbaum writes that the Fed’s annual retreat this year was fraught with “…a series of academics warn[ing] policy makers that their view of inflation was oversimplified, and that their policies were less effective as a consequence.”

This is existential stuff for the Fed. I and others have long groused about the how the Phillips Curve—the historical relationship between inflation and unemployment—is an increasingly unreliable guidepost for Fed policy. One interpretation of some of the work that’s coming out on this is that Yellen and Co. are staring down at a map which no longer accurately shows the landscape of the economy they’re trying to manage.

Fed vice-chair Stan Fischer argued that “the role of labor market slack is easily overstated…”

I think slack is understated, so this caught my eye. Based on his remarks on this point, Fischer believes that since the reduction of labor market slack has not generated price pressures, there must be other dynamics pushing the other way, like the strengthening dollar. Hmmm…maybe on the price side, but there’s nothing much in the way of nominal wage growth pressures either. So it seems absolutely critical to not assume away the possibility that there’s been less slack reduction than you think. Look at the employment ratio; look at Andy Levin’s all-in slack measure—they’re still signaling a job market that is unquestionably improving but is still far from full employment.

And yes, I completely agree that the strengthening dollar is in the mix, lowering both inflation and, through the trade deficit, growth. What I don’t see is how those facts convince one that it’s necessary to liftoff sooner than later. Again, I stipulate the Blinder point re 25 basis points not being worthy of all this sturm und drang, but the point here is the if I understand him correctly, Stan’s incorrectly discounting existing slack.

Is this right: “The biggest risk for those that are less fortunate is that we would go back into recession.”

So said James Bullard, president of the St. Louis Fed, as a rationale for doing what the representatives of the less fortunate—the members of the Fed Up campaign—were decidedly asking him not to do. He’s basically saying: “we must raise soon to protect the expansion against forces that would threaten its survival.”

The problem with this framing is that what really helps those who’ve yet to benefit from the recovery is really tight, full-employment labor markets, as Dean Baker and I show here. These results are particularly notable for minorities, who have a much larger full employment multiplier re their employment and earnings opportunities than whites.

In a sense, this is the “asymmetric risk” argument that remains central: given the absence of price or wage pressures, any moves to slow the economy are more risky to workers’ well-being than are inflation or recession.

The piece suggests there’s a “disconnect between the officials and the activists” coming from both the left and right.

Not sure that’s correct. Activists on the right want “to impose new restrictions on the Fed’s conduct of monetary policy. A leading proposal would require the Fed to choose a formula for setting rates and stick with it.”

That’s far more radical than the ask from the left, which is that the FOMC at this point give more weight to the full employment side of the dual mandate than the stable prices side. At its core, that’s a substantive argument about observable movements of variables and expectations. Read any Chair Yellen speech over the past few years and you’ll hear her wrestling with precisely those questions.

I don’t see a disconnect there as much as a disagreement about many of the factors discussed above, re data trends and models.

The critique/attack from the right is a wholly different creature, an ideological one targeting the independence of the Fed in ways closer to Ayn Rand, or her namesake, Rand Paul, than actual data.