Total and Short-Term Unemployment and the Recent Behavior of Prices and Wages

Total and Short-term Unemployment and the Recent Behavior of Prices and Wages <ul style="display: flex;"><li style="flex:1">Background </li><li style="flex:1">Background (cont.) </li></ul>• FRBNY staff analysis: considerable slack remains in the economy • Motivation to explore these issues: “missing deflation puzzle” <ul style="display: flex;"><li style="flex:1">•</li><li style="flex:1">Labor market flows </li><li style="flex:1">•</li></ul>“Standard” Phillips Curve models → very low inflation or deflation in the aftermath of the Great Recession • This assessment is an important factor in FRBNY staff outlook <ul style="display: flex;"><li style="flex:1">•</li><li style="flex:1">Compensation growth also should have been lower </li></ul>• One proposed explanation: Short-term/long-term unemployment distinction <ul style="display: flex;"><li style="flex:1">•</li><li style="flex:1">A restraining factor for price- and wage-inflation </li></ul>• However, recent research has focused on two issues: <ul style="display: flex;"><li style="flex:1">•</li><li style="flex:1">Long-term unemployed (unemployment duration > 27 </li></ul>weeks): limited impact on price/wage inflation •• Extent of slack in labor market <ul style="display: flex;"><li style="flex:1">•</li><li style="flex:1">Short-term unemployment near historical average: less </li></ul>slack than implied by conventional measures Magnitude of restraining effect on inflation from conventional measure(s) of labor market slack Illustration of “Standard” Approach: Gordon (2013) • Price-inflation (PCE deflator) Phillips curve model: Unemployment Rates by Duration Percent Percent <ul style="display: flex;"><li style="flex:1">12 </li><li style="flex:1">12 </li></ul>Correlation Between Shortterm and Long-term Unemployment •• Lagged inflation terms Unemployment gap based on: 10 8 10 81976—2007 1976—2013 0.63 0.28 •• Total unemployment rate Short-term unemployment rate Total Unemployment <ul style="display: flex;"><li style="flex:1">•</li><li style="flex:1">Supply shocks: </li></ul><ul style="display: flex;"><li style="flex:1">6</li><li style="flex:1">6</li></ul>••• Food and energy inflation Relative import price inflation <ul style="display: flex;"><li style="flex:1">4</li><li style="flex:1">4</li></ul>Short-term Unemployment Trend productivity acceleration/deceleration variable Long-term Unemployment • Other features: <ul style="display: flex;"><li style="flex:1">2</li><li style="flex:1">2</li></ul>•• 1960:Q1-2013:Q1 sample period Joint estimation of time-varying NAIRU <ul style="display: flex;"><li style="flex:1">0</li><li style="flex:1">0</li></ul>1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 4Source: Bureau of Labor Statistics Total and Short-term Unemployment and the Recent Behavior of Prices and Wages Evaluation of Short-term vs. Long-term Distinction Model-estimated NAIRUs <ul style="display: flex;"><li style="flex:1">Percent </li><li style="flex:1">Percent </li></ul><ul style="display: flex;"><li style="flex:1">7</li><li style="flex:1">7</li></ul>• Out-of-sample forecast performance (often during post-2007 period) NAIRU—Total Unemployment 6543210 6543210<ul style="display: flex;"><li style="flex:1">•</li><li style="flex:1">Comparison of forecast errors using short-term and total </li></ul>unemployment gaps NAIRU—Short-term Unemployment • Within-sample estimates of the coefficient(s) on the unemployment gaps over different sample periods <ul style="display: flex;"><li style="flex:1">•</li><li style="flex:1">Are the estimates more stable using the short-term </li></ul>unemployment gap? 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013 Source: Gordon 2013 Model-estimated Unemployment Gaps Annualized Quarterly PCE Inflation: Out of Sample Forecasts, 2007-Present <ul style="display: flex;"><li style="flex:1">Percentage point </li><li style="flex:1">Percentage point </li></ul><ul style="display: flex;"><li style="flex:1">6</li><li style="flex:1">6</li></ul>Percent 8Percent 543 5 8Forecast using Short-term Unemployment Gap 4 64 6 3Total Unemployment Gap 4<ul style="display: flex;"><li style="flex:1">2</li><li style="flex:1">2</li></ul><ul style="display: flex;"><li style="flex:1">2</li><li style="flex:1">2</li></ul>Short-term Unemployment Gap 10 1<ul style="display: flex;"><li style="flex:1">0</li><li style="flex:1">0</li></ul>0Forecast Using Total Unemployment Gap -2 -4 -6 -8 -2 -4 -6 -8 -1 -2 -3 -4 -1 -2 -3 -4 <ul style="display: flex;"><li style="flex:1">1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013 </li><li style="flex:1">2005 </li><li style="flex:1">2006 </li><li style="flex:1">2007 </li><li style="flex:1">2008 </li><li style="flex:1">2009 </li><li style="flex:1">2010 </li><li style="flex:1">2011 </li><li style="flex:1">2012 </li><li style="flex:1">2013 </li></ul><ul style="display: flex;"><li style="flex:1">Source: Gordon 2013 </li><li style="flex:1">Source: Gordon 2013 </li></ul>Total and Short-term Unemployment and the Recent Behavior of Prices and Wages Phillips Curve Stability and Forecast Contributions in Short-term Unemployment Gap Model Summary of Other Studies • Is the short-term unemployment rate a better indicator of labor market slack? Sum of unemployment coefficients with estimation through various dates • Empirical evidence at aggregate level is mixed: 1996Q4 Short-term -0.741 2006Q4 Short-term -0.726 2013Q1 Short-term -0.641 ••• Very favorable Total -0.473 Total -0.465 Total -0.314 <ul style="display: flex;"><li style="flex:1">•</li><li style="flex:1">Ball and Mazumder (2011), Krueger, Cramer and </li></ul>Cho (2014), Macro Advisers (2014) Slightly favorable <ul style="display: flex;"><li style="flex:1">•</li><li style="flex:1">Feroli (2014), Hooper, Luzzetti and Slok (2014), </li></ul>Linder, Peach and Rich (2014), Watson (2014) Forecast Decompositions (Averages over period) 2008Q1-2009Q4 -0.06 2010Q1-2013Q3 Not convincing Hatzius and Stehn/Mericle (2014) <ul style="display: flex;"><li style="flex:1">Imports </li><li style="flex:1">0.01 </li></ul>0.26 -0.76 1.76 Food-energy Unemployment Lagged inflation -0.20 •-0.78 2.38 Source: Gordon 2013 <ul style="display: flex;"><li style="flex:1">Summary of Other Studies (cont.) </li><li style="flex:1">Discussion Questions </li></ul><ul style="display: flex;"><li style="flex:1">• Analysis at aggregate level may be problematic </li><li style="flex:1">• What is your current view concerning the short- </li></ul>term/long-term unemployment debate? •• Little precedent for current labor market environment High correlation between short- and long-term unemployment series prior to 2007 • What is your forecast for price- and wage inflation over the near- and medium-term horizons? <ul style="display: flex;"><li style="flex:1">•</li><li style="flex:1">Additional checks for robustness needed </li></ul>• Some have claimed that labor market conditions may be more closely linked to services inflation than goods inflation. Do you believe this distinction is helpful in discussions of inflation and the inflation outlook? • Alternative approach: use disaggregated data <ul style="display: flex;"><li style="flex:1">•</li><li style="flex:1">Kiley (2014) – 24 large U.S. metropolitan areas </li></ul><ul style="display: flex;"><li style="flex:1">•</li><li style="flex:1">Short- and long-term unemployment exert equal </li></ul>downward pressure on price inflation <ul style="display: flex;"><li style="flex:1">•</li><li style="flex:1">Hooper, Luzzetti and Slok (2014) – State level data </li></ul><ul style="display: flex;"><li style="flex:1">•</li><li style="flex:1">Long-term unemployed more impactful in labor </li></ul>market as short-term unemployment gap closes

Total and Short-Term Unemployment and the Recent Behavior of Prices and Wages

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