Monday, August 17, 2015

The labor market isn't tight, just employers' wallets

 - by New Deal democrat

Via Mark ThomaProf. Stephen Williamson writes a nice, thorough post on the state of the labor market, which is well worth reading in full.

One point on which I disagree with his analysis has to do with the Beveridge curve, i.e., the tradeoff between the unemployment rate and job openings, which he graphs here:

He writes, 
Early in the post-recession period, people were speculating as to whether the rightward shift in the Beveridge curve was due to cyclical factors (the Beveridge curve always shifts rightward in a recession) or some phenomenon related to mismatch in the labor market (the unemployed don't have skills that match well with the posted vacancies). Perhaps surprisingly, the Beveridge curve has not shifted back, with the end of the Great Recession now more than 6 years in the rearview mirror. That would seem to put the kabosh on cyclical explanations for the phenomenon. But it's not clear that mismatch fares any better in explaining the Beveridge curve shift. If that's the explanation, why doesn't the mismatch between the searchers and the searched-for go away?"
And he concludes his review in part thusly:
Employment growth is currently strong, and by most measures the labor market is currently somewhat tight to very tight. 
In other words, the labor market is tight because even with a U3 unemployment rate of 5.3%, job openings are soaring. Although he doesn't mention it, there are more job openings now than even during the height of the tech bubble at the beginning of 2000!

I disagree.  And the reason can be found with wages.  Below is a graph of job openings, minus new hires (i.e., the number of unfilled job openings) (blue) vs. YoY nominal wage growth (red):

By and large, the two series moved in tandem since the JOLTS series began in 2000, through 2010.  Since then, there have been three distinctive episodes:

1. During 2011-12, wage growth declined. Unfilled vacancies rose.
2. In 2013-early 2014, wage growth improved. Unfilled job opensings plateuaed.
3. Since mid-2014, wage growth has flagged.  Unfilled job openings have soraed   

 Note that at 2%, YoY wage increases are well below even the 2003-07 average of about 3.5%.

This is a market which is not clearing.  Prospective employers and employees are at a standoff. To put it less charitably, employers can't find workers to fill their job openings ... for the paltry wages they want to pay them.  With near record corporate profits, that isn't a tight labor market. It's tight-wads.