Monday, June 29, 2009

Establishment Data

The Bureau of Labor Statistics publishes payroll data from business establishments. The data is a broad based survey is a better employment metric than the household survey since establishment data comes from actual payrolls of an estimated 40 million workers.

This is my down and dirty take on graphical data. Usually, where manufacturing hours dip below 41.5, this shows that the economy is not producing at capacity. Thus, a sign of a recession. The nonfarm hours have declined for several months. To me this means that consumers have less money to spend. This shows a decreased in aggregated demand. A decline in the hours worked also means that the economy is not making the natural rate output.

In the data is another thought for me. Outside of manufacturing, most workers only work a four-and-a-quarter day week. As a teacher, I usually work a 60-hour week. One implication to me is that potential teachers have to be screened for their ability to work long, uncompensated hours during the nine-month school year.

Saturday, June 27, 2009

Labor Flows

This data will be updated on July 2, but let's make some sense of it now. The Civilian Labor Force equals the employed plus unemployed. Those who have quit looking for a job are "Not in the labor force."

The number of employed declined but not by the same amount as unemployed increased. How do one explain that changed in the labor force? [1] the pool of unemployed is not stagnant. Each month there are large flows of workers entering and leaving unemployment. I crudely computed that the unemployed changes by 33% each month based on the duration of unemployment. [2] Workers might be marginally attached to the labor force. These workers reluctantly take part-time jobs just to have some income. The BLS counts these individuals as employed. [3] College and high school graduations added thousands of new job searchers who are counted as unemployed until they are hired. [4] When the economy sours businesses rely on retirees to trim the their payrolls to avoid the psychological costs of layoffs. Many firms just choose to work their retained labor harder and longer. [4] Previously discouraged workers who where not in the labor force might decide to start looking for work. This is a good sign since it might indicate that market conditions are favorably changing. Checking Table A - Major Indicators of Labor Market Activity, I find that both average hours and wage have decreased from the previous month.

When the media reports the unemployment rate as 9.4%, this often misleads readers into believing that many workers are without work. The employment pool sees constant changes in the composition of the labor force. Keep this in mind when the new employment numbers are released on July 2.

Friday, June 26, 2009

Table A From BLS

Let's dig into the data. Table A-Major indicators of Labor Market Activity is a cool place to look. AP teachers only use Household Data. Here a dedicated researcher will find absolute numbers on the labor force, unemployment, and discouraged workers. Of note is the composition of workers by gender, age, and race.

Teens are fickle and most live with their parents. I believe employers are reluctant to hire teens because of training costs and the uncertainty of duration of employment. Teens will jump ship and take a higher paying job.

Steve Hipple, an economist with the Bureau of Labor Statistics, said there are several reasons the average is higher for blacks than whites and has always been at least double since data has been collected beginning in 1972.

Hipple said one of the main reasons for the large gap was discrimination in the workplace.

"There are many reasons the numbers vary so much, but the main reason seems to always be because of discrimination on many levels," Hipple said.

Other reasons contributing to the rate difference are that blacks have lower levels of schooling on an average. The age ratio for blacks in the labor market is younger than whites, averaging between 16 to 19 years old. It was also noted that blacks are normally employed in seasonal occupations, and they are more likely to be concentrated in urban areas with a minimum number of jobs available.

In my opinion, the labor market is dominated by white infrastructure. What I mean is that it is who you know that often leads to employment. Since those who hire are white, it's likely that they will know and hire white employees.

Thursday, June 25, 2009

Beige Book

The Beige Book, an anecdotal discussion of the economy is here. Below the picture of Fed president, Mr. James Bullard, is the five minute audio version. The book should be "blue" to reflect declining prices, increasing unemployment, decreasing manufacturing, decreasing housing starts, and no lending activity.

Wednesday, June 24, 2009

GIF Animation Test

Mikeroeconomics is devoted to bringing you the best content for students on the web. After spending two days working on a flash animation, I was disappointed that I could not load a swf file into blogger. I have so much to learn. This animation was completed in 10 minutes. How is learning explained in economics? A student will learn something as long as the future benefits outweight the present costs?

Duration of Unemployment

Using data series "Civilian Labor Force Level" and "Number Unemployed for Less Than Five Weeks" for the website, I plotted the number of unemployed (thousands) for 2007, 2008, and 2009. It appears that those being laid off are now finding work quicker than at the height of 2008. Let's hope that this is a leading indicator.

Tuesday, June 23, 2009

Jobless Recovery

After the 1991 and 2001 recessions, output increased by more than employment. In other words, firms were able to make more product while keeping a constant workforce. This is a "jobless recovery". A jobless recovery sees unemployment increasing as GDP increases. How does this happen?

When the economy picks up, workers feel optimistic about their job searches. Workers who were discouraged enter the labor market in large numbers. This has the net effect of increasing unemployment. Oliver Blanchard in his introductory text, describes labor hoarding as one of many causes. In this scenario, employers choose to work their current staff harder and intensify resource use then hire more workers. My interpretation is that employers are uncertain that the recovery is complete and want to wait and see before making costly labor transactions.

The Congressional Budget Office projects that GDP will increase by 4.1% in 2010 and recovery will begin in the fourth quarter of 2009. I think you will see another jobless recovery for the reasons above and because firms have substituted technology for labor. Since most of our economy is now a service and information economy, much of that work can be mechanized or even outsourced. [Source of graph: St. Louis FED FRED data base.]

Sunday, June 21, 2009


This term describes an equilibrium condition that depends on the history of the system. The natural rate of unemployment is a debated concept that attempts to measure the combined structural and frictional components. Structural changes in employment might come from an obsolete skill such as sweeping the streets with a push broom. Structural unemployment might result from institutional factors such as the minimum wage that keeps the market clearing wage rate above equilibrium. When employees are between jobs, they are fractionally unemployed.

So does a social institution have a memory? The natural rate is constantly changing as both the composition of the labor force changes and new innovations are introduced. The natural rate seems to be declining. My conclusion is that using history as a guide for policy making might lead to unintended consequences for labor.

Yet, the actual rate seems to fluctuate around the natural. After reading the Black Swan, I must believe that there are exogenous factors influencing the history of a equilibrium.

Saturday, June 20, 2009

CBO Estimate on the Natural Rate of Unemployment

This graph is from the Congressional Budget Office and taken from a paper, "The Effect of Changes in Labor Markets on the Natural Rate of Unemployment." [See Figure 2].

The conclusions of the paper are [1] measuring the natural rate is unreliable. [2] changes in the composition of the labor force appear to have decreased the Un. These changes include more women and teens in the market. These groups typically have a higher unemployment rate. [3] increased productivity increases result in a lower real wage and thus higher employment. thus, the unemployment rate would be lower. [4] temp services and the Internet have helped match employees to jobs. Thus, the unemployment rate would be lower.

The natural rate seems to be declining since the 1960's. Difficulty in measuring the true rate leads to policy debate. Still, a target is needed to anchor the economy.

Thursday, June 18, 2009

Unemployment Rate


In this short Camtasia video, I survey the unemployment rate since 1948. The graph is made fromt he FRED data base at the St. Louis Federal Reserve Bank.

GIF Animation

This is a test blog to see if I can animate a graph. I think the future of education depends on teaching innovations. The following, I hope, is a flash animation illustrating an increase in demand. Other websites have used use such as AMOSweb, but I'm just catching on.

Wednesday, June 17, 2009

Growth Rate Form of Okun's Law

In this form of Okun's Law, the GDP is constant and grows naturally at 3%. Any deviation from the natural unemployment rate effects output. Since the unemployment rate is currently 9.4%, we are losing output. My calculations indicate that our GDP growth will be a negative 4.2%. I've asymmetrically compared my forecaste with the St. Louis FED. Wikipedia has a full discussion here.

Tuesday, June 16, 2009

Average Rate of Unemployment Since 1948

Here I graphed the mean unemployment since 1948. The 5.6% average is close to the scatter plot I spent all day working on. Is simple better or does the average simply confirm?

Natural Rate Again

This year I have a FED Challenge team. We are going to use data to help us make policy. Deriving the natual rate of unemployment is a place to start. Here's my TI-83 version with the natural rate calculated at 5.825%.

Introduction to FRED

I hope my voice editing is better on this one.

Average Productivity in the US

Which decade had the highest productivity? Economists take real GDP and divide it by employment. From my graph, the 60's seemed to have the highest productivity per worker. How can this be given all of the technological improvements like the Internet?

One answer can be because of labor hoarding in which firms face transaction costs to reemploy idle labor. So the employed remains high even in recessionary times. Another answer, in my humble opinion, was that the marginal product of labor is in steady state by the labor force continues to grow. Finally, Okun's Law states that for every one percent change in the unemployment rate, GDP changes two percent. This is salient to me because it means that GDP depends on other variables besides labor for output. Variables such as the state of technology, bargaining power of labor, and the product mark up aren't easily measured in average productivity. [Source of data: FRED Series GDPC1 and CE160V]

What is the Natural Rate of Unemployment

The natural rate of unemployment conceptualizes that inflationary expectations match the actual inflation rate. Thus, there will be no change in the unemployment rate when wage setters fully anticipate inflation and don't ask for a wage increase. When the actual price level equals anticipated, then the change in inflation is zero and there's no change in the unemployment rate. Using a linear regression formula from my TI-83, I find that the Un, natural rate of unemployment, is 6%.

The US is currently at 9.2%. Okun's rule of thumb is that for every 1% increase in the unemployment rate, GDP falls by 2%. This suggests that 6.4% of GDP is being lost. [Source of data is FRED and BLS CPS] Data and spreadsheet will be forwarded to interested users on request.

Sunday, June 14, 2009

For Matt

Matt and I have had a four year argument that I want to settle right now. Matt contends that a consumer is NOT constrained to the demand curve. My argument, which still might be ineffective, goes like this. Suppose that 10 billion shoe laces are sold at $1 in a perfectly competitive market. Now Matt goes to school in high-top basketball shoes and kids tease him. Matt desperately wants shoe strings so he goes to the Dollar Store and buys a pair of shoe strings for $50. Has Matt changed equilibrium? NO. Let's look at the margin.

There are now 10,000,000,001 transactions for a total market value of $10,000,000,050. If I divide total market value by transactions, the average amount paid for shoe laces is $1.000000005. Matt's transaction has not changed equilibrium. I conclude that Matt indeed was not constrained by the demand curve, but is irrational behavior didn't materially effect the market. Matt will go back to school and still be the object of teasing.

Saturday, June 13, 2009

Labor Hoarding

In Muscatine, 25% of the workforce is employed by HNI, an office furniture producer. When the economy began to slid into recession, HNI hoarded it's labor. At first, HNI asked employees to take their vacation. Then HNI asked for voluntary layoffs. Then HNI rotated workers by letting workers lay dormant for a week at a time. Finally, HNI had to layoff some employees. HNI knows the emotional effects of a reduction in force and behaved as best as it could by labor hoarding. Some employees worked less hours to help save jobs or chose to clean machinery. The costs of firing employees and then rehiring might have been a behavior that lead to HNI's labor hoarding.

HNI uses labor and capital to make office furniture and fireplaces. During the recession, HNI under utilized their factors of production. If all firms behaved like HNI one should observe a decrease in productivity. Economists define productivity as the quanity produced divided by employment. If I hold technology constant, the data suggests a macroeconomic decrease in productivity.

Google Economist, Hal Varian, has a nice article about productivity and the 2002 recession here.

Utility Theory?

In this TED Talk, Nancy Etcoff makes so researched-based points about happiness. Most interesting to me is that economics lumps all utility into one model when the source of our happiness is multi variable. Ms. Etcoff's research that money marginally makes us happy and humans are genetically programmed to seek pleasure. When economists discuss utility they mean the well-being of an individual--a stock variable or one point in time. That's why economists assume that more is preferred to less. This talk is recommended if only to examine your beliefs.

Wednesday, June 10, 2009

Doubting the Economic Assumptions

On an episode of House [Damned If You Do], Sister Augustine refuses life-saving medical care and puts her life in God's hands. Did the nun act rationally?

House, the alter ego of Sherlock Holmes, thinks that the sister isn't acting rationally. He says, "I'll bet you look both ways before crossing the street?" meaning that she doesn't put all of her decisions in the "hands of God." How is it that she can be rational in everyday matters and irrational when it comes to her life? In the episode, House unilaterally determines the fate of the sister and saves her life.

This episode compels me to think that in a crisis, someone always thinks it's better to look after me then let me make my own choice. This bothers me since the assumption does not allow for data outside the norm. So is the assumption valid?

I think the assumption is valid if millions of transactions are considered so that no one transaction can influence the average. But, I wouldn't bet my future on the median tendency.

Average Productivity Since 1950

Using real GDP and the employment rate, I calculated the average productivity since 1950. The graph tells me that productivity comes in spurts. There was a temptation for me to think that the Internet might have been a cause for the growth in the 90's but after reading the Black Swan, I decided that there might be hundreds of variables that combined just right. Productivity growth appears to be slowing. The source of this graph was the FRED data base at the St. Louis FED.

Rethinking Economics Assumptions

When developing an economic model, the researcher makes assumptions that captures the behavior of the economic actors. If the data doesn't fit the model, the researcher develops new assumptions. As a social science, economics has many shades of gray in the core definitions. For example, what is "utility"?

Jeremy Bentham believed that economic animals sought pleasure and avoided pain. In microeconomics, we contend that goods will be consumed so as to maximize utility, or pleasure.

Suppose Juan only wants to sit home and play video games. I assume that Juan derives a great deal of pleasure since he is giving up athletics and many social occasions. So if Juan plays Terminator X all day, he is maximizing his utility--perhaps at a decreasing rate.

I contest this assumption since playing video games does not accomplish anything so his life has no meaning. Since his life has no meaning, Juan's actions do not provide utility. In other words, a rational economic actor must accomplish something in order for it to be utility. Playing games doesn't accomplish anything.

A nihilist would disagree since our lives have no meaning since nothing matters. I hardly believe Bentham was a nihilist.

Socrates believed that the unexamined life was not worth living. In my words, this means that a full life is one filled with academic inquiry and discovery. In my example, Juan's life is devoid of examination and, therefore, not worth living.

Economists often disagree on what utility means. I now posit that utility theory only applies to actors who seek out to accomplish goals and incur opportunity cost because of their actions. This definition will allow us to reasonably predict actions.

Tuesday, June 09, 2009

Academic Scholarships Are Really Coupons

In the guidance office, I talked with several MHS students who have received scholarships. Many of these students receive $20K or more. Does the amount of the monetary award show academic ability or price discrimination?

I will venture that the marginal cost of educating an additional student is zero. In other words, if there are two students in a room or 100 the cost is the same. But among each student is a different ability to pay and various benefits. The college wants to maximize its revenues, so it simply offers scholarships to find the highest tuition a student will pay.

Granted, many students are deserving of a scholarship and the awards also attract the best talent. But, if the goal is to accrue as much total revenue for the college, then the college will find it profitable to give scholarships as long as the price paid by the student is greater than the cost.

A recruiter from NIAC, Ft. Dodge, Iowa, told me that all he has to do is offer a $100 "Scholarship" to a potential athlete to get that student to sign a letter of intent. Clearly, this is testing the student's ability to pay by decreasing the tuition price in small increments.

As with a business, a college's goal is to maximize profits.

Institutional Barriers to Market Entry

American schools are criticized for lack of student preparation and the inability to compete globally. I believe one of the many reasons is that schools are a monopoly with significant barriers to entry.

An assumption of perfectly competitive markets is that there's perfect information. Suppose I was motivated to learn Algebra and found a good, used textbook at the bookstore. As a non-certified user, I cannot obtain an answer key to check my answers. This greatly decreases my knowledge of results and probably kills my motivation. It would be like shooting hoops and not knowing if you're making a basket. So access to materials is a barrier. There are also licensing and accreditation requirements. Furthermore, schools are not open year around and operate 7/24 of a day. Clearly, schools don't maximize full the full extent of their resources. My conclusion is that schools want to maintain their market presence by under allocating instructional resources.

Today, while I was reading Ben Bernanke's textbook, Macroeconomics, I found myself underlining, making notes in the margin, and copying text to my journal. I thought how different I read compared to what students can do in my classroom. They cannot write in the book simply because replacement is a burden to the district. My point is schools can't teach reading the way students read. Wouldn't it be great if students could read on a handheld device that allowed them to write with their fingers to annotate text, copy and paste text to a journal, and NOT destroy the original document? This is the direction that education should take to destroy monopoly power. The text should be interactive, amendable, and the students.

When school resumes in the fall, many students dread the thought of returning. The very nature of a monopoly is a resentment. Can it be that students simply resent schools because schools deliberately produce less education at a higher cost? One of my goals for the summer is to find technology that allows students to breath in my curriculum, keep it, and use it. I welcome any comments on what technology I can use to accomplish this goal.