Wednesday, June 10, 2009
aggregate weekly hours index
Instead of focusing on changes in actual jobs to measure the strength of the labor market, Frankel focuses on "hours worked." He does this because companies under pressure often reduce hours and overtime before they cut jobs. Similarly, when the economy turns up, companies often start adding hours and overtime before they start hiring. Thus, total hours worked provides a more real-time view of the state of the economy.
And how did total hours worked look in May? Lousy. Specifically, according to Frankel, they did not suggest any sort of a turn in the labor market.Total hours worked is equal to the total number of workers employed multiplied by the average length of the workweek for the average worker. The length of the workweek tends to respond at turning points faster than does the number of jobs. When demand is slowing, firms tend to cut back on overtime, and then switch to part-time workers or in some cases cut workers back to partial workweeks, before they lay them off. Conversely, when demand is rising, firms tend to end furloughs, and if necessary ask workers to work overtime, before they hire new workers. (The hours worked measure improved in April 1991 and November 2001 which on other grounds were eventually declared to mark the ends of their respective recessions.) The phenomenon is called “labor hoarding” and it is attributable to the costs of finding, hiring and training new workers and the costs in terms of severance pay and morale when firing workers.
Unfortunately, as reported by Forbes, pursuing this logic leads to second thoughts about whether the most recent BLS announcement was really good news after all. The length of the average work week fell to its lowest since 1964 ! The graph below shows that, not only did total hours worked decline in May, but the rate of decline (0.7%) was very much in line with the rate of contraction that workers have experienced since September. Hours worked suggests that the hope-inspiring May moderation in the job loss series may have been a monthly aberration. If firms were really gearing up to start hiring workers once again, why would they now be cutting back as strongly as ever on the hours that they ask their existing employees to work? My bottom line: the labor market does not quite yet suggest that the economy has hit bottom.
calculated risk provides additional color. the level of AWHI may not lead an end to a recession, but the rate of change could.
the trouble with frankel's assertion is that, although it's difficult to see on the level chart he provides, there IS a nascent moderation in the rate of change of AWHI over the last three months. and if you browse through past recessions using the federal reserve's data, it becomes apparent that even this degree of moderation is quite enough to be precursor to the end of the recession.