Unemployment Intensity Index is a Great Indicator of Worker’s Strength in the Labor Market

 

 

Developed by Shaikh (2013) in order to examine unemployment rate and the duration of employment, unemployment intensity index (Ui) takes both features into account.  Shaikh states that

…, both the extent and the duration of unemployment can exert downward pressure on the ability of workers to secure increases in their real wages.  We may think of the combined measure as an index of the number of worker-weeks of unemployment (Shaikh 2013: 14-15)

Many heterodox economists (Shaikh 2013, Setterfield 2023, Paternesi Meloni and Stirati 2020) believe that unemployment intensity index gives a more accurate picture of the effect of labor market slack on wages. The relationship is a negative one for a given degree of bargaining power of labor

Setterfiield (2023), shows when controlling for the unemployment rate itself, unemployment intensity will rise/fall as unemployment duration rises/falls, even if the unemployment rate remains constant (as a result of offsetting changes in incidence and duration that nevertheless suggest a deterioration in labor market performance).

To this end, figure 1 illustrates the behavior Ui from January 2000 to May 2024 which incorporates the last three business cycles. During the recoveries from the dot-com recession and (especially) the Great Recession, Ui drifts upwards. This suggests that the roughly constant rates of U3 over the first 24 months of these recoveries reported. 

In his analysis of unemployment intensity compared to the business cycle, Setterfield (2023) believes that roughly constant rates of standard reported unemployment rate (or U3) over the first 24 months of these recoveries reported were associated with rising unemployment duration.

 

But no similar trend in UI is evident during post-COVID recovery. Instead, following an initial rise, Ui fluctuates around a roughly constant rate for 12 months before entering into a marked decline after the 14th month of expansion. After 18 months of the post-COVID recovery Ui has regained its value at the start of the recovery. It then continues to fall further during the final six months of the period captured …. so that during the first 24 months of the post-COVID expansion as a whole, Ui displays a negative trend.  None of this is consistent with what we would expect to observe had short-term outcomes associated with the COVID-19 recession scarred the US labor market via adverse effects on the duration of unemployment (Setterfield 2023: 18-19).

Current data shows unemployment intensity appears to be slightly increasing from the previous months but does not show any signs of an economic downturn.  Interestingly,  the length of the official recession periods does corresponds with the peak cycle of the unemployment intensity index meaning that official business cycle is weighted towards the corporate sector as opposed to the index focuses on the labor.  It is not a well-kept secret that it takes six months to a year before the labor market indicators to catch up the financial sectors.

                       Figure 1 Unemployment Intensity 2000 -2024