Relevant and even prescient commentary on news, politics and the economy.

Back to Zero

by Tom Bozzo

The unexpected drop in the unemployment rate for January made me more than usually curious about the household survey results, and things there actually look OK for a change. The flat unemployment rate between November and December ’09 was the less-than-virtuous result of declining labor force participation pacing the decline in employment. This month’s decline in the unemployment rate reflects increasing labor-force participation and employment-to-population ratios; unemployment levels and underemployment rates [1] are also down. The unemployment decline appears to be statistically significant based on the BLS’s (inexact) guidance on sampling variability in household survey estimates.

The headline employment figure, in contrast, is not a statistically (or qualitatively) significant result, hence the summary’s “essentially unchanged” language. The everlovin’ net birth-death model is subtracting more jobs this month than it did in January ’09 — -427,000 jobs vs. -356,000 a year ago — so if we’re actually at a turning point expect this adjustment to be a drag on measured employment. The mild upturn in manufacturing employment follows other strong data from that sector, and it’s also not unexpected to see temporary employment accounting for the measured service sector growth.

Brad DeLong has been scratching his head over seasonal adjustment to the unemployment claims series; I’m wondering about what’s showing up as a December employment dip. The not-seasonally-adjusted data usually features a small November-to-December drop. Last year’s -538,000 was less than in ’08 (around -1 million) but more than previous years. A December dip after a strong November doesn’t feel right, so go figure.

Calculated Risk and Spencer have graphs and much more discussion.

[1] I expect the last paragraph of the Times story to be revised later to reflect this.

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Those Low Rates

Via (what else?) Alea’s Twitter feed, John Taylor defends himself against Ben Bernanke:

“The evidence is overwhelming that those low interest rates were not only unusually low but they logically were a factor in the housing boom and therefore ultimately the bust,” Taylor, a Stanford University economist, said in an interview today in Atlanta.

It’s not actually that they’re not saying the same thing. Bernanke argued (and I agreed) that low rates did not cause the housing bubble. We have had low rates without producing housing bubbles before. (Other asset bubbles are another question.) Indeed, the last lasting housing bubble peaked just as the Federal Funds rate did:

More accurately (and also via ATF), Caroline Baum takes Bernanke to task for sleight-of-hand:

For example, Bernanke takes great pains to rebut criticism that the funds rate was well below where the Taylor Rule…suggested it should be following the 2001 recession. The Taylor Rule uses actual inflation versus target inflation and actual gross domestic product versus potential GDP to determine the appropriate level of the funds rate.

Substitute forecast inflation for actual inflation, and the personal consumption expenditures price index for the consumer price index, and — voila! — monetary policy looks far less accommodating, Bernanke said.

It’s always easier to start with a desired conclusion and retrofit a model or equation to prove it.

Ouch. Is it a great day when the journalist is making more sense about the economist’s work than another economist is?

But more to the point, the argument that rates were kept unnaturally low from ca. 2002 through ca. 2005 depends very much on the idea that the Fed does not have two jobs. (Once again, h/t to Dean Baker.)

The other half below the break

As Baker notes at the link above, “the dual mandate [of the Fed] is full employment (defined as 4.0 percent unemployment) and price stability.”

Let’s be generous. I’ve plotted the Civilian Employment/Population Ratio and the Official Unemployment Rate below. The blue line at 4.5 applies only to the Unemployment Rate (red line). (I didn’t plot it at 4.0 because that would be cruel.)

So what we have is a situation where (1) the Employment/Population Ratio by the end of 2006 is barely back near the level it was at the end of the recession of 2001 and (2) it is only near the end of 2006 that the Official Unemployment Rates approaches the official target rate (which it hadn’t seen since before the 2001 recession).

It seems apparent that Taylor’s “Rule” (which considers inflation and GDP, but not employment per se) is not compatible with official Fed mandates. In such a context, Caroline Baum’s “gotcha” is more a case of her using inappropriate variables—and Bernanke substituting a more appropriate model, given the Fed’s mandates—than it is a case of Bernanke “retrofitting.”

No wonder John Taylor says we should worry about inflation; in his world, we never have to worry about unemployment, so long as there are enough bubbles to inflate GDP.

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I Blame This on the NHL

With all the talk of “Detroit,” you would think that Michigan would have lost the most employees, as a percentage of same, on the year. After all, the scariest graph of the U.S. MSAs isn’t scary for nothing.

But the Regional and State Employment data is out for October (h/t CR), and there’s a different leader.

Apparently, the bursting of the Sunbelt Bubble (building expensive houses in the absence of a water table; what could go wrong?) compares well with destroying unionized automobile production. (Note to Senator Shelby: destroying Detroit didn’t keep your state from being #10 on the list.)

Also note that #4 on the list is my favorite state for bank failures. (The three states with 20 or more bank failures since Bear Stearns failed are 4th, 9th, and 11th on the list. The only other state in double-digits right now, Florida, is 16th.) I’ll wait patiently for Brad DeLong to explain again how “support of the banking system by the Fed and the Treasury [has] significantly helped the economy.”

The third and biggest point is that many of those are large states that have leaned Democratic in the past several years. Anyone betting that they—and the next two states, North Carolina and Wisconsin, which both went for Obama in 2008—will be hard-pressed to support Democratic policies twelve months from now without a significant change in the trend.

New Jersey showed you what happens when you run a former Goldman Sachs CEO for Governor right now. Virginia showed what happens when the base isn’t motivated. Paul Krugman makes the point directly:

The longer high unemployment drags on, the greater the odds that crazy people will win big in the midterm elections — dooming us to economic policy failure on a truly grand scale.

What are the odds of crazy people winning big? I’m not certain, but I make them much better than 20:1 based on the current data.

UPDATE: Via Mark Thoma, Free Exchange, of all places, also sees the danger:

[W]hat is clear is that it does no good for prominent, respected economists to continue heaping praise on a Fed that failed in its mission before the crisis and which [sic] is failing in its mission now.

Because as unpleasant as the prospect of Congressional intervention in monetary policy is, two more years of high unemployment might well lead to far worse.

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Employment Policy

Robert Waldmann

Larry Summers, who is very very good at provoking debate, said
“It may be desirable to have a given amount of work shared among more people. But that’s not as desirable as expanding the total amount of work.”

Paul Krugman responds here

True. But we are not, in fact, expanding the total amount of work — and Congress doesn’t seem willing to spend enough on stimulus to change that unfortunate fact. So shouldn’t we be considering other measures, if only as a stopgap?”

Please click the link and read Krugman’s op-ed if you haven’t already. It is excellent but limited to 700 words. Unlimited reflections on the topic after the jump.

I’m going to start with my proposal. I think that there should be a combination of subsidies for new hires funded by revenues from cap and trade (I’m a member of the Pigou club) and an increase in the progressivity of the tax system (not just because I always want to increase the progressivity of the tax system).

Second, Krugman suggests that US unemployment is not just high, but much higher than it need be given the large recession and small stimulus. Note that the evidence he presents is the change in employment and unemployment in the US and Germany. One might suspect that this amounts to the US unemployment rate rising to a level similar to the German unemployment rate – that in effect Krugman is proposing that we don’t accept unemployment that suddenly rises to around 10% in a recession but rather insist on such levels all the time.

One would be wrong (I admit I was such a one, I haven’t been following German unemployment). The OECD standardized US unemployment rate surpassed the Euro area unemployment rate in August 2009 (warning pdf) (figures for September are in the mail the August figures were released October 12). The OECD standardized US unemployment rate 9.7% was significantly higher than the German rate 7.7% in August. The decline in German GDP was, if anything, slightly larger. I find this stunning.

So how did they do it and should we do what they did?

First all Euro area countries have strong restrictions on layoffs. At least two Italy and Spain have decided not to apply the restrictions to many newly hired workers starting, in the case of Spain, almost 30 years ago. The Spanish increase in unemployment is even huger than the US increase.

It was already clear in 1980 that employment protection protected employment in recessions. It is also notable that, before their reforms relaxing restrictions, Italy and Spain managed decades with no employment growth. I very much like employment protection legislation as it changes the balance of power between workers and employers. I don’t like zero employment growth for decades. In any case, it isn’t going to happen there (in the USA).

The effect of employment protection legislation is a confounding factor not relevant to the US policy debate and a major part of the explanation of the especially bad experiences of the US, Spain and Ireland.

Second job sharing. Germans have been doing this for decades. The idea is that there is a fixed number of hours of work demanded and it is better if everyone works part time than if some are unemployed. This reasoning is like a red flag to a bull to almost all economists certainly including Larry Summers (and including Paul Krugman in the past). Krugman considers it a third best approach imposed by political limitations. I’d note that the simplest way to do this would be to make the payroll tax progressive so that less has to be paid by firms and workers if there are more workers each of whom is paid less . Also a progressive payroll tax implies increased revenues in the future even if marginal rates are a function of real wages (so inflation doesn’t cause bracket creep).

In one of my favorite papers of all time MacDonald and Solow argue that employment will be increased by a progressive payroll tax for fixed revenues (zero in their model). They consider a unionized firm (the paper is very old) but evidence on wages suggests that similar things happen without formal unions. The point is that it doesn’t really matter why a firm is spending the same money to pay 3 people a lot or 4 people a little. Whether the 3 are paid a lot because they work longer hours or because they have higher hourly wages, hiring them is still 3 jobs for the price of 4.

I don’t see any value added from applying the benefit only in cases in which one can document the splitting of a set of tasks to share jobs. This would be complicated and I don’t think there is anything especially desirable about that.

Note a historical example, the Clinton tax increase of 1993. Not all taxes were increased as the bill also expanded the Earned Income Tax Credit. Taxes were higher on average and much more progressive. The tax changes were followed not only by a huge increase in employment but also a downward shift of the Phillips curve. Theory and evidence correspond in this case. Also the proposal is wildly popular according to dozens of polls.

OK aside from that Krugman mentions hiring subsidies. Now most such subsidies would go to employers who would have hired without a subsidy. One would expect much of that money to go to the workers who would have been hired anyway (how much depends on assumptions about labor markets and/or bargaining). So ? It’s an excuse to pump more money into the economy which would be good policy.

Also such subsidies have been shown to affect employment. In particular a deadline to get the subsidy (only paid if one hires before oh say November 2 2010 just to pick a date) would have a large effect on the speed of the increase in employment. Following Greg Mankiw, I’d add it on to cap and trade as part of where the revenues go. As noted by Mankiw, this is also an excuse to start subsidizing before CO2 permits are actually sold as it takes time to set up a cap and trade system.

So I propose the Greg Mankiw/soak the rich plan to help US employment.

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Seasonal Posting: NYTFail, Part 2

First, David Leonhardt argued that this recession was good for workers.

Now, Floyd Norris apparently has decided to mix and match data. (I wonder if the fact many NYT employees who are looking at their 45-day severance offers is having an effect on its economic coverage.)

One of the standard “economist jokes” is about the one who died because he forgot to “seasonally adjust” his pool. In that tradition, Norris declares:

The adjustments are for seasonality. For some reason, October is the month with the largest seasonal adjustment down in jobs. So the increase in the unemployment rate does not reflect people actually losing jobs. It reflects the belief that seasonal factors should have added more jobs than they did.

All this may be very reasonable, and there is no way I can think of to test whether the seasonal adjustments are reliable. [emphases mine]

Gosh, I wonder why October would have a larger seasonal adjustment, and whether there is any BLS data to support that adjustment?

Apparently, employers traditionally hire a lot of people in October for “the Holiday Season.” And while it’s possible that they will be doing all that hiring in November this year, it hasn’t been the way to bet during this millennium.

Norris continues:

But I suspect seasonal factors are less important this year, when the economy may be changing directions, than they normally are.

It was with such optimism that Napoleon went to Russia, people bought VA Linux at $100 a share, and the Bush/Cheney/Rumsfeld axis decided to run a two-front war in Afghanistan and Iraq. With statements similar to Norris’s:

In reality, the government report says unemployment rates remained steady at 9.5 percent. And the number of jobs actually rose, by 80,000. And the number of jobs for college-educated Americans rose more than in any month in the last six years.

Well, the number of jobs rose (as one would expect, given the Holiday Sales push) but Table B-1 is closer to 40,000 than 80,000:

Where we do see an 80,000 job increase is in the private sector, which is more than 500,000 workers lower than it was in August. If you want to play a non-seasonally adjusted, private-sector only game with the data, you should at least be honest about it.

More vitriol and data below the break.

The details of that 80,000 look even worse: declines in all Goods-producing areas (except about 200 new jobs in primary metals, 300 in “miscellaneous manufacturing,” and 1,100 in motor vehicles and parts; cash for clunkers, anyone?) which are balanced by the Service sector, most notably the 63,500 new Retail jobs. Can you say “seasonal employment”? Floyd Norris apparently cannot.

The rest of the Non-Seasonally Adjusted figures are even less encouraging. Table A-8 of the report shows more than 100,000 people added to “not on temporary layoff”:

while Table A-9 is depressing: a larger number of unemployed at all durations, with the median duration of unemployment increased by more than one month (in a month):

And while the BLS has not updated their Job Openings data for October, the graphic through September isn’t exactly pointing to a decline in that median (or a robust recovery):

Is there a recovery in process? Maybe, though I’m not convinced, since most of the positive data seems, as Paul Krugman noted, “unrepresentative.”

But things are not so good as Floyd Norris wants to pretend, even (or especially) using the data he chooses to highlight.

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Vague Thoughts on The Theory of the Firm, the Business Cycle and Kurt Vonnegut

Robert Waldmann

Don’t say you weren’t warned. I am trying to understand the effects of the switch from mechanically controlled machine tools to electronically controlled machine tools and then to digitally controlled machine tools. I don’t really know much about machine tools, but, then again, I don’t know much about firms or the business cycle either. My thoughts after the jump.

update: spelling checked

I warn again, don’t trust any claims of fact in this post.

The reference to Kurt Vonnegut is a reference to “player piano” a dystopian vision of mass unemployment due to industrial robots. It seems that Mr Vonnegut never checked how many people are actually employed in manufacturing, since he asserted that there would be massive unemployment even if people demanded services from other people. So I am not going to predict massive unemployment.

I am partly stimulated by the Nobel Memorial Prize committee which gave the prize to Oliver Williamson for new contributions to the old theory of the firm — that is for trying to figure out the optimal amount of vertical integration. In very brief Williamson argued that vertical integration is efficient when intermediate goods are made with inflexible capital.

IIRC They key example is stamps for bashing metal which shape metal into one form. He noted that arms length market transactions don’t work in this case. Once the parts supplier has sunk money into the specific capital, the final goods manufacture can pay a price equal to marginal cost giving it 0 return on the sunk cost. Thus only a fool will sink money in capital which produces a good for only one possible customer without any guarantees. A long term contract promising to by a fixed amount of the part for a fixed price can make the transaction possible. Similarly things work out fine if the parts are made by the same firm which makes the final product, since the firm has no incentive to take advantage of itself.

(a bit of jargon here. To pay marginal cost to a supplier who has paid a fix cost of building specialized capital is called “to seize the quasi-rent produced by the capital.” I will strikestick with “take advantage of” below.)

Note the example depends on the inflexibility of capital. Once it applied to grinding and assembling as well as stamping. That is, I am changing the subject to equipment which grinds, assembles, welds etc. The specific example of metal stamps still works, but many other productive processes have evolved in a way that protects a parts supplier from ruthless bargaining by their customer, the final goods producer.

Once upon a time, machines which ground and welded and so forth were controlled by the hands of skilled artisans. Also parts were put together by human hands. Then it was noted that a machine could do that on its own with its active bits (drill bits for example) guided by metal guides, by oddly shaped metal parts through which other metal parts slid or by oddly shaped gears.

This made it possible to substitute pieces of metal for people and the pieces of metal demanded no wages. The problem is that the machine could do only one thing. To make the mechanically controlled machine tool do something else, new metal parts had to be designed and made and the mechanically controlled machine tool and to be disassembled and reassembled. This process is called “re-tooling”.

Then technology shifted to analog electronically controlled machine tools (as described by Kurt Vonnegut). The movements were controlled by electronic signals read off a magnetic tape. The machine tool could be, in effect, retooled by leading it through the new motions once. I don’t know how this was done, but I assume that a manual control (like a joystick or something) was plugged in and the tape recorder was set to record. Then someone could try to make the machine tool perform a new task and keep trying and recording over the tape till the controller did it well (via the joystick). Probably frustrating, but quicker than designing, casting disassembling and reassembling.

Then they went digital. Now the motions are described with equations and the new instructions are typed on a keyboard. No one with skilled hands was needed (I mean the equations could be typed in by hunt and peck if necessary). The tragic irrelevance of the artisan in the digital age was made by David Noble (who was allegedly denied tenure at MIT, because he noted that technology is not everyone’s friend).

This made manufacturing much more flexible. This reduced the optimal degree of vertical integration. If suppliers just have to reprogram their machine tools when their current customer tries to take advantage of them, then they don’t neeed to be a long term contracts nor is efficiency enhanced if they merge with their customer.

Why low and behold, large firms are outsourcing more and more in the age of digitally operated machine tools. I’m sure Prof. Williamson has noted this fact which supports his analysis.

I am interested in something else — the business cycle. I think that increased flexibility helps us understand the late great moderation (near absence of the business cycle form 1982 through 2007), the reduction in temporary layoff unemployment, the unprecedented current average duration of unemployment, and the joblessness of recent recoveries.

The point is that it used to be that a rule of manufacturing is that when demand is slack one shuts down and retools. Producing new products and improving efficiency required a fairly long period without production — the period during which the machine tools were disassembled. Relatively few people were employed disassembling, and reassembling the mechanically controlled machine tools. Thus temporary layoffs were a necessary part of innovation. Given that, firms decided to schedule them at a time when demand was slack. If all firms have the same policy, recessions can happen due to a sunspot. In practice they had something to do with monetary policy and/or oil shocks, but the instability of the system made frequent severe recessions possible.

If it takes minutes not weeks or months to digitally retool, then there is no technological need for temporary layoffs. It might be better to deal with slack demand by cutting prices rather than production. Sometimes firms will choose to shut down a factory permanently, but they will have less reason to shut it down for weeks or months but not forever.

In fact, there has been a massive reduction in temporary layoff unemployment, and, in particular, in temporary layoff unemployment during recessions. This implies weaker recoveries — permanently laid off workers need to find new jobs and expanding firms need to find workers. In particular, this implies a less rapid increase in employment in recoveries. Finally it obviously implies longer average spells of unemployment for the same unemployment rate.

Many stylized facts about the changes in the business cycle can be explained by increased flexibility of capital, including, in particular, digitally operated machine tools.

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Consumer confidence: fluff or thrill

by Rebecca Wilder

Thrill. The Conference Board reported that the August consumer confidence index (CCI) jumped 14% in August to 54.06. In contrast, the August University of Michigan Consumer Sentiment index (CSI) fell; but the two generally trend together, and the CSI is subject to revisions reported tomorrow.

Confidence can be swayed by current political agenda or asset prices, but nevertheless, it is a coincident measure of the business cycle. And broken down into its two components – the present economic situation index and expectations index – the August report was quite positive (as positive as can be coming off of record lows).

The expectations index surged almost 16% in August to 73.48, its highest level since December 2007 and 2.7% over its previous high in May 2009. The current conditions index grew around 7%, but is hovering at low levels with no strong sign of improvement.

Clearly, the expectations index is making much more headway than the present situation index. And this is why that information is important: historically, the expectations index, rather than the current conditions index, is a good indicator of consumer spending growth.

The chart illustrates annual personal consumer spending growth and the two components of the CCI, with associated simple correlation coefficients. The correlation between the overall CCI and annual PCE spending growth spanning June 1977- June 2009 is 0.63. However, the biggest weight is coming off of the expectations component of the CCI, correlation = 0.69, rather than the present situation component of the CCI, correlation = 0.45.

On the other hand, the present-situation component of the CCI is a decent indicator of current labor market conditions.

The chart illustrates annual employment growth (measured by the nonfarm payroll), and the two components of the CCI. The simple correlation between the overall CCI and employment growth is 0.59 (noticeably smaller than the PCE correlation), which according to its correlation, is more heavily weighted by the present situation component of the CCI.

Based on this simple analysis, the CCI reading is consistent with an oncoming surge in spending growth over the next six months. Even in the recovery after the 1991 recession, when the expectations index improved quickly while spending growth was sluggish to rise, spending growth jumped from essentially 0% annual growth to almost 3.6% in just four months – after the surge in expectations index and before the bottom in the current conditions index.

Yes, there are plenty of credit-related issues why this might not happen. And there is an obvious economic link between employment, income, and spending. However, for those indicators that are critical to recovery, i.e., consumer spending (housing and inventories are important, too – see the second chart on this post), the expectations index is certainly a positive signal for spending events to come.

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Employment report follow up

By Spencer,

Yesterday in describing the employment report I said:

Moreover, the manufacturing work week rose from 39.5 to 39.8 hours and overtime hours were 2.9 hours versus 2.8 in the second quarter. Much of this was auto and confirms the other reports that at least auto output is rebounding.

I was criticized and accused of political bias because I was placing too much emphasis on the auto industry. According to my critics the increase in the auto hours worked should be ignored because it was due to government interference and did not reflect what was really happening in the economy.

Moreover, it was implied that the auto industry was atypical and was not representative of the rest of the economy. The BLS publishes the hours worked for ten sub industries of durable manufacturing. So what happened to them? In nine of the ten industries the work week expanded last month and four industries switched from falling hours worked to rising hours worked.

Moreover, in the private service providing industries, hours worked expanded 0.3%, the first monthly increase since August, 2008. Just to put this in perspective, employment in the private service providing industries is 112,788,000 or roughly ten times employment of 11,817,000 in all manufacturing:

So the criticism that the hours worked just reflected the impact of the cash for clunkers on the working of the economy is obviously completely wrong.

Yes, as I pointed out the hours worked increase was impacted by the auto sector, but it was widespread through out the economy. The improvement in the service sector was particularly significant and that had nothing to do with the auto sector.

Moreover, I specifically pointed out that hours worked is a leading indicator of future employment. At no time did I say that the recession was over. That was the reason I characterized the employment report as encouraging. Compared to many other private
analysts, especially on Wall Street, I thought my analysis was very tempered.

I do not see where it was politically biased, and the argument that hours worked expanded only because of the auto sector just reflects ignorance.

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employment report

By Spencer,

The employment report was very encouraging.

Most importantly, aggregate hours worked were unchanged at 91.1 as compared to 104.1, 101.7 and 99.7 over the last three quarters. An unchanged reading is a massive improvement from the 8% to 9% rate of decline over the past three quarters. With positive productivity this impies that thrird quarter real GDP growth could easily be positive..

Moreover, the manufacturing work week rose from 39.5 to 39.8 hours and overtime hours were 2.9 hours versus 2.8 in the second quarter. Much of this was auto and confirms the other reports that at least auto output is rebounding. The hours worked together with productivity strongly impies that manufacturing output rose in July — to be reported about mid-month. Moreover, the average workweek and overtime hours are traditional leading indicators.

Wage growth improved, but not enough to reverse the sharp slowing in average hourly earnings growth.

With hours worked stable and hourly earnings rising average private weekly earnings rose from $611.49 to 614.34.
The improvement in weekly earnings is a welcome sign for what I consider the greatest risk to the recovery, the unprecedented decline in nominal, repeat nominal, income so far this year. For a sustained recovery nominal and real income growth has to improve at some point. Normally, real income growth is a lagging indicator at bottoms but it also kicks in soon after the bottom. Tax cuts are offsetting some of this weakness but a sustained recovery requires growth in real income.

The consensus forecast is for a very weak recovery. But the consensus forecast is always for a weak recovery. The actual historic record is for recoveries to be proportional to the recession. That is, severe recessions have strong recoveries and mild recessions have weak recoveries.
I’m not making a forecast or taking a position that the consensus is wrong, or that those who expect no recovery are wrong either. But at every bottom economists always have a long list of reasons why this recovery will be weak. And they are usually wrong. In 1981, I won the National Association of Business Economists annual forecasting contest by forecasting an average or normal recovery from the 1980 recession. It was the strongest forecast in the competition.

Footnote. Despite the increase in the minimum wage the teenage unemployment rate actually fell.

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