Category Archives: labor market

Youth and Non-Work

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Tyler Cowen writes,

For Americans aged 16 to 24 who aren’t enrolled in school, the employment picture is grim. Only 36 percent are working full time, down 10 percentage points from 2007. Longer term, the overall labor-force participation rate for that age group has dropped 20 percentage points for men and 14 points for women since 1989.

…If we consider four-year college graduates only, average starting salaries, inflation-adjusted, were higher in 2000 than they are today

Some hypotheses:

1. We now have many college graduates who could not actually graduate in a rigorous major.

2. The young people I know who are not working full time have all formerly had full-time jobs, so that they are showing a lifestyle preference. I am admittedly looking at a small sample, not necessarily representative.

3. Young people who are not interested in having children do not feel compelled to work full time. Again, my evidence is anecdotal, but it seems to me that compared to when I was their age, there are a lot more young people these days who do not seem at all interested in having children. Admittedly, there could be causality running from weak job prospects to less interest in having children.

Overall, I see this as part of the Vicky-Thete polarization trend. If you do not have Vicky values, there may not be a compelling reason to work full time.

Labor Force (non-) Participation

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David Leonhardt writes,

Yes, the unemployment rate has fallen. But almost the entire reason it has fallen is the drop in the number of people in the labor force — either working or actively looking…This shift long predates the recent financial crisis, too. The labor force participation rate peaked more than a decade ago… the labor force participation rate has fallen almost as sharply for people aged 25 to 54 as it has for the overall adult population.

Pointer from Mark Thoma.

Leonhardt refers to this white paper, from Express Employment Professionals, which appears to be a search firm. It says,

According to Gallup’s “Payroll to Population” measure, fewer Millennials were working full time in June of 2013 than in June of 2012, 2011, or 2010…

That paper and Leonhardt also refer to a note by San Francisco Fed economists Leila Bengali, Mary Daly, and Rob Valletta. They write,

Although the 2007–09 downturn exhibits a strong positive relationship between state-level changes in employment and participation, the recovery so far does not. This calls into question our interpretation that much of the recent participation decline is cyclical and likely to reverse. However, the current weak correlation between changes in employment and labor force participation could reflect employment’s relatively modest recovery to date. The economy has been expanding for a sustained period. But, as of March 2013, we have recovered only 67% of total jobs lost during the downturn. Thirty-seven months after the employment trough in past recoveries, employment greatly exceeded the pre-recession peak.

Leonhardt argues that the phenomenon of lower labor force participation is important. I agree.

It is hard to invoke conventional macroeconomics to explain it. Sticky nominal wages? If wages are too high, then I would think we should see labor force participation that is high rather than low. That is, lots of people would want to work because wages are too high to clear the labor market.

Casey Mulligan’s idea of a redistribution recession? As I read the recent Cato paper by Tanner and Hughes, since 1995 the disincentive to work has gone down in many states (see table 2 of their paper). For example, in Illinois, they calculate that in 1995 overall welfare benefits were a salary equivalent to $29,000, but today they are only $13,580, after adjusting for inflation. One would think that labor force participation would have increased in such states. Meanwhile, no large state shows an increase of as much as $5000. I think one would have to bring disability into the story to make the case. Indeed, the white paper from EEP says,

Fourteen million Americans, including roughly 8.5 million former workers receive disability. In 2011, that included 4.6 percent of the population between the ages of 18 and 64. These Americans are not included among the “unemployed.” And it’s estimated that less than one percent of them have returned to the workforce in the last two years.

Another story to invoke is that of job polarization. The EEP paper refers to a previous survey.

The survey also found that 53 percent of more than 400 U.S. employers say that recruiting and filling positions is “somewhat difficult” or “very difficult.”

Want Job, Won’t Look For One

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Troy Davig and José Mustre-del-Río explore this category in the labor market surveys.

The crisis saw a sharp rise in the number of people who, in response to surveys, indicated they wanted a job but were not actively seeking one. As long as these individuals are not actively seeking work, they are not considered part of the labor force and are not counted as unemployed in official government statistics such as the unemployment rate. The group continued to swell through the first few years of the economic recovery and, by early 2013, numbered some 6.7 million—nearly 2 million more than before the crisis. Residing on the periphery of the labor market, this group may be viewed as a “shadow labor supply.”

Pointer from James Pethokoukis. I am not sure what this trend means. It’s one of those things I put on the blog in case I want to come back to it later.

One possibility is that the market sent a bunch of workers memos saying, “You are now ZMP.” The ones who are still looking for jobs did not understand the memo. The folks being labeled here as “shadow labor supply” get it.

Youth Unemployment

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Diana G. Carew writes,

Of the 17 million Americans age 16-24 not enrolled in school or working full-time in July 2013, 5.6 million were working part-time, 3.2 million were unemployed – a 17.1 percent unemployment rate – and another 8.4 million were not in the labor force altogether.

Together, these charts suggest the problem facing young Americans is structural. If worsening labor market conditions were a temporary effect of the recession, we would have expected to see improvement with the recovery. Instead, young Americans appear stuck in their post-recessionary state.

Pointer from Tyler Cowen.

Why is the gap between the reservation wage and marginal revenue product so much higher among young people than among others?

Some possibilities:

1. The trend in the Thete lifestyle is to work only sporadically, counting on support from relatives and the government.

2. The minimum wage is much more binding than we thought.

3. Downward wage stickiness is much more prevalent among people who are new to the labor market than among middle-aged workers. (I admit I am being sarcastic here)

Fewer $20 Bills to Pick Up

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That is how Greg Kaplan and Sam Schulhofer-Wohl explain the decline in internal migration in the United States.

the causes of decreased migration that we identify suggest that the economy may not be less flexible after all. Rather, low migration means that workers either do not need to move to obtain good jobs or have better information about their opportunities.

They suggest that returns to skill have tended to equalize across regions. I am not sure how to reconcile this with Enrico Moretti’s work.

Pointer from Timothy Taylor.

Shoot First, Negotiate Later

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No, this is not another post on the Zimmerman case. It is my reaction to an article by Mary C. Dalythese patterns are consistent with the reluctance of employers to adjust wages immediately in reaction to changing economic conditions. In particular, employers hesitate to reduce wages and workers are reluctant to accept wage cuts, even during recessions. This behavior, known as downward nominal wage rigidity, played a role in past recessions, but was especially apparent during the Great Recession. Wage rigidity kept nominal wage growth positive throughout the recession. This led to a significant buildup of pent-up wage cuts, that is, wage cuts that employers wanted, but were unable to make. As the economy recovers, pent-up wage cuts will probably continue to slow wage growth long after the unemployment rate has returned to more normal levels.

Pointer from Mark Thoma.

If no one told you what the data looked like, which would be more plausible?

a) Employers at first are reluctant to let go of employees, and they instead react to a drop in demand by immediately slowing wage growth. If the recession persists, they fire people.

b) Employers at first are reluctant to slow wage growth, so they fire people. If the recession persists, they slow wage growth.

I’m sorry, but (a) seems way more plausible to me than (b). We live in a world where there are a lot of fixed costs of hiring and firing. Yet the authors want to argue that in the short run, the easiest margin of adjustment is to fire people, and then in the long run you hire them back at lower wages.

Now this is a bit better:

As the recovery takes hold, businesses gradually reduce wage growth. At the same time, inflation typically erodes the real wages of workers, relieving some of the pent-up demand of employers for wage cuts. This gradual process can continue long after the unemployment gap begins to narrow. At the same time, slower wage growth also means businesses are able to hire more workers, which stimulates the demand for labor and pushes the unemployment rate down further.

Emphasis added. Still, I hate the phrase “pent-up demand for wage cuts.” It makes it sound as if “gee, if we could just get workers to accept a little lower wage, I could keep all of them.” That is a world in which there are an awful lot of $20 bills lying on the sidewalk.

Instead, I prefer to think of a dynamic economy and ask “what keeps entrepreneurs from finding ways to make use of available resources (unemployed workers)?” To me, that makes a recession more comprehensible, although less treatable.

Two Blog Posts on Servants

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Two years ago, I asked, Where are the Servants?

In an economy where some folks are very rich and many folks are unemployed, why are there not more personal servants? Why don’t Sergey Brin and Bill Gates have hundreds of people on personal retainer?

A few days ago, Alex Tabarrok wrote Inequality and the Servant Boom, in which he quotes an article from the Telegraph.

The number of domestic servants is booming across central London: wherever the multiple between the wages of the rich and the poor grows, so does the number of servants. Much of the time, the towering Georgian and Victorian terraced houses of Belgravia now have only servants living in them – their masters and mistresses are drifting around the world, from yacht to schloss to Park Avenue apartment, in search of pleasure or tax avoidance. Drive round the area at night, and it’s often only the lights in the attics and the basements – the servants’ quarters – that are on.

But it’s not just in the gilt-edged parts of Britain that the service industry is flourishing. According to the Work Foundation, there are now more than two million part-time or full-time domestic workers across the country. All told, 10 per cent of households now employ some sort of domestic help.

Relative Wages

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Felix Salmon finds some interesting charts, from something called the National Employment Law Project.

They looked at the annual Occupational and Employment Statistics for three years — 2007, 2009 and 2012 — and created a list of wages for 785 different occupations. They then split those occupations into five quintiles, according to income; the lowest quintile made $9.49/hr, on average, last year, while the highest quintile averaged $40.23/hr.

As you go down the charts, you can see that until you get to the fourth and fifth quintiles, most jobs fall below the green lines — which means that they’re seeing their real wages fall. You can also see the commodification of low-wage jobs in the the number of occupations in the bottom two quintiles: there are just 47 occupations in the bottom quintile, while there are 186 occupations in the top quintile. (Each quintile, of course, includes the same number of total workers.)

Some remarks:

1. I would have preferred that they split the quintiles in 2007, rather than 2012. That way, you reduce the likelihood of accidental correlation between levels and growth rates. But leave that aside.

2. I would like to see employment data for the various occupations. If employment also fell in the occupations where real wages fell the most, that would suggest that what we are seeing is structural change. In fact, it would suggest that real wages did not fall enough.

3. James Tobin, in a Presidential Address to the American Economic Association over forty years ago, suggested that the Phillips Curve might be explained by downward stickiness of nominal wages when relative wages are in need of adjustment. Raising aggregate demand raises prices, and that in turn helps bring down the real wages in sectors where they otherwise would be too high.

ZMP and Gender

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Nicholas Eberstadt writes,

In the early 1950s, practically all men in this age group [25 to 54] were either working or looking for work-fewer than 3 men out of every 100 were out of the labor force. By contrast, over 11 out of every 100 men of prime working age are completely out of the labor force today-one in nine, fully four times the fraction back in the early postwar era. This flight from work at prime working ages accounts for the vast majority of the 13 percentage point drop in employment ratios reported for this key demographic group over the past sixty years (i.e., 1953-2013)

Some comments

1. If you look closely at Eberstadt’s charts, you can see that the decline in adult male employment was at least as large between 1999 and the present as it was from 1950 to 1999. In terms of the rate of change, the decline was gradual until recently, and then it accelerated. In addition, I believe it is the case that the growth in female employment slowed just as the decline in male employment accelerated.

2. If you want to tell a conventional macro story, you could attribute most of what has happened since 1999 to aggregate demand. On the other hand, I think pretty much everyone would agree that the from 1950-1999 we were seeing secular, structural changes that raise female employment and reduced male employment. It would be absurd to tell an aggregate demand story for this. Still, it is interesting that the drop in male employment is not steady, but instead consists of downward ratchets that occur during recessions, while during recoveries male employment levels off and even rises.

3. Continuing with the theme of conventional macro, you might say that what we have seen recently is another downward ratchet in male employment due to severe drops in aggregate demand. This is overlaid on a continuation of the secular decline.

4. The secular explanation would be that low-skilled men have faced increasing competition from capital and from foreign labor.

5. It is not clear what the possibilities are for raising the skills of males displaced by these phenomena.

6. Going forward, one plausible scenario is continued divergence between Vickies and thetes. We should perhaps be thinking more in terms of how to adapt to such an outcome, as opposed to making futile attempts to ward it off.

Investment and Employment

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Reacting to my post on capital-labor substitution, reader points me to this analysis.

This excess rise in the capital-labor ratio highlights the negative effect of Federal Reserve
policy on wages and unemployment. The persistent, extremely low interest rates are
keeping real wages from climbing and retarding the rate of hiring. The Federal Reserve is
making unemployment worse than it has to be.

Putting on my macro hat, I would say that we are talking about too many endogenous variables here, meaning variables that depend on what is happening to other variables. The capital-labor ratio depends on investment and on hiring decisions. The real interest rate depends on supply and demand factors in the capital market. And so on.

In general, when investment is high, you might expect the demand for labor to be high. This could be because capital and labor are complementary. Even more, from a textbook Keynesian perspective, investment is spending, spending is economic activity, and more economic activity means more employment. The late 1990s exemplify this, with strong investment and a high ratio of employment to population.

Again, from a Keynesian perspective, one expects in a slump that hiring will be low, investment will be low, and real interest rates will be low. All of these are endogenous to whatever caused the slump.

Now, let me put on a PSST hat, meaning that I look at the economy entirely from a structural perspective, not from a Keynesian perspective. I would say that for the past fifteen years, we have seen both capital-labor substitution and factor-price equalization. Both of these require a reallocation of labor. This is not taking place very quickly. What are the reasons? Some possibilities:

1. Weak incentives for the unemployed to take jobs that require a loss of status or an adverse relocation. Older unemployed people can collect disability. Younger unemployed people can live with their parents.

2. Unusually few fast-growing firms. Perhaps entrepreneurs are not finding ideas that pan out. Perhaps when things pan out they are finding ways to grow quickly without adding thousands of workers (think of Internet businesses).

3. Perhaps the labor-leisure choice is being driven by attitudes about health insurance. If you really care a lot about health insurance, you take a job, even if you think that the take-home pay is barely worth it. The same deal gets turned down by someone who does not value health insurance. With the health insurance component of compensation so high these days, this can be important.