Category Archives: labor market

The State of the Economy

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1. There have been several posts pointing out that wage growth has been slow, even though the unemployment rate has fallen.

2. There have been several posts, including some of mine, on low long-term interest rates. More recently, the WSJ talked with James Bullard.

Right now, “the markets are making a mistake” and expect the Fed to maintain its ultra-easy policy stance longer than Fed officials themselves currently expect, Mr. Bullard said. When it comes to these expectations, “I would prefer that those be better aligned than they are.”

3. Scott Sumner writes,

The 4-week moving average of layoffs came out today at 287,750. Total civilian employment in September was 146,600,000. The ratio of the two, i.e. the chance of being laid during a given week if you had a job, was below 2 in 1000. That’s only happened once before in all of American history–April 2000.

However,

We are even seeing a lower employment/population ratio in the key 25-54 demographic, compared to seven years ago.

Read his whole post.

On (1), I would note that a few years ago wage growth was violating the Phillips Curve on the high side, and now it is violating the Phillips Curve on the low side. And yet mainstream macroeconomists stick to the Phillips Curve like white on rice. I would emphasize that the very concept of “the” wage rate is a snare and a delusion. Yes, the Bureau of Labor Statistics measures such a thing.

Instead, think of our economy as consisting of multiple labor market segments, not tightly connected to one another. There are many different types of workers and many different types of jobs, and the mix keeps shifting. I would bet that in recent years the official statistics on “the” wage rate have been affected more by mix shifts than by a systematic relationship between “the” wage rate and “the” unemployment rate.

On (2), I view this as evidence for my minority view that the Fed is not a big factor in the bond market. Instead, the Fed is mostly just following the bond markets. When it actually tries to affect the bond market, what you get are “anomalies,” i.e., the failure of the bond market to do as expected by the Fed.

On (3), I think that we are seeing a Charles Murray economy. In Murray’s Belmont, where the affluent, high-skilled workers live, I am hearing stories of young people quitting jobs for better jobs. On the basis of anecdotes, I would say that for young graduates of top-200 colleges, the recession is finally over. The machinery of finding sustainable patterns of specialization and trade is finally cranking again.

In Murray’s Fishtown, on the other hand, the recession is not over. I would suggest that we are seeing the cumulative effects of regulations, taxes, and means-tested benefits that reduce the incentive for firms to hire low-skilled workers as well as the incentive for those workers to take jobs. As Sumner points out, President Obama’s policies have moved in the direction of making these incentives worse.

The Wedge Between Compensation and Wages

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Mark Warshawsky and Andrew Biggs write,

Most employers pay workers a combination of wages and benefits, the most important of which is health coverage. Economic theory says that when employers’ costs for benefits like health coverage rise, they will hold back on salary increases to keep total compensation costs in check. That’s exactly what seems to have happened: Bureau of Labor Statistics data show that from June 2004 to June 2014 compensation increased by 28% while employer health-insurance costs rose by 51%. Consequently, average wages grew by just 24%.

The kicker:

Health costs are a bigger share of total compensation for lower-wage workers, and so rising health costs hit their salaries the most. The result is higher income inequality.

I don’t think you can blame company-provided health insurance as a first-order cause. Suppose that there were no company-provided health insurance, and everyone instead bought health insurance on their own. In that case, more of the compensation of employees would have been in the form of wages and salaries. If health insurance in the individual market had gone up as rapidly as it has in the company-provided market, then this would have a stronger effect on the cost of living for low-income workers. So even if you did not have company-provided health insurance, you would still have the “wedge” between compensation and disposable income after health insurance.

As a second-order effect, you can argue that company-provided health insurance, and its tax exemption, push in the direction of raising health care costs. But that is not such a compelling argument.

I do think that it is increasingly misleading to speak of a single “cost of living,” when so much of the market basket consists of medical procedures and college expenses that not everyone undertakes. That is, I still believe that Calculating trends in the real wage is much harder than we realize, because every household has different tastes.

Related, from Timothy Taylor:

it’s also intriguing to note that since 1984, the share of income spent on luxuries is rising for each income group, and the share of income spent on necessities is falling for each income group.

He refers to a study by LaVaughn M. Henry.

Creative Class or Creative License?

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I started with Peter Lawler’s post.

Are we dividing, maybe more than ever, into a “creative class” and a “service class?”

I followed the link to Emily Badger’s piece.

Their analysis separates workers into three classes, derived from Florida’s research: the “creative class” of knowledge workers who make up about a third of the U.S. workforce (people in advertising, business, education, the arts, etc.); the “service class,” which makes up the largest and fastest growing sector of the economy (people in retail, food service, clerical jobs); and the “working class,” where blue-collar jobs in industries like manufacturing have been disappearing (this also includes construction and transportation).

I am inclined to accuse Florida and his colleagues of using creative license in defining the occupations that constitute the “creative class.” As I stated this summer, I view the process of urban gentrification as being driven by hospitals and universities. They have the money, they are expanding in cities (during my road trip this summer, I saw this in Pittsburgh, Cincinnati, and St. Louis), and they hire people with lots of education credentials, who then move into the city.

But these credentialed workers are not necessarily creative. They are not opening new vistas or making new discoveries or overthrowing social conventions. Many of them are administrators who, if anything, get in the way of the creative individuals in their institutions.

Look, I think that Florida and his colleagues are spot-on in their observation of the changing geography of social class. But the term “creative class” grates on me, because I think it is misleading.

All Solid for Fluidity

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Davis and Haltiwanger write,

Our discussion leads to the hypothesis that fluid labor markets promote high levels of employment. Conversely, according to this hypothesis, a secular decline in labor market fluidity is a force for lower employment rates.

…The loss of labor market fluidity suggests the U.S. economy became less dynamic and responsive in recent decades. Direct evidence confirms that U.S. employers became less responsive to shocks in recent decades, not that employer-level shocks became less variable…

The authors only speculate about the reasons for a less fluid labor market. An older labor force; changes in business models (I think of big firms coming in to replace mom-and-pop retailers), occupational licensing, health-insurance job lock?

Labor Force Participation

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From a paper by Bill Wascher and many co-authors.

participation rates among youths have been declining since the mid-1990s, in part reflecting the higher returns to education documented extensively by other researchers, but also, we believe, some crowding out of job opportunities for young workers associated with the decline in middle-skill jobs and thus greater competition for the low-skilled jobs traditionally held by teenagers and young adults. Such “polarization” effects also appear to have weighed on the participation of less-educated prime-age men and, more recently, prime-age women. In contrast, increasing longevity and better health status, coupled with changes in social security rules and increased educational attainment, have contributed to an ongoing rise in the participation rates of older individuals, but these increases have not been large enough to provide much offset to the various downward influences on the aggregate participation rate.

…the nearly 2¼ percentage point decline in the aggregate participation rate we project over the next decade will continue to hold down trend output growth by a little less than ½ percentage point per year through the end of the decade.

The Book on SecStag

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Timothy Taylor writes,

Coen Teulings and Richard Baldwin, who have edited a useful e-book of 13 short essays with a variety of perspectives on Secular Stagnation: Facts, Causes and Cures. In the overview, they write: “Secular stagnation, we have learned, is an economist’s Rorschach Test. It means different things to different people.”

Read his whole post.

The interesting secular trends include low real interest rates, low productivity growth, and declining labor force participation among prime-age workers.

From a conventional AS-AD perspective, low real interest rates are a demand-side phenomenon. The other two are supply-side phenomena. I wish the secstag folks would get together and sort this out.

I think that the most important secular trends are:

1. The New Commanding Heights. That is, the shift in the economy toward a lower share of goods consumption and a higher share of consumption of education and health care services. The New Commanding Heights are sectors in which productivity is difficult to measure and government interference is rampant.

2. The Great Factor-price Equalization. That is, the ability of workers with a given level of skills in China and India to compete with workers of equivalent skills in the U.S. This benefits the median worker in China and India as well as high-skilled workers in all countries, but it threatens the median worker in the U.S.

3. Vickies and Thetes. Or what Charles Murray calls Belmont and Fishtwon. In the U.S., there is extreme cultural sorting going on. People with high intelligence and conscientiousness are moving in one direction, and people who are low in those traits are moving in the other direction.

I think that (1) explains the low productivity growth. It could be partly a measurement problem and partly a problem of government putting sand in the gears.

I think that (2) and (3) explain the labor force participation problem.

What about low real interest rates? This one has puzzled me for a decade. Is it possible that (1) is the explanation? That is, the New Commanding Heights are not nearly as capital-intensive as the old commanding heights of steel, electric power, and transportation. Also, investment may be deterred because of the way government affects these sectors.

Davis and Haltiwanger

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It’s the paper everyone is talking about. I am on travel so I have yet to read the paper. James Pethokoukis has a helpful post. He concludes

On the downside, less labor dynamism “goes hand in hand with a slower arrival rate of new job opportunities” which “increases the risk of long jobless spells” and hampers the ability to “switch employers so as to move up a job ladder, change careers, or satisfy locational constraints.” When Americans are on the move, America is on the move. And right now, we aren’t — with evidence to suggest bad government policy shares a large chunk of the blame.

Pethokoukis also posts on a paper by David Autor that sounds interesting.

Edward Lazear on JOLTS

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He writes,

During the typical month when jobs increase by about 100,000, 5.1 million workers are hired and five million separate from their jobs, resulting in a net change of +100,000 jobs.

…more hires are needed, specifically about 5.2 million in the average month. We are just past the halfway point in getting hiring back to normal levels.

Pointer from John Cochrane.

The AS-AD story is that there is still not enough aggregate demand to stimulate enough new hires per month to overcome (new job separations per month + labor force growth + excess workers accumulated over the past six years of weak AD).

The PSST story is one of huge frictions that keep people from working in the market economy. One friction is that as technology and other factors change in the economy, the discovery process of new ventures does not keep pace. Another source of friction is government policies that reduce supply and demand in the labor market.

I doubt that there is an empirical method of distinguishing between these two stories. However, I would note that in the post-2008 period there are relatively few cases of workers getting laid off and returning to their old jobs. If there were large numbers of such cases, that would suggest that the problem of discovering new patterns of sustainable specialization and trade was relatively unimportant, and it would incline me toward the AS-AD story.

Steven Braun vs. Brad DeLong

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Braun as a co-author writes,

the US has enjoyed a sustained economic recovery that has exceeded most contemporaneous and historical financial crisis benchmarks. Up until a year ago, the unemployment rate was falling by an average of 0.7 percentage points per year, roughly tracking the more successful historical experiences, and well exceeding the norm following a financial crisis. In the past year, the pace of the decline in the unemployment rate has doubled. As a result, the official unemployment rate is 83% of the way back to its pre-Global Crisis average. A variety of other indicators–such as broader measures of labour market underutilisation that include discouraged workers or marginally attached workers as well as unemployment rates for different demographic groups–show similar magnitudes of recovery

DeLong writes,

But I look at 25-54 [year-olds]. The employment rate is down from 79.9% in 2007 to 76.6% in July 2014–3.3%-points less, compared to 4.0%-point a fall from 63% to 59% over the entire population. The participation rate is down from 80.8% in July 2014 compared to 83.1% for 2007–2.3%-points, compared to the 3.1%-point fall from 66.0% to 62.9% over the entire population.

Pointer from Mark Thoma.

Ordinarily, I would side with Braun, for two reasons. First, he is a gentle, soft-spoken guy. Second, he knows labor market data better than anybody I know.

In fact, right now I find DeLong’s take more compelling. But if Braun were to convince me that I am wrong, it would not be the first time he has done so.

UPDATE: DeLong strengthens his case.