Category Archives: labor market

Probably Not Due to AD

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The Wall Street Journal reports,

The employment rate of Italians under 40 fell nine percentage points since 2007, while it rose the same amount for those between 55 and 64 years, according to Eurostat.

The article points to high fixed costs of hiring works, which holds down employment of young people and leaves them only with short-term, temporary jobs. Read the whole thing. One more excerpt:

Employers in many countries are reluctant to hire on permanent contracts because of rigid labor rules and sky-high payroll taxes that go to funding the huge pension bill of their parents.

Don’t think it couldn’t happen here.

Data to Ponder

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It comes from William Emmons, but I cannot find the presentation, which is referenced here. I got as far as I did by following a pointer from Tyler Cowen.

Emmons shows median real income for households headed by college graduates roughly constant from 1991 to 2012, with median real income over that same period falling over 15 percent for households headed by those without college degrees.

Some remarks:

1. I would guess that the share of households headed by someone with a college degree has gone up, so that perhaps overall median household income has gone up. And mean incomes have probably gone up even more, because the mean includes high-salary individuals, successful investors, and entrepreneurs.

2. This looks like workers without college degrees becoming ZMP.

3. Other factors of production, namely capital and foreign workers, are putting downward pressure on American wages.

Disability and Employment

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Sarah Portlock of the WSJ reports,

In 2013, just over one in six — or 17.6% — of people who were disabled had a job, down slightly from the prior year. The report tracks workforce characteristics of people with a disability, which includes hearing, sight, cognition, mobility or other impairments.

…The Labor Department report comes as new regulations require federal contractors to ask their employees if they have a disability in an effort to reduce joblessness in the community. Companies must employ a minimum of 7% disabled workers, or prove they are taking steps to hire more, or else they could face penalties or lose their government contracts.

In the first paragraph, she links to a report from the Department of Labor.

Government policies shift the supply curve of disabled workers to the left, by offering benefits for not working. The second paragraph describes a policy to shift the demand curve to the right. What would standard economic analysis predict?

The Federal Government and Occupational Licensing

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Morris Kleiner writes,

There is good reason for workers in licensed fields to push for the laws. Jobs in a service-oriented economy are more likely to be licensed, which raises wages by about 15 percent, as I found in research with the Princeton economist Alan B. Krueger, the former head of President Obama’s Council of Economic Advisers. This is largely because of the ability of regulated professions working through state legislators and regulatory boards to limit the supply of practitioners and to drive up costs to consumers.

What can the Federal government do about this? Some options:

1. Require states to accept licenses from other states unless there is a compelling case that other states’ qualifications are not relevant (might be the case with lawyers, for example, because you need to know a different set of laws).

2. Strong-arm states by making federal aid for worker training, unemployment benefits, and other programs conditional on a state getting rid of anti-competitive licensing laws.

3. Pass a “right to provide service” law that permits any firm to provide a service, regardless of whether it uses licensed personnel. For services that potentially endanger consumers, require providers to undergo periodic audits to ensure that their safety practices are state of the art. Also, require service providers to obtain insurance against lawsuits for fraud or malpractice. This would lead the insurance companies regulate the service providers. Perhaps such a law could only apply to firms that do business in more than one state (I am really fuzzy on how the Commerce Clause separates state from federal power these days. My sense is that it doesn’t.)

Scott Sumner on the German Jobs Miracle

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He writes,

So what’s the real explanation for the German success? That’s pretty obvious; the Hartz reforms of 2003 sharply reduced the incentive to not work, and sharply increased the incentive to take low wage jobs. As a result, today Germany has lots of very low wage jobs of the type that would be illegal in France or California. (Germany has no minimum wage.)

The Real Inequality Problem

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John Cochrane writes,

The worry is that we are more and more bifurcating into a market with a small number of “permanent,” high benefit, high hours worked, career jobs, and a larger group of “temporary” employees, limited in hours and incidentally limited in career and human capital development.

That sounds a lot like the academic job market. The tenured professors on one side of the inequality gap, and the adjuncts on the other.

But never fear. Progressive policies are here to solve exacerbate the problem. Casey Mulligan writes,

Under the Affordable Care Act, between six and eleven million workers would increase their disposable income by cutting their weekly work hours. About half of them would primarily do so by making themselves eligible for the ACA’s federal assistance with health insurance premiums and out-of-pocket health costs, despite the fact that subsidized workers are not able to pay health premiums with pre-tax dollars. The remainder would do so primarily by relieving their employers from penalties, or the threat of penalties, pursuant to the ACA’s employer mandate. Women, especially those who are not married, are more likely than men to have their short-term financial reward to full-time work eliminated by the ACA. Additional workers, beyond the six to eleven million, could increase their disposable income by using reduced hours to climb one of the “cliffs” that are part of the ACA’s mapping from household income to federal assistance.

Brad DeLong’s Hierarchy of Work

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He writes,

We (1) move things with large muscles; (2) manipulate things with small muscles; (3) use our hands, mouths, brains, eyes, and ears to make sure that ongoing processes and procedures stay on track; (4) via social reciprocity and negotiation try to keep us all pulling in the same direction; and (5) think up new things for us to do. The coming of the Industrial Revolution –the steam engine to power and the metalworking to build machinery — greatly reduced the need for human muscles and fingers for (1) and (2). But it enormously increased (3), for all those machines needed to be minded and all of that paper needed to be shuffled. Each improvement in machines made each human cybernetic control element more valuable as well.

Think of (1) as working without tools. (2) is working with tools, but without machinery. (3a) is working with machinery in large organizations. (3b) is working in middle management in large organizations. (4) is managing large organizations, but without creativity and innovation (I think of accountants, m. (5) is creativity and innovation.

Brad’s point is that over historical time, you can watch machines move up the food chain. Today, the computer revolution is in the process of taking away jobs at level (3). The question is whether it is possible to find matches at level (4) and level (5) for most workers, or whether they are instead doomed to a lower-level existence.

Along similar lines, see Kevin Maney’s column, which I arrived at via Irving Wladawsky-Berger (who writes that “larger numbers of people will have to invent their own jobs”) by following a pointer from James Pethokoukis.

Technology or the Safety Net?

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The Financial Times reports,

Non-store retail, which includes online shops, recorded a boom in sales – up 31 per cent to $380bn. But the number of establishments rose only 12 per cent to 66,339 while employment in the sector was down slightly.

Pointer from Tyler Cowen. The gist of the article is that the U.S. economy is becoming more capital intensive.

Casey Mulligan, who gave a talk yesterday on his book The Redistribution Recession, says that 2/3 of the shortfall in employment can be explained by additions to the safety net. The big ones are extending unemployment compensation from 26 weeks to 99 weeks and taxpayers now supplying 65 percent of the cost of COBRA (health benefits) for people who lose jobs. Mulligan combines the various safety-net enhancements made since 2007 with standard estimates of how the “wedge” between the net gain to the worker from employment and the cost of compensation to employers affects hours worked, and that is how he arrives at his 2/3 figure.

In short, the economy has become more capital intensive since 2007 in large part due to the expansion of the safety net. Mulligan pointed out that this does not mean that the expansion was wrong, but he says you should not expect to return to the same rate of labor force participation that we had a few years ago as long as the new measures remain in place. And it will get worse once health care reform takes hold–including many Republican proposals as well as Obamacare. I do not have details on how health reform affects employment–that is the topic of Mulligan’s new book.

Mulligan would like suggestions for a title for the new book. I might suggest “Side Effect: Health Care Reform and the Job Market”

The Labor Market: Four Takes

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1. Josh Barro writes,

For four decades, even in stronger economic times, wage gains have not kept pace with economic growth. Wages and salaries peaked at more than 51 percent of the economy in the late 1960s; they fell to 45 percent by the start of the last recession in 2007 and have since fallen to 42 percent.

I would note that a very important part of that trend is the shift from “straight” wages and salaries to other forms of compensation, notably health insurance. Higher payroll taxes also play a role. The share of total compensation to GDP held up fairly well until recently. One might argue that with offshoring, capital-labor substitution, and the relentless climb of non-wage benefits costs, the elasticity of demand for labor is starting to yield declines in labor income.

2. Catherine Rampell writes,

The share of people getting laid off each month — as well as, more disturbingly, the shares getting hired and quitting their jobs — is near record lows. That’s according to Labor Department data released this week and calculations from John Haltiwanger , an economist at the University of Maryland. Haltiwanger estimates that private-sector layoffs, hires and resignations are 21 percent to 26 percent below their rates two decades ago.

This is important information, and Rampell wisely points out that there are a number of plausible explanations, with rather divergent policy import.

Incidentally, I agree with Tyler Cowen that it is good to have Barro and Rampell joining the ranks of columnists. I look forward to op-eds that I might actually have to read in order to find out what they have to say.

3. Bill Gates says,

I think tax structures will have to move away from taxing payroll. … Technology in general will make capital more attractive than labor over time. Software substitution — whether it’s for drivers or waiters, nurses … it’s progressing. And that’s going to force us to rethink how these tax structures work in order to maximize employment given that capitalism in general over time will create more inequality, and technology over time will reduce demand for jobs, particularly at the lower end of the skill set. We have to adjust, and these things are coming fast. Twenty years from now, labor demand for lots of skill sets will be substantially lower, and I don’t think people have that in their mental model.

James Pethokoukis points out, as I would, that Gates’ views align with a growing literature on this topic.

4. Mark Perry writes,

one of the reasons for the disappointing monthly employment reports is the persistent weakness in the public sector employment, which is offsetting the relatively healthy increases in private sector hiring that is 63% greater than private job creation during the last recovery.

I am not sure that his numbers line up with his rhetoric. Relative to the labor market as a whole, the weakness in public sector employment strikes me as pretty small. To put it another way, if you were to restore all of the government jobs that have been lost since the start of the recession, the employment-population ratio would be maybe .3 or .4 higher than it is now, but still about 4.0 below what it was before the recession hit.

I suspect that state and local governments have been constrained by low property taxes and increases in Medicaid spending. Also, if they have to hold down employment because of the strain of pensions, that would not surprise me.

Labor Force Participation Chartfight

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1. John Cochrane presents a chart showing that over the last 25 years, the employment-population ratio tracks the ratio of people aged 25-54 to the total population.

Pointer from Mark Thoma. The chart is from Torsten Slok of Deutsche Bank.

2. John Taylor has a chart showing that the labor force participation rate is several percentage points that which was projected several years ago based on demographics. The chart comes from a paper by Chris Erceg and Andy Levin.

The first chart suggests that most of the decline in the employment/population ratio in recent years is due to demographic changes. The second chart suggests the opposite. How to reconcile the two?

3. And then there is Binyamin Appelbaum:

In February 2008, 87.4 percent of men in that demographic had jobs.

Six years later, only 83.2 percent of men in that bracket are working.

Pointer from Tyler Cowen.

My verdict is that Slok’s chart, referred to by Cochrane, is misleading. Here is the chart:

The way that the two lines are superimposed makes it appear that 2007 was a glorious year of over-employment, and the plunge in the employment-population ratio looks like a reversion to trend. Suppose you were to slide the blue line up vertically so that it just touches the red line at the peak in 2007. That would make the chart look much more like Appelbaum’s, shown below:


Some other issues:

–I suspect that some of the drop-off in employment has occurred among youth, who are outside of the 25-54 bracket that Slok uses.

–Another issue is what you think should have happened outside Slok’s bracket at the other end, namely 55-64 year olds. These are baby boomers, so that their share of the labor market has been soaring. The most likely reconciliation of the two charts is that the baby boomers have been retiring early at rates higher than historical norms.

As far as labor force participation goes, is 55 the new 65? If so, then somebody should trace out what that means for Social Security. Fewer people paying in and more people collecting disability cannot be a good thing for solvency.

Update: Cochrane offers another take, more nuanced.