The Mysterious Labor Market

Gene Sperling is unhappy with reporter’s and commentator’s rosy view of the labor market.  Better than expected is not necessarily the same as good:

Are We Lowering Our Standards for Job Growth?, Gene Sperling, Bloomberg: … the 207,000 gain in jobs in July beat both market expectations and was a vast improvement over typical monthly job growth during this recovery. Yet … there has been a disturbing tendency among both commentators and the news media to start using the terms ''better than expected'' and ''good'' without distinction. It seems that everyone got so used to dismal job growth -- and even job losses -- in the first 18 months of this recovery that diminished expectation led many to cheer any report that was into six digits. Consider the following: during the previous four recoveries that lasted 44 months or longer, job growth averaged … 285,000 jobs a month. But job growth in this recovery has been a fifth that rate … only 66,000 jobs a month. … I don't claim to fully understand why job growth has been so weak. … why is this job recovery weaker than all other job recoveries? ...

There may be a number of mutually reinforcing factors that have discouraged employers from bringing on new full-time workers. … we have seen increased risk and uncertainty in the fiscal health of the U.S. economy. … rising labor force competition overseas, especially from China and India. … rising costs for health insurance and benefits. … these concerns have pushed companies to go to even greater lengths to boost productivity by squeezing more out of investments in computers and other technology 

Dare we call it a labor market “conundrum?”  I’d rather not, I’m getting tired of that word, but it is a mystery and solving that mystery is an important task.  Labor typically lags behind output in a recovery, but the lag seems to have increased even further this time.  Until we understand why this has occurred, designing policies to address labor market problems will be difficult.

Comments

[pgl]

Gene captures my view perfectly!

[spencer]

Weak job growth is the flip side of strong productivity.

In the old high productivity era of 1960-74 productivity growth was about 66% of real gdp growth.
In the low productivity era of 1975-95 it was about 50%
of real gdp growth. since 1995 it has been almost 90% of real gdp growth.

this means that in the old days a 1% increase in real gdp was accompanied by a 0.3% increase in employmnet.
From 1975 to 1995 this relation ship was about 0.5.
But now a 1% increase in real gdp only generates a 0.1% increase in employment.

The good of high productivity is accompanied by the bad of weak employment.

[anne]

Yes; why should we be at all surprised by a moderate or weak labor market? Productivity growth has been high the last 5 years, population growth is moderate, so economic growth could have been higher than it was and should have been higher to stimulate more employment and wage and benefits increases. From the middle of the 1990s, responsible fiscal policy cut into government debt and allowed the Federal Reserve to experiment with low interest rates that in turn contributed to higher growth and higher employment.

[ken melvin]

What if none of the 207,000 jobs were as good as those lost? Via Stephen Pizzo http://www.newsforreal.com

Well, yes, 207,000 is a very pretty number -- as long as you don't look too closely at it.

26,000 (about 13%) are tax-supported government jobs.
177,000, or 98%, are in the domestic service sector, such as,
30,000 food servers and bartenders,
28,000 health care and social assistance,
12,000 real estate, 6,000 credit collection agencies,
8,000 transit and ground passenger transportation,
50,000 retail trade and 8,000 wholesale trade.
7,000 were manual construction jobs, most of which were filled by Mexican immigrants,
"Not a single one of these jobs produces a tradable good or service that can be exported or serve as an import substitute to help reduce the massive and growing US trade deficit. The US economy is employing people to sell things, to move people around, and to serve them fast food and alcoholic beverages. The items may have an American brand name, but mainly made off shore. (For example, 70% of Wal-Mart’s goods are made in China.)" Paul Craig Roberts, Hoover Institute Senior Fellow

[knzn]

Without question, part of the reason for the slow job growth is that the working-age population is growing more slowly than in other recent recoveries. (The children of the baby boomers had reached working age before this recovery began.) In theory, the rest of it could be explained by a decline in labor force participation: that is, the Fed has deliberately kept the recovery slow, reacting to the observation that fewer people are looking for jobs, and not wishing to produce an excess-demand situation that would cause inflation.

Personally, I don’t buy that: there is little evidence that businesses in the aggregate are having a harder time finding workers, so I’m inclined to view the low labor force participation as a reaction to slow job growth rather than a cause. However, the Fed has gotten monetary policy pretty close to neutral already. Obviously the Fed is satisfied with the pace of the recovery, and I would suggest that the only reasonable explanation for the slow job growth is that the Fed likes it that way. Otherwise, they wouldn’t be raising rates. It’s not the labor market but the Fed that is mysterious.

[Jim Welsh]

According to NBER, the current expansion began in November 2001. Most analysts use that date to measure job growth, when comparing the current expansion with other post World War II recoveries. What if NBER is worng about the start date. Heresy you say? Look at state tax revenues. They didn't begin to grow until the second quarter of 2003, which suggests the real recovery didn't begin until well after NBER says. This also explains why job growth was so weak in the first 18 months of NBER's 'recovery'. This doesn't change the fact that the current recovery has been comparatively weak.

[Dave Schuler]

Sperling writes:

these concerns have pushed companies to go to even greater lengths to boost productivity by squeezing more out of investments in computers and other technology

I wish that Sperling had written out of investments in computers (which they made some time ago). The sluggish numbers in the computer and technology sector don't support the notion that companies are doing a lot of new buying in that area.

ken melvin's point above is also well-taken. Health care is heavily subsidized by the government. So government (and its client sectors) are the largest growth sectors. Is that the prescription for future economic growth?

Meanwhile, I have a not-entire-on-the-subject question. I keep running into more and more people who are working 50, 60 or more hours in total at multiple (presumably) minimum wage jobs. How are these counted in the household survey of employment?

[camille roy]

"The good of high productivity is accompanied by the bad of weak employment."

Nope. The "good" of high productivity is accompanied by stagnant and declining wages and weak DOMESTIC employment.

In other words, all benefits of growth are flowing into the pockets of the rich. We're in another robber baron era.

[bakho]

The loss of MFG jobs dates way back into the Clinton administration. At the time it was "not a problem" because the MFG jobs were being replaced with the "new economy" tech jobs. The last recession saw a decrease in the tech jobs, so we had overall job loss. We are still losing mfg jobs. Where is the new sector that is creating jobs?

Spending to repair, improve and build infrastructure?
Fitting and refitting buildings to conserve energy?
Production of alternative energy and environmental equipment?
Converting the auto fleet to hybrid technology?
Nanotech manufacturing?
Stem cell based goods?
Building muni wifi systems?
Upgrading K12 for new communication systems?

Kevin Philips in Wealth and Democracy charts the history of economic bubbles and recoveries in the US. He states that the sector that leads the economy out of recession is never the one that collapsed going into the recession. Do economies sometimes get stuck in relative overcapacity until the next big thing appears?

FDR would have had a few ideas on how to address the labor problems. Is the labor market truly a problem created by the Fed? (after all fed rates were at 1% and are still below "neutral"). Or is it a problem better addressed by fiscal policy and attention to preparing for the future?

[donna]

"The children of the baby boomers had reached working age before this recovery began"

'Scuse me, but as a trailing edge boomer, I'd like to point out my 19 yo still doesn't have a job, and the younger son isn't 16 yet.

[William Polley]

Jim writes:

"According to NBER, the current expansion began in November 2001. Most analysts use that date to measure job growth, when comparing the current expansion with other post World War II recoveries. What if NBER is worng about the start date."

I address that issue indirectly in my latest post.

[knzn]

bakho: The weak labor market was not created by the Fed, but it is tolerated by the Fed, which has the power to do something about it. Almost certainly, we would have stronger job growth if the Fed had kept interest rates at 1%. In 2003, a fiscal response was clearly necessary, and we got it in the Bush tax cut (maybe not the ideal response, but better than nothing). The Fed will neutralize any fiscal response (such as the highway bill) that gets tried today. Indeed, the Fed may go beyond neutralizing the response, because, in the presence of a large deficit, the Fed may feel the need to be extra-vigilant against any fears of inflation. The only way to create jobs is for a lot of people to start looking for jobs, and then the Fed will allow the jobs to be created.

So all you students and stay-at-home moms and whoever you are that aren’t looking for jobs, get out there and do your patriotic duty! Drop out of school, put your kids in day care, and start reading the want ads! (Actually, you could stay in school and keep taking care of your own kids: reading the want ads these days won’t take up much of your time.)

[bakho]

In spite of what Bush says about Transportation bill and jobs, the hard truth is that the new transportation bill at $285 Billion over 6 years replaces a 6 year $218 Billion bill that expired. Given the less than $70 Billion increase (and factor in inflation), the new spending bill would seem to be no more than a continuation of old spending. We can argue that the new bill directs more money to "Pork" projects but creating "new" jobs is not going to happen. Preventing additional job loss by cutting Transportation spending is the best that can be attributed to the transportation bill.

Further, I don't buy the argument that a Fed rate of 1% will create a lot more jobs than a Fed rate of 3.5%. Somewhere between 1% and 3.5% the Fed hits the liquidity trap. I would like to see the evidence that lowering the Fed rates to 1% created large numbers of new jobs or that raising the rates to 3.5% has cost jobs. The best evidence of creating jobs is the construction boom in parts of the country. But the construction boom is toast as major parts of the country are overbuilt and occupancy rates have dropped.

Lowering the Fed rates will only create jobs if there is pentup demand for investment capital that will be used to create jobs in the US. Where is this pentup demand when overcapacity in many sectors still exists and many of the best investments are still overseas and involve movement of jobs from the US to offshore? If there is a huge unmet demand for investment capital, why are long term bond rates so low?

There is a range of Fed rates where small movements in the rate can have a lot of traction and influence employment. Below that range or above that range, it takes rather large movements in Fed rates to have much of an effect. Much of what the Fed is currently doing is incrementally feeling their way out of the liquidity trap zone. They will move rates upward until they hit a point where the rates have some traction. Since they started raising rates, I don't see a lot of evidence of much traction. Can you point me to some evidence that recent increases in the Fed rate have diminished investment?

[knzn]

bakho: I could buy your argument that monetary policy won’t work in this range if it were being tried and not working. It’s true, it _might_ not work, but since the Fed is deliberately moving toward a neutral policy, their action indicates they are satisfied with what is happening. And if they are satisfied with what is happening now, they will see a need to tighten more aggressively if they see a fiscal stimulus likely to produce a stronger recovery. Nobody doubts the Fed’s ability to slow down a recovery with tight policy (as opposed to the “moving toward neutral” policy we have now). Therefore fiscal policy (or any other non-monetary demand-side policy) won’t work. Whether or not monetary policy is an effective stimulus, it is an effective limit on growth.

It would be very difficult to produce evidence one way or the other on whether recent increases in short-term rates have diminished investment, because there are lags in the process. There is plenty of historical evidence on the subject. In any case, if the Fed were to attempt a more pro-growth policy, it would be effective in large part through a weakening dollar rather than through investment.

How can there be a liquidity trap “between 1% and 3.5%” ? A liquidity trap is when people are have so much liquidity preference that the Fed can supply unlimited money without getting rates to go down any further. Obviously the Fed did manage to get rates down to 1%. In theory 1% might have been a liquidity trap, but I very much doubt there was a true trap much above 0%.

You say “the construction boom is toast as major parts of the country are overbuilt.” I agree that perhaps the boom is toast, but I would suggest that is because the Fed has been raising interest rates. The "overbuilt" status depends on how attractive house-owning is, which depends on the interest rate.

[bakho]

Attractiveness in house-owning is the total cost of house plus interest compared to renting and investing the capital otherwise tied to the house, elsewhere. In an overbuilt area, renting may be a much better deal.

As for liquidity trap, Krugman has resurrected this idea to explain late 90s Japan economy. "An economy is in a liquidity trap if aggregate demand consistently falls short of productive capacity despite essentially zero short-term nominal interest rates."

http://www.pkarchive.org/japan/japtrap.html

A "zero short-term nominal interest rate" of course is inflation dependent. I do not think we are anywhere near a liquidity trap at 3.5%. However, is the approach to a liquidity trap like falling off a cliff? Probably not. As interest rates approach the zero short-term nominal interest rate, there is a loss in traction.

We are still in a situation where demand for US goods and services is consistently below capacity in most sectors. No sector shows this more than parts mfg where demand for US produced parts has dropped significantly. The demand for labor has decreased even more because of increases in productivity.

Certainly we should be looking at comparative advantage to understand the slow job creation in the US.

IMHO, these are not problems easily solved by adjustment of Fed rates and these attempts result in little traction to Fed actions (Although, I think that raising rates by another 1% would get a lot of traction and 2% might crash the economy). When capital and investments are more global, it is more difficult to use interest rates to specifically target domestic employment. The Fed (in its wisdom) targets inflation, not employment. Thus the Fed will raise rates in the face of "wage inflation". How long has it been since the US suffered from serious "wage inflation"? For a variety of reasons there is currently a very weak link between domestic employment and Fed rates.

[bakho]

I would also suggest that recent raises in the Fed rate have yet to have a large effect on home mortgage rates:

http://www.hsh.com/mtghst.html

People in the 1980s had mortgages over 10%.

[knzn]

Raises in the federal funds rate have certainly affected rates on ARMs and other mortgage vehicles that depend on shorter-term rates. And in recent weeks, it seems they have begun to affect regular mortgages.

The Fed primarily targets inflation, but it does so using employment statistics (particularly the unemployment rate) as important intermediate indicators. It is clear that the Fed gets worried when unemployment threatens to go below 5%. But in any case, this has nothing to do with capital being global. More global capital markets simply mean that the exchange rate becomes a more important mechanism for the transmission of monetary policy.

Specifically because the Fed targets inflation, trade issues and productivity cannot explain the slow job growth (unless we actually hit a liquidity trap, as perhaps we did in 2003). Foreign competition and rising productivity have negative direct impacts on employment, but they also reduce inflation and thus make the Fed more willing to tolerate higher employment. Foreign competition and rising productivity are reasons that the Fed has followed a “measured” tightening policy rather than a rapid one which would have reduced employment.

[bakho]

I thought the "measured tightening" was supposed to allow time for adjustment and for people to anticipate the next Fed rate change? Isn't transparency in general a good thing?

In the late 90s, why did the Fed raise rates? Was employment the reason? Why is there not a balance between Fed monetary policy and fiscal policy. When we are running $400 Billion deficits, doesn't that "loose fiscal" policy demand a tighter monetary policy in response? Since the deficit is decreasing, is this why the Fed should reconsider its move to neutral?

In 2000, fiscal policy was collecting 20.9% of GDP in taxes and spending only 18.4%. Why was this not considered sufficient brake on the economy? Why did the Fed raise rates considering that the fiscal policy in place was already slamming the brakes?

Doesn't fiscal policy have to "set the table" in order for monetary policy to be effective? If one looks at an extreme case of an underdeveloped economy, one could go in with a very low interest rate but the effect would be diminished because the infrastructure necessary for return on investment is absent. Does this apply to our current economy? Even if investment capital is available, investment opportunities that create jobs are not available? Could a different fiscal policy make investment opportunities?

In the current economy, the wealthy are doing quite well and corporate profits are high. However, the middle class are not sharing the fruits of the current economic expansion. Is monetary policy the proper tool to correct this? Or is monetary policy too blunt a tool and a different fiscal policy needed?

I am of the opinion that bad monetary policy can make the situation worse, but that the best monetary policy cannot fix our current employment and wealth distribution issues. That requires a different fiscal policy.

[knzn]

I agree that wealth distribution issues have to be addressed through fiscal policy. As for employment, however, I think fiscal policy cannot be effective unless it has the cooperation of monetary policy, which, in general, it won’t have. Occasionally they do work together (as in 2003); mostly they try to offset (as in 1982 or, in reverse, 1993). (The other problem with using fiscal policy to manage employment is that the government seldom does a good job of it. The Fed bats maybe .350; Congress bats about .150)

But the behavior of the private sector usually has a bigger effect than either fiscal or monetary policy. That’s why the Fed tightened in 2000 and loosened in 2001. The private sector was running an aggressive “high-employment policy” in 2000, which the Fed sought to offset, and the private sector subsequently switched to a “low-employment policy” which the Fed again sought to offset. The Fed’s current slow move toward neutral indicates that it is satisfied with what the private sector and the government are doing. If either the private sector or the government try to stimulate the economy more rapidly today, the Fed will be unhappy and move from neutral to tight.

[bakho]

So if the Fed is happy with the rate of economic expansion, corporate profits are up, productivity is up, but not enough new jobs are being created. Isn't a solution for the government to increase taxes on the wealthy and spend that money on worker retraining and infrastructure projects that utilize the unemployed? Isn't another solution to raise minimum wage so that the lowest paid workers get a bigger piece of the pie?

I know this prescription is unpopular with our governing elites and the media, but shouldn't this have the support of most Americans and be better for the economy in the long run?

[knzn]

Interesting. I don’t think worker retraining would help much, because today’s low level of help wanted advertising suggests that businesses are not looking for workers, so there’s nothing to retrain them for. I would certainly support higher taxes on the wealthy, but I don’t think spending the money on infrastructure would help much unless we get to the point where the Fed is once again running out of ammunition. (A smaller government deficit also might have a positive psychological effect on business confidence, and the decreased borrowing would tend to weaken the dollar, thus creating more export jobs.)

The minimum wage is an interesting idea. The textbook argument is that minimum wages reduce employment by making hiring more costly, though the empirical evidence is mixed. However, if a higher minimum wage gives people more incentive to look for work, the increase in job-seeking might help convince the Fed that we need more jobs. By a similar mechanism, extending unemployment benefits might have the paradoxical effect of increasing employment.

[bakho]

Minimum wage increase is LONG overdue. More than 4 years and counting. Increasing minimum wage greatly affects teen workers who spend every cent they make. I am thinking it would boost demand. I suspect that high gas prices greatly reduce the amounts teens spend on other items.