Category Archive for: Unemployment [Return to Main]

Tuesday, April 17, 2012

"An Election-Year Giveaway Unlikely To Create Any Jobs"

Bruce Bartlett:

Do Small Businesses Create Jobs?, by Bruce Bartlett, Commentary, NY Times: ... Congress is, of course, always keen to find ways of aiding small businesses, which are akin to mom and apple pie in its eyes. Just recently, it approved the JOBS Act, which is intended to ease access to credit by “emerging growth” companies. Congressional Republicans are anxious to enact a new tax cut for small businesses, as well. The Small Business Tax Cut Act, which was reported out by the House Ways and Means Committee on April 10, would give a one-year, 20 percent tax cut to every business with 500 or fewer employees.
The Joint Committee on Taxation estimates that it will reduce federal revenues by $46 billion. The committee report offered virtually no rationale for the legislation other than that small businesses are good and deserve a tax cut, period. The linkage between a small business’s tax burden and job creation, however, is tenuous at best. ...
The Tax Policy Center estimates that the benefits would accrue overwhelming to the wealthy, with 49 percent of the total tax cut going to those making more than $1 million.
There may be policies that would increase the number of business start-ups and aid employment this way. But an across-the-board tax cut for every small business, defined only in terms of employment, is nothing but an election-year giveaway unlikely to create any jobs whatsoever.

Instead, let's use the $46 billion this would cost (and mostly waste in terms of job creation) to build infrastructure. If it helps to sell it, make it infrastructure that would be useful to small businesses -- it can probably be argued that most infrastructure projects would help small businesses in one way or the other. This way, even apart from the better prospects for job creation from infratructure spending, at least we'll have something to show for the money when all is said and done.

Thursday, April 12, 2012

Are the Hawks Correct about the Fall in Productive Capacity?

There is a growing contingent at the Fed advocating interest rate increases sooner rather than later. I continue to think that is a mistake.

The reasoning from those who think it's time to begin reducing monetary stimulus is that the natural rate of output -- the full employment level of output -- has fallen so much that even though the recovery to date has been slow, nevertheless we are nearing potential output. Thus, any further push to increase output further could be highly inflationary.

Why do I think this is incorrect? I believe there are several types of shocks that can hit the economy. There are both permanent and temporary shocks to aggregate demand, and there are both permanent and temporary shocks to aggregate supply. As I explained here, analysts who conclude we are almost back to potential output may very well be confusing permanent and temporary shocks to aggregate supply.

As Charlie Plosser explained to me recently, it is difficult to sort aggregate demand and aggregate supply shocks. Aggregate demand shocks can produce supply shocks, and supply shocks can have an effect on demand. The explanation I was given by Plosser was, I think, intended to convince me that what look like aggregate demand shocks are actually the result of supply shocks. However, I think the explanation works better in the other direction. For example, repeating a previous argument:

When there as a large AD shock in the form of a change in preferences, say that people no longer like good A as it has gone out of fashion and have now decided B is the must have good, then there will be high unemployment in industry A and excess demand for labor and other resources in industry B. As workers and resources leave industry A, our productive capacity falls and it stays lower until the workers and other resources eventually find their way into industry B. When this process is complete, productive capacity returns to where it was before, or perhaps goes even higher. Thus, there is a short-run cycle in productive capacity that mirrors the business cycle.
Even a standard business cycle type AD shock will temporarily depress capacity and produce similar effects. Suppose that interest rates go up, taxes go up, government spending goes down, investment falls --pick your story -- causing aggregate demand to fall. When, as a result, businesses lay people off, close factories, etc., productive capacity will fall. It can be cranked up again, and will be when the economy recovers, but rehiring labor and taking equipment out of mothballs takes time. In the interim the natural rate of output falls and, just as with a change in the preference for good A versus good B, a negative aggregate demand shock can cause "frictions" on the supply side that temporarily increase the natural rate of unemployment. And there are many other ways this can happen as well.
The point is that there can be short-run cyclical AS effects, and failing to account for these can lead to policy errors.

So it may be true that productive capacity has fallen, but I beleive the fall is largely temporary, not permanent. (To be clear, I think there is a permanent component, but it is nowhere near as large as the inflation hawks are assuming -- i.e. the full employment target, once temporary effects have been cleared out of the way, is higher than the estimates that are behind the hawkery. Essentially, what I am arguing is that the temporary supply shocks are, in part, a function of AD shocks, but the effect of the AD shocks on AS wanes over time.)

If this is correct, policymakers should not be concluding that the shocks are permanent, throwing up their hands, and saying there is nothing more we can do. Instead, if, as I believe, much of the fall in productive capacity is temporary, then the job of policymakers is to make sure that employment recovers as fast as the temporary supply shocks wane. That won't be easy, employment so far has been very slow to recover and if that continues it's entirely possible that productive capacity will recover faster than employment. If policymakers try to freeze employment at a level that is too high out of misguided worries about inflation, then they will hold back the recovery and make this problem worse. That's the opposite of what they should be doing.

I could be wrong, which is what I'd like the hawks to consider. That is, what are the costs of being wrong versus the costs of being correct? My view is that the costs of doing too much -- the inflation cost -- is much lower than the costs of doing too little, i.e. the costs of higher than necessary unemployment (though see David Altig). I'm aware that we differ on this point, those in favor of relatively immediate interest rate increases see the costs of inflation as very high and it's this point that I hope will generate further discussion. In reality, how high are the costs of a temporary bout of inflation -- I have faith that the Fed won't allow an increase in inflation to become a permanent problem -- and are they so high that they justify erring on the side of doing too little rather than too much? I don't think they are, but am willing to listen to other views.

Wednesday, April 11, 2012

Monetary Policy: More or Less?

Narayana Kocherlakota recently says (and Jason Rave is not happy):

I would say that it would be appropriate to change the Fed’s current forward guidance to the public about the future course of interest rates. Currently, the FOMC statement reads that the Committee believes that conditions will warrant extraordinarily low interest rates through late 2014. My own belief is that we will need to initiate our somewhat lengthy exit strategy sometime in the next six to nine months or so, and that conditions will warrant raising rates sometime in 2013 or, possibly, late 2012.

But I hope that John Williams, and others with similar views, carry the day:

Let me summarize where the Fed stands in terms of achieving its congressionally mandated goals. We are far below maximum employment and are likely to remain there for some time. The housing bust and financial crisis set in motion an extraordinarily harsh recession, which has held down consumer, businesses, and government spending. By contrast, inflation is contained and may even fall next year below our 2% target.
Under these circumstances, it’s essential that we keep strong monetary stimulus in place. The recovery has been sluggish nationwide... High unemployment, restrained demand, and idle production capacity are national in scope. These are just the sorts of problems monetary policy can address. ...

The hawks will keep pushing to tighten sooner rather than later, so let's hope those who want to do more, or at least not do less, can at least produce the gridlock needed to keep current policy in palce.

Friday, April 06, 2012

Fed Watch: Labor Market Softens in March

Tim Duy:

Labor Market Softens in March, by Tim Duy: If the employment report falls on a holiday weekend, does it make a sound? Yes it does, at least when it comes in far below expectations, with 120k nonfarm payroll gain compared to a consensus of 205k. Treasury yields collapsed on the news, and are now once again hovering around 2 percent on the ten-year bond. In my opinion, this is yet another data point that confirms what has become my baseline view of this recovery - neither an optimist nor a pessimist should one be. The economy is grinding away at rate close to its potential growth rate, perhaps a little above. Certainly not a disaster in terms of expecting another recession, but also certainly also not a success story.
First off, should we be terribly concerned with the headline NFP number in and of itself? No. There is a lot of variance in the month to month changes:


Reading too much into a single data point is simply a dangerous game. During the first quarter of 2012, the average gain was 211k a month. Part of the story is likely that warmer weather boosted the numbers in January and February, and there was some give-back in March - though note again the variance of this number. You almost always need some story to explain the month to month deviations from the trend. The question is whether or not this one data point should deter you from believing the trend is intact. My view is that it should not. That said, if you thought the last two reports were really indicative of the underlying trend, I would say that that was overly optimistic. Slow and steady, slow and steady.
On the surface, some good news in that the unemployment rate continued to decline:


Still, the improvement was driven by a decline in the labor force, which fell by more than the decline in the number of unemployed. I tend to think Fed hawks will fixated on the decline in the unemployment rate itself rather than the underlying reason for the declines. One way to "solve" the unemployment problem is to drive people from the labor force, let their skills deteriorate, and ensure that a cyclical problem becomes a structural one. In other words, the view of St. Louis Federal Reserve President that the economy is operating near potential is almost certain to become a self-fulfilling prophesy given the unwillingness of the Fed to implement a more aggressive policy stance.
Support for the "structural not cyclical" view will be found in the persistence of long-term unemployment:


That said, if we were truly operating near potential, one would not expect the wages of those employed to continue to stagnate:


True enough, average hourly wages increased a nickel in March, but note that this was offset by a decline in hours so that average weekly wages fell. On net, not much help to support still weak disposable personal income growth:


For further evidence that the economy remains well below trend, note the ongoing high levels of those employed part-time for economic reasons:


An improvement, to be sure, but still a long way to go before the labor market is normalized.

As far as other views, a couple caught my eye this morning. The first was from spencer at Angry Bear:

The index of hours worked has been raising a red flag about the numerous other signs of stronger employment and an acceleration of economic growth. They are not showing the recent improvement that other employment data have been reporting Recently, unit labor cost has been rising faster than prices, implying margin pressure and very weak profits. To sustain profits growth, firms have to reestablish stronger productivity growth. The weakness in March employment is a strong indicator that business is trying to rebuild productivity growth and profits growth.

This bodes poorly for the sustainability of the recent upward trend in equities. Another issue is what does this mean for monetary policy? I think Ryan Avent (via Brad DeLong as the Economist server appears to be down at the moment) captures the general spirit:

This report will be widely analysed within the context of this year's political elections, despite the fact that the single most important influence on employment growth now and over the next four years will be the stance of monetary policy. As this report is consistent with recent Federal Reserve forecasts, indicating that the Federal Open Market Committee is satisfied with present employment trends, policy is unlikely to change in reaction to anything released today

The data is sufficiently disappointing as to not alter the view of the doves, and notably Federal Reserve Chairman Ben Bernanke, that there is no need to tighten policy in the near future, leaving the 2014 timing intact. Thinking about the trends as noted above, there is no reason on the basis of this report to believe that a significant deterioration in the outlook has or is about to occur, and thus no reason to expect this will nudge the FOMC toward another round of QE. This I find unfortunate because, as I noted earlier, the longer the Fed continues to operate policy along the post-recession growth trend the more likely it is that this will indeed become the new trend for potential output.

Bottom Line: A disappointing jobs report for those who expected the US economy was about to rocket forward, but one consistent with the slow and steady trend into which the US economy appears to have settled. And no reason to change the basic outlook for monetary policy - the Fed is on hold until the data breaks cleanly one direction or the other.

Jobs Report Shows Weakness. Will Policymakers Respond?

Here's my reaction to the jobs report:

Jobs Report Show Weakness. Will Policymakers Respond? (CBS MoneyWatch) COMMENTARY The Employment Report for March was weaker than many analysts expected. The unemployment rate fell slightly from 8.3 percent to 8.2 percent, and on the surface that seems like good news. But the 120,000 jobs created during the month was barely enough to keep up with population growth, the labor force participation rate actually fell from 63.9 percent to 63.8 percent, and the employment to population ratio also fell from 58.6 to 58.5 percent. Thus, the fall in unemployment reflects fewer people searching for jobs more than an uptick in job creation.

This is just one month's worth of data, and monthly data can be noisy so it's not time to panic yet. The recovery could pick up steam again next month. But the possibility that it won't pick up, e.g. because unseasonably good weather distorted the numbers for the last few months, has to be taken seriously by policymakers. ...[continue reading]...

Paul Krugman: Not Enough Inflation

The unemployed need more help from the Fed:

Not Enough Inflation, by Paul Krugman, Commentary, NY Times: A few days ago, Alan Greenspan ... spoke out in defense of his successor. Attacks on Ben Bernanke by Republicans, he told The Financial Times, are “wholly inappropriate and destructive.” He’s right...
But why are the attacks on Mr. Bernanke so destructive? ... The attackers want the Fed to slam on the brakes when it should be stepping on the gas... Fundamentally, the right wants the Fed to obsess over inflation, when the truth is that we’d be better off if the Fed paid ... more attention to unemployment. ...
O.K.,... let me take this in stages. First, about inflation obsession: For at least three years, right-wing economists, pundits and politicians have been warning that runaway inflation is just around the corner, and they keep being wrong. ... At this point, inflation is ... a bit below the Fed’s self-declared target of 2 percent.
Now, the Fed has, by law, a dual mandate: It’s supposed to be concerned with full employment as well as price stability. And while we more or less have price stability by the Fed’s definition, we’re nowhere near full employment. So this says that the Fed is doing too little, not too much. ...
To be sure, more aggressive Fed policies to fight unemployment might lead to inflation above that 2 percent target. But remember that dual mandate: If the Fed refuses to take even the slightest risk on the inflation front, despite a disastrous performance on the employment front, it’s violating its own charter. And, beyond that,... a rise in inflation to 3 percent or even 4 percent ... would almost surely help the economy. ...
Which brings me back to those Republican attacks and their chilling effect on policy.
True, Mr. Bernanke likes to insist that he and his colleagues aren’t affected by politics. But that claim is hard to square with the Fed’s actions, or rather lack of action. As many observers have noted, the Fed’s own forecasts indicate that ... it still expects low inflation and high unemployment for years to come. Given that prospect, more of the “quantitative easing” ... should be a no-brainer. Yet the recently released minutes from a March 13 meeting show a Fed inclined to do nothing unless things take a turn for the worse.
So what’s going on? I think that Fed officials, whether they admit it to themselves or not, are feeling intimidated — and that American workers are paying the price for their timidity.

The Change in Public Sector Employment During the Recovery is a Drag


Thursday, April 05, 2012

Fed Watch: Behind the "Trend is the Cycle"

Tim Duy:

Behind the "Trend is the Cycle", by Tim Duy: Via Mark Thoma, David Andolfatto finds evidence of a permanent component to recent job losses. Reviewing a recent paper (which I enjoyed) by Nir Jaimovich (Duke University) and Henry Siu (University of British Columbia), Andolfatto notes:

The conclusion is that jobless recoveries are due entirely to jobless recoveries in routine occupations. In this group, employment never recovers beyond its trough level, nor does it come anywhere near its pre-recession peak. This is in stark contrast to earlier recessions.

He further sees a smoking gun in this chart:


And again notes:

This last figure is quite dramatic. It shows how, prior to 1990, routine employment rebounded strongly following a recession. But since 1990, it appears not to rebound at all. Indeed, the pattern appears to be one of a precipitous decline in recession, followed by a period of relative stability in the subsequent expansion.

I have to admit that I was perplexed by Andolfatto's surprise with this result - the basic patterns of this chart should be easily recognizable as simply the path of manufacturing employment in the US:


That employment in this sector has not rebounded after the past two recessions is not exactly a secret (there is likely some construction element in the first chart as well, but I am putting that aside for the moment). That said, I think there is an interesting question here - should we define these job losses as primarily structural (supply) or cyclical (demand)? To be honest, I admit that I have gone back and forth on this topic.

If I am in a mercantilist frame of mind (see here), I would say this becomes an issue in the mid-1990's when China devalues and fixes the renminbi. This act of currency manipulation to gain a competitive advantage is ignored by the Clinton Administration, and the offshoring craze goes into hyperdrive. Non-durable goods manufacturing begins to slide immediately, and durable goods employment contracts during the 2001 recession and never rebounds as firms choose to restart production in China rather than the US. I anticipated the same after the 2007-2009 recession, a prediction that has not been entirely true.

Somewhere in here is also a construction story, in which the flow of capital into the US finds its way into the housing market, which in turn boosts construction jobs which are subsequently lost. The construction jobs would fall into the routine manual worker category that appears to have suffered from permanent dislocation.

Is this a structural story, or rather just an outcome of a global savings glut/demand shortfall? If domestic demand in China had been higher, wouldn't the Chinese current account surplus have been smaller? And shouldn't the same be true of Japan and Germany? And if this was the case, would the US current account deficit also been smaller, suggesting external factors were less of a drag on demand? And if that were the case, would job losses in manufacturing have been so severe? Would the housing bubble have erupted as it did? And would other sectors have grown more quickly to compensate for job losses in manufacturing?

What I am thinking is that in a world with a global demand shortfall combined with currency manipulation, international trade can become a zero-sum game that leads to dislocations that appear to be structural but are in fact largely cyclical or more broadly demand related.

Alternatively, rather than rely on the global imbalances story, you can argue that the drop in manufacturing is entirely the result of productivity increases. I really don't think this helps, as it doesn't explain why the displaced workers have not been entirely reabsorbed elsewhere in the economy. Remember, we used to argue that all those displaced workers would simply find jobs in the rapidly growing sectors of the economy. Apparently, this has yet to happen. It is kind of hard to argue that the problem is retraining or skills. Perhaps this is true in the short-run, but we are talking about trends that are nearly two-decades or more old. Surely a greater degree of adjustment should have happened by now. It is just as easy to believe that the demand is lacking to absorb the released resources (a euphemism, by the way, for fired workers), which fits with a global savings glut/demand shortfall story as well.

Moreover, a structural story doesn't answer the problem of sticky wages. If in fact the jobless recovery was simply an artifact of job losses for employees with routine skills, why is wage growth for remaining workers so muted? Why such a high proportion of zero wage gains?

Finally, I would add that if you believed that fundamentally a global demand shortfall and related imbalance story was at play, some rebalancing, due, for example, to a mixture of higher foreign wages and a weaker dollar, would have predictable impacts in stimulating export and import competing industries. Some evidence for this can be found in the upswing in durable goods manufacturing:


This is where I was wrong; it is more of increase than I would have expected given my mood in 2010. See also recent stories about the re-shoring phenomenon. For example, from the FT:

Jeff Immelt, General Electric’s chief executive, says the decision to put $1bn into the group’s domestic appliances business is “as risky an investment as we have ever made”.

He may well be right. The decision to bring back to Louisville, Kentucky, hundreds of jobs that had been outsourced to Mexico and China is emblematic of his strategy for GE. If it fails, it will be hung around his neck forever.

“Reshoring” production is a strategy being tried by many American manufacturers, as rapid wage growth in emerging economies and sluggish pay in the US erodes the labour cost advantage of offshore plants.

The US has added 429,000 factory jobs in the past two years, replacing almost a fifth of the losses during the recession.

Trend or fad? Too early to tell.

Bottom Line: I don't think the results Andolfatto cites should come as much of a surprise. If you were looking for a jobless recovery two years ago, the "routine" task sectors of construction and manufacturing were cause for concern. But I think the dynamics in those sectors can be explained in the context of a global demand shortfall rather than entirely structural phenomena.

Wednesday, April 04, 2012

"Recessions and the Cost of Job Loss"

From the NBER Digest:

Recessions and the Cost of Job Loss, NBER: ...Using Social Security records for U.S. workers covering more than 30 years (1974-2005), researchers Steven J. Davis and Till von Wachter explore the cumulative earnings losses associated with what they call "job displacement." They are particularly interested in the role of labor market conditions at the time of job displacement in determining the magnitude of these losses.
In "Recessions and the Cost of Job Loss" (NBER Working Paper No. 17638 [open link]), they find that for men under the age of 50 with three or more years of job tenure, job loss reduces the present value of earnings by an estimated $77,557 (2000 dollars). This amount is estimated over a 20-year period using a 5 percent annual discount rate. The estimated losses are even larger for men with more job tenure, but are smaller for women.
The researchers further find that earnings losses rise steeply with the unemployment rate at the time of displacement. If the unemployment rate at the time of displacement is less than 6 percent, then the average earnings loss equals 1.4 years of pre-displacement earnings. If the unemployment rate is above 8 percent, the average earnings loss equals 2.8 years of pre-displacement earnings. ...

Or, to put it another way, "For high-tenure workers who experience job displacement in a recession, the losses amount to about three years of earnings at pre-displacement levels and 19% of the present value earnings of otherwise similar workers who retain jobs."

The longer that the unemployment rate stays high, the larger the permanent losses -- losses that fall mostly on individuals who have done nothing to deserve such a fate except choose the wrong occupation, be born at the wrong time and enter the workforce during a recession, and so on. And there are societal costs as well that we all pay in one way or the other.

To say what ought to be obvious, but apparently isn't, we should be doing more than we are to help with job creation.

"The Trend is the Cycle"

David Andolfatto continues to press the case that the downturn in the economy has a large, permanent component:

The Trend is the Cycle, Macromania: Nir Jaimovich (Duke University) and Henry Siu (University of British Columbia) appear to have made a very interesting discovery. Evidently, there appears to be a very strong link between two much talked about phenomena: job polarization and jobless recoveries. ...

What's the bottom line? After separating jobs into various categories:

The conclusion is that jobless recoveries are due entirely to jobless recoveries in routine occupations. In this group, employment never recovers beyond its trough level, nor does it come anywhere near its pre-recession peak. This is in stark contrast to earlier recessions. 

And the prediction is that the routine jobs lost during the recession are gone forever. If so, then we are much closer to a full recovery than most people think and it's time to start considering reversing stimulative policies. However, as noted at the end of the post:

The work here is still very preliminary... Needless to say, it is hardly the last word on the subject.

There is plenty of evidence pointing in the other direction, i.e. plenty of evidence indicating the problem is cyclical and we are nowhere near full recovery.

With so much uncertainty remaining, the advice from Stevenson and Wolfers in a post earlier today about how policymakers should react when they are unsure of how strong the recovery will be is appropriate:

the cost of too little growth far outweighs the cost of too much. If we readily bear the burden of carrying an umbrella when there’s a reasonable chance of getting wet, we should certainly be willing to stimulate the economy when there’s a reasonable risk that doing nothing could yield a jobless generation.

The fact that the costs are asymmetric and what this means for policy -- it should lean against the more costly outcome -- seems strangely absent from policy discussions and decisions.

Tuesday, April 03, 2012

Fed Watch: More on Rigid Nominal Wage Growth

Tim Duy:

More on Rigid Nominal Wage Growth, By Tim Duy: Paul Krugman looks at the evidence on nominal wage rigidities here and sees additional reason to believe the primary economic challenge is a demand shortfall. He concludes with this point:

Oh, and someone is sure to chime in and say that this proves that the solution to unemployment is to make wages more flexible. No, it isn’t: in a liquidity trapped, deleveraging economy lower wages would actually worsen the situation.

It is important to emphasize this point, and Japan provides a good example. Via the Financial Times:

..Bonuses have been coming under heavy pressure in Japan for years as part of a wider effort to restrain incomes.

And while workers around the developed world have been complaining of a squeeze on incomes over the past two decades, in Japan thinner pay packets fuel wider deflation. That makes it even harder for the government to rein in its runaway debt and for the central bank to use monetary policy to boost growth...

...While policymakers bemoan the salary squeeze, political pressure is growing for heavy cuts to public sector pay as a quid pro quo for a proposed doubling of Japan’s 5 per cent consumption tax. Shortly after becoming prime minister last year, Yoshihiko Noda – already Japan’s poorest premier on record – gave himself a 30 per cent pay cut.

I think the role of role of bonuses in driving Japan's deflation is underappreciated. The bonus system allows for more flexible wages, thus allowing for the real possibility of negative nominal wage growth and thus deflation. In contrast, downward nominal wage rigidities in the US reduce the likelihood of deflation, but lessen the resolve of monetary policymakers to stimulate activity - for example, see the efforts by St. Louis Federal Reserve President James Bullard to argue that existence of low rates of inflation is evidence that the economy is operating at potential rather than see the flattening of the relationship between unemployment and inflation as a straightforward outcome of downward nominal wage rigidities.

Friday, March 30, 2012

"Are Unemployed Construction Workers Really Doing Better?"

I've been trying to get the Federal Reserve banks to engage more with the public through blogs, with economics bloggers in particular. We'll see how that goes, but it's encouraging to see that they are starting to converse and debate among themselves:

Are unemployed construction workers really doing better?, Pedro Silos and Lei Feng, macroblog: Two New York Fed economists, Richard Crump and Ayşegül Şahin, writing in Liberty Street Economics, have shared some interesting findings regarding developments in the labor market during the ongoing recovery. Their conclusion is that unemployed construction workers, according to several indicators, seem to be doing better than workers who lost jobs in other sectors. ...
These facts, according to the authors, provide support to the hypothesis that problems in the labor market cannot be blamed on the degree of mismatch between displaced construction workers and job vacancies in other sectors.
In this post, we present an alternative view of the fate of unemployed construction workers...

Hope to see more of this.

Skills Mismatch, Construction Workers, and the Labor Market

Via the NY Fed's Liberty Street Economics blog:

Skills Mismatch, Construction Workers, and the Labor Market, by Richard Crump and Ayşegül Şahin: Recessions and recoveries typically have been times of substantial reallocation in the economy and the labor market, and the current cycle does not appear to be an exception. The speed and smoothness of reallocation depend in part on the structure of the labor market, particularly the degree of mismatch between the characteristics of available workers and newly available jobs. Such mismatches could occur because of differences in skills between workers and jobs (skills mismatch) or because of differences in the location of the available jobs and available workers (geographic mismatch). In this post, we focus on skills mismatch to assess the extent to which the slow pace of the labor market recovery from the Great Recession can be attributed to such problems. If skills mismatch is much more severe than usual, we would expect the unemployment rate to remain higher for longer and the workers subject to such mismatch to have worse labor market outcomes.

We concentrate particularly on construction workers, who many have thought are prone to a high degree of skills mismatch because of the housing boom and bust. Contrary to this view, we find that (1) general measures of mismatch, after rising sharply in the recession, are now near their pre-recession level as they continue to display a pronounced cyclical pattern; and (2) construction workers are not experiencing relatively worse labor market outcomes. ...[continue reading]...

These two points support the argument I've been making that many of the structural factors that people are seeing are likely to be temporary and hence should not constrain monetary policy (i.e. to the extent that natural rates have changed, much of the change is temporary).

Thursday, March 29, 2012

Long-Term Unemployment Has Long-Term Effects

Travel day coming up, so a series of quick hits. Let's start with this. Long-term unemployment has permanent effects:

The Enduring Consequences of Unemployment, by Binyamin Appelbaum, Commentary, NY Times: Our economic malaise has spurred a wave of research about the impact of unemployment on individuals and the broader economy. The findings are disheartening. The consequences are both devastating and enduring.
People who lose jobs, even if they eventually find new ones, suffer lasting damage to their earnings potential, their health, and the prospects of their children. And the longer it takes to find a new job, the deeper the damage appears to be. ...

Maybe we should do something.

"Disentangling the Channels of the 2007-2009 Recession"

According to this, for now and into the foreseeable future, "jobless recoveries will be the norm":

Disentangling the channels of the 2007-2009 recession, by Jim Hamilton: Harvard Professor James Stock and Princeton Professor Mark Watson presented a very interesting paper last week at the Spring 2012 Conference for the Brookings Papers on Economic Activity. Their paper studied similarities and differences between the 2007-2009 recession and other U.S. business cycles.

Stock and Watson characterized the comovements over 1959:Q1-2007:Q3 of 198 different U.S. macroeconomic variables...

Their first question was whether the observed U.S. macroeconomic data continued to track those factors in the same way during the most recent recession and recovery as they had historically. Stock and Watson's answer was, for the most part, yes. ...

But if the Great Recession can be interpreted as normal responses to abnormally large shocks, what about the anemic recovery? Stock and Watson attribute this to a slowdown in trend growth rates... Again quoting from Stock and Watson's paper:

The explanation for this declining trend growth rate which we find the most compelling rests on changes in underlying demographic factors, primarily the plateau over the past decade in the female labor force participation rate (after rising sharply during the 1970s through 1990s) and the aging of the U.S. workforce. Because the net change in mean productivity growth over this period is small, this slower trend growth in employment corresponds directly to slowdown in trend GDP growth. These demographic changes imply continued low or even declining trend growth rates in employment, which in turn imply that future recessions will be deeper, and will have slower recoveries, than historically has been the case. In other words, jobless recoveries will be the norm.

So why are we talking about reducing rather than enhancing social support for the jobless?

Tuesday, March 27, 2012

The Economy’s Great Fall: Are the Losses Permanent?

DeLong and Summers, the debate over potential output, and whether Bernanke has the courage, foresight, and persuasiveness to follow Greenspan's lead:

The Economy’s Great Fall: Are the Losses Permanent?

I wrote this before Bernanke's speech on the labor market on Monday. He says, echoing the topic of the column:

Is the current high level of long-term unemployment primarily the result of cyclical factors, such as insufficient aggregate demand, or of structural changes, such as a worsening mismatch between workers' skills and employers' requirements? ... I will argue today that ... the continued weakness in aggregate demand is likely the predominant factor.

So maybe the structural impediment, inflation hawk types at the Fed will be vanquished after all. We shall see. [See Tim Duy's comments on as well.]

Saturday, March 24, 2012

"What Should Trade Negotiators Negotiate About?"

Robert Skidelsky:

...The target of all versions of fair trade is “free trade,” and the most damaging attacks on FAIRTRADE have come from free traders. In Unfair Trade, a pamphlet published in 2008 by the Adam Smith Institute, Mark Sidwell argues that FAIRTRADE keeps uncompetitive farmers on the land, holding back diversification and mechanization. According to Sidwell, the FAIRTRADE scheme turns developing countries into low-profit, labor-intensive agrarian ghettos, denying future generations the chance of a better life.
This is without considering the effect that FAIRTRADE has on the poorest people in these countries – not farmers but casual laborers – who are excluded from the scheme by its expensive regulations and labor standards. In other words, FAIRTRADE protects farmers against their rivals and against agricultural laborers.
Consumers, Sidwell argues, are also being duped. Only a tiny proportion – as little as 1% – of the premium that we pay for a FAIRTRADE chocolate bar will ever make it to cocoa producers. Nor is FAIRTRADE necessarily a guarantee of quality: because producers get a minimum price for fair-trade goods, they sell the best of their crop on the open market.
But, despite its shaky economics, the fair-trade movement should not be despised. While cynics say that its only achievement is to make consumers feel better about their purchases – rather like buying indulgences in the old Catholic Church – this is to sell fair trade short. In fact, the movement represents a spark of protest against mindless consumerism, grass-roots resistance against an impersonal logic, and an expression of communal activism.
That justification will not convince economists, who prefer a dryer sort of reasoning. But it is not out of place to remind ourselves that economists and bureaucrats need not always have things their own way.

Not sure how much time I'll have -- I'm traveling today and have to meet a deadline along the way -- so let me turn the conversation over to someone who might know a bit about this topic, Paul Krugman:

What Should Trade Negotiators Negotiate About? A Review Essay, by Paul Krugman: If economists ruled the world, there would be no need for a World Trade Organization. The economist's case for free trade is essentially a unilateral case - that is, it says that a country serves its own interests by pursuing free trade regardless of what other countries may do. Or as Frederic Bastiat put it, it makes no more sense to be protectionist because other countries have tariffs than it would to block up our harbors because other countries have rocky coasts. So if our theories really held sway, there would be no need for trade treaties: global free trade would emerge spontaneously from the unrestricted pursuit of national interest. (Students of international trade theory know that there is actually a theoretical caveat to this statement: large countries have an incentive to limit imports - and exports - to improve their terms of trade, even if it is in their collective interest to refrain from doing so. This "optimal tariff" argument, however, plays almost no role in real-world disputes over trade policy.)
Fortunately or unfortunately, however, the world is not ruled by economists. The compelling economic case for unilateral free trade carries hardly any weight among people who really matter. If we nonetheless have a fairly liberal world trading system, it is only because countries have been persuaded to open their markets in return for comparable market-opening on the part of their trading partners. Never mind that the "concessions" trade negotiators are so proud of wresting from other nations are almost always actions these nations should have taken in their own interest anyway; in practice countries seem willing to do themselves good only if others promise to do the same.
But in that case why should the tits we demand in return for our tats consist only of trade liberalization? Why not demand that other countries match us, not only in what they do at the border, but in internal policies? This question has been asked with increasing force in the last few years. In particular, environmental advocates and supporters of the labor movement have sought with growing intensity to expand the obligations of WTO members beyond the conventional rules on trade policy, making adherence to international environmental and labor standards part of the required package; meanwhile, business groups have sought to require a "level playing field" in terms of competition policy and domestic taxation. Depending on your point of view, the idea that there must be global harmonization of standards on employment, environment, and taxation is either the logical next step in global trade negotiations or a dangerous overstepping of boundaries that threatens to undermine all the progress we have made so far.
In 1992 Columbia's Jagdish Bhagwati (one of the world's leading international trade economists) and Robert E. Hudec (an experienced trade lawyer and former official now teaching at Minnesota) brought together an impressive group of legal and economic experts in a three-year research project intended to address the new demands for an enlarged scope of trade negotiations. Fair Trade and Harmonization: Prerequisites for Free Trade? (Cambridge MA: MIT Press, 1996) is the result of that project. This massive two-volume collection of papers is unavoidably a bit repetitious. One also wonders why only economists and lawyers were involved - what happened to the political scientists? (More on that later). But the volumes contain a number of first-rate papers and offer a valuable overview of the debate.
In this essay I will not try to offer a comprehensive review of the papers; in particular I will give short shrift to those on competition and tax policy. Nor will I try to deal with the quite different question of how much coordination of technical standards - e.g. health regulations on food (remember the Eurosausage!), or safety regulations on consumer durables - is essential if countries are to achieve "deep integration". Instead, I will try to sort through what seem to be the main issues raised by new demands for international labor and environmental standards..
The economics and politics of free trade
In a way, the most interesting paper in the Bhagwati-Hudec volumes is interesting precisely because the author seems not to understand the logic of the economic case for free trade - and in his incomprehension reveals the dilemmas that practical free traders face. Brian Alexander Langille, a Canadian lawyer, points out correctly that domestic policies such as subsidies and regulations may influence a country's international trade just as surely as explicit trade policies such as tariffs and import quotas. Why then, he asks, should trade negotiations stop with policies explicitly applied at the border? He seems to view this as a deep problem with economic theory, referring repeatedly to the "rabbit hole" into which free traders have fallen.
But the problem free traders face is not that their theory has dropped them into Wonderland, but that political pragmatism requires them to imagine themselves on the wrong side of the looking glass. There is no inconsistency or ambiguity in the economic case for free trade; but policy-oriented economists must deal with a world that does not understand or accept that case. Anyone who has tried to make sense of international trade negotiations eventually realizes that they can only be understood by realizing that they are a game scored according to mercantilist rules, in which an increase in exports - no matter how expensive to produce in terms of other opportunities foregone - is a victory, and an increase in imports - no matter how many resources it releases for other uses - is a defeat. The implicit mercantilist theory that underlies trade negotiations does not make sense on any level, indeed is inconsistent with simple adding-up constraints; but it nonetheless governs actual policy. The economist who wants to influence that policy, as opposed to merely jeering at its foolishness, must not forget that the economic theory underlying trade negotiations is nonsense - but he must also be willing to think as the negotiators think, accepting for the sake of argument their view of the world.
What Langille fails to understand, then, is that serious free-traders have never accepted as valid economics the demand that our trade liberalization be matched by comparable market-opening abroad; and so they are not being inconsistent in rejecting demands for an extension of such reciprocity to domestic standards. If economists are sometimes indulgent toward the mercantilist language of trade negotiations, it is not because they have accepted its intellectual legitimacy but either because they have grown weary of saying the obvious or because they have found that in practice this particular set of bad ideas has led to pretty good results.
One way to answer the demand for harmonization of standards, then, is to go back to basics. The fundamental logic of free trade can be stated a number of different ways, but one particularly useful version - the one that James Mill stated even before Ricardo - is to say that international trade is really just a production technique, a way to produce importables indirectly by first producing exportables, then exchanging them. There will be gains to be had from this technique as long as world relative prices differ from domestic opportunity costs - regardless of the source of that difference. That is, it does not matter from the point of view of the national gains from trade whether other countries have different relative prices because they have different resources, different technologies, different tastes, different labor laws, or different environmental standards. All that matters is that they be different - then we can gain from trading with them.
This way of looking at things, among its other virtues, offers an en passant refutation of the instinctive feeling of most non-economists that a country that imposes strong environmental or labor standards will necessarily experience difficulties when it trades with other countries that are not equally high-minded. The point is that all that matters for the gains from trade are the prices at which you trade - it makes absolutely no difference what forces lie behind those prices. Suppose your country has been cheerfully exporting airplanes and importing clothing in return, believing that the comparative advantage of your trading partners in clothing is "fairly" earned through exceptional productive efficiency. Then one day an investigative journalist, hot in pursuit of Kathie Lee Gifford, reveals that the clothing is actually produced in 60-cent-an-hour sweatshops that foul the local air and water. (If they hurt the global environment, say by damaging the ozone layer, that is another matter - but that is not the issue).You may be outraged; but the beneficial trade you thought you had yesterday has not become any less economically beneficial to your country now that you know that it is based on these objectionable practices. Perhaps you want to impose your standards on these matters, but this has nothing to do with trade per se - and there are worse things in the world than low wages and local pollution to excite our moral indignation.
This back-to-basics case for rejecting calls for harmonization of standards is elaborated in two of the papers in Volume 1 of Bhagwati-Hudec: a discussion of environmental standards by Bhagwati and T.N. Srinivasan, and a discussion of labor standards by Drusilla Brown, Alan Deardorff, and Robert Stern. In each case the central theme is that neither the ability of a country to impose such standards nor its benefits from so doing depend in any important way on whether other countries do the same; so why not leave countries free to choose?
Bhagwati and Srinivasan also raise two other arguments on behalf of a laissez-faire approach to standards, arguments echoed by several other authors in the volume. The first is that nations may legitimately have different ideas about what is a reasonable standard. (The authors quote one environmentalist who asserts that "geopolitical boundaries should not override the word of God who directed Noah" to preserve all species, then drily note that "as two Hindus .. we find this moral argument culture-specific"). Moreover, even nations that share the same values will typically choose different standards if they have different incomes: advanced-country standards for environmental quality and labor relations may look like expensive luxuries to a very poor nation. Second, to the extent that nations for whatever reason choose different environmental standards, this difference, like any difference in preferences, actually offers not a reason to shun international trade but an extra opportunity to gain from such trade. It is very difficult to be more explicit about this without being misrepresented as an enemy of the environment - an excerpt from the entirely sensible memo along these lines that Lawrence Summers signed but did not write at the World Bank a few years ago is reprinted in my copy of The 776 Stupidest Things Ever Said - so it is left as an exercise for readers.
The back-to-basics argument against harmonization of standards, then, is completely consistent and persuasive. And yet it is also somehow unsatisfying. Perhaps the problem is that we know all too well how little success economists have had in convincing policymakers of the case for unilateral free trade. Why, then, should we imagine that restating that case yet again will be an effective argument against the advocates of international harmonization of standards? Confronted with the failure of the public to buy the classical case for free trade, and unwilling simply to preach the truth to each other, trade economists have traditionally followed one of two paths. Some try to give the skeptics the benefit of the doubt, attempting to find coherent models that make sense of their concerns. Others try to make sense not of the skeptics' ideas but their motives, attempting to seek guidance from models of political economy. The same two paths are followed in these volumes, with several papers following each approach.
Second-best considerations and the "race to the bottom"
The general theory of the second best tells us that if incentives are distorted in some markets, and for some reason these distortions cannot be directly addressed, policies in other markets should in principle take the distortions into account. For example, environmental economists have become sensitized to the likely interactions between pollution fees - designed to correct one distortion of incentives - with other taxes, which have nothing to do with environmental issues but which, because they distort incentives to work, save, and invest may crucially affect the welfare evaluation of any given environmental policy.
There is a long history of protectionist arguments along second-best lines. (Among Jagdish Bhagwati's seminal contributions to international trade theory was, in fact, his work showing that many critiques of free trade are really second-best arguments - and that the first-best response rarely involves protection). Here's an easy one: suppose that an industry generates negative environmental externalities that are not properly priced, and that international trade leads to an expansion of that industry in your country. Then that trade may indeed reduce national welfare (although of course trade may equally well have the opposite effect: it may cause your country to move out of "dirty" into "clean" industries, and thereby lead to large welfare gains). However, the advocates of international environmental and labor standards seem to be offering a more subtle argument. They seem to be claiming that an environmental (or labor) policy that would raise welfare in a closed economy - or that would raise world welfare if implemented by all countries simultaneously - will reduce national welfare if implemented unilaterally. Thus the independent actions of national governments in the absence of international standards on these issues can lead to a "race to the bottom", with global standards far too lax.
What sort of model might justify this fear? In an extremely clear paper in Volume 1, John D. Wilson gives the issue his (second) best shot, showing that international competition for capital - in a world in which the social return to capital exceeds its private return, for example due to capital taxation - could do the trick. Other things being the same, tighter environmental or labor regulation will presumably decrease the rate of return on investments, and thus any country which has a pre-existing tendency to attract too little capital will have an incentive to avoid such regulations; whereas a collective, international decision to impose higher standards would not lead to capital flight, since the capital would have nowhere to go.
Is this a clinching argument? Not necessarily. For one thing, like all second-best arguments it is very sensitive to tweaking of its assumptions. As Wilson points out, capital importation may have adverse as well as positive effects, especially from the point of view of an environment-conscious country. In that case a positive rate of taxation is appropriate - and if the actual rate of taxation is too low, countries may adopt excessively strong environmental standards in a "race to the top". If this seems implausible, Wilson reminds us of the NIMBY (not in my backyard) phenomenon in which no local jurisdiction is willing to be the site for facilities the public collectively needs to locate somewhere.
Even if you regard a race to the bottom as more likely than one to the top, there is still the question of whether such second-best arguments are really very important. This is doubtful, especially where environmental standards are concerned. The alleged impact of such standards on firms' location decisions looms large in the demands of activists who want these standards harmonized. But the chapter by Arik Levinson, surveying the evidence, finds little reason to think that international differences in these standards actually have much effect on the global allocation of capital.
So while it is possible to devise second-best models that offer some justification for demands for harmonization of standards, these models - on the evidence of this collection, at any rate - do not seem particularly convincing. The classical case for laissez-faire on national economic policies is surely not precisely right, but it does not seem wrong enough to warrant the heat now being generated over the issue of harmonization. Simply pointing this out, however, while important, does not make the phenomenon go away. So it is at least equally important to try to understand the political impulse behind demands for harmonization, and in particular to ask whether the political economy of standard-setting offers some indirect rationale for insisting on harmonization of such standards.
The political economy of standards
Consider - as Brown, Deardorff, and Stern do - a single industry, small enough to be analyzed using partial equilibrium, in which a country is considering imposing a new environmental or labor regulation that will raise production costs. As they point out, if the costs of the regulation are less than the social costs imposed by the industry in its absence, then it is worth doing regardless of whether other countries follow suit. But the distribution of gains between producers and consumers does depend on whether the action is unilateral or coordinated. If one country imposes a costly regulation while others do not, the world price will remain unchanged and all of the burden will fall on producers; if many countries impose the regulation, world prices will rise and some of the burden will be shifted to consumers.
So what? Well, it is a fact of life, presumably rooted in the public-goods character of political action, that trade policy tends to place a much higher weight on producers than on consumers. So even though the national welfare case for the regulation is not weakened at all by the fact that the good is traded, the practical political calculus of getting the regulation implemented could quite possibly depend on whether other countries agree to do the same. This suggests an alternative version of the "race to the bottom" story. The problem, one might argue, is not that countries have an incentive to set standards too low in a trading world. Rather, it is that politicians, who respond to the demands of special-interest groups, have such an incentive. And one might argue that this failure of the political market, rather than distortions in goods or factor markets, is what justifies demands for international harmonization of standards.
An environmentalist or defender of workers' rights might also make a related argument. He or she might say "You know that countries aren't in a zero-sum competition, and I know that they aren't, but the public and the politicians think they are - and industry lobbies consistently use that misconception as an argument against standards that we ought to have. So we need to set those standards internationally in order to neutralize that bogus but effective political ploy". It is very difficult for trade economists to reject this line of argument on principle. After all, it is very close to the reason why free-traders who know that the economic case for liberal trade is essentially unilateral are nonetheless usually staunch defenders of the GATT: trade negotiations may be based on a false theory, but by setting exporters as counterweights to producers facing import competition they nonetheless are politically crucial to maintaining more or less free trade. That is, the true purpose of international negotiations is arguably not to protect us from unfair foreign competition, but to protect us from ourselves. (When the United States recently imposed utterly indefensible restrictions on Mexican tomato exports, an Administration official remarked off the record that Florida has a lot of electoral votes while Mexico has none. The economically correct rebuttal to this sort of thing is to point out that the other 49 states contain a lot of pizza lovers; the politically effective answer is to subject US-Mexican trade to a set of rules and arbitration procedures in which the Mexicans do too have a vote).
While one cannot dismiss such political-economy arguments as foolish, however, the problem is to know where to stop. Here is where it would have been useful to hear from some political scientists, who might be able to tell us more about when international negotiations over standards are likely to improve domestic policies, and when they are likely simply to serve as a cover for protectionist motives. But while I would have liked to see an analysis from that point of view, much of the legal analysis that occupies Volume 2 of the Bhagwati-Hudec books does shed light on the problem.
Standards and the rule of law
Economists pronounce on legal matters at their peril: law, even international trade law, is a discipline all its own, with a jargon just as impenetrable to us as ours is to them. Let me therefore tread cautiously in interpreting the arguments here. As I understand it, the problem involved in defining the limits of fair trade is not too different from that of defining the limits of free speech. Take it as a given that countries can do things that are perceived to be economically harmful to other countries - it does not necessarily matter whether this perception is correct. Which of these things can realistically be prohibited, and which should be tolerated? The answer is a matter of degree. The fellow at the next table who insists on talking loudly to his partner about marketing is annoying, but one cannot reasonably ask the law to do anything about him; the person who shouts "Fire" in a crowded theater is something else again.
Where does one draw the line in international economic relations? The prevailing principle of international law derives from the 17th-century Peace of Westphalia, which ended the Thirty Years' War by establishing the rule that states may do whatever they like (such as imposing the sovereign's religion) within their borders - only external relations are the proper concern of the international community. By this principle labor law, or environmental policies that do not spill across borders, should be off limits.
Now in practice we do not always honor the principle of the hard-shell Westphalian state. We are sometimes willing to impose sanctions or even invade to protect human rights. Even in trade negotiations it is an understood principle that if a country de facto undoes its trade concessions with domestic policies - for example, offsetting a tariff cut with an equal production subsidy - it is considered to have failed to honor its agreement. But while borders are fuzzier in legal practice than they are on a map, the basic structure of trade negotiations is still basically Westphalian. The demand for harmonization of standards is, in effect, a demand that this should change.
We have seen that the strictly economic case for that demand is fairly weak, but there may be a stronger case on grounds of political economy. But what do the legal experts say? The general answer, as I understand it, is that they don't think it is a good idea. A lucid chapter by Frieder Rousseler grants that the political argument for harmonization has some force, but concludes that to give in to it would open up too wide a range of potential complaints, much the same as would happen if I were allowed to sue people whose words annoy rather than actually slander me. Other authors, such as Virginia Leary and Robert Hudec himself, seem to have a similar point of view, suggesting only that nations might want to enter into specific environmental and labor agreements that would then be enforced by the same institutions that enforce trade agreements. (One essay, however, a piece by Daniel Gifford and Mitsuo Matsushita on competition policy, seems more economistic than the economists: it argues that the international acceptability of competition policies should be judged on whether they seem likely, or at least motivated by the desire, to enhance efficiency).
To an economist, at least, the legal case here seems fairly similar to the economic case for trade negotiations. We have a purist principle: unilateral free trade, the Westphalian state. We recognize based on experience that it is useful to compromise that principle a bit, so that we work with mercantilists rather than simply castigating them and allow a bit of international meddling in internal affairs. But while a bit of pragmatism is allowed, the principle remains there; and it is not a good idea to stray too far. On the evidence of these volumes, then, the demand for harmonization is by and large ill-founded both in economics and in law; realistic political economy requires that we give it some credence, but not too much. Unfortunately, that will surely not make the issue go away. Expect many more, equally massive volumes to come.

Friday, March 23, 2012

How Much "Slack" is Left in Labor Markets?

David Altig, research director at the Cleveland Fed, looks at how close labor markets are to being "normalized":

Why we debate, by David Altig: It's been a while since we featured one of my favorite charts—a "bubble graph" comparing average monthly job changes during this recovery with average changes during the previous recovery, sector by sector.


If you try, it isn't too hard to see in this chart a picture of a labor market that is very close to "normalized," excepting a few sectors that are experiencing longer-term structural issues. First, most sectors—that is, most of the bubbles in the chart—lie above the horizontal zero axis, meaning that they are now in positive growth territory for this recovery. Second, most sector bubbles are aligning along the 45-degree line, meaning jobs in these areas are expanding (or in the case of the information sector, contracting) at about the same pace as they were before the "Great Recession." Third, the exceptions are exactly what we would expect—employment in the construction, financial activities, and government sectors continues to fall, and the manufacturing sector (a job-shedder for quite some time) is growing slightly.
For the skeptics, I below offer a familiar chart, which traces the level of total employment pre- and post-December 2009, compared with the average path of pre- and post-recession employment for the previous five downturns:


We are now more than 16 quarters past the beginning of the recession that began in the fourth quarter of 2007, and total employment is still 4 percent lower than it was at the beginning of the downturn. In the previous five recessions by the time 16 quarters had passed, employment had increased by about 6 percent. Even in the worst case, indicated by the lower edge of the gray shaded area, employment growth was flat—and that observation is qualified by the fact that the recovery from the 1980 recession was interrupted by the 1981–82 recession.
This unhappy comparison is not driven by the construction, financial activities, and government sectors. In the area of professional and business services, which has logged the largest average monthly employment gains in the current recovery, the number of jobs still sits 2.7 percent below the level at the outset of the last recession, as the chart below shows.


Total private-sector jobs in education and health services, which never actually contracted during the recession, nonetheless remain abnormally low in historical context.


In these charts lies the crux of some very basic disagreements about the appropriate course of policy. The last three graphs draw a clear picture of labor markets that are underperforming by historical standards—a position that I take to be the conventional wisdom. An argument against following that conventional wisdom centers on the question of whether historical standards represent the appropriate yardstick today. In other words, is the correct reference point the level of employment or the pace of improvement in the labor market from a permanently lower level? For the proponents of the latter view, the bubble chart might very well look like a return to normal, despite the fact that employment has not returned to prerecession levels.
One way to adjudicate the debate, in theory, is to rely on the trajectory of inflation. If there remains a significant amount of slack in labor markets, as the conventional interpretation of things suggest, there ought to be consistent downward pressure on prices. The case for consistent downward pressure on prices is not so obvious. Measured inflation appears to moving in the direction of the Federal Open Market Committee's 2 percent long-term objective.


Also, the Atlanta Fed's own monthly survey of business inflation expectations, which surveys a panel of businesses from our Reserve Bank district, indicates that this inflation number (shown in our March release from earlier this week) is in line with what private-sector decision makers anticipate:

"Survey respondents indicated that, on average, they expect unit costs to rise 2.0 percent over the next 12 months. That number is up from 1.9 percent in February and comparable to recent year-ahead inflation forecasts of private economists. Firms also reported that their unit costs had risen 1.8 percent compared to this time last year, which is unchanged from their assessment in February. Inflation uncertainty, as measured by the average respondent's variance, declined from 2.8 percent in February to 2.4 percent in March, the lowest variance since the survey was launched in October 2011."

Does that settle it? Not quite. There may not be much evidence of building disinflationary pressure, but neither is there building evidence of an inflationary push that you would expect to see if the economy were bumping up against capacity constraints. Obviously, the story isn't over yet.

Thursday, March 22, 2012

Weekly Initial Unemployment Claims Decline

Good news via CR:

Weekly Initial Unemployment Claims decline to 348,000. by Calculated Risk: The DOL reports:

In the week ending March 17, the advance figure for seasonally adjusted initial claims was 348,000, a decrease of 5,000 from the previous week's revised figure of 353,000. The 4-week moving average was 355,000, a decrease of 1,250 from the previous week's revised average of 356,250.
The previous week was revised up to 353,000 from 351,000. ...

The ongoing decline in initial weekly claims is good news. Even in "good times" weekly claims are usually just above 300 thousand, and claims are getting there.

Wednesday, March 21, 2012

"The Changing Face of Foreclosures"

Another reason to attack the unemployment problem aggressively -- unemployment causes foreclosues:

The Changing Face of Foreclosures, by Joshua Abel and Joseph Tracy, Liberty Street: The foreclosure crisis in America continues to grow, with more than 3 million homes foreclosed since 2008 and another 2 million in the process of foreclosure. President Obama, in his speech of February 2, 2012, argued for expanded refinancing opportunities for homeowners and programs to expedite the transition of foreclosed homes into rental housing. In this post, we document the changing face of foreclosures since 2006 and the transformation of the crisis from a subprime mortgage problem to a prime mortgage problem owing to the housing bust and persistent high unemployment. Recognizing this change is critical because the design of housing policies should reflect the types of homeowners who are at risk of foreclosure today rather than those who were at risk at the onset of the financial crisis.
It is well known that problems with nonprime lending helped to spark the housing crisis, which was a catalyst for the financial crisis and ensuing recession. Also well known is the progressive erosion of underwriting standards in nonprime lending toward the end of the housing boom. As a result, many nonprime loans were made to borrowers who did not have the ability to pay for them, especially if house prices did not continue to increase. Not surprisingly, then, as house prices began to flatten and decline in 2006, foreclosure starts were dominated by nonprime borrowers. As shown in our first chart, nonprime borrowers accounted for about 65 percent of foreclosure starts in 2006. However, as the financial crisis led to the Great Recession (indicated in grey), the composition of borrowers entering foreclosure shifted quite dramatically. By 2009, prime borrowers had eclipsed nonprime borrowers as the dominant source of new foreclosures. In fact, from 2009 until the present, prime borrowers have accounted for the majority of all new foreclosure starts. A fairly steady 10 percent of foreclosure starts were associated with mortgages guaranteed by the Federal Housing Administration or the Department of Veterans Affairs.

Share of Foreclosure

What accounts for the dramatic change in the composition of foreclosure starts since 2006? Our next chart shows two important economic factors that have affected homeowners over this period—house prices and unemployment. For each mortgage that enters foreclosure, we calculate the percentage change in metropolitan area house prices from the time that the mortgage was originated to the time it entered foreclosure. We report average changes across all new foreclosures by year and quarter. From 2006 through 2008, as the share of new foreclosures was shifting from nonprime to prime borrowers, we see that initially foreclosures involved properties that were on average still increasing in value
(as measured by the positive cumulative change in the metro area house price index defined above), but then shifted to properties with declining house prices (in 2008), and eventually to properties where on average house prices had declined by 20 percent (in 2009). In fact, since 2009, properties entering foreclosure have continued to face a 20 percent decline in value on average.
We also calculate the change in the local (defined as the metropolitan area) unemployment rate. Just as foreclosure starts were initially associated with properties whose value was still rising, so foreclosures in 2006 and 2007 were linked to local labor markets where the unemployment rate was still declining. In 2008, however, foreclosures shifted to markets where unemployment was beginning to rise and, in 2009, to markets where unemployment had increased on average by more than 2 percentage points. In 2010, foreclosure starts occurred in markets where the increase in the local unemployment rate exceeded 5 percentage points on average since the mortgages were originated. The shift in the composition of new foreclosures from borrowers with nonprime mortgages to those with prime mortgages reflects the fact that falling house prices and rising unemployment tend to impact all borrowers in a local housing market, not just nonprime borrowers. As a result, traditionally safe borrowers began falling behind on their payments as they felt the severe effects of the housing bust and high unemployment.

Economic Conditions

In the design of housing policy, an important consideration is the extent to which foreclosures result from situations where borrowers cannot afford their mortgage from the outset. In these circumstances, foreclosures can be viewed as the market process for removing borrowers who should not have been approved for a mortgage in the first place or who cannot sustain their mortgage going forward. When affordability is the key determinant of foreclosures, policies aimed at reducing the flow into foreclosure run the risk of slowing an adjustment process necessary for an eventual housing market recovery. A useful metric for the ability of a borrower to afford a mortgage is the “debt-to-income” (DTI) ratio. This measures the cost of the mortgage (monthly payments, property taxes, and homeowner’s insurance) relative to the borrower’s income. Unfortunately, because the data that we use from Lender Processing Services do not consistently report the DTI ratio, we cannot assess this affordability measure across time for foreclosure starts.
However, we provide an alternative indirect measure of affordability. The basic idea is that in cases where a borrower cannot afford a mortgage from the outset, payment problems are likely to materialize sooner rather than later. In the chart below, we look at the time between the origination of a mortgage and the beginning of the string of missed payments that ultimately led to foreclosure. We show the 25th percentile (25 percent of the times were shorter, P25), the median (50 percent of the times were shorter, P50), and the 75th percentile (75 percent of the times were shorter, P75). Initially, when most foreclosure starts were associated with nonprime mortgages, 25 percent of the borrowers had been in the house fewer than eight months before falling behind on their payments, and 50 percent fewer than eighteen months. However, more recently, as the composition of foreclosures shifted to prime borrowers, 75 percent had been in the house more than three years, and 50 percent more than four years. This suggests that as the recession hit, foreclosures shifted from borrowers who often could not afford their houses to borrowers who had demonstrated that they could (by virtue of making payment for several years) but began to fall behind on their payments when they were hit by the dual crises of house price declines and high unemployment.

Percentiles of Duration

This change in the face of foreclosures is mirrored in many other dimensions. Our last chart shows the evolution in the distribution of origination credit (FICO) scores over time for new foreclosures. In 2006, 25 percent of foreclosure starts were associated with borrowers who had a credit score of 580 or below at the time they took out the mortgage, and 50 percent had credit scores of 620 or below. However, by 2009, as the recession set in and shifted the mix of foreclosures to prime borrowers, 50 percent of new foreclosures had origination credit scores of nearly 680, and 25 percent had credit scores of 720 or higher.

Percentiles of FICO

Nonprime lending during the housing boom was concentrated in what were called “exotic” mortgages with little down payment, initial “teaser” rates and, in some cases, negative amortization. However, since 2010, 65 percent of foreclosure starts have been associated with borrowers who took out thirty-year fixed-rate amortizing mortgages (viewed by consumer advocates as the “safest” mortgage product)—up from 40 percent early in the crisis. Similarly, the prime borrowers who have entered foreclosure in the past several years have on average made a meaningful down payment of 20 percent.
A large foreclosure pipeline hangs over U.S. housing markets, creating headwinds for housing market recovery. What began as a nonprime mortgage problem has evolved into a prime mortgage problem with the onset of the recession. The inability to afford a home has been replaced by declining house prices and high unemployment as the primary driver of new foreclosures. Clearly, these changes have implications for the design of housing policy: By recognizing the shifting face of foreclosures, policymakers can make more informed choices about the most effective forms of intervention and the groups of borrowers that could best be served by them.

Sunday, March 18, 2012

Public Sector Payroll Jobs: Bush and Obama

[Travel day -- I am going to visit the St. Louis Fed for a week -- will post as I can. (The post earlier today is related to the visit. I am going to talk about potential output and the controversy that erupted on economics blogs in a talk during the visit and I wanted to clarify my thinking on a few points. I also met the president of the Philadelphia Fed Charles Plosser on Friday, and he was well aware of my view on this from the blog. He was the one who motivated me to think about how demand side shocks can produce temporary supply-side effects, and the degree to which the supply side effects pose a constraint for policy. On that point, I see I have an ally in the view that much of the current change in the natural rate of output is temporary.)]

Calculated Risk notes a difference between public sector employment during the Bush and Obama administrations. After the stock market crash, public sector employment continued to rise during the Bush administration, but after the housing market crash public sector employment declined. This made the recession worse, and it's working against the recovery:

Public and Private Sector Payroll Jobs: Bush and Obama, by Calculated Risk: This is a follow up to the previous post showing the year-over-year change in private and public sector payroll jobs. ...

The employment recovery during Mr. Bush's first term was very sluggish, and private employment was down 913,000 jobs at the end of his first term. The recovery has been sluggish under Mr. Obama's presidency too, and there are still 247,000 fewer payroll jobs than when Mr. Obama's term started (although it appears this will turn positive in a couple of months).

Public Sector Payrolls

A big difference between Mr. Bush's first term and Mr. Obama's presidency has been public sector employment. The public sector grew during Mr. Bush's term (up 900,000 jobs), but the public sector has declined since Obama took office (down 590,000 jobs). These job losses are at the state and local level, but they are still a significant drag on overall employment.

It appears the public sector jobs losses are slowing, and it looks likely that the decline in public payrolls will probably end mid-year 2012.

That's a big difference in public sector employment -- just short of 1.5 million more public sector jobs were created or saved under Bush.

Tuesday, March 13, 2012

Fed Watch: Thoughts on Okun's Law

Tim Duy:

Thoughts on Okun's Law, by Tim Duy: I have been thinking about Jon Hilsenrath's article describing the breakdown of Okun's Law. First off, consider the chart:


Note that while Hilsenrath describes Okun's Law as the relationship between changes in the unemployment rates and the difference between actual and potential GDP growth, the chart that accompanies his article relates changes in unemployment rates and output growth. My chart illustrates the relationship between the year-over-year change in the unemployment rate (DIFFU) and the output growth gap (GAP), defined as the difference between the year-over-year changes in real GDP and and CBO potential GDP. The slope of the line above can be obtained from the regression equation:

DIFFUt = beta*GAPt

For the 1970:1 to 2011:4 sample, the slope (beta) is -0.41, suggesting that growth 1 percentage point in excess of potential growth yields a 0.4 percentage point decline in the unemployment rate. So far, so good. That said, even a cursory look at the chart will tell you that it would be a mistake to place too much weight on this relationship when considering near term forecasts. Observations are dispersed widely around the trend line; the R-squared is 0.71, leaving plenty of the change in unemployment unexplained by the output growth gap alone. Moreover, there are some curious points in the lower left-hand and upper right-hand quadrants which seem to be at odds with Okun's Law. Indeed, the last two quarters of 2011 were such points, with unemployment falling despite output growth just below potential growth (year-over-year basis).
This suggests to me that Okun's "Law" might break down on a fairly regular basis, which would not be a surprise given short run variations in productivity and labor force growth. To get at this question, collect the estimates of beta from three-year rolling windows beginning with the 1960:1-1963:1 sample and ending with the 2008:4-2011:4 sample:


And that is what we call job security for reporters and economists alike. The sensitivity of unemployment to the output growth gap ranges from almost 0 to almost -0.6, with recent estimates at the low end. Indeed, in the past few years, changes in unemployment have become more sensitive to the output growth gap. That said, how much should weight should we place on this deviation? After all, at something closer to business cycle frequencies, we can discuss the "breakdown" of Okun's Law every few years as productivity fluctuates with the business cycle.
What about a longer estimation period that smooths the cyclical variation? Consider a ten-year rolling window:


As one might expect, the range of estimates is much more narrow. But still, the ten-year estimates following the three-year estimates down in recent years. Maybe something more persistent is happening, with the sensitivity of unemployment to the output growth gap changing from -0.3 to -0.5 over the last decade, a record low at this horizon. And notice that estimates of beta at the three-year horizon were decreasing prior to the recession; maybe what happened during the recession was in part just the continuation of an existing trend? Perhaps this is additional evidence of a trend productivity slowdown underway (I hope to tackle this issue more later).
Will the old Okun's Law soon reassert itself? I don't know, but looking at the ten-year trend suggests that we could continue to see fairly solid job growth even in a environment of relatively tepid GDP growth.

Monday, March 12, 2012

Stiglitz: The US Labor Market is Still a Shambles

Joe Stiglitz:

The US labour market is still a shambles, by Joseph Stiglitz, Commentary, Financial Times: It is understandable, given the number of times green shoots have been seen since the downturn began in December 2007, that there might be some skepticism about claims the recovery is finally under way. To me the question is what does it imply for policy? Does it mean we can be more relaxed about the demands for budget cuts emanating from fiscal conservatives? Or that the US Federal Reserve should start paying more attention to inflation, and begin contemplating raising interest rates? Even if this is not one of the many green shoots that soon turn brown, the economy will almost certainly need more stimulus if it is to return to full employment any time soon.
This is the inevitable conclusion from looking at the state of the labour market today. It is a shambles. ...
Today the American economy faces three big risks. First, a steeper European downturn, as a result of the excessive austerity and the euro crisis. Second, complacency that the economy will recover quickly without government support. Though every downturn comes to an end, that should not be of much comfort. Third, that we accept that an unemployment rate above 7 per cent is inevitable.
If my Cassandra forecast turns out to be wrong, stimulus can be cut. But if it turns out to be right, and we do too little, we will live to regret it.

I hope you know by now that I agree.

Friday, March 09, 2012

Fed Watch: Another Positive Employment Report

I missed this post from Tim Duy earlier today:

Another Positive Employment Report. by Tim Duy: It is increasingly difficult if not impossible to deny the real improvements in labor markets in recent months. First, the ongoing declines in initial jobless claims clearly suggested the recovery was gaining depth and sustainability:


Then comes the February employment report along with upward revisions to the December and January numbers:


Nonfarm payroll gains are averaging a solid 245K per month over the last three months. Does this mean the Federal Reserve can pull back on the throttle? No, although I am sure you will hear the more hawkish policymakers using this report as evidence that policy reversal will happen sooner than markets anticipate. To be sure, that may still turn out to be true, but this data still reveals the depth of the hole left behind by the recession. But he majority of the FOMC will notice the stagnant unemployment rate (8.3%), a consequence of a small gain in labor force participation. If labor force participation rates begin to rebound, the improvement in the unemployment rate will stall, and the Fed could find itself willing to ease again later this year as suggested in this week's well documented Wall Street Journal article.
Moreover, note that wage gains remain anemic, both for all workers:


and for non supervisory and production workers:

The lack of substantial wage gains, combined with relatively low labor force participation rates suggests that we still have a long way to go before labor markets normalize:


Of course, if labor force participation rates stagnate while job growth continues unabated, the Fed will find themselves facing a more rapid drop in unemployment. That would certainly take QE3 off the table, and turn attention back to the timing of the next tightening cycle. This is not my expectation, but it certainly bears watching.
Bottom Line: Another good report, although still suggestive of the beginning of recovery. In my mind, true recovery will come when the cyclical declines in labor force participation are further reversed. At this point, there is no reason for the Fed to pull their foot off the gas. On net though, the employment report does push back the timing of any additional easing. The Fed will move to the sidelines while policymakers assess the level of slack in labor markets. If the cyclical downturn resulted in sustained structural damage, there may be little slack. But if an influx of returning workers puts a floor under the unemployment rate, the Fed will have more work still to do.

The Labor Market Continues to Improve

Here are my comments on the employment report:

The labor market continues to improve, CBS News

Job growth is better, but still too slow -- at this rate it will take years to get back to full employment -- so the question is whether job growth will continue to accelerate, level off, or (shudder) perhaps even slow down. I'm hoping for acceleration, but there's no certainty it will come.

[Editing is slow today, no link yet, so here's the post:]

The employment report brings good news. According to the the Bureau of Labor Statistics, nonfarm payroll employment rose by 227,000 in February, and the unemployment rate was unchanged at 8.3 percent.

How can an unchanged unemployment rate be good news? The unemployment rate falls when more people get jobs, and it increases when more people enter the labor force and begin looking for jobs. In the current report these two factors offset each other leaving the unemployment rate unchanged. There were more jobs, but also more people looking. As the BLS reports, "The civilian labor force participation rate, at 63.9 percent, and the employment-population ratio, at 58.6 percent, edged up over the month." The fact that more people are looking for jobs can be viewed in a positive light since it reflects increased optimism about their chances of finding employment.

The job creation number is also good news even though the 227,000 jobs that were created falls short of the amount we need to recover in an acceptable amount of time. At this rate, it will be several years before we reach full employment. That's too long, and I have been hoping to see signs that job growth is accelerating. In past recessions recoveries there have been several months with 300,000 or 400,000 created and we need job creation of this magnitude to keep up with population growth and provide jobs for the millions of people still looking for work.

This report does show signs that job creation is accelerating. The increase in employment is broad-based, each month the job creation figures look a bit better, and if the acceleration in job growth continues that will be a very welcome development. Will it continue? It would be a mistake not to expect rough spots on the road to recovery, there will inevitably be setbacks and in any case we cannot be certain that the needed acceleration will occur. Trouble in Iran could cause oil prices to spike and that would be very bad news. Europe looks better, but surprises are always possible, and there are other risks as well.

Thus, although the labor market is improving it's still too soon for policymakers to forget about the job market and turn their attention elsewhere, though they have mostly done that anyway. And it's certainly too soon to begin reversing course through interest increases or deficit reduction. The economy is looking more hopeful, but until the hopes are realized we need to keep doing all we can to help the labor market recover.

Wednesday, March 07, 2012

"Cuts to State and Local Government Workforces are Particularly Damaging for Women"

Cuts to state and local workforces have not been qually distributed between men and women. It's not even close (ideally, state and local employment would have been protected during the recession so that we wouldn't have to worry about this at all, but policy has been far from ideal):

...cuts to state and local government workforces, while a significant drag on the economy as a whole, are particularly damaging for women. In 2011, women made up 46.6 percent of the overall labor force, but among state and local workers, about 60 percent are women. Because women are so disproportionately represented in state and local jobs, they also have taken the brunt of the job losses in state and local governments. Of the net change in total state and local employment between 2007 and 2011—a decline of roughly 765,000 jobs—70 percent of the drop is from female employees. Today, there are about 540,000 fewer women in state and local jobs than in 2007, compared with about 225,000 fewer men. ...

Tuesday, February 28, 2012

"How to Bring Jobs to People Who Need Them Most"

We must do a better job of protecting workers and their families from the short-run and long-run consequences of globalization and technological change:

How to Bring Jobs to People Who Need Them Most, by Mark Thoma: Is manufacturing special? Should the US do more to preserve its manufacturing base? President Obama brought these questions to the forefront with his recent proposal to use tax breaks and other encouragements to revive the manufacturing sector. Some people such as former Clinton economic advisor Laura Tyson argue that “manufacturing matters.” But others such as her UC Berkeley colleague and former Obama advisor Christina Romer argue against such special treatment.
Who is right? In the past, I have given a lukewarm endorsement to the president’s proposal. I believe manufacturing is one of the more promising avenues for the future economic growth, but I’m wary of picking winners. I’d prefer that we create the conditions for winners to emerge instead of putting too much emphasis on any one area.
But perhaps a more targeted approach is justified after all. Recent research by David Autor, David Dorn, and Gordon Hanson highlights the large detrimental effects that the loss of manufacturing jobs has had on some communities. ...[continue reading]...

(Apologies that it is split into two pages, it's not my choice -- single page, bare bones, no comments, print version here.)

Friday, February 24, 2012

Autor, Dorn, and Hanson: When (and Where) Work Disappears

The loss of manufacturing jobs to overseas producers has large negative impacts on workers and their communities. I'm with David Autor, one of the authors of the study described below, when he says "policymakers need new responses to the loss of manufacturing jobs: 'I’m not anti-trade, but it is important to realize that there are reasons why people worry about this issue.' ... Trade may raise GDP, but it does make some people worse off. Almost all of us share in the gains. We could readily assist the minority of citizens who bear a disproportionate share of the costs and still be better off in the aggregate":

When (and where) work disappears, MIT News: ...A new study co-authored by MIT economist David Autor shows that the rapid rise in low-wage manufacturing industries overseas has ... had a significant impact on the United States. The disappearance of U.S. manufacturing jobs frequently leaves former manufacturing workers unemployed for years, if not permanently, while creating a drag on local economies and raising the amount of taxpayer-borne social insurance necessary to keep workers and their families afloat.
Geographically, the research shows, foreign competition has hurt many U.S. metropolitan areas — not necessarily the ones built around heavy manufacturing in the industrial Midwest, but many areas in the South, the West and the Northeast, which once had abundant manual-labor manufacturing jobs, often involving the production of clothing, footwear, luggage, furniture and other household consumer items. Many of these jobs were held by workers without college degrees, who have since found it hard to gain new employment.
“The effects are very concentrated and very visible locally,” says Autor... “People drop out of the labor force, and the data strongly suggest that it takes some people a long time to get back on their feet, if they do at all.” Moreover, Autor notes, when a large manufacturer closes its doors, “it does not simply affect an industry, but affects a whole locality.” ...
The findings highlight the complex effects of globalization on the United States. “Trade tends to create diffuse beneficiaries and a concentration of losers,” Autor says. “All of us get slightly cheaper goods, and we’re each a couple hundred dollars a year richer for that.” But those losing jobs, he notes, are “a lot worse off.” For this reason, Autor adds, policymakers need new responses to the loss of manufacturing jobs: “I’m not anti-trade, but it is important to realize that there are reasons why people worry about this issue.” ...
Double trouble: businesses, consumers both spend less when industry leaves
In the paper, Autor, Dorn (of the Center for Monetary and Fiscal Studies in Madrid, Spain) and Hanson (of the University of California at San Diego) specifically study the effects of rising manufacturing competition from China, looking at the years 1990 to 2007. ...
The types of manufacturing for export that grew most rapidly in China during that time included the production of textiles, clothes, shoes, leather goods, rubber products — and one notable high-tech area, computer assembly. Most of these production activities involve soft materials and hands-on finishing work. “These are labor-intensive, low-value-added [forms of] production,” Autor says. “Certainly the Chinese are moving up the value chain, but basically China has been most active in low-end goods.”
In conducting the study, the researchers found more pronounced economic problems in cities most vulnerable to the rise of low-wage Chinese manufacturing; these include San Jose, Calif.; Providence, R.I.; Manchester, N.H.; and a raft of urban areas below the Mason-Dixon line — the leading example being Raleigh, N.C. “The areas that are most exposed to China trade are not the Rust Belt industries,” Autor says. “They are places like the South, where manufacturing was rising, not falling, through the 1980s.” ...
And as the study shows, when businesses shut down, it hurts the local economy because of two related but distinct “spillover effects,” as economists say: The shuttered businesses no longer need goods and services from local non-manufacturing firms, and their former workers have less money to spend locally as well. ... “People like to think that workers flow freely across sectors, but in reality, they don’t,” Autor says. ...
New policies for a new era?
In Autor’s view, the findings mean the United States needs to improve its policy response to the problem of disappearing jobs. “We do not have a good set of policies at present for helping workers adjust to trade or, for that matter, to any kind of technological change,” he says.
For one thing, Autor says, “We could have much better adjustment assistance — programs that are less fragmented, and less stingy.” The federal government’s Trade Adjustment Assistance (TAA) program provides temporary benefits to Americans who have lost jobs as a result of foreign trade. But as Autor, Dorn and Hanson estimate in the paper, in areas affected by new Chinese manufacturing, the increase in disability payments is a whopping 30 times as great as the increase in TAA benefits.
Therefore, Autor thinks, well-designed job-training programs would help the government’s assistance efforts become “directed toward helping people reintegrate into the labor market and acquire skills, rather than helping them exit the labor market.”
Still, it will likely take more research to get a better idea of what the post-employment experience is like for most people. ...
“Trade may raise GDP,” Autor says, “but it does make some people worse off. Almost all of us share in the gains. We could readily assist the minority of citizens who bear a disproportionate share of the costs and still be better off in the aggregate.”

Thursday, February 23, 2012

What's Wrong With This Picture?

State local

Sunday, February 19, 2012

NBER Research Summary: Offshoring, International Trade, and American Workers

Here's a description of recent academic work on offshoring and US workers:

Offshoring, International Trade, and American Workers, by Ann Harrison and Margaret McMillan, NBER Reporter 2011 Number 4: Research Summary: In 1982, only one out of four employees of U.S. multinationals was located offshore, and over 90 percent of those employees were in industrial countries. By 2007, the share of offshore employment had reached 44 percent, and the majority of those jobs were in low-income countries. These trends in offshoring are mirrored in the statistics on international trade: over the past two decades imports from low-wage countries have more than doubled.1
Over this same time period, U.S. employment in the manufacturing sector fell sharply and income inequality increased. ... Our research is motivated by these parallel developments and seeks to understand the implications for American workers.
Are U.S. Based Multinationals Exporting Jobs?
This question has always been of interest to policymakers and is arguably more important now than ever before. Accordingly, there is no shortage of academic research on this topic.2 The problem is that the answer to the question seems to change depending on the study. ... Our research examines this seemingly contradictory evidence in an attempt to bring closure to this debate. ...
Interpreting the Results on Multinational Employment Abroad
Our results indicate that whether the offshoring of jobs by U.S. multinationals leads to a decline in U.S. based employment depends on both the location of the investment abroad and the motive for the investment. In general, the expansion of employment in low-income countries has been associated with a contraction in employment in the United States... However, when American workers and workers in low-income countries perform different tasks, the expansion of multinational employment abroad can lead to increases in domestic employment. Taken together, these results go a long way toward explaining why previous researchers have found seemingly contradictory results. ...
Economy-wide Trends in Employment, Wages and Inequality
Using data from the CPS, we show that between 1982 and 2002, total manufacturing employment fell from 22 to 17 million, with rapid declines at the beginning of the 1980s and in recent years. However, the effects were uneven across different types of workers. For workers without a college degree, there were significant declines in manufacturing employment over the entire period. The opposite was true for workers with a college degree. Within manufacturing, the labor force has become increasingly well educated, as college graduates replace workers with high school degrees.
Wage trends mirror the shifts in employment. While wages fell for the least educated workers, they increased for workers with at least some years of college. The biggest wage gains were for manufacturing workers with an advanced degree. The decline in wages for high school dropouts and the steep wage increases at the upper end of the income distribution indicate a sharp increase in wage inequality.
Are Trade and Offshoring Responsible for Growing Wage Inequality?
... We focus on ... the movement of workers across sectors and occupations. To the extent that trade leads workers to switch industries (for example from manufacturing to services) or occupations (for example from machine tool operator to burger flipper), studies that focus on the impact of trade liberalization on within-sector inequality miss an important part of the story.
... We begin by showing that trade and offshoring are associated with a contraction in the manufacturing workforce. Then,... we demonstrate that workers who switch industries within manufacturing experience almost no decline in wages. However, when workers relocate to the service sector, they experience a significant wage loss. The negative wage impact is particularly large among displaced workers who also switch occupations. ... These effects are most pronounced for workers who perform routine tasks. This downward pressure on wages because of import competition and offshoring has been overlooked since it operates between and not within sectors. ...
Implications for American Workers
The trends in offshoring and international trade that we have described are likely to accelerate. China currently employs around 120 million people in the manufacturing sector and, although some reports indicate that wages are rising in China, those wages are still only a tiny fraction of wages in the United States. Moreover, China is expanding its manufacturing base to low-wage countries across the globe through a series of overseas economic zones11 . The implication for American workers is that in order to regain ground, they will need to find jobs outside of manufacturing where wages are comparable to those in manufacturing.
This is a tall order. ... This state of affairs has led some economists, including one of us, to reconsider the role of industrial policy. ...

Thursday, February 16, 2012

"Unemployment, Well-Being, and Capitalism"

Some people apparently interpreted this post as a shot at Chris Dillow's support of labor (more specifically, that I essentially accused him of being a "bourgeois apologist"). It wasn't intended that way, and as his latest post hopefully makes clear it wouldn't have been applicable in any case (in fact, in many ways his views go quite a bit beyond my own):

Unemployment, well-being and capitalism, by Chris Dillow: The call for “joined up government” is an old one. It should apply - but doesn’t - to the coalition’s attitude to the unemployed.
Cameron has said: “I do believe government has the power to improve wellbeing.” If this is so, then you’d expect a big part of public policy to focus upon how to improve the well-being of the unemployed. This is because these are, on average, significantly unhappier than other people - even the divorced - and it is probably easier to make the unhappy averagely content than it is to make the happy ecstatic.
But the coalition is not obviously solicitous towards the well-being of the unemployed. It prioritizes placating ratings agencies over creating jobs; its lackeys insult those who have suffered unemployment; it harasses the unemployed into workfare even though such schemes are of questionable efficacy; and it does little to combat a mindset that sees the poor, rather than poverty, as disgusting.
This inconsistency between a concern for well-being and a lack of concern for the unemployed is not, however, simply an intellectual failing. It reflects the fact that capitalism* requires that there be not just unemployment but that the unemployed be unhappy. I say so for three reasons:
1. Capitalism requires an excess supply of labour in order to bid down wage growth and industrial militancy. When Norman Lamont said unemployment was a “price well worth paying” to get wage inflation down, he was just blurting out the truth seen by Kalecki 50 years earlier - that “unemployment is an integral part of the 'normal' capitalist system.”
2. Capitalism needs the unemployed to look for work - to be an effective supply of labour. This requires that they be “incentivized” to seek jobs by meagre unemployment benefits and by being stigmatized. In other words, the unemployed must be made unhappy.
3. Blaming the unemployed for their plight serves a two-fold function in legitimating capitalism. It distracts attention from the fact that unemployment is caused by structural failings in capitalism, sometimes magnified by policy error. And in promoting the cognitive bias which says that individuals are the makers of their own fate, it invites the inference that, just as the poor deserve their poverty, so the rich deserve their wealth.
In short, in terms of attitudes and policies towards the unemployed, there is an ineliminable tension between capitalism and the promotion of well-being.
 * Note to right-libertarians. By “capitalism” I do NOT mean “free market economy” but rather a system in which large companies are run for profit by hierarchical structures for the benefit of a minority of people (which only sometimes includes shareholders). 

Wednesday, February 15, 2012

Austerity's Silver Lining?

Paul Krugman highlights the failure of austerity policy in Europe:

Clearly, It’s Time for More Austerity, by Paul Krugman:

Chris Dillow tries to find a "silver lining" in the UK's austerity policy, a policy that has increased the UK's unemployment rate:

...there might be a silver lining here. It could that one pleasant legacy of the 1930s depression was a favorable unemployment-inflation trade-off in the 1950s and early 60s. This was because workers who remembered the depression were scared of unemployment and so did not press for large wage gains even though they were in a strong labor market. The upshot was that inflation stayed low. However, as workers who remembered the 30s retired and were replaced by workers who had known only full employment, risk aversion and the fear of unemployment receded and so wage militancy rose.
It might be, therefore, that in 20 or so years time, we’ll enjoy low inflation if we get an economic boom because today’s joblessness might permanently reduce wage militancy (or an inclination to get into debt).
This, I suspect, is the best that can be said in favor of present economic policy.

Yes -- if we can just crush the working class and its demand for a fair share of the gains from growth, prosperity will be just around the corner.

What If Emergency Unemployment Benefits Expire?

What will happen if Congress allows the extension of unemployment insurance to expire at the end of this month?:

What Happens if Congress Doesn’t Continue Emergency Unemployment Benefits?, by Chad Stone, CBPP: The emergency federal unemployment insurance (UI) program is set to expire at the end of the month. If Congress fails to extend it:

  • The number of weeks of available benefits for unemployed workers will shrink dramatically, to fewer than 26 weeks in some states (see the maps [1,2] below).
  • Nearly 4.5 million jobless workers will lose UI benefits before the end of the year (see the table below).
  • The economic recovery will slow.

Besides the obvious benefit of supporting unemployed workers and their families at a time when there is still only one job opening for every four unemployed workers, UI is one of the most cost-effective ways to support the economic recovery. ...

The failure of people to find jobs that don't exist is surely a moral issue.

Tuesday, February 14, 2012

"The American Social Fabric"

I was struck by this statement by David Brooks:

"The American social fabric is now so depleted that even if manufacturing jobs miraculously came back we still would not be producing enough stable, skilled workers to fill them."

I'll leave the response to Dean Baker:

Five years ago we had two million more people employed in manufacturing than we do today. Has the social fabric become so depleted in this period that these people or others could now not fill these jobs if they came back? If Brooks really thinks that the ill effects of unemployment are that extreme he should be screaming for more stimulus in every column.

I think Brooks is wrong about the cause. It's not moral decay of the middle class, it's the desperation that comes with lack of opportunity, and the lock-in that comes with some of the solutions to that problem. But I will note that I have been emphasizing the social value of keeping people connected to the labor force through temporary jobs programs since the onset of the recession.

[For more on Brooks, see here (Krugman) and here (Mishel).]

Sunday, February 12, 2012

"Why Manufacturing Still Matters"

Christina Romer says there's nothing particularly special about manufacturing. I was a bit more wishy-washy overall, but said essentially the same thing (Basically: though I think that manufacturing is one of our best hopes right now, it is not the only hope we have and we shouldn't overemphasize any one area). Here's Laura Tyson filling in the other side of the debate with an argument about why manufacturing does, in fact, matter (the actual post has quite a bit more detail to support the arguments outlined below):

Why Manufacturing Still Matters, by Laura D’Andrea Tyson, Commentary, NY Times: As one of a rare group of economists who believe that “manufacturing matters” for the health of the American economy, I was heartened to hear President Obama emphasize manufacturing in his State of the Union address. During the last two years, the manufacturing sector has led the economic recovery, expanding by about 10 percent and adding more than 300,000 jobs.
Admittedly, this is a small number compared with overall private-sector job gains of 3.7 million during the same period, but it reverses the trend of declining manufacturing employment since the late 1990s.
And promising signs are emerging that American companies are shifting some manufacturing production and employment back to the United States. Policies to strengthen the competitiveness of the United States as a location for manufacturing can strengthen these nascent developments.
Though there are economists who do not share my heretical view, I believe that a strong manufacturing sector matters ... for several reasons. First, economists agree that the United States must rebalance growth away from consumption and imports financed by foreign borrowing toward exports. ...
Second, on average manufacturing jobs are high-productivity, high value-added jobs with good pay and benefits. ...
Third, manufacturing matters because of its substantial and disproportionate role in innovation. ...
In his State of the Union speech, President Obama proposed several additional changes in business taxes to discourage the outsourcing of manufacturing jobs and to encourage their creation in the United States.
A significant reduction in the corporate tax rate in the United States, which is the second highest among the developed countries, would be a much more powerful incentive to encourage American manufacturing production than these changes. Nor is it likely that they would have much effect on American manufacturing employment, because outsourcing has not been the major cause of manufacturing job losses. ...
The remarkable divergence between manufacturing output and employment reflects strong labor productivity growth, driven by labor-saving technological progress. This trend is likely to persist independent of changes in corporate taxation.
The other policies President Obama is promoting to support manufacturing — measures to increase high-school graduation rates; work-force training programs at community colleges; more support for basic research, infrastructure investment, and scientific, engineering and technical education; and immigration reform — would benefit not just manufacturing but the entire economy.
There is widespread support for such policies among economists, whatever their view of the role of manufacturing.

Tuesday, February 07, 2012

Unequal Recovery

Lower skilled workers haven't benefited much from the recovery:

Unemployment drop still leaves low skill workers behind, by Michael A. Fletcher, Washington Post: The nation’s jobless rate has declined to its lowest level in three years, a fact that has left Jamie Bean, an unemployed air-conditioner repairman, feeling more left out than ever.
Bean, 36, lost his job in December. ... Bean’s predicament is not unlike that of many workers who have a high school education or less. Not only were they hit especially hard by the recession, they also have continued losing ground in the recovery that has followed.
By disproportionate numbers, these Americans have given up looking for work, making the nation’s recovery appear better than it is. ... 
The number of Americans facing this predicament isn’t small. Nearly a third of the nation’s labor market has only a high school diploma. ... The news is worse for high school dropouts. ...
The recovery, economists say, has highlighted the consequences of not earning a college degree. ... The improvements that have occurred since the start of the recovery have accrued mostly to better-educated workers, analysts say. The economic challenge that lies ahead is finding a new place for workers such as Bean, who lack advanced academic credentials. Many of them rely on community colleges for their training, but those budgets have been cut in recent years. ...

It's easy to imagine Congress forgetting about this group (even more than it already has).

Sunday, February 05, 2012

Romer: Do Manufacturers Need Special Treatment?

Christina Romer says the case for promoting manufacturing is less than fully convincing:

Do Manufacturers Need Special Treatment?, by Christina Romer, Commentary, NY Times: Everyone seems to be talking about a crisis in manufacturing. Workers, business leaders and politicians lament the decline of this traditionally central part of the American economy. President Obama, in his State of the Union address, singled out manufacturing for special tax breaks and support. Many go further, by urging trade restrictions or direct government investment in promising industries.
A successful argument for a government manufacturing policy has to go beyond the feeling that it’s better to produce “real things” than services. American consumers value health care and haircuts as much as washing machines and hair dryers. And our earnings from exporting architectural plans for a building in Shanghai are as real as those from exporting cars to Canada.
The economic rationales for a policy aimed specifically at shoring up manufacturing largely fall into three categories. None are completely convincing: Market Failures ..., Jobs ..., Income Distribution ...
As an economic historian, I appreciate what manufacturing has contributed to the United States. It was the engine of growth that allowed us to win two world wars and provided millions of families with a ticket to the middle class. But public policy needs to go beyond sentiment and history. It should be based on hard evidence of market failures, and reliable data on the proposals’ impact on jobs and income inequality. So far, a persuasive case for a manufacturing policy remains to be made...

[I probably should have noted that I said something similar in my last column, i.e. "Manufacturing ... is not the only path to a better future. We need a strategy that creates the conditions for new, innovative firms of all sorts rather than focusing too much on any one area."]

Friday, February 03, 2012

Fed Watch: Good News on Employment

Tim Duy:

Good News on Employment, by Tim Duy: With only a minimal drag from the government sector, the February employment report shined on the back of a solid gain in private sector hiring:


The last couple of months look more like the optimistic numbers seen early in 2011 before the mid-year slowdown raised the specter of another recession. As has been widely noted, there is little to complain about in this report. To be sure, in many respects we are still deep in the hole. Long-term unemployment remains a challenge:


Wage growth is meager:


And the employment to population ratio remains sits a levels not seen since the early 1980s:


Still, as noted earlier, these issues should be alleviated if job growth is sustained. And as a precursor to such improvements, the unemployment rate is falling, and at a reasonably quick pace:


What will this mean for the Fed? As I discussed earlier, the unemployment rate looked to be the weak link in the Fed's most recent forecast of 8.2-8.5% by year end. We are at 8.3% in January, and unless either waves of workers re-enter the job market or the economy shifts gears dramatically soon, we will be easily below 8% in just a couple of months. Under such a trajectory, I have to imagine that another round of QE, as well as the Fed's interest rate projection, are not sure bets at all.
To be sure, one can argue the Fed should seize this opportunity to entrench the recovery with more easing. After all, the employment to population ratio suggests plenty of slack in the labor market, as does minimal wage growth. And unit labor labor costs are moving sideways as well:


We know that at least one policymaker, Chicago Federal Reserve President Charles Evans, would already be easing much more aggressively, but we also know that others, such as Philadelphia Federal Reserve President Charles Plosser thinks the current rate outlook is not consistent with an improving economic environment. A couple of reports like this will find others in his camp as well.
I think it still premature to expect the Fed to dramatically shift forward their own expectations of a rate hike. That said, since the recession ended, Federal Reserve officials have tended to shift expectations away from more easing and toward tightening every time the data shows a little life, only to have to backtrack six months later when hopes are dashed. Assuming the Fed follows the same pattern, watch for a shift in tone from Fed officials.

I'm starting to wonder how the Fed will wiggle out of its interest rate commitment should the economy turn out to be stronger than the Fed's forecast. I still think the Fed needs to insure against potential problems -- it's far too soon to conclude our troubles are over, we're still in a deep, deep hole and a slower than tolerable recovery is certainly still possible, perhaps even likely -- but it does look as though there's a chance the Fed will have to reconsider its recent interest rate commitment ("exceptionally low levels for the federal funds rate at least through late 2014"). The FOMC does give itself an out by saying conditions are "likely to warrant" this policy, but it seems to me it has been interpreted as a pretty firm commitment. (Note: To be clear, I am not advocating interest rate increases any time soon -- I think the Fed is likely to pull the interest rate trigger too early rather than too late -- but given the Fed's inclination to raise rates sooner rather than later, how will it explain itself if that time to raise rates comes earlier than projected?)

Dean Baker: Strong Job Growth

With all the cheering about the jobs report this morning showing 243,000 jobs created last month and a fall in the unemployment rate to 8.3 percent, I thought it might be useful to present a contrary voice (especially since I'm at a conference and don't have time to do much myself). This is the most negative report I could find, and even then Dean Baker says that "The January report is undoubtedly one of the best reports that we have seen since the recession began." However, "While this is markedly better than what we had been seeing, at this rate we would not get back to full employment until 2020":

Strong Job Growth Leads to Drop in Black/Hispanic Unemployment, by Dean Baker: The Labor Department reported that the unemployment rate fell to 8.3 percent in January, bringing its drop over the last year to 0.8 percentage points. African Americans in particular saw an especially sharp decline in unemployment, with their overall rate falling by 2.2 percentage points to 13.6 percent, the lowest level since March of 2009. The unemployment rate for African American men over age 20 fell by 3.0 percentage points to 12.7 percent, the lowest level since November of 2008. The drop for women over age 20 was 1.3 percentage points to 12.6 percent. The unemployment rate for Hispanics dropped by 0.5 percentage points to 10.5 percent, the lowest since January of 2009. These numbers are erratic and may be partially reversed in future months.
The gains for whites were more modest, with the overall unemployment rate edging down by 0.1 percentage points to 7.4 percent. The unemployment rate for white men over age 20 fell by 0.2 percentage points to 6.9 percent, while it was unchanged for women over age 20 at 6.8 percent. The unemployment rate for all men and women over age 20 is now the same at 7.7 percent, the first time they have been equal since the recession began in December, 2007.
Other data in the household survey were more mixed. ...[continue reading]...


Monday, January 30, 2012

FRBSF: Why Is Unemployment Duration So Long?

What's responsible for the slow recovery of employment in recent recessions? :

The analyses discussed here suggest that weak labor demand is the primary explanation for prolonged unemployment duration observed in the recent recession and recovery. The weak recovery of employment is similar to the jobless recoveries that followed the 1990–91 and 2001 recessions. This suggests that the labor market has changed in ways that prevent the cyclical bounceback in the labor market that followed past recessions. The shift towards jobless recoveries probably reflects a reduction in temporary layoffs during cyclical downturns. Stricter market incentives to control costs in the face of stiff domestic and international competition may also be factors. In addition, anecdotal evidence suggests that recent employer reluctance to hire reflects an unusual degree of uncertainty about future growth in product demand and labor costs. These special factors are not readily addressed through conventional monetary or fiscal policies. But such policies may be able to offset the central obstacle of weak aggregate demand.

More here.

Thursday, January 19, 2012

"Weekly Initial Unemployment Claims decline to 352,000"

Via Calculated Risk, some decent news on the jobs front:

Weekly Initial Unemployment Claims decline to 352,000, by Calculated Risk: The DOL reports:

In the week ending January 14, the advance figure for seasonally adjusted initial claims was 352,000, a decrease of 50,000 from the previous week's revised figure of 402,000. The 4-week moving average was 379,000, a decrease of 3,500 from the previous week's revised average of 382,500.

The previous week was revised up to 402,000 from 399,000.

The following graph shows the 4-week moving average of weekly claims since January 2000.

Click on graph for larger image.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased this week to 379,000.

The 4-week moving average is well below 400,000. ... This is the lowest level for weekly claims since April 2008.

Things are looking better, but I am not ready to conclude we are in the clear just yet -- there are still risks ahead and, in any case, we need an acceleration of activity in order to recover in a decent period of time. Unfortunately, it's not clear where that acceleration will come from. I hope the good news continues, and that it gets even better, but policymakers need to remain wary and, importantly, they should not conclude that the economy is healthy enough to begin raising interest rates or pursuing aggressive deficit reduction -- it's still far too early in the recovery process for that.

Wednesday, January 11, 2012

Fed Watch: Output Gaps and Inflation

Tim Duy:

Output Gaps and Inflation, by Tim Duy: Regarding, again, the size of the output gap, this remark is found in the most recent Fed minutes:

However, a couple of participants noted that the rate of inflation over the past year had not fallen as much as would be expected if the gap in resource utilization were large, suggesting that the level of potential output was lower than some current estimates.

I think this has less to do with the size of the output gap and more to do with downward nominal wage rigidities. Note that wages are still rising, although the pace of wage growth for production and nonsupervisory workers is still falling:


Perhaps a better example is the relatively new series, wages for all workers:


Overall private wage growth bottomed out in 2009 and held around 1.75%, perhaps just beginning to rise in recent months.
Despite very high unemployment and underemployment, wage growth is still positive. It tends to be very difficult to induce workers to take wages cuts (think also how the newly unemployed will resist taking new jobs with a substantially lower pay), which in-turn helps put a downside to inflation. In other words, one would expect the relationship between the output gap (or, similarly, high unemployment) and inflation to flatten as inflation rates fall toward zero.
This is also covered by Paul Krugman here and here.
Also note that rising wages doesn't necessarily imply higher inflation. Between the two is productivity growth. To account for the latter, we can look at unit labor costs:

Not exactly a lot of inflationary pressures stemming from unit labor cost growth. Presumably, high real wages could come by redistributing productivity gains to workers in the context of low inflation. For that to happen, however, I think we will need a lot more upward pressure on the labor market than we are seeing right now.

Monday, January 09, 2012

Will Obama's Military Cuts Hurt the Economy?

I was asked to comment on the economic impact of cuts to defense spending:

Will Obama's military cuts hurt the economy?

Saturday, January 07, 2012

"An Appalling Idea"

If Republicans get their way, collecting unemployment insurance will be much harder for many workers:

An Appalling Idea, Even by Washington Standards, CBPP: For legislation to extend the payroll tax cut through the end of 2012, House Republicans are expected to push for a provision on unemployment insurance (UI) that is appalling even by current Washington standards. Neither President Obama nor Congress should accept any payroll-tax legislation that includes it. Here’s why:
The provision, part of a full-year payroll-tax bill that the House passed in December, would deny UI benefits to any worker who lacks a high school diploma or GED and is not enrolled in classes to get one or the other — regardless of how long the person worked or whether he or she has access to adult education, which itself has been subject to significant budget cuts in the past few years and is heavily oversubscribed.
The proposal would deny UI benefits to hundreds of thousands of workers — many of them middle-aged — who have worked hard, played by the rules, and effectively paid UI taxes for years and who then were laid off due to no fault of their own. ...
Older workers would be hit the hardest. Nearly half (47 percent) of UI recipients with less than a high school education or the equivalent are over age 45... In 2010, half a million workers age 50 or over who received UI lacked a high school diploma. By contrast, less than one-fifth of UI recipients without a high school diploma or the equivalent are under age 30.
For most of these individuals, who may have worked for 30 years or more, returning to high school makes little sense. And adult education, even when it might be useful because the workers are younger, very often isn’t available due in part to federal and state budget cuts.
Virtually every state had waiting lists in local adult education programs in 2009-2010, according to the most recent survey, and the number of people on waiting lists doubled just between 2008 and 2009-2010. Furthermore, the shortage of adult education slots has almost certainly grown significantly since 2009-2010 because of substantial budget cuts in adult education since then. ...
The proposal ... would allow people without a high school diploma or GED to receive benefits only if they enroll in classes for which there often would be no slots available — in part because of budget cuts approved by some of the same policymakers who now embrace this new requirement.
President Obama and lawmakers of both parties face a crucial test. They claim to care about average Americans who are trying to find work in an economy that still struggles to create jobs. If they give in to House Republicans and agree to this provision as part of a final package on the payroll tax cut, their claims will ring thin — and they will deserve the strong criticism that will come their way.

If all that is required is to enroll and benefits end before enough credits are accumulated to graduate, how much effort do you think these students will put into their classes (and if there is a GPA requirement, e.g. you cannot get an F, many will do just enough to meet the requirement, and no more)? Students who have no interest in being in adult education classes, no interest in learning, will crowd out students who want to be there (and being in school doesn't help much with job search). How is that better? If there was excess capacity in the system, they could enroll without displacing someone else. But that's not the situation right now, and if Republicans have their way with budgets, that's unlikely to change (and even if it was the situation, I'd still object to making obtaining a degree a condition for receiving unemployment insurance). I suppose we could get a bunch of private schools offering an easy way to satisfy the requirement in exchange for some of the money the unemployed receive through unemployment insurance (guaranteed to pass or your money back!), but degree mills popping up to collect money from the unemployed -- money they very much need -- is not a very desirable outcome (and if the government pays for the classes, the incentives are even worse).

Friday, January 06, 2012

The Employment Report

I have a few comment on today's employment report:

Unemployment declines, but don't sound the all clear just yet

Paul Krugman: Bain, Barack and Jobs

Romney's claims about job creation are nonsense:

Bain, Barack and Jobs, by Paul Krugman, Commentary, NY Times: ...Mr. Romney claims that Mr. Obama has been a job destroyer, while he was a job-creating businessman. For example, he told Fox News: “This is a president who lost ... two million jobs...” He went on to declare, of his time at the private equity firm Bain Capital, “I’m very happy in my former life; we helped create over 100,000 new jobs.”
But his claims about the Obama record border on dishonesty, and his claims about his own record are well across that border. Start with the Obama record. It’s true that 1.9 million fewer Americans have jobs now than when Mr. Obama took office. But the president inherited an economy in free fall... So how much of that Obama job loss took place in, say, the first half of 2009?
The answer is: more than all of it. The economy lost 3.1 million jobs between January 2009 and June 2009 and has since gained 1.2 million jobs. ... So Mr. Romney’s claims about the Obama job record ... are deeply misleading. Still, the real fun comes when we look at what Mr. Romney says about himself. Where does that claim of creating 100,000 jobs come from?
Well, Glenn Kessler of The Washington Post got an answer from the Romney campaign. It’s the sum of job gains at three companies that Mr. Romney “helped to start or grow”: Staples, The Sports Authority and Domino’s.
Mr. Kessler immediately pointed out two problems with this tally. It’s “based on current employment figures, not the period when Romney worked at Bain,” and it “does not include job losses from other companies with which Bain Capital was involved.” ... Hey, if pluses count but minuses don’t, everyone who spends a day playing the slot machines comes out way ahead! ...
Mr. Romney’s claims about being a job creator would be nonsense even if he were being honest about the numbers, which he isn’t.
At this point, some readers may ask whether it isn’t equally wrong to say that Mr. Romney destroyed jobs. Yes... The real complaint about Mr. Romney and his colleagues isn’t that they destroyed jobs, but that they destroyed good jobs.
When the dust settled after the companies that Bain restructured were downsized — or, as happened all too often, went bankrupt — total U.S. employment was probably about the same... But the jobs that were lost paid more and had better benefits than the jobs that replaced them. Mr. Romney and those like him didn’t destroy jobs, but they did enrich themselves while helping to destroy the American middle class.
And that reality is, of course, what all the blather and misdirection about job-creating businessmen and job-destroying Democrats is meant to obscure.

Monday, January 02, 2012

Paul Krugman: Nobody Understands Debt

We should be doing more to help the unemployed:

Nobody Understands Debt, by Paul Krugman, Commentary, NYTimes: In 2011, as in 2010, America ... continued to suffer from disastrously high unemployment. And ... almost all the conversation in Washington was about something else: the allegedly urgent issue of reducing the budget deficit.
This misplaced focus said a lot about ... how disconnected Congress is from the suffering of ordinary Americans. But it also revealed something else: when people in D.C. talk about deficits and debt, by and large they have no idea what they’re talking about...
Perhaps most obviously, the economic “experts” on whom much of Congress relies..., the likes of the Heritage Foundation have been waiting ever since President Obama took office for budget deficits to send interest rates soaring. Any day now! And while they’ve been waiting, those rates have dropped to historical lows. ...
But Washington isn’t just confused about the short run; it’s also confused about the long run... Deficit-worriers ... see America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments. This is, however, a really bad analogy in at least two ways.
First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. ...
Second — ...the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves. ... If your image is of a nation that’s already deep in hock to the Chinese, you’ve been misinformed. ...
Now.., you don’t have to be a right-wing ideologue to concede that taxes impose some cost on the economy... But these costs are a lot less dramatic than the analogy with an overindebted family might suggest.
And that’s why nations with stable, responsible governments — that is, governments that are willing to impose modestly higher taxes when the situation warrants it — have historically been able to live with much higher levels of debt than today’s conventional wisdom would lead you to believe. Britain, in particular, has had debt exceeding 100 percent of GDP for 81 of the last 170 years. When Keynes was writing about the need to spend your way out of a depression, Britain was deeper in debt than any advanced nation today, with the exception of Japan. ...
So yes, debt matters. But right now, other things matter more. We need more, not less, government spending to get us out of our unemployment trap. And the wrongheaded, ill-informed obsession with debt is standing in the way.

Sunday, January 01, 2012

Jobs, Not the Deficit, Should be Our Most Immediate Concern

The NY Times editorial staff:

As Good as It Gets?: ...The way to revive sustainable growth is with more government aid to help create jobs, support demand and prevent foreclosures. As things stand now, however, Washington will provide less help, not more, in 2012. Republican lawmakers refuse to acknowledge that government cutbacks at a time of economic weakness will only make the economy weaker. And too many Democrats, who should know better, have for too long been reluctant to challenge them.
The drag from premature cuts is significant. ... It does not have to be this way. After nearly a year of trying to accommodate Republicans in their calls for excessive budget cuts, President Obama finally pushed a strong jobs bill including spending for public works, aid to state and local governments and an infrastructure bank, as well as renewal of a payroll tax break and jobless aid. Congressional Republicans blocked the bill, and with it, the chance to create some 1.9 million jobs. But late last month, the Republican leadership in the Senate and House retreated — even if extremists in the party did not — and managed to temporarily extend the payroll tax cut and jobless benefits.
The extension is only for two months, setting up another fight. But the good news is that in the showdown, Mr. Obama and the Democratic leadership did not back down. ...
The economy, and struggling Americans, need a lot more help. Mr. Obama needs to translate his newfound focus on the middle class into an agenda for broad prosperity, making the case that what the nation needs now is a large short-run effort to create jobs coupled with a plan to cut the deficit as the economy recovers.

Christina Romer agrees (me too):

Two Big Problems, Two Ready Solutions: The United States faces two daunting economic problems: an unsustainable long-run budget deficit and persistent high unemployment. Both demand aggressive action in the form of fiscal policy. ...
On the deficit, the big worry isn’t the current shortfall, which is projected to decline sharply as the economy recovers. Rather, it’s the long-run outlook. ...
But we can’t focus on the deficit alone. Persistent unemployment is destroying the lives and wasting the talents of more than 13 million Americans. Worse, the longer that people remain out of work, the more likely they are to suffer a permanent loss of skills and withdraw from the labor force.
Despite heated rhetoric to the contrary, the evidence that fiscal stimulus raises employment and lowers joblessness is stronger than ever. And pairing additional strong stimulus with a plan to reduce the deficit would likely pack a particularly powerful punch for confidence and spending. ...
 Because many people worry about increasing the role of the federal government, why not give substantial federal funds to state and local governments for public investment? Tell them that the money has to be used for either physical infrastructure like roads, bridges and airports, or for human infrastructure like education, job training and scientific research. Then let the states, cities and towns figure out what would work best for their citizens. ...

It would be helpful if the press would react as negatively to a failure to produce a jobs bill as it does to failures to come to an agreement about reducing the deficit. But it doesn't. The lack of effort from Congress on jobs is hardly noted in the press while the deficit -- and calls to do something about it -- is noted almost daily.

We need to do more to help the unemployed.

Saturday, December 31, 2011

Will the Payroll Tax Cut be Extended Through the End of 2012?

Steve Benen doesn't think there's a very good chance that the payroll tax cut will be extended through the end of 2012:

Enjoy the payroll tax break while it lasts, by Steve Benen: Last week, after a needlessly-contentious process, Congress approved a two-month extension of the payroll tax break. As part of the agreement, a conference committee will try to come up with an agreement to extend the cut through the end of 2012.

I’ve been rather pessimistic about the likelihood of success, and yesterday, the odds got worse.

The Senate Republican leader announced Friday that he had chosen three of his colleagues to try to thrash out a bipartisan deal on payroll taxes, unemployment benefits and Medicare.

The three Republican senators will join four Democratic senators and 13 House members on a conference committee... The newly named Republican conferees are Senators Jon Kyl of Arizona, Michael D. Crapo of Idaho and John Barrasso of Wyoming.

These ... are three senators you’d appoint to a conference committee if you want to be destructive.

Kyl, for example, was instrumental in sabotaging the super-committee process... Crapo and Barrasso, meanwhile, are two far-right senators who’ve never demonstrated any willingness to accept concessions on anything.

What’s more, note that the House GOP leadership has already announced its conferees, most of whom have already said they don’t want a payroll-cut extension no matter what concessions Democrats are willing to make...

What about the risk of being blamed? Remember,... the process itself offers cover. Instead of last week, when House Republicans became the clear villains,... the party will find it easier to spread the blame around.

“It’s not our fault,” GOP leaders will say. “We tried to work with Democrats on a deal, but one didn’t come together. Oh well.”... and the media would feel obligated to say “both sides” failed to reach an agreement.

And even if the payroll tax cut is extended, it's likely that Republicans will demand -- and get -- large concessions in return, e.g. permanent reductions in spending on social insurance programs.

Thursday, December 29, 2011

It's the Season for Optimism

This is the time of year when we get to read all the stories about how the economy is poised to do better in the coming year. There have been a couple of these today, and I expect more will follow.

Better than what? Yes, signs are pointing in the right direction, but we are still in a deep, deep hole and the signs also point to a long, long road to recovery. The economy still needs help, job creation in particular, but, unfortunately, these stories create an elevated sense of optimism about the coming year. This lets policymakers off the hook and helps them avoid the difficulties they would face if they proposed more aggressive policy actions.

Doing better is not the same as doing well enough, and policymakers have no reason to relax yet. I hope the people writing these stories will make that clear.

Maybe we'll be surprised by the strength of job creation in the coming year, I certainly hope so, but we shouldn't count on it.