Tim Duy: The Labor Force – Views From the Trenches

Tim Duy has some observations on the labor market:

A couple of observations regarding the great labor market debate.

First, I was discussing the issues surrounding declining labor force participation rates (recently, see David Altig here and here and William Polley here) with our colleague, Robin McKnight. She pointed me to the following paper:

Autor, D.H. and Duggan, M.G., The Quarterly Journal of Economics, Volume 118, Number 1, 1 February 2003, pp. 157-205(49) Abstract: Between 1984 and 2001, the share of nonelderly adults receiving Social Security Disability Insurance income (DI) rose by 60 percent to 5.3 million beneficiaries. Rapid program growth despite improving aggregate health appears to be explained by reduced screening stringency, declining demand for less skilled workers, and an unforeseen increase in the earnings replacement rate. We estimate that the sum of these forces doubled the labor force exit propensity of displaced high school dropouts after 1984, lowering measured U. S. unemployment by one-half a percentage point. Steady state calculations augur a further 40 percent increase in the rate of DI receipt.

The paper is definitely worth a read. The authors argue that a combination of factors drove a significant number of low-skilled workers out of the labor force over the past two decades, starting with a liberalization of the Disability Insurance program. The DI benefits formula is indexed to the mean wage in the economy. Widening income differentials raised the relative benefits for low-skilled workers. This was accentuated by the rising real value of medical benefits also provided. The impact of these events was to increase the likelihood that a low skilled job loser would seek and receive DI benefits.

Notably, the authors contend the adjustment is only partially complete. Their calculations suggests an “additional 40% increase in DI recipiency rates over the next decade, which is likely to be concentrated among less skilled workers.”

Unfortunately, the authors do not examine the 16-24 age group identified by David Altig and William Polley.

Second, yesterday I was in Salem, Oregon to discuss the economic outlook with the local economic development group. In talking with the participants, I was once again struck by the wildly different views of the labor market. I will warn that many of the sentiments passed on to me are at odds with the views of many of the regular readers of these pages.

Consider for a moment how you would answer the following question:

“What is the “true” unemployment rate?”

Would you provide the headline number, 4.7%? Or unemployment for just 15 weeks or more, 1.5%? Or unemployment including marginally attached and part-time workers, 8.4%?

In order to answer the question, I have to probe a bit deeper into the questioner’s view of the labor market. (I suppose this implies that my answer is contingent on the questioner’s priors.) Invariably, one group of questioners will complain about the quality of jobs or inability to find jobs – arguing the statistics simply overstate economic strength. (They also point to rising rolls of persons on public benefits as evidence of job market weakness. To some extent, the paper Autor-Duggan paper hits on this point.)

The people who are doing the hiring, however, tell the exact opposite story. They simply do not believe that there are any potential employees available. For instance, one employer described the difficulty finding entry level workers for jobs that pay $30-35k with benefits. The jobs required something equivalent to an associate’s degree, and they would pay for education if they could find suitable candidates. Higher level workers were equally difficult to find. Another employer described a maintenance technician opening that had been unfilled for 8 months. The job was initially offered at $18/hr, rising to $22/hr currently.

The upshot of these two sides appears to be that (local) employers are not really facing a shortage of workers per se. They are facing a shortage of what they view as qualified workers. Note that qualified workers could be of both the skilled and unskilled variety. The skills mismatch story is not really new, and is consistent with the challenges of structural change and education processes. But every employee placement firm tells me another story: They reject 90% or more of the applicants for one or more of the following three reasons:

Fails the drug test. Felony conviction in the past 7 years. Lack of work history – work history is seen as evidence that the potential employee can get out of bed and show up to work on a regular basis.

The suggestion from employers then is that an interconnected set of social problems is increasingly a barrier to employment. And if one can’t find employment, what is the likelihood of overcoming the challenges to employment? And how does one move out of the lower reaches of the income distribution?

These are just stories I hear when I actually leave campus, not carefully collected statistical evidence. And there are likely local dynamics at play. Job growth in Oregon is running at twice the national rate, suggesting that the pool of available labor is drying up quickly. But I hear these types of stories frequently and consistently from a broad range of employers. And I repeatedly hear concerns about the health of the economy from those who work most closely with the disadvantaged. Overall, it suggests to me that the labor market and financial strains on the lower ranges of the income distribution in particular are the result of a complex and long running mix of social forces and policy impacts that we don’t fully understand.