The Frozen Labor Market

The labor market recovery of the past two years ago has not gained enough strength to rule out the possibility of a lost decade.  The recovery is especially weak for less educated workers and for cities devastated by the housing market collapse.  The economy is in better shape than three years ago but we would need to add 10 million full-time jobs to return to pre-recession employment to population ratios.  It is doubtful that 2012 will be much better than 2011 because the labor market appears much less dynamic than it was just a decade ago.

The recovery is weaker than the headlines suggest.  The unemployment rate has fallen by 1.4% over the past two years but this is largely due to workers leaving the labor force; the labor force participation rate has declined by 1.1% since January 2010.  The participation rate has been trending down for years so a small part of this decline was expected.  Nonetheless we should not be encouraged by declining labor force participation during a recovery.

The following figure presents a disconcerting trend: hires and separations have fallen steadily relative to the size of the labor force over the past decade.  The labor market is much less dynamic than it was prior to the Great Recession.  Although companies are laying off fewer workers, they are also hiring fewer workers, and employed workers are reluctant to quit.  Consequently new labor force entrants and job losers face fewer job opportunities and struggle to find a job.

Gross labor market turnover, measured by the sum of hires and separations per labor force participant, has fallen 25% since 2002.  This indicates a labor market that is more sluggish and less dynamic than it was just a decade ago.  Companies may be reluctant to hire because they are uncertain about: (i) the strength of the economic recovery, (ii) health care costs, or (iii) whether temporary tax code provisions will be extended or curtailed.  Hiring rates may also be weak because jobless workers lack the skills and experience that companies demand, or because start-ups can’t obtain financing for their new ventures.  A robust recovery must include much more hiring so that enough jobs are created to employ new graduates and the long-term unemployed.  This won’t happen if the labor market remains as sluggish as it has been since 2008.

Multipliers

We are producing more with fewer workers; U.S. employment is below the pre-recession peak of January 2008 but output (real GDP) is 1.2% higher.  Employment in the private sector and state and local government has declined over the past four years while Federal employment has increased.  Since January 2008:

• Private sector employment declined by 4.5%
• Federal government employment increased by 3.4%
• State government employment declined by 1.6%
• Local government employment declined by 2.8%

Is the decline in state and local government employment a drag on the economy as Paul Krugman has argued?  Or have state and local governments, like the private sector, become more efficient and deliver more and better quality services with fewer employees?  This is impossible to tell from National Income Accounts data which only measure the cost of government spending and not the value of the government services provided.

It is important to put the recent declines in state and local employment into perspective.  In the past fifteen years local government employment has grown almost twice as fast (17.5%) and state government employment has grown slightly faster (10.3%) than private sector employment (9.1%).  State and local government has grown relative to the private sector for decades.

The recovery/stimulus legislation was designed to bolster state and government spending.  However, as John Taylor testified to Congress, state and local governments used stimulus funds largely to reduce borrowing rather than increase expenditures.

Paul Krugman argues for more state and local government spending on goods, services and investment.  (He admits that “safety-net spending … has soared in this slump.”)  Keynesians believe that if spending were $340 billion higher (about 2% of GDP), GDP would be 3% higher due to the “multiplier” effect and the unemployment rate would be 1.5% lower.   A “multiplier” argument is a smokescreen for the real debate about the appropriate size and scope of government.  Some state and local government spending/employment cuts make sense if they eliminate waste and duplication but that is the opposite of what “multiplier” calculations would conclude.

In addition many leading economists such as John Cochrane and John Taylor are skeptical of large multipliers for stimulus spending.  More importantly, the “multiplier” argument says nothing about which programs should be expanded and whether any programs should be cut.  The emptiness of a “multiplier” justifcation for government spending is clear when one recognizes that Keynesians believe that government reductions in waste and fraud would lower GDP and raise the unemployment rate.

One of the most important election issues is the debate over the proper size and scope of government.  The debate would be more informative if it focused on the direct costs and benefits of government programs, assumed that programs must be paid for even if financed through bonds, and did not rely on possible “multiplier” effects to justify spending.

Bounty Payments, Concussions, and the NFL

On Friday the NFL announced the findings of its investigation of the “Bounty Rule.”  The NFL stated that players and an assistant coach on the New Orleans Saints maintained an internally financed fund to reward defensive players for forcing turnovers and causing “knockouts” and “cart-offs.”  Subsequently there have been stories that the investigation will eventually lead to the Washington Redskins, where the assistant coach previously worked, and that the punishment for teams that used a “bounty” system will be severe.

This issue is a major concern for the NFL because of lawsuits over concussions suffered by former players.  There are reports that a “bounty” system will make coaches and players more likely to be held liable for the injuries suffered on the football field.  I believe that concussions and severe blows to the head are more likely on passing plays and would like to see the NFL give defenses more of an advantage for stopping the pass.  The number of severe blows to the head per season might decline if NFL teams would run more and pass less.

An alternative is to increase the punishment for defensive players after hard hits.  Some NFL fans are concerned that the game’s appeal will be diminished if more personal fouls are called on defensive players.  Although the NFL says it has stepped up enforcement of these types of fouls, NFL data reveals that the number of penalties called per game peaked in the late 1990s and is down about 8% since then.  There is also no indication that the average severity of penalty infractions have changed in the past decade.  The average yards per penalty last season was 8.4 yards, virtually identical to the average in the 2001 and 2002 seasons.

The NFL has become more dangerous because players are stronger and faster than in earlier eras.  The risk of concussions and head injuries also increased when the NFL changed its rules to “open up the game” by encouraging more passing plays.  The following chart shows that the number of passing plays per game increased after the 1978 rule limiting contact between defensive backs and wide receivers to five yards from the line of scrimmage, and has continued to increase.

NFL rule changes have made elite quarterbacks more valuable and encouraged teams to draft and retain linemen to protect the team’s most valuable player (think “The Blind Side”).  The chart also shows that teams became much better at protecting their quarterback and reduced the rate at which sacks occur by about 25% per passing play, since the early 1970s.  The total number of sacks per game has remained unchanged from the early 1970s, however, because teams pass 25% more often.

A recent study showed that running backs and quarterbacks receive the most severe blows to the head.  Although further analysis of these (and more) data is required, I suspect that quarterbacks, receivers, and running backs are most vulnerable to severe hits when they are in open space.  This is much more likely to occur on a passing play.

The NFL may be able to reduce the probability of head injuries by changing its rules to favor pass defenses.  This would reduce the number of passes and consequently the number of hits that occur when an offensive player is in the open field and more vulnerable.  First, I would allow defensive backs to maintain contact with a receiver beyond five yards.  Second, I would reduce the penalty for pass interference from 15 to 10 yards, unless it was flagrant.  In the case of a flagrant penalty the ball would be spotted at the point of the foul (if it was more than 10 yards downfield).

I would like to see the NFL consider these rule changes before attempting to further penalize defensive players for hits that are too hard and/or too close to the head.  Decisions on the field are made in a split second, and it may be difficult to provide the proper incentives for defenders to adapt on the field.  It is much easier to change the incentives faced by offensive coordinators by making it harder to complete a pass.  This may not be enough of a change to improve safety, but it might be a good first step.

Unemployment and Education Snobs

Steve Rattner presented another interesting set of charts on Morning Joe yesterday.  The charts showed how the unemployment rate and average pay are related to educational attainment.  This is an uncontroversial topic for labor economists; when workers lack marketable skills unemployment is a likely outcome.  For many jobless workers chronic unemployment will continue until they acquire more training and/or education.

The following chart caught my eye.  The current unemployment rate of workers with less than a high school diploma is over 14%, and much higher than the rate for more educated workers.

After seeing this chart and others like it, the guests and hosts on Morning Joe took the easy route and derided Rick Santorum’s comments about education snobs.  I would have been much more interested in a discussion of the following facts:

• The unemployment rate is 17.6% for native-born men age 25 to 64 with less than a high school diploma.
• The unemployment rate is 9.8% for foreign-born men age 25 to 64 with less than a high school diploma.
• Foreign-born men account for 57% of the employment of men age 25 to 64 with less than a high school diploma.

Most unskilled jobs that do not require a high school diploma are now held by immigrants.  About 2 of 3 employed male immigrants who lack a high school diploma were born in Mexico and more than 5 of 6 are from either Mexico or Latin America.

Workers without a high school diploma have a difficult time finding a job and many of the available jobs are unpleasant and involve manual labor.  Although immigrants from Mexico and Latin America are typically less educated than American workers and face language barriers, they have lower unemployment rates than workers who were born and educated in the United States.  This is an indictment of our education system and our opportunities for vocational training.  It’s time to address our poor record of educating and training the next generation of workers, especially for students who are unlikely to receive a college diploma.

Delayed Retirement

There is one group of workers whose employment rates did not fall during the recession – senior citizens.  This, however, is not necessarily good news.  Although Americans have been choosing to delay retirement and work later in life for the past few decades, some recent decisions to delay retirement may have been motivated by declines in household wealth during the recession.

The following chart presents changes in the employment to population ratio for adult men over the past four years.  I use a “Full-Time Equivalent” notion of employment so that a part-time job counts as one half of a full-time job.  The chart shows that the employment to population ratio:

• Fell sharply during the recession and has partially recovered for men under age 65.
• Fell modestly for men age 65 to 69 and has recovered all of the previous losses.
• Increased modestly for men age 70 to 74 even during the recession.

The deep recession damaged the employment prospects of prime working age men more than the aggregate employment figures suggest.  The aggregate employment decline was ameliorated by some senior citizens delaying their retirement because of substantial losses in their household wealth.