Pay and Productivity

On Labor Day weekend in 2012 labor’s share of national income is lower than it has been since World War II, and there is a widening gap between growth in output per hour and labor compensation.  There is no doubt that technological change and globalization have contributed to these trends.  The clearest path to mitigating these trends is better education and training programs to prepare workers for a highly competitive and dynamic global labor market.

Worker productivity is a key factor in determining pay.  In a competitive economy a worker’s wage equals the additional revenue generated by one more unit of labor services.  A worker who costs twice as much as another must be twice as productive, at the margin, in order to keep his/her job.  The key is worker productivity at the margin, which is difficult to measure.  The Bureau of Labor Statistics (BLS) reports average output per hour (which is higher than marginal output per hour) and has shown that wages and average productivity have diverged over the past two decades.

This week the BLS released productivity data for detailed retail trade industries in 2011.  Two of the industry leaders in productivity gains between 2010 and 2011 were book stores and florists.  Output per hour worked increased by 13.4% in book stores and by 20.6% in florists from 2010 to 2011.  A naïve interpretation of these data would lead to the prediction that wages should rise sharply for employees of book stores and florists.

Productivity in book stores and florists has risen because management has developed methods to sell more with fewer employees.  Employment in book stores is less than half of what it was in 2003 and employment in florists is down 43% since 2003.  The worker productivity gains at these retailers are unlikely to be the result of more productive and skilled employees, but instead due to efficiency gains.  The revenue generated by an additional hour of a worker’s time may well be about the same as it was a decade ago, with fewer workers in the store.  In this situation an increase in average worker productivity per hour doesn’t translate into wage gains.

Technological change and globalization have weakened the demand for labor in goods producing industries for decades.  Over the past decade gains in information technology have weakened demand for workers in the service and retail sectors as well.  These trends present a challenge for the labor movement in the U.S. on this Labor Day weekend.

Labor Market Pessimism

Through the first six months of the year the number of workers who quit their job is down 28.5% from 2007.  Workers do not generally quit a job if they believe it will be difficult to find a new job.  A low quit rate is a symptom of worker pessimism in the labor market.

A second indication of labor market pessimism is that although the number of workers laid off through the first half of 2012 is down 3.3% from 2007, the number of laid off workers filing for unemployment insurance claims is up over 18% from 2007.  Workers who are laid off appear more pessimistic about finding a new job than they were in 2007 because they are much more likely to file for unemployment insurance.  A laid off worker who is fairly certain to be re-employed within a few weeks is much less likely to go to the trouble of filing for unemployment insurance claims.

The labor market recovery will be weak as long as quit rates remain far below pre-recession levels and new unemployment insurance claims stay at their current rate of 374,000 per week (compared to 317,000 per week in 2007).  The pessimism of those who have recently lost jobs and those who are considering a job move suggest that the unemployment rate is unlikely to drop over the next few months.

The Slow Growth in Full-Time Jobs

Full-time employment of adults age 20 to 54 has grown substantially slower than part-time employment during this economic recovery.

  • Part-time employment grew annually by 0.73% from May-July 2010 to May-July 2012.
  • Full-time employment grew annually by 0.22% from May-July 2010 to May-July 2012.
  • The fraction of workers with part-time jobs has remained above 16% since 2009, about 3% higher than the average from 2000-2008.
  • There are about 3.2 million fewer full-time workers than what was typical for the U.S. workforce from 2000 to 2008 (holding constant total employment).

The millions of under-employed adults age 20 to 54 are both a symptom and a cause of the weak economic recovery.

Another indication of the problem of under-employment in this recovery is evident in the BLS Displaced Worker Surveys of 2010 and 2012.  The survey focuses on workers who lost jobs they held for at least three years prior to being displaced.  A “displacement” is a job separation that occurred because:  “a plant or company closed or moved, there was insufficient work” or the “position or shift was abolished.”  The survey asks people who were displaced in the past three years whether they were re-employed and if so, whether their new job is full-time or part-time.  The 2010 and 2012 Displaced Worker Surveys indicate that an unusually high fraction of re-employed workers have only found part-time work.

The following chart illustrates the fraction of re-employed displaced workers who held only a part-time job in all of the Displaced Worker Surveys from 1996 to 2012.

A comparison across surveys indicates that:

  • More than 15% of workers who had found work after displacement from a longer lasting job were working part-time in surveys that asked about  job losses from 2007 to 2011.
  •  About 10% of workers who had found work after displacement from a longer lasting job were working part-time in surveys that asked about  job losses from 1993 to 2007.
  • Workers displaced since 2007 have been 1.5 times more likely to be re-employed at a part-time job.

The weak economic recovery has resulted in a stubbornly high unemployment rate, discouraged jobless workers from looking for work and caused the labor force participation rate to fall well below pre-recession levels.  There are also several million more adults now working part-time compared to the pre-recession labor market.  BLS surveys indicate that some of these “new” part-time workers were displaced from jobs they held for years prior to the recession of 2007-2009.  Consequently the national unemployment rate of 8.3% substantially understates the degree of underutilization of human capital in our economy.

Why Increasing CAFÉ Standards for Automobile Efficiency is a Mistake

The Obama Administration announced new regulations requiring automakers to sell cars and light trucks which average 54.5 miles per gallon by 2025.  This requires cars and light trucks to be twice as fuel-efficient as the current regulations in just 12 years.  President Obama has said:  “These fuel standards represent the single most important step we’ve ever taken to reduce our dependence on foreign oil.”  (The Keystone Pipeline might have reduced dependency even more but that was a step not taken.)   In contrast, a spokesperson for Mitt Romney said “Governor Romney opposes the extreme standards that President Obama has imposed, which will limit the choices available to American families.”

The more stringent standards are promoted as a way to reduce the demand for oil.  One way to do this is by reducing the demand for cars and driving but Bob King, President of the United Autoworkers, believes the new standards will make it cheaper to drive.  He said: “These new standards will help propel the auto industry forward by giving American families long-term relief from volatile fuel prices.  Lowering the total cost of driving will make automobiles more affordable and expand the market for new vehicles.”  Unfortunately it is quite likely that King is wrong and the more stringent regulations will increase the cost of vehicles and the cost of travel per passenger mile.

Motor vehicles contribute to traffic and air pollution (negative externalities) and use public roads.  Sensible policy includes gasoline taxes and vehicle registration fees.  It may be appropriate to raise gasoline taxes and vehicle fees if the perceived costs of the negative externalities caused by cars and trucks have increased.  It makes little sense, however, to double the fuel efficiency regulations for cars and light trucks by 2025.  The new regulations will have unintended consequences, including:

  • A shift to the production of smaller vehicles that will make it more difficult for car pooling and result in even more vehicles with only a single passenger on our roads and highways.  Higher gas taxes would encourage more car pooling and reduce traffic.
  • A delay in purchases of newer and more fuel-efficient (but more expensive) vehicles further increasing the average age of vehicles on the road.  Higher gas taxes would encourage people to trade in less efficient cars.
  • Drivers will be encouraged to drive more often once they have incurred the fixed cost of  buying a new more efficient car.  Cars that achieve 54.5 miles per gallon will cause drivers to make more trips and increase traffic and congestion.  Higher gas prices cause drivers to economize on the number of trips and reduce traffic.
  • A shift to the production of lighter and less safe vehicles.  Higher gas taxes make it more expensive to operate larger and heavier vehicles but families who value those features would still be able to purchase larger vehicles.

This is not to say that gas taxes should be raised but rather that higher gas taxes make far more sense than the new regulations which will cause families to delay trading in their older less efficient cars for newer more efficient ones.  The new regulations may make it impossible for soccer moms and dads to take their families and friends together in the same vehicle, will reduce car pooling and won’t reduce traffic and congestion.  Other than that it is a great idea.

The Misguided Focus on Green Jobs

The Bureau of Labor Statistics (BLS) counts the number of “green“ jobs in the U.S. economy and earlier this summer its methodology for determining whether a job was “green” came under fire in a Congressional committee hearing when we learned that oil lobbyists, antique store operators, and sales persons at used record stores are “green” jobs.  While it is appropriate for the BLS to measure employment in all sectors of the economy it is foolish to make an increase in “green” jobs a policy goal.  “Green” jobs represent the cost, not the benefit, of investments in cleaner energy technology.  The benefits of “green” investments are cleaner air and water.  The U.S. government should evaluate environmental policy by measuring improvements in environmental quality relative to the costs of achieving those gains.  The policy goal should be to achieve cleaner air and water at the lowest cost which typically means with fewer “green” jobs.  Even if the Obama Administration’s loan guarantee program created many new “green” jobs (which it didn’t) that would not make the initiative a success.  Small gains in environmental quality per job created (or dollar spent) is inefficient.  It is costly to divert resources to “green” jobs that provide little benefit to the environment.

A corollary to this argument is that we should not put high tariffs on solar panels imported from China to protect “green” jobs in the U.S. even if Chinese manufacturers are selling their products for less than the production costs.  Unfortunately this is precisely what is happening.  If Chinese manufacturers selling solar panels to the U.S. for less than cost is bad for our economy then receiving free solar panels from China must be extremely harmful.  Of course that is absurd.  If foreign producers are willing to (perhaps) foolishly subsidize the production of solar panels and sell them to us for less we should accept their gift.

Jobs are the by-product of wealth and value creation not a means unto themselves.  The value of cleaner air and water is not directly measured in GDP.  Clean air, rivers, and oceans are public goods and not traded in markets where prices reveal marginal valuations.  (Of course solar panels and windmills are traded in markets and if it is profitable for U.S. companies to sell these products overseas, without subsidies from the U.S. government, more power to them.)  The additional costs of generating cleaner energy, including the wages and salaries paid for “green” jobs, are included in GDP.  However, investments in new energy technologies can be expensive but not valuable; Solyndra is a notable recent example.  As long as our goal seems to be the creation of more “green” jobs, whatever the cost, we will continue to make errors in environmental policy.

Workers Displaced from 2007-2011 have Struggled to Find Employment

Every two years the Bureau of Labor Statistics (BLS) surveys workers who were displaced from “long-tenured” jobs in the previous three years.  A “long-tenured” job is one which lasted at least three years prior to the job “displacement.”  A job “displacement” is a separation that occurred because:  “a plant or company closed or moved, there was insufficient work” or the “position or shift was abolished.”  Generally these longer term jobs are better jobs and “displacements” are job separations for economic reasons that occur disproportionately in recessions.  The BLS survey is conducted in January or February of even-numbered years.  The most recent data from the January 2012 survey indicates that the number of displaced workers was much higher during the 2007-2009 recession and the rate at which workers found new jobs during the recovery has been much lower than after the recession of 2001.  However the earnings received by displaced workers who were re-employed at the time of the BLS survey are similar for the recessions of 2001 and 2007-2009.

The following bar chart indicates the number of workers displaced from “long-tenured” jobs per year, over the previous three years, in BLS surveys from 1994 to 2012.  The line graph above the bar chart indicates the re-employment rates for these workers as of the survey.  On average the survey occurs about 18 months after the typical worker lost their job.  The 2010 and 2012 surveys include workers displaced in the 2007-2009 recession while the 2002 and 2004 survey includes workers displaced in the 2001 recession.

A comparison across surveys reveals that:

  • About 40% more workers per year were displaced from “long-tenured” jobs between 2007 and 2011 compared to the 1999-2003 period.
  • Workers displaced from “long-tenured” jobs from 2007 to 2011 were 18% less likely to find re-employment within the next 18 months compared to workers displaced from 1999 to 2003.

The next bar chart compares the earnings of displaced workers who were able to find a full-time job after displacement to their previous earnings, based on BLS surveys from January 1996 to January 2012.  The red bar measures the fraction of re-employed full-time workers who are paid at least 20% less than previous earnings.  The green bar measures the fraction of full-time re-employed workers who are paid least as much as they earned previously.

A comparison across surveys reveals that:

  • Workers displaced from “long-tenured” jobs between 2007 and 2011, who found another full-time job, were slightly more likely (8.5%) to experience a pay decrease of 20% or more compared to workers displaced from 1999 to 2003.
  • Workers displaced from “long-tenured” jobs from 2007 to 2011, who found another full-time job, were no more likely to receive a pay decrease of any kind compared to workers displaced from 1999 to 2003.

The recession of 2007-2009 was the deepest downturn since World War II.  The recovery since 2009 has been tepid.  This is reflected in both the number of workers displaced from jobs they held for at least three years and the low rate at which these workers found jobs during the recovery.  There are much smaller differences in the relative earnings of workers who found full-time work in this recovery compared to displaced workers after the 2001 recession.  The most troubling empirical finding is that between 2007 and 2011 only about half of workers displaced from jobs they held for at least three years were employed within the next 18 months.

Mass Layoffs Down 30% in Government – Up Slightly in Private Sector

The Bureau of Labor Statistics just released data describing mass layoffs in July 2012.  There were 1,340 layoff actions involving 127,092 private sector and 10,328 government workers (seasonally adjusted).  The number of workers affected by the layoffs is based on new filings for unemployment insurance during July.  Each layoff event involved at least 50 employees from the same employer.

Over the past three months there have been 35,820 government workers and 363,197 private sector workers filing for unemployment benefits as a result of mass layoffs.  This represents a 30% decline in the number of government workers laid off compared to the same period in 2011.  Mass layoffs in the private sector increased by 5% compared to 2011.

About one in 292 private sector workers experienced a mass layoff in the past three months compared to one in 427 government workers.  In other words the typical private sector worker was 46% more likely to be part of a mass layoff than the typical government worker.  At least when it comes to mass layoffs, it would be hard to conclude that the private sector is doing fine.

Delaying Retirement and the Inexorable Growth in Entitlement Spending

Neither political party appears likely to support entitlement reform if it means reducing benefits for the current generation of retirees or those approaching retirement age.  Although economists are correct to point out that the growth in entitlement spending presents a huge challenge, seniors care about the financial burdens facing their children and grandchildren and can take private actions to mitigate the damage caused by inactivity in Washington, DC.  Seniors can delay retirement, work longer, save more, and leave more in bequests to their children and grandchildren who are likely to face higher taxes and reduced benefits.

On Bloomberg View Professor Laurence Kotlikoff, a one-time candidate for President of the United States, warned that “expanding Social Security, Medicare and Medicaid benefits, shifting the structure of the tax system to lower the burden on retirees relative to workers, and cutting taxes have all saddled the U.S. with unsupportable obligations.”  He also argued that a solution to this dilemma should include a reduction in the Social Security and Medicare benefits of today’s elderly.  Without such sacrifices Kotlikoff calculates that we are likely to leave “future generations to cover what now amounts to a $222 trillion fiscal gap between future expenditure and taxes.”

Lawrence Summers, Harvard professor and former director of President Obama’s National Economic Council, explained in the Washington Post that 32% of the federal budget is devoted to supporting those over 65.  He also warned that the ratio of individuals age 65 and above to those of working age “will rise from 1 for every 4.6 workers to 1 for every 2.7 over the next generation.”

Adam Ozimek at Modeled Behavior has suggested that one way to mitigate the impact of the aging baby boom population is to increase (skilled) immigration among the working age population.  This can and likely will be part of the solution.  However, Ozimek calculates that immigration would have to more than double for the working age population to increase as much as the elderly population (in sheer numbers), and immigration would have to increase by more than 600% for the ratio of workers to retirees to remain constant.  Again, this seems unlikely to occur.

Some older current retirees and early generations of retirees, who worked between the 1950s and 1980s, were often entitled to receive more (in present value) than they contributed to the Social Security and Medicare system.  These parents of baby boomers have already received most if not all of their entitlement benefits.  In a pay-as-you-go system payroll taxes on their children and grandchildren financed part of their Social Security and Medicare benefits.  The magnitude of Social Security’s potential intergenerational transfer varies from decade to decade.  During the 1950s, a worker with the median (male) earnings paid an average payroll tax rate of 3.8% (half matched by their employer).  Because maximum taxable income in the 1950s was slightly above median earnings, a worker earning twice the median (near the top 10% of earners) paid an average tax rate of 2.22%.  The following chart shows that average tax rates increased dramatically from 1950 to 1990.  Since 1980 there has also been no difference in the average payroll tax rates paid by nearly all workers, regardless of their income.

Although it is doubtful that either political party will support entitlement reform that reduces expected benefits for adults age 60 and above, seniors can make sacrifices for their children and grandchildren without Congressional action.  If older Americans internalize the financial burdens of their children and grandchildren (Ricardian equivalence) they will not view the political failure to reduce current benefits as an increase in their family’s wealth.  They will work longer and save more to leave as bequests.  Larry Summers wrote that it is unlikely that increased labor force participation of seniors will be enough to counteract the demographic changes we face, but the aggregate effects of these private financial sacrifices can be substantial.

Over the past two decades the labor force participation rates of men and women age 60 and above increased by about 30 percent.  There are 3 million more adults in their sixties in the labor force than would have occurred if labor force participation rates remained constant.  Part of this, no doubt, is due to increases in health and life expectancy of seniors.  For the average 65-year-old man two more years of work now represents only 11.4% of his remaining life.  For the average 65-year-old woman two more years of work represents less than 10% of her remaining life.

Responsible behavior by seniors can mitigate the failure of the President and Congress to make serious reforms to entitlement programs.  Unfortunately these private efforts probably won’t be enough to close the gap in entitlement funding faced by future generations.  But if tens of millions of seniors delay retirement and save more over the next two decades it will surely help.

President Obama’s Gender Gap

President Obama faces an important gender gap in a key labor market indicator – the unemployment rate.  The unemployment rate in July for women age 25 to 54 was 7.4% while the unemployment rate for men of the same age group was 7.0%.  It is more troubling that the unemployment rate for women age 25 to 54 has increased by 1.2% in the President’s first 42 months in office, while it has dropped by 0.6% for men age 25 to 54.  (Note: I use the unemployment rate for this age group because younger workers may drop out of the labor force to attend school and older workers may drop out of the labor force to retire.)

Over the past 30 years the average unemployment rate for men has been slightly lower than for women (age 25 to 54).  Moreover the annual jobless rate for women has exceeded the men’s rate by more than 0.4% (the current gap) only three times in the past three decades.

The following chart compares unemployment rates for women for President Obama and the previous five presidents who were seeking re-election, 42 months into their first term.  The current unemployment rate of 7.4% for prime working age women is one percentage point higher than the rate for any other first term incumbent.

The increase in the unemployment rate of 1.2% is also unusually high compared to previous presidents seeking re-election.  The only president who held office during a larger increase in women’s unemployment was George Herbert Walker Bush; the unemployment rate for women age 25 to 54 increased by 1.8% from January 1989 to July 1992.

The reason for the poor labor market outcomes for women in the past three and a half years is worthy of more study.  The composition of employment by sector doesn’t explain the gender gap.  Over one million construction sector jobs have been lost since January 2009 and only about one in eight of these jobs were held by women.  In contrast, women hold about four out of five jobs in the health care sector, where employment has increased by 925,000 in the past 42 months.  Much has been made, by some observers, about the decline in government employment since January 2009.  Government employment has dropped by 625,000 in the past 42 months, but 43% of these jobs were held by men.  Finally, government employment is about 16.5% of total employment, or about 0.2% higher than when President Bill Clinton said “the era of big government is over.”  The modest decline in public sector employment over the past few years is simply not large enough to explain the increasing unemployment rate of women.

There will be three more monthly labor reports that will be released by the BLS before election day.  However, it is almost certain that when voters go to the polls the unemployment rate for women will be higher than for men and substantially higher than it was on Inauguration Day.  That could mitigate some of the gender gap Mr. Obama enjoyed in 2008.

Forward? More on Inefficiency in Government

Economic advisors who advocate Keynesian policies must convince voters and taxpayers that more government spending will stimulate economic recovery.  Since many government spending programs just divert resources from one activity to another, it would be helpful if advisors advocating a bigger government sector could point to programs that work, i.e. where the benefits exceed the real opportunity costs.  Although it is difficult to identify and accurately measure all of the benefits to many government programs, when voters and taxpayers see obvious waste and inefficiency it is harder to make the case for more government spending.

Like many residents of Northern Virginia I observe the inefficiency of the Washington DC public transportation system on a daily basis.  I have boarded the morning train at Rosslyn during rush hour hundreds of times over the past two years.  Orange line trains arrive from the west, Blue line trains arrive from the south, and either train takes riders downtown.  Ask anyone at the Rosslyn station on a weekday morning and they will tell you the same thing: Orange line trains are predictably over-crowded and often it is impossible to board due to a lack of space.  Blue line trains always have space and often one can find a seat.

Clearly there aren’t enough Orange trains running in the morning relative to Blue trains.  This is inefficient.  Transportation costs can’t be minimized if there are predictably fewer passengers per train on Blue lines than Orange lines during rush hour.  This should be obvious to management at the Washington Metropolitan Area Transit Authority (WMATA).  Although reallocating trains may represent a small cost saving there is no reason to remain inefficient.  The fare changes (it costs $1 more for a paper ticket) have shifted nearly all rush hour commuters to a plastic Smart Card that tracks movements throughout the WMATA system.  If taxpayers can’t trust the government to run operations like WMATA efficiently, the case for more government spending is much less convincing.

The inefficiency at WMATA is seen in many other government agencies and in many public institutions.  The next time public college university administrators complain about the shortage of classroom space and advocate for more infrastructure spending they should be required to show how efficiently classroom space is currently being used.  On most college campuses classrooms are less utilized early and late in the day, and on Monday-Wednesday-Friday relative to Tuesday-Thursday (let alone when comparing summer to the traditional school year).  Colleges and universities should use their current physical plant efficiently before taxpayers are required to spend for more space.

The big debate in this fall’s Presidential election will be over the proper size and scope of government.  Regardless of the outcome of that debate, politicians and bureaucrats should be held responsible for waste and inefficiency in spending programs.  There is no doubt that we can’t fix our fiscal problems just by reducing waste and inefficiency in government.  But wasteful government spending diverts resources from more productive uses and will not help an economic recovery, regardless of what some advocates might say.

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