70,000 Workers Displaced by Hurricane Sandy in New Jersey: Unemployment Rate May Reach 11%

Hurricane Sandy had a devastating effect on employment in New Jersey and a fairly large impact on employment in New York, as well.  A leading indicator of unemployment is the weekly report of new unemployment insurance claims.  A spike in new jobless claims means that a large number of workers were displaced from their jobs.  New Jobless claims have quadrupled in New Jersey and doubled in New York in the aftermath of Sandy relative to November 2011.  Using these data I estimate that Hurricane Sandy displaced 150,000 workers in the first two weeks after the storm hit, with 70,000 jobs lost in New Jersey and 50,000 lost in New York.  These job losses could push the November unemployment rate above 11% in New Jersey and above 9% in New York.

During the weeks of November 10^th and November 17^th (the most recent weeks for which detailed state data are available) about 96,000 jobless workers in New York filed for first-time unemployment insurance benefits, compared to about 48,000 new claims one year ago.  Similarly, almost 92,000 jobless workers in New Jersey filed for first-time unemployment insurance benefits during the weeks of November 10^th and November 17^th, compared to just over 24,000 new claims one year ago.  In the weeks after Sandy the rate at which workers lost jobs is about four times higher in New Jersey and twice as high in New York compared to November 2011.

The following charts compare the year-to-year change in new unemployment insurance claims the weeks of November 10^th and November 17^th and the corresponding change in claims for the previous 16 weeks (on average).  The charts indicate that new jobless claims remain very high in New Jersey while they have dropped recently in New York but remain above 2011 levels.  In both states new jobless claims in 2012 were consistently below 2011 levels until Hurricane Sandy hit.

Hurricane Sandy caused about 70,000 people to lose their jobs and file for first-time unemployment insurance benefits in New Jersey and 50,000 in New York during the weeks of November 10^th and 17^th.  These job losses are measured relative to the declines that would have been expected had the storm not hit the New Jersey coast.  Using similar methods, I estimate that about 30,000 additional jobs were lost in the rest of the country, possibly due to Hurricane Sandy.

The November jobs report (released on December 7^th) is the first one after the presidential election and the first to include data gathered after Hurricane Sandy.  The storm’s displacement of 150,000 workers in the past two weeks is enough to increase the U.S. unemployment rate from 7.9% to 8.0%.  Hurricane Sandy is also likely to increase the unemployment rate to 11% in New Jersey (from its current 9.7%) and above 9% in New York (from its current 8.7%).  The November unemployment rate is based on worker’s labor force status for the week ending November 17^th.  This means that continued job losses and displacement of workers in the second half of November, especially in New Jersey, will not factor into the November unemployment rate but could possibly cause the unemployment rate to increase further in December.

The Real Jackpot Payoffs for Powerball on November 28th

Powerball is advertising that the expected jackpot for tonight’s drawing is $500 million and that there is a 1 in 175 million chance of matching all six numbers and winning a share of the jackpot.  The ads are misleading because $500 million equals the undiscounted value of payouts received over a 30 year period, not the cash value, and assumes that the prize will not be shared.  A more accurate description of the jackpot prize distribution is:

• A one in 476 million chance of winning $163.7 million (the jackpot is shared by two winners)
• A one in 479 million chance of winning $327.4 million (a single jackpot winner)
• A one in 947 million chance of winning $109.1 million (the jackpot is shared by three winners)
• A one in 2.82 trillion chance of winning  $81.9 million (the jackpot is shared by four winners)
• A one in 11.23 trillion chance of sharing the jackpot among at least five winners

If the advertised jackpot increases to $600 million, a more accurate description of the jackpot prize distribution would be:

• A one in 539 million chance of winning $196.4 million (the jackpot is shared by two winners)
• A one in 682 million chance of winning $131.0 million (the jackpot is shared by three winners)
• A one in 852 million chance of winning $392.9 million (a single jackpot winner)
• A one in 1.29 trillion chance of winning  $98.2 million (the jackpot is shared by four winners)
• A one in 3.27 trillion chance of sharing the jackpot among at least five winners

The most likely outcomes are that there will be a single winning ticket or the jackpot will be shared by two winners.  As the advertised jackpot nears $600 million, it becomes much more likely that there will be at least a three-way split of the jackpot.  Either way, the best strategy for lottery players is to choose a combination of six numbers that the other 200+ million lottery players won’t select.

Is a Powerball Ticket a Good Bet?

The advertised Powerball jackpot has now been revised up to $500 million and the game rules indicate that the chance of winning the jackpot is 1 in 175 million for each $2 ticket that is purchased.  To the naïve Powerball customer this may seem like the expected payout from a $2 ticket is well above $2.  That reasoning is incorrect because the $500 million payout over 30 years has a cash value of only $327 million and there is a 63% chance that a winning ticket will be shared with one or more other players.  If Powerball lottery officials are correct and the jackpot is $500 million on Wednesday night, the expected payout on a $2 ticket will be $1.53.  If lottery officials have underestimated Wednesday’s jackpot the expected value of a $2 ticket will be somewhat lower.  For example, if the jackpot is $550 million (paid out over 30 years) the expected value of a ticket declines to $1.50.

Lottery officials expect about 227 million $2 tickets to be sold.  32.5% of the proceeds from these ticket sales are added to the cash value of the jackpot with another 17.5% funding consolation prizes.  This suggests there should be a 50% return on a $2 ticket, or a $1 expected value based only on current sales.  The expected return on a $2 ticket is substantially higher than this, about $1.53, because of the players in the 15 previous drawings where no winning ticket was selected.  These prior Powerball players have subsidized players in this week’s drawing.

Although 227 million tickets are expected to be purchased between Saturday night’s drawing and Wednesday’s drawing, with the odds of a winning ticket being 1 in 175 million, there is a  37% chance that there will be no winning ticket on Wednesday night.  If even more than 227 million tickets are sold, the jackpot increases but so does the chance of sharing the prize with other winners.  The following table illustrates some possible outcomes if the jackpot continues to increase for the November 28^th Powerball drawing.

Jackpot Values and Expected Returns for November 28 Powerball Drawing
Advertised Jackpot	Cash Value of Jackpot	Tickets Sold	Chance of No Winning Tickets	Expected Value of $2 Ticket
$500 million	$327 million	176.3 million	36.6%	$1.53
$550 million	$360 million	226.7 million	27.4%	$1.50
$600 million	$393 million	277.0 million	20.6%	$1.48

A $2 Powerball ticket typically has an expected return of $1 meaning that half of the money spent on tickets will not be paid out in prizes.  Because there have been 15 weeks of drawings with no winners the rollover in the Powerball jackpot is about $203 million.  This means a $2 ticket purchased this week has an expected value of $1.53.  It is more likely than not that ticket sales will be above the projected amount of 227 million, which will raise the jackpot but dilute the expected value of each ticket sold.  The expected value of a ticket will likely remain near $1.50, but as the jackpot rises it becomes much more likely that there will be at least one winner on Wednesday night.  A winner on Wednesday will reduce the advertised jackpot on Saturday December 1 to $40 million (cash value of $25.8 million).

(Not) Leaving Las Vegas: When Unemployment Happens in Vegas the Jobless Stay in Vegas

Since February 2009 the unemployment rate in Las Vegas has averaged 13.1% and never dropped below 10.1%; it now stands at 11.5%.  Jobless workers have not left the metro area despite the persistently high unemployment rate and lack of job growth since the recession ended.  This stunning lack of out-migration, Las Vegas’ labor force of about 980,000 workers declined by less than 200 people in the past four years, is puzzling because there are better job prospects for the unemployed and underemployed in other parts of the western U.S. 

Every other state has a healthier labor market than Nevada and every major metropolitan area has a lower unemployment rate than Las Vegas.  The unemployment rate in North Dakota is 3.1% and has not been above 4.2% since February 2009.  Unemployment rates in Nebraska, South Dakota, Utah and Wyoming are 3.8%, 4.5%, 5.2% and 5.2% respectively.  The combined labor force in these states is more than 3.5 times larger than Las Vegas, and could easily absorb jobless workers leaving Las Vegas.  The labor forces in these relatively healthy states have grown by an average of less than 1.4% over the past four years.  In other words their labor markets are expanding at a steady but unspectacular rate.

The last four years stand in stark contrast to Las Vegas’ recent history.  Between 2004 and 2008 the Las Vegas labor force grew by 16.8%.  Between 2000 and 2004, a time of relatively slow economic growth for the U.S. overall, its labor force grew by 14.1%.   This means that about one-quarter of the Las Vegas labor force arrived between 2000 and 2008.  These recent arrivals came to a city in the midst of a real estate boom but have persevered through four years of high unemployment and plunging real estate values.

A comparison of Las Vegas and cities on the Gulf and Atlantic coasts that also experienced a real estate boom and bust in the past decade is informative.  Between 2004 and 2008 the labor force grew by 13.4% in Fort Myers-Cape Coral, Florida and by 12.7% in Myrtle Beach, South Carolina.  Since then their labor forces decreased by 1.3% and 4.2% respectively.  If the labor force in Las Vegas contracted at the same rate as it did in Fort Myers or Myrtle Beach, because unemployed workers left the city to find employment elsewhere, the Las Vegas unemployment rate would be 1.3 to 3.9 percentage points lower.

Labor forces have declined in many cities across the U.S., even those that did not experience a real estate boom and bust, but not in Las Vegas.  Much like the gambler who stays at the blackjack table believing his luck will change with the next shoe the people who came to Vegas for economic opportunities are hanging on and hoping that 2013 will be different.

Hurricane Sandy Likely to Increase Unemployment Rate to 8.0% or 8.1%

The November jobs report (released on December 7^th) will be the first one to include household and payroll survey data gathered after Hurricane Sandy.  It is likely that November’s unemployment rate will jump from its current level of 7.9% to 8.0% or 8.1% due to Hurricane Sandy.  Sandy had a devastating impact on the tri-state area of New York, New Jersey and Connecticut where about one eighth of U.S. output is produced.  A leading indicator of the unemployment rate is the weekly report of new unemployment insurance claims.  A spike in new jobless claims means that a large number of workers were displaced from their jobs.  As I explain below, Hurricane Sandy displaced 145,000 workers as measured by new jobless claims in the first full week after the storm hit.

During the week of November 10^th (the most recent week for which detailed state data are available) over 63,000 jobless workers in New York filed for first-time unemployment insurance benefits, compared to about 21,400 new claims one year ago.  Similarly, over 46,000 jobless workers in New Jersey filed for first-time unemployment insurance benefits during the week of November 10^th, compared to just over 12,000 new claims one year ago.  The rate at which workers lost their jobs nearly quadrupled in New Jersey and nearly tripled in New York compared to November 2011.

The following charts compare the year-to-year change in new unemployment insurance claims the week of November 10^th, the first report to reflect Hurricane Sandy effects, and four-week moving averages of year-to-year changes in new claims over the previous 20 weeks.  For example, the annual percentage change in new claims for November 3^rd is based on a comparison of data for the week of November 3^rd and the three previous weeks to the corresponding weeks in 2011.  The charts indicate that, for New York and New Jersey, new jobless claims were consistently below 2011 levels until Hurricane Sandy hit.

Hurricane Sandy caused about 80,000 people to lose their jobs and file for first-time unemployment insurance benefits in one week in New York and New Jersey alone.  Although the effect of Hurricane Sandy on the rest of the country is smaller, it isn’t negligible.  The following chart compares the year-to-year change in new jobless claims the week of November 10^th to four-week moving averages of year-to-year changes in new claims for the rest of the United States (excluding New York and New Jersey).  The chart indicates that new jobless claims were up about 12% in the first full week after Hurricane Sandy, or an increase of 65,000 claims.

Hurricane Sandy’s displacement of 145,000 workers in one week is enough to increase the U.S. unemployment rate by 0.1 percentage point, from 7.9% to 8.0%.  The November unemployment rate is based on worker’s labor force status for the week ending November 17^th.  That means that one more week of new jobless claims data will factor into November’s unemployment rate.  The preliminary new claims data for the week of November 17^th shows a smaller increase in displaced workers, probably half as many as the 145,000 displaced in the prior week.  We will know more on November 29^th when more detailed and complete data for the week of November 17^th are released.  At this point it is most likely that the November unemployment rate will jump to 8.0% or 8.1%.

1.7 Trillion Weeks of Unemployment Benefits

In the past four years Federal and state unemployment insurance programs paid about 1.7 trillion weeks  (32.7 million years) of unemployment insurance benefits to jobless workers as they continued their job search.  32.7 million years is a remarkably long time period that is usually reserved for events measured on the geologic time scale (South America fully detached from Antarctica about 32.7 million years ago during the Oligocene Epoch).  Unemployment benefits were paid to an average of nearly 8.2 million workers per week, every week, for the past four years.  The unemployment insurance rolls have been quite high for an unusually long time because of the depth of the recession, the weakness of the recovery and because Congress and the President extended unemployment benefits so that job losers could collect benefits for up to 99 weeks. 

More generous benefits undoubtedly provided greater financial support for job losers and their families, but also encouraged jobless workers to be more selective in their job search and remain unemployed longer.  Many Democrats and Keynesian economists view the unemployment insurance program, food stamps and other social safety net programs as economic stimulus.  On the other hand conservatives, such as Casey Mulligan of the University of Chicago, argue that the work disincentives of the unemployment insurance program and other safety net and entitlement programs increased the depth and length of the recession.

One way to quantify the opportunity cost of providing unemployment insurance benefits to approximately 8.2 million jobless workers per week is to consider how many employees could have been hired using those resources.  Although unemployment insurance benefits vary by state, the typical weekly benefit is about one half of a worker’s previous weekly wage.  This means that the cost of insuring 8.2 million jobless workers per week is about the same as the wage and salary costs of employing 4.1 million workers per week. 

Many economists have complained that the government stimulus didn’t include enough investment in infrastructure or purchases of goods and services.  Our representatives in the Federal government chose to pay people to search for work rather than employ them directly for public works projects.  But how many roads, bridges, schools and other valuable public sector investments could have been completed instead of paying for 1.7 trillion weeks of job search?  Instead of paying half of the typical weekly salaries of 8.2 million people looking for work each week, we could have instead:

• Paid the salaries of every worker employed in the construction and repair of streets, highways and bridges for the next century
• Paid the salaries of every elementary and secondary school teacher in the U.S. for four years.
• Paid the salaries of all workers in the motor vehicle (and parts) industry for two decades.

Democrats and Keynesian economists lament that state and local government employment has fallen 1.8% over the past five years instead of the 3.9% growth from 2002 to 2007.  The relatively small decrease in state and local government payrolls pales in comparison to the cost of jobless benefits over the past four years.  The money paid to unemployed workers per year over the past four years is equal to about 1/5 of the annual salaries of all state and local government employees combined.

Hoover Dam, The Grand Coulee Dam, LaGuardia Airport, The Lincoln Tunnel and many other public works projects were built during the Great Depression when many of the workers on these projects had few other job options.  The economic approach to dealing with the 2008-2009 recession has been quite different.  In 2013 we will reach 2 trillion weeks of unemployment benefits paid since the recession began.  When the history of this recession and recovery is written it will be clear that we did not use this time of excess capacity and idle workers to re-build and re-tool our infrastructure.  We will not be able to point to the dams, bridges, highways, schools and hospitals that were built during the recovery even though about two million construction workers lost their jobs after the residential real estate market collapsed and many of them are still out of work.  Instead the approach of this Administration and this Congress has been to pay people who lost their jobs to look for work, even though many of the jobs that were lost in the recession are no longer there.

Twinkies, Unions, Debt and Bankruptcy

Hostess is shuttering its bakeries and plants that produce Twinkies, Wonder Bread and other iconic snacks because of a strike, mismanagement and shifting preferences of the American consumer.  Pro-union advocates are blaming poor management and hedge funds.  Pro-management advocates are blaming unreasonable union demands.  Clearly neither side wanted the company to liquidate its assets.  Yet what happened to Hostess, and its workforce, is what we should expect from union-management battles in the U.S.  More than twenty years ago fellow Welch Consulting economist Donald Deere and I explained why management, faced with the threat of unionization and strikes, would use debt as a tool to protect its investors.

First, recognize that the valuable asset of union membership, unlike ownership of a company, is non-transferrable.  Upon retirement older union members can’t sell the property rights to their job in a unionized plant.  This means union members discount the future more than firm owners and shareholders.  The thousands of Hostess workers who retired in the past two decades were harmed less by the decline in the profitability of the company after their retirement than they would have if they could have sold their unionized jobs to the next generation of workers.  The right to work as a union member at a healthy company would sell for far more than the right to work for an unhealthy company.  (The absence of a market for the purchase and sale of union membership rights even though these rights yield a share of firm profits is an example of incomplete markets.)

Second, recognize that unions can bargain over the return on sunk investments (plant and equipment) and not just bargain over profits.  Once a billion dollar plant has been built, a union can hold-up management for the returns on that specific investment.  If the union succeeds, investors will get a lower return than they anticipated from their investment, but as long as variable costs are covered they won’t shut down the plant.  It is impossible for a union to pre-commit to only negotiating and striking for a share of the profits.  So even if a union has good intentions and promised only to negotiate for a share of profits, investors and management would be wary and assume the worst; the returns to sunk investments are assumed to be on the negotiating table.

What can firms do to protect investors from union demands?  They can use debt to make management threats more credible.  Investors and management facing the scenario described above will prefer debt finance to equity finance because debt makes the threat of bankruptcy more credible.  (Union threats are another reason why the Modigliani-Miller theorem doesn’t hold.)  The more debt-financed a company is, the more likely an adverse demand shift, bad management decisions or excessive labor costs will push the firm into bankruptcy.  Debtors must be paid whereas union demands come before dividend payments to shareholders.  So companies like Hostess use debt-finance as leverage against unions, knowing that this allows them to get more wage and benefit concessions from unions.  Unions are constrained more if a company threatens to file for bankruptcy because it can’t pay its debts than if the company threatened to suspended dividend payments to its shareholders.

The high debt to equity policy for management is similar to the sequestration policy agreed to by the President and the Congress.  At the time the sequestration deal was made, neither branch of government wanted to go over the fiscal cliff.  The deal’s purpose was to constrain the negotiations of the parties going forward.  Likewise, the owners of Hostess did not want their negotiations to end in the liquidation of the company.  They put in place a mechanism designed to limit future union wage demands even though they knew it would increase bankruptcy risk.  They likely made such a choice in order to protect their profits and the return on their sunk investments.  The lesson is that poison pills designed to constrain bargaining positions will sometimes have to be swallowed.

President Obama’s Strongest Support is from High Marginal Tax Rate States

President Obama’s strongest support in last week’s election was from states that have the highest marginal tax rates for the top earners in their states.  The average top marginal tax rate in the states (and Washington DC) that President Obama won is 6.24% while the average top marginal rate in the states that Mitt Romney won is 4.92%.

In addition, a simple regression of President Obama’s percentage margin of victory (or loss) against the top marginal tax rate in a state indicates that each one percentage point increase in a state’s marginal tax increased the President’s margin of victory by 3.35%.  This means the higher the marginal tax rate paid by top earners for the state income tax, the greater the support for President Obama.  The following graph shows the relationship between the margin of victory and top marginal tax rates.  The regression relationship is statistically significant.  (The t-statistic on the marginal tax rate variable is 2.92.)

There are, of course, other important factors influencing election outcomes.  But it appears that the President’s strongest supporters and the base of the Democratic party tend to live and work in states that have the highest marginal income tax rates.  The Republican party and the President’s opposition live and work in states with lower marginal tax rates.  Both sides have been elected to come back to Washington and work on a solution to avert the fiscal cliff and achieve some type of Federal income tax reform.  A key area of disagreement is about the top marginal tax rate for the highest income earners.  A compromise on this issue may be difficult to achieve given the policy preferences and philosophies of each party’s base.

Note: the top state marginal tax rates used in this analysis are from the Tax Foundation.

Shovel-Ready

In 2009 President Obama and the Democratic-controlled Congress passed an $800 billion stimulus package that was supposed to mitigate the impact of the recession.  There has been much debate about the effectiveness of the stimulus spending and the cost per job “created or saved.”  Other criticism focused on government’s failure to identify and fund shovel-ready jobs that would have improved and updated our infrastructure.  Much of the stimulus money helped fund state and local government positions for teachers, firefighters and other public employees.  It appears that the stimulus legislation did little, if anything, to stop the decline in certain types of construction employment, most notably street, highway and bridge construction.

Proponents of the stimulus package argue that public investments help foster greater economic growth.  Skeptics argue that projects are funded are based on cronyism and political paybacks rather than priorities for economic growth.  Economists on both sides of the argument should examine employment in private-sector construction industries during the recession and recovery.  Many Keynesian economists lament the fact that employment in state and local government has lagged during the recovery despite the stimulus package.  However, large increases infrastructure spending are not expected to result in big gains in public sector jobs.  Infrastructure investment will instead re-direct resources to private sector government contractors that build and repair the infrastructure.

The following chart shows the changes in quarterly employment in two of the biggest heavy construction industries: construction of utility systems (other than oil and gas pipelines) and construction of streets, highways and bridges.  Employment in both industries has been normalized to 100 as of the first quarter of 1990.  There are fewer employees building and fixing highways and bridges than at any time in the past 20 years.  Employment in street, highway and bridge construction is down 5.3% in the past two years and 18.5% in the past five years, and the share of total employment in this industry is at a record low.  Employment in the construction of utility systems dropped from 2007 through the end of 2009 and this industry has recovered almost 25% of its job losses.  In contrast construction in the booming oil and gas pipeline construction industry is up almost 35% in just two years.  This boom in energy construction is not the result of 2009 stimulus program, however.

 

Government spending largely redistributes resources through the entitlement system which is why the government budget is a much higher fraction of GDP than the public sector’s share of total employment.  Even when governments devote resources to infrastructure projects, the workers are typically private sector employees of government contractors.  Government spending over the past five years has been primarily on transfer programs and not infrastructure.  This is best seen by examining employment in the heavy construction industries.  Employment in highway and bridge construction is well below pre-recession levels and has even dropped in the past two years.  The situation is somewhat better for employees of firms that build and repair utility systems where about 25% of the job losses during the recession have been reversed.

Undercounting Very Discouraged Workers

See my guest blog post today at Modeled Behavior discussing how and why the BLS is underestimating labor underutilization.