New Jobless Claims Aren’t As Good As They Look

The Department of Labor announced yesterday that new jobless claims have fallen to 305,000 for the week, a six-year low.  Unfortunately, the new jobless claims figure isn’t as reliable an indicator of labor market trends as it used to be.  It says more about the continued decline in layoffs than it does about a surge in hiring.  The biggest problem in today’s labor market is a weak hiring rate for employers.  So while a lower level of new jobless claims is better than a higher level, I don’t expect this to signal a boom in job creation.

To see why layoffs aren’t the problem, as many workers were laid off in the five years since the Lehman collapse as during the real estate boom of 2003-2007.  In the five years between 2003 and 2007, in the midst of a real estate boom and economic recovery, when the unemployment rate averaged 5.2%, there were 1.86 million layoffs per month, on average.  In the five years since the Lehman collapse in August 2008, including the biggest recession since the Great Depression, when the unemployment rate averaged 8.6%, there were also 1.86 million layoffs per month, on average.  While layoff rates were elevated during the second half of 2008 and all of 2009, over the past three years layoffs have been 8.8% lower than pre-recession levels and continue to decline.

Over the past three years during our tepid economic recovery, only 4.23 million people have been hired per month, on average, compared to 5.1 million people per month in 2003-2007. 870,000 fewer people have been hired each month over the past three years compared to 2003-2007.  This great slowdown in hiring, which represents a decline of 17% compared to the previous economic recovery, is the biggest challenge facing the labor market and the economy.

Unemployment insurance data are less relevant in 2013 because of the narrow focus on relatively recent job losers.  New labor market entrants and re-entrants to the labor force, comprise about half of the unemployed but are ineligible for unemployment insurance.  Longer term unemployed workers and jobless workers who have given up their job search and dropped out of the labor force are also ineligible for UI.  For unemployed new entrants and re-entrants to the labor force, and for the millions of jobless workers who have dropped out of the labor force, a surge in hiring is needed to bring them back to work.  So while there were 3.8% fewer layoffs in the past 12 months compared to one year earlier, the fact that hiring only increased by 1.1% over the same period means that employment rates will remain low until businesses increase the pace of their hiring.

Unemployment insurance data are also less relevant in today’s economy because the fraction of unemployed workers eligible for state unemployment insurance programs is at an all-time low.  The following chart shows the percentage of unemployed workers who are job losers and have been unemployed for 26 weeks or less.  These two conditions are good proxies for the key determinants of eligibility for most state UI programs.* Since 1980, in non-recession years, about 40% of unemployed workers would satisfy these requirements.  During recession years, about 45% of the unemployed are job losers in their first 26 weeks of unemployment.  Over the past 3 and one half years, however, only about one-third of unemployed workers have been relatively recent (26 weeks or less) job losers.

The fraction of jobless workers who are eligible for UI is even smaller.  If one includes workers who have dropped out of the labor force in the past year but are available for work as “jobless”, only 26% of “jobless” workers satisfy the conditions required by most state UI programs.

While new jobless claims data provide some information about the rate at which workers are losing jobs, and whether job losers appear to be finding work before filing for UI benefits, yesterday’s new claims figures must be interpreted carefully.  The labor market of 2013 is very different from the pre-recession labor market.  Layoffs continue to decline but have not coincided with commensurate increases in hiring in a weak recovery.  Most jobless workers are long-term unemployed, new-entrants or re-entrants to the workforce unable to find work, or those who have given up job search altogether and are no longer labor force participants.  Employers have hired 870,000 fewer workers per month over the past three years than they were prior to the recession.  Until hiring levels approach the 5 million hires per month that were common in 2003-2007, job growth will continue to disappoint.  Slightly lower new jobless claims per week is just one small step in the right direction.

*Unemployed workers are eligible for Federal UI benefits if they are unemployed longer than 26 weeks and reside in states where unemployment rates are sufficiently high.  Most state UI programs allow up to 26 weeks of benefits but they need not be the first 26 weeks of a worker’s unemployment spell and benefits are only available for job losers.

The Decline in Construction Employment, Infrastructure Investment and the Davis Bacon Act

Reihan Salam has a smart piece in National Review Online and provides some good insights about how the construction sector is changing and why construction employment has not rebounded as it has in prior recoveries.  He notes that modular construction and technological change is likely to change the labor intensity of construction projects.  So even when construction activity rebounds, construction employment may never regain the share of total employment it reached during the housing boom of a decade ago.  Salam is correct; trends in construction employment may begin to look a bit more like manufacturing.  In U.S. manufacturing it has been quite common to see output increase despite stagnant or even declining employment because of technological change.

Salam writes that construction projects in the U.S are often inefficient and I agree, especially when it comes to infrastructure investments.  The federal regulations make public sector projects far too expensive to taxpayers even at a time when a record downturn in construction employment should mean much lower costs.  The federal government has not taken enough advantage of the considerable slack in construction employment to build and repair infrastructure.

By law, federal government projects must pay the prevailing wages of construction workers, and these wages are often union scale.  This regulation, known as the Davis Bacon Act, has artificially inflated the price of construction labor on public sector projects.  Even in states and counties  where construction employment has been depressed for the past five years, government contractors are sometimes required to pay wages in construction trades that exceed the average in the area by at least $10 per hour.

Davis Bacon wages do not rely on carefully designed samples of workers, such as the Bureau of Labor Statistics (BLS) Occupation Employment Statistics (OES) Survey to determine the wage distribution in construction trades in a local area.  Instead, Davis Bacon wages are determined in the Labor Department’s Wage and Hour Division which over-samples unions and obtains much higher construction wage estimates.  Only 6.6% of private sector workers are union members so the special treatment of unions in Wage and Hour Division surveys leads to unrepresentative prevailing wage estimates.

As an example consider Riverside County, California where the unemployment rate in July was 11.1%.  The most recent OES survey reports that the average wage for a carpenter is $27.25 per hour and 75% of carpenters earn $36.39 per hour or less in Riverside.  Yet the Davis Bacon Act mandates that federal contractors pay at least $48.43 per hour to carpenters in Riverside, in wages plus fringe benefits, on government construction projects.  The Davis Bacon prevailing wage for carpenters is $37.35 per hour and prevailing fringe benefits are $11.08 per hour.  (The BLS National Compensation Survey reports that the average cost of fringe benefits is $10.52 per hour nationwide.)  Similarly inflated compensation is required for brick masons, electricians, plumbers and equipment operators.

Although reasonable economists can disagree about the level of public spending on infrastructure, ideally we should make more public investments in infrastructure during a downturn when opportunity costs are lower.  The Davis Bacon Act interferes with such a common sense policy.  Conservatives should have proposed a repeal of Davis Bacon in the waning months of the Bush Administration or early in the Obama Administration as a way to more efficiently utilize slack resources during the recession.

Requiring taxpayers to pay inflated prices to construction labor makes as much sense as paying inflated interest rates to government bondholders even though market interest rates have declined.  The federal government currently pays lower interest rates on government debt because it pays market rates on new debt issues.  Fortunately there is no equivalent to the Davis Bacon Act requiring that the federal government pay inflated non-market interest rates to protect retirees and pension funds that hold government bonds.  It is time to change the law so that taxpayers can also pay market wages on construction projects.

The Cost of Scheduling a Sacrificial Lamb for Major College Football Programs

Danny Kanell of ESPN has a great idea.  Make the non-conference exhibition games we just witnessed this weekend part of spring football practice.  The lesser schools who need the money to fund their athletic programs can still get paid and the games, as lopsided as they might be, are certainly more entertaining than a spring practice game.

There were 14 non-conference games between top 25 college football programs this weekend with an average score of 49 to 10.  In the 5 conference games involving top 25 teams the average score was 35 to 18.

Darren Rovell of ESPN regularly reports the financial payouts that major college football programs make to smaller programs when they come to play and often lose by 4 touchdowns or more.  For example, this week Savannah State was a 59.5 point underdog at the University of Miami.  Savannah State is receiving $375,000 for travelling a little over 400 miles to Miami to be one of the biggest underdogs in the history of NCAA football.

By my count, Rovell has reported 26 of these non-conference payouts over the past 3 weekends.  Over the past 3 weekends:

• The average payout received by a visiting team is $613,000.
• The average distance travelled by a visiting team is 530 miles.
• The average Sagarin rank of a visiting team is 145 of 247 (end of 2012 season)
• Only 31% of visiting teams ranked in Sagarin’s top 100 (end of 2012 season)

I estimated a simple regression of the relationship between a visiting team’s payout, its Sagarin rank and the distance travelled to the game.  I found no evidence that higher ranked non-conference opponents commanded a higher payout, but each 10% increase in distance travelled is associated with a 1.8% higher payout.

So while major college football programs can bring in a lesser team to beat up in front of season ticket holders for about $600,000, they should expect to pay about $205 more per mile travelled for each sacrificial lamb.

Simple Arithmetic and the Participation Gap

One week ago Gavyn Davies, columnist for the Financial Times, noted that the labor force participation rate has dropped 2.8 percentage points since 2007.  He explained further that some researchers attribute about half of the decline to demographic change leaving a 1.3 percentage point drop in participation due to the sluggish recovery.  While I strongly disagree with the view that demographic change accounts for half of the decline in participation, that is not the emphasis of this blog post.*

Davies then conjectured that the decline in participation “implies that the genuine amount of slack in the labour market might be about 1 to 1.5 percentage points more than implied by the unemployment rate.”  Presumably Davies, the former head of the global economics department at Goldman Sachs, meant that official statistics report the unemployment rate on a labor force base that is considerably smaller than it would be in a healthy economy.

Where Davies gets this wrong is in the simple arithmetic of his calculation of the shrinking labor force.  Assuming that Davies is correct that the labor force participation rate dropped just 1.3 percentage points due to the weak economy, that decline is 1.3% of an adult U.S. population of 246 million or 3.2 million adults.  The labor force is now measured at about 155 million so the 1.3 percentage point gap in participation translates into a 2.1% drop in the size of the labor force. (about 63% of adults participate in the labor force).  If all of the 2.8 percentage point drop in the participation rate is due to cyclical factors that would mean that the weak economy has shrunk the labor force by 6.9 million adults or 4.4%.

When describing changes in percentage points and comparing one time series to another, analysts should be careful that the base for calculations are consistent. 1% of the adult population represents about 2.46 million people while 1% of the labor force represents 1.55 million people.  The official unemployment rate measures the slack in the labor market conditional on the size of the labor force, not the adult population.  Whether you believe Davies’ numbers or not, its clear that there are between 3.3 and 6.9 million Americans no longer participating in the labor force because of a weak labor market recovery.

*See my previous post explaining that in a healthy labor market participation should be rising not falling for adults age 55+ who are younger (due to the baby boom cohort), have longer life expectancies, longer to wait for Social Security benefits, and women in this age cohort greater lifetime labor force attachment than previous generations.

The Labor Market Recovery is Weak

I present some evidence that the unemployment rate understates the weakness in the labor market recovery and that a full-time-equivalent (FTE) employment to population ratio is a better measure of labor market activity in a guest post at Modeled Behavior.  This is the approach we take in the Welch Consulting Employment Index.

In the post I calculate that FTE employment is 6.1% below trend.  My calculations of FTE employment relative to trend account for the changing age composition of the population and quite different trends in employment rates within each age group.

One of the most important observations that I make in my post is that over 40% of the shortfall in full-time employment is among adults age 55+.  To non-labor economists this observation may seem surprising because FTE employment rates for adults age 55+ remained steady since 2008.  But employment rates were trending up for this group quite steadily prior to the recession as the following figure shows.

If the labor market recovery was typical of most postwar recoveries employment rates for the age 55+ cohort would still be increasing.  The fact that employment rates have remained constant since 2008 is very disappointing.  The natural employment rate for this age cohort is trending up for several reasons: (I) the Social Security retirement age for this age group is now 67 rather than 65 so more seniors will remain employed, (2) increases in life expectancy, (3) the aging of the baby boom cohort means that a higher fraction of the age 55+ group are in the 55-59 and 60-64 age categories that have always displayed higher employment rates, and (4) women now reaching age 55 have much greater labor force attachment throughout their careers than earlier cohorts of women.

The bottom line is that despite the unemployment rate dropping from 10% to 7.3% (which is still quite high) the labor market is much weaker than the official unemployment rate would suggest.  There are millions of adults in part-time work who in previous recoveries would have been working full-time and there are millions more who have given up looking for work and are no longer counted as part of the labor force.

 

 

 

Leaving Las Vegas But Devastating Atlantic City and Reno

Employment in casino hotels in the U.S. is on the decline.  Atlantic City, Las Vegas and Reno are seeing fewer visitors and lower revenues.  Part of this decline is due to the weak economy and stagnant middle class incomes.  The employment declines also reflect a long-term shift away from gaming in cities such as Atlantic City and Reno to other forms of gambling and entertainment.  Atlantic City casinos face competition from casinos in Pennsylvania, Delaware and Maryland, and Reno casinos have been hit hard by a very weak Nevada economy and increased competition from casinos in California and other western states.  As more states and cities allow casino gambling as a way to generate state and local government tax revenue, Atlantic City and Reno are likely to suffer even bigger declines in demand.  At one time these cities offered a relatively scarce commodity – legal casino gambling.  They now face sluggish demand because of a tepid economic recovery and increased competition.  Neither of these economic factors is likely to change soon.

The struggles of Atlantic City casinos have been well documented as earnings in the second quarter of 2013 are reportedly down 45% from the second quarter of 2012.  Employment in Atlantic City casino hotels in the second quarter of 2013 was nearly 35% below employment in 2000.  (For ease of exposition in what follows I use casinos to describe the industry group for “casino hotels”)  While employment in Las Vegas casinos is down only about 5% from 2000, casino employment in the rest of Nevada is down 43% from 2000.  Reno has the largest concentration of Nevada casinos outside of Las Vegas and employment there is down 44% since 2000.

As the following chart shows the sharp declines in casino employment in Atlantic City and Nevada outside of Las Vegas has occurred at the same time that casinos have been rapidly expanding outside of Atlantic City and Nevada.  (The chart normalizes employment to 100 in the first quarter of 2000 using the Current Employment Statistics series of the BLS.)

Employment in casinos outside of Nevada and New Jersey is up about 45% since 2000.  Vacationers who previously travelled to Atlantic City and Reno to gamble are instead visiting casinos along the Gulf Coast, or one of the 470 American Indian casinos located across the U.S. (including Connecticut, upstate New York, and parts of California).  Casinos outside of Nevada and Atlantic City employed 13.2% of all casino workers in the U.S in 2000 but now account for 21% of U.S. casino jobs.  Moreover casinos outside of Nevada and Atlantic City now employ more workers than all the casinos in Atlantic City, Reno, Laughlin, Lake Tahoe and all of Nevada outside the Las Vegas metro area.  This trend will continue as states and cities hungry for new sources of tax revenue allow more casinos to be built.  New casinos located throughout the U.S. will offer even more competition to Atlantic City and Reno.  The unemployment rate in 2013 has been an average of 13.2% in Atlantic City and 9.8% in Reno – both well above the U.S. rate.  Increased competition in casino gambling, the primary entertainment and tourist attractions in these cities, means that their local economies will continue to struggle.