Blogging now at Autos and Economics

I may on occasion repost here, but have decided not to spread my posts across several blogs. Please follow at:

Autos and Economics

http://autosandeconomics.blogspot.com

---

During the Washington and Lee University academic term my students and I blog on the following class-related sites.

---

Fall 2015

Senior Macroeconomics Seminar (Econ 398)– mainly US-related

China's Modern Economy (Econ 274)

Economics of Business Strategy  Industrial Organization  (Econ 243)

---

Winter 2016:

Econ 274 and Econ 243 as above

---

Spring 2016

Auto Industry (Econ 244)

Mike Smitka, Professor of Economics, Washington and Lee University

It's not just kids and retirees

...early retirement and education aren't "safety valves"...

At 8.3%, "headline" unemployment represents 1 in 8 would-be workers without jobs. Furthermore, we know that we're seeing not just high unemployment but also a big drop in the size of the labor force. That is, we've observed a big drop in the unemployment-population ratio.

OK, but isn't this just youth staying in school longer? And baby boomers who are retiring, or retiring early? After all, the unemployment rate for "prime" workers is 7.2%, rather lower than the July 2012 average of 8.3%. And if we're thinking of the impact on families -- kids -- high "primer earner" unemployment is more worrisome than that at the young and old ends of the age spectrum.

Now for the population as a whole employment has fallen more than unemployment has risen. Rephrased, the non-participation [in the labor force] rate rose, from 33.9% in January 2004-December 2006 to 36.2% over the 6 months ending in July 2012, a 2.3% rise. Relative to the base (66.1%) that's equivalent to a 3.5% rise in unemployment. If we add that to the headline rate we get 11.8%.

This sort of shift doesn't typify previous recessions. But perhaps this time around it's not the recession but long-term trends that happen to be showing up now. [See the graph below on the long-term trend.] In particular, we've far more youth in higher education, and baby boomers are in their early 60s. So it could be that large numbers of younger individuals are staying in school -- or, having grim job prospects, are enrolling in community colleges en masse. Meanwhile, for the boomers, while retiring before age 65 may be painful, it's feasible. And government workers and others can qualify for pensions before age 65, and don't have to wait on social security.

Unfortunately, the data show it's not just boomers and students: the shift for the prime age workers (age 25-54) is in fact is larger than that for the population as a whole. We're not in fact seeing a boom in schooling and early retirements.

In particular, during the bubble era 2004-7 prime age labor force participation rose by 1.4 percentage points, from a peak of 78.7% to 80.3%, and averaged 79.4% over January 2004-December 2006; over the last 6 months, through July 2012, it's averaged 75.7%. That's a drop of 3.7% (and an equivalent rise in the non-participation rate). Doing the same arithmetic leads to an adjusted unemployment rate of 11.9%. At one level it's not surprising; prime age workers (25-54) are a large proportion of the standard labor force (age 16-64), so the averages can't diverge all that much. Still, I'd hoped otherwise. But early retirement and education aren't "safety valves" that mute the impact of the Great Recession. That's not the case

...Mike Smitka...

Has Unemployment Really Fallen?

...retirement is not the answer...

The Financial Times has a good April 17, 2012 article looking at the sources of continued high unemployment and declining labor force participation.

On the unemployment side, there are structural arguments—workers live in the wrong places, have the wrong skills—and cyclical arguments. The article finds a bit of both, with the suggestion that the latter is pretty strong.

A drop in participation can potentially mask far higher underlying slack in labor markets, as people give up looking for jobs, or return to school (and stop looking for jobs), or retire (and, duh, stop looking for jobs). But to be counted as "unemployed" in our monthly labor force survey you have to be actually job hunting, not merely job dreaming. My own calculations show participation has dropped 2.2%, using the average going into the Great Recession and the average of the past 6 months. If all those would in fact have temporarily given up on finding work and so are counted as unemployed, that would push the current rate from 8.1% to 11.5%.

Other countries use similar methods while differing in details, such as how recently you have to have undertaken concrete job search efforts. Japan uses two weeks, the US four, and so unsurprisingly Japanese unemployment tends to look low from a US perspective.

Technically they are NILFs, Not In the Labor Force. But how many of those who have officially exited the labor market retired according to plan? The higher that number, the less that this shift in participation matters.

A block of the baby boomers have now hit age 62 and thus can potentially begin collecting their Social Security pension. Leaving aside the possibility that many had no intention of retiring, how much of the bump in NILFs is due to people age 62 and above? I'm doing such calculations for Japan and will post those results in due course to my Japan and Economics blog. Unfortunately, comparable age-specific data are not publicly available for the US. The gist of the FT article is that (unfortunately) intended retirement is not the cause.

The recession, in other words, remains really bad. The graph below thus projects the pace of recovery in employment using pre-recession employment-to-population ratios. At the current pace, we'll be back to par in 2016, assuming the the rapid pace of recent months continues unabated for the next four years.

...Mike Smitka...

Note: Another component of the drop in participation is due to those who qualify for disability pensions and actually "retire" and start claiming them. While some of that is because of the onset of disability, some is a function of the difficulty for an older individual to land another job. leading them to drop out of the labor force (become a NILF) and claim a pension. Herman Schwartz, a political scientist at UVA, has looked at this in the European context, and finds strong evidence that in hard times (or when unfavorable adjustments are made in the rules of regular retirement pensions) those who claim disability increases, indeed increases a lot. Of course that means that people aren't naturally welfare cheats, to use current US labels: lots of people who could retire due to age or disability in fact don't. Most people prefer work to just sitting around...

Who Feeds Leviathan? -- Children!

Mike Smitka

...Leviathan is the creation of 10-year-olds...

What of Leviathan? Let's rely upon data, here the Bureau of Labor Statistics Employment Situation Table B-1. [note]

First, where are all those bureaucrats I hear about in the local coffee shop? Their level peaked in 1991, a consequence of the policies of the Reagan era. Yet in the following decade our population, our national income and the complexity of our economy increased. We're trying to provide basic government services on the cheap. Now Social Security checks no longer require an army of paper pushers to get them out each month. But checking for food stamp, tax and medicare fraud -- that requires more, and more skilled workers, not fewer. Don't moan to me about welfare cheats in the same breath you complain about the size of government!

So who created Leviathan? – children did! The only significant source of government employment is education. As our population rose, so did the number of teachers.  Despite continued population, increases, however, their numbers were down by 250,000 going into the summer; given budget pressures, it's anyone's guess how many additional cuts will become visible as school starts. But those I hear railing against Big Government in the local coffee shop are retired or approaching retirement; they have no stake in what happens 10 years from now, when today's kids hit the job market. In contrast, tax cuts are immediate...

Note: BLS data don't include those on active military duty, an artifact of the days when military service was involuntary.

The devil in the unemployment details

Two charts. One is the number of employed, compared to where employment should be absent the Great Recession. I've not tried to correct this for the pending retirement of the Baby Boomers, but the bottom line (or rather the gap) is unfortunately all too robust.

The second eliminates those who are employed but on involuntary short hours. That's a measure of the human cost -- focused on that narrower group of employed takes cognizance that not only have many lost their jobs in the recession, but many have also been put on short hours.

Now what to make of this? We need to return to the trend line to be back at the status quo. The latest jobs report doesn't provide bad news, it just doesn't provide good enough news. We need to have unusually good job creation -- and recent history has no examples of sustained rapid job growth beyond a couple quarters in a row. When I do back-of-the-envelope calculations I come up with 5 more years. More careful analysis could show that the gap is too large (I've used a trend, not actual demographic data) and that we can have both sustained and rapid job growth. I hope I'm off on both counts, but I still believe "five years" is the right order of magnitude.

Unless, that is, Congress throws us back into recession. Is threatening Medicare and randomly shutting down government services going to encourage people to spend [and businesses to invest] rather than save? Not likely.

Then there are the mass firings of teachers and others at the state and local level. California already has to pay a stiff premium so state-level legal constraints aside, markets aren't going to let them borrow money to stop their local downward spiral. And it's not just California, but state and local governments across our land. US Federal debt is not an issue -- look at the market's judgement revealed in low interest rates. And because it's not an issue, it does offer a way to keep us from digging our hole deeper. For better or for (in this case) worse, Congress is washing its hands of watching after the commonweal in favor of generating sound bites for the campaign trail.

My numbers by themselves are too pessimistic. But not if you correct them for politics

Republicans and Federalism

Original post March 3, 2009 on "Autos and Economics" blog, moved here as part of reorganization of my blogs.
This has become a hot topic: for a related post see a Paul Krugman NYT op-ed on Texas.

One of the legacies of George Bush will be a n erosion of state's rights. There is much irony in that, because it is in direct contradiction to his self-proclaimed position of opposing the power of the Federal government in favor of those of these several States assembled.
First of course is his own push for an imperial presidency, that sits above both courts and legislature. Here we have had an administration that claimed to seek judges for our highest courts who would adhere to our founding father's faith as expressed in the Constitution. But not in practice. Who is the arbiter of what is legal? The presidency. What is the role of the legislator? To do his bidding, and if not, to be overridden in signing statements.
Second were a series of policies that intruded into historic state powers, over education, over law enforcement and in other areas. This is hardly new, and not necessarily inappropriate: there is no particular reason that the range of contemporary issues will line up neatly with the divisions of locality and state that prevailed in the past, much less the distant past. However, a number of such policies, including in education, have not been accompanied by a commensurate transfer financial resources from the federal government. In other words, while on paper states had been delegated responsibility, from their perspective these were unfunded mandates to follow federal guidelines for tasks that as often as not had long been delegated to them. So the reality has been that in the name of states rights their powers have been abrogated by the federal government in a manner costly to their fisc.
Third and not yet apparent is the long-run impact of multiple bubbles. As long as real estate prices and retail sales boomed, grumbling did not translate opposition to the above changes. With 50 states and over 10,000 localities, priorities vary widely; organizing joint "voice" proves well-nigh impossible. This is the in line with the standard "tragedy of the commons," but the common result is that states and localities throughout the US are facing budgetary pressures unknown in memory – perhaps they were worse in the 1930s, but not in my memory. For all practical purposes they are unprecedented.
Here I am making a prediction, bolstered by years of casual observation as an economist rather than a close reading of developments in local public finance. I believe, however, that states and localities in hardest-hit regions will face bankruptcy before the current recession recedes, not the least of which will be California. In the meantime, the provision of basic services such as education and public safety is being pared to the bone, and beyond, weakening these systems for years to come. The only way to stave off collapse will be through a vast expansion of subventions from the federal government. This will represent a de facto transfer of power to Washington, unlike anything seen before, wrought out of the dregs of 8 years of Republican rule.
As an economist I have mixed feelings about this; I believe that today the US is primarily a national economy rather than a collection of local economies. We can see this in our personal mobility, in the growth of retailers that are national in scope, and in the multi-state (though not yet truly national) structure of our banking system. Having political subdivisions disjoint from the geography of our economy does not (always? every?) make sense. What the Republicans have done is to undermine the status quo from multiple directions. This seems not to have been a conscious process; there certainly was no vision of a new order. But it may already be too late to shore up that old infrastructure.
In any case, the irony remains that politicians mouthing the mantra of states rights have unleashed forces that in hindsight serve instead to increase the power to the central government.