Tag Archives: labor

Paul Krugman notes that persistent unemployment hurts the employed as well by decreasing their bargaining power, citing the low (voluntary) quit rate as evidence. This is an interesting claim with compelling evidence – wages grow a lot faster for everyone when unemployment is low. But there’s something peculiar about the the recent recovery – it’s relatively powerless. Let me explain. Both the early and late 2000s recessions have been followed by so called “jobless recoveries” where output rises a lot quicker than employment. One would expect that this would be correlated with slower increase in bargaining power (using quit rate as a proxy) though there is no way to be sure, the JOLTS dataset we use to measure these things only goes as far back as the turn of the century.

But one would at least guess that a recovery in power would be in line with a recovery of the labor market. Using quits and unemployment as the relevant proxies, this would be incorrect:

The above is a simple graph of unemployment and quit level since 2000. Economic theory predicts that sharp falls in output and employment should be followed by proportionally rapid recoveries (the so-called “v-shaped” recession). It is a well-known fact that the late 2000s recession hardly followed this pattern. But the way quits and unemployment differ in their respective dynamics is interesting. Even though the decline in unemployment after 2007 was hardly proportional to the crash, at least it was quicker – that is a higher absolute slope – than the early 2000s. Conversely, not only did quits fall much faster in 2007, they also recovered – in absolute and relative terms – much more slowly!

If you crunch the numbers you’ll see that after 2001 unemployment fell 30% as quickly as it picked up. The same figure for 2007 is 20%. So it’s slower, but at least comparable. On the other hand, in 2001 quits recovered 64% as quickly as they fell whereas for 2007 that figure stands at an anemic 28%. Quits after 2001 picked up at 0.61 points (indexed to 2007) every month, but only 0.43 points in 2007, despite the much sharper crash.

Some of this is not surprising. While a deeper recession would normally be followed by a deeper recovery, there are limitations on the extent to which this relationship can hold, especially noting second order effects of hysteresis and market inflexibility. But some of this is definitely surprising. Using the figures above, unemployment recovered almost 70% as quickly in 2007 as it did in 2001. Without some important structural changes, that figure would be in the same ballpark for relative quit recovery, which only stands around 40%.

Qualitatively this means the willingness of workers to quit their jobs is far less than the unemployment rate would indicate, even using the standards of the 2000s, which weren’t by any measure amazing years for labor. If JOLTS went as far back as the Clinton years we would probably see an even stronger relationship between quits and unemployment, something that’s falling apart.

So now I should answer the proverbial “what does this mean”. There are a number of candidate explanations. Loyal readers know that I’m not hostile to a partially structural read, but even that can’t explain everything, because structural arguments generally accept that unemployment rate (as opposed to employment level or participation rate) is a broadly accurate read of the economy, and that much of labor force exit is due to an aging population (or technology, or whatever). I haven’t looked at the numbers, but if we looked at the above data using employment-population ratio instead of unemployment, the late and early 2000s may not look so different.

Ultimately if we are to believe that the structural power relationship in the labor market has not changed noticeably since 2000, unemployment rate grossly overstates the pace of labor market recovery, and the Fed should not even be thinking about tightening of any type. On the other hand, to the extent that unemployment rate is a good gauge of overall labor market health, workers have seen a pretty substantial fall in their bargaining power since 2000 (and remember this is independent of employment levels, unless there are some severe nonlinearities in the data).

Another explanation comes to mind, though given the magnitude it is unlikely. Tyler Cowen notes that future inequality will likely be tolerated without Occupy-esque discontent as an aging country likes stability and calm. It may similarly be the case that older workers are less likely to quit their job as that implies an abrupt shift and uncertainty. Job changes may also require intrastate relocations, something else that has declined over the last few decades (though there’s a bit of chicken and egg, here).

All are pretty harrowing tales for American workers, though in the long-run the former is preferable. The growing unwillingness of workers to quit places strong disinflationary headwinds in the economy as the ability to hit a wage-price spiral becomes much more difficult. Edward Lazear and James Spletzer also estimated that low churn (of which quits are a big component) cost the US economy $208 billion dollars this recovery. More generally – and in this arena I have no expertise; I turn to leftists like Matt Bruenig – this has social consequences by placing a subservience of labor to capital. I’m generally wary of such distinctions, and it’s unclear that any of the proposed solutions like higher minimum wages and stronger unions would make much of a difference – but the possibility exists and it is important.

The powerless recovery is freaky. We are possibly seeing a greater dependence on employment when tight labor markets are a thing of the past.

A Disjoint Labor Market and the Two Recessions

August 14, 2013

the Economy: Home and the World

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Peter Orszag, Barack Obama’s former OMB director, argues that structural factors – like labor market mismatch, globalization, and automation – are unlikely to explain much of the recent shift the the Beveridge Curve. That is, we have a historically low hiring rate given the number of job openings and unemployment.

While it would be foolish to discount cyclical dynamics, we ought to pay heed to certain structural inconveniences. Some economists like to classify recessions into letter shapes including: “V” (rapid fall, rapid recovery), “U” (fall, stagnate, recover), “W” (double-dip and recover), “L” (fall and stagnate). Europe, and much of the United States (with apologies to North Dakota) are somewhere in between the latter, crappier, two. Measured by income or unemployment, at least.

But job openings tell a fundamentally different story:

What we see is an (approximately) L-shaped recovery for hires and a very V-shaped recovery for openings. Openings are showing a rapid recovery because they fell twice as hard. (So it’s unfair for Orszag to claim that openings are recovering much faster without noting the respective falls). While this data set does not go far back, we can see this tension of shape only in this recession. Previously, as theory and common sense would expect, both followed a similar path, if to different magnitudes. This time, one might say, there are two different recessions. (And as I tackle in a later post, openings should map very well to aggregate demand as a whole, suggesting a much stronger demand-side recovery than many suggest.)

This suggests the skill mismatch thesis has more support than Orszag believes. He makes an interesting point: the opening-hire ratio is abnormally high even for Retail Trade, which isn’t a particularly skill intensive sector. While that’s a fair characterization, retail is also a remarkably noisy data set:

Now, if we wanted to draw any inference, there clearly is a negative trend since 2011. That’s important because this deterioration doesn’t go as far back as 2008 – or even 2009 – as would be suggested by a cyclical downturn. This is an important distinction from ferment in the labor market as a whole. It’s entirely fair to argue that this inference derives from too-noisy data: but it’s the only inference one can make. We certainly may not conclude that the opening-hire ratio in retail trade speaks against mismatch theories as a whole.

For example, there seems to be no problems for workers in “Food and Accommodative Services” another historically low-skill, low-wage market:

In fact, we should note that not only the magnitude, but also the shape, of hirings and openings are in harmony – in 2001 as well as 2009. This tells us something has changed between then and now in the market as a whole that has not changed in the minimum wage market. A best guess might be skills.

Research and common sense suggests workers at the bottom crust of our labor market are slightly more persistent against globalization and automation than those in the middle. Technology and globalization tend to hollow out jobs open to middle-class, blue-collar builders and factory workers: jobs that made the 20th century American. On the other hand, it’s markedly more difficult to outsource your fry cook to China.

As I’ve noted before, many of the problems caused by sticky wages have likely evaporated. Aggregate demand is well short of where it should be, without front-loaded spending cuts, but it’s becoming harder to attribute as a primary cause. Paul Krugman recently cited evidence that industries that were hit the hardest are recovering the quickest, which is great evidence in favor of the cyclical downturn hypothesis.

However, while it’s certainly clear that there was an incredible aggregate demand shortfall between 2008 and 2012, it’s harder to argue that this deficit continues today. Let me be clear: I think smart stimulus today – the type that boosts supply, demand, and low-income welfare – is a good policy today. However, the fact that many of the less desirable shifts to which Orszag refers begin years after the trough informs me that structural adjustment may be an important component of the recovery.

Some on the right, at this point, throw their hands up and claim “we’ve done what we can”. I’m not so complacent. America lost jobs that aren’t coming back. A recession only made it easier to plow through the industrial hurdles of such a change. This is precisely the time to offer high-quality, technical education through free two-year colleges targeted at our broad middle class. This is precisely the time to roll back payroll taxes completely. This is precisely the time to expand the earned income credit.

There’s one very important argument in Orszag’s column that deserves more attention: internal recruiting. There’s some more evidence that this might be true:

A healthy labor market “churns” a lot: a lot of people get fired, a lot get hired, and still others quit. But we’re not seeing a recovery in fires, hires, and quits. Fewer people are fired if they can be internally rehired to do something more important. There is an important problem with this argument, that is “layoffs and discharges” are down to their trough in a healthy market. Regardless, the problem with internal job markets is that only the employed benefit: and a rise thereof would suggest painful problems for the long-term unemployed. Economists know employers look for many “signals” that provide information about a candidate (in other words, its not the amazing education you get at Harvard that get you hired). One potentially important signal is employment itself. That’s a big problem.

Orszag notes that “over the past three years, the number of job openings has risen almost 50 percent, but actual hiring has gone up by less than 5 percent. Companies are advertising a lot more jobs, in other words, but not filling them.” That’s fair enough, but it’s somewhat tricky to look at the recovery without scrutinizing the downturn. The real problem is the L-shaped hires graph and V-shaped recovery graph. And if we don’t do something about it soon enough, jobs Americans never had will go overseas.

Every Man a Dyna-byte

June 15, 2013

the Economy: Home and the World

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Several bloggers over the past week have commented on lethargic labor market movements as cause of economic decline. Adam Ozimek here argues that the docile job market is possible cause of stagnation. More acutely, Evan Soltas suggests that slow churning increases economic frictions and deepens the long-term unemployment crisis. Most interestingly, Ryan Decker notes that “churning is costly [and] if churning is declining for good reasons, we should applaud it. But that may not be the case.”.

What is see lacking across this discussion – in the long view – is a consideration of how new structures and and Internet have permanently altered what “economic dynamism” is, and how it can be measured thereof. We might call the switch to this new world a “reset”, as per Tyler Cowen. As I discuss here, the most notable economic development seems to be an increase in the stock (as opposed to bond) component of human capital.

To understand the potential impact of the Internet, start with this seemingly irrelevant 2007 paper from Hoyt Bleakley and Jeffrey Lin, “Thick Market Effects and Churning in the Labor Market: Evidence from U.S. Cities”. Bleakley and Lin suggest thick labor markets encouraging deeper and broader churning are causally-linked with agglomeration effects and hence wealth:

These results provide evidence in favor of increasing-returns-to-scale matching in labor markets. Results from a back-of-the-envelope calibration suggest that this mechanism has an important role in raising both wages and returns to experience in denser areas.

I don’t see many bloggers considering the Internet as an urban agglomeration. In the old days of manufacturing, agglomeration markets derived primarily from physical proximity. However, the idea of urban scaling is theoretically captured (see the Santa Fe Institute on cities or Geoffrey West on the surprising math thereof) with the idea that as the number of inhabitants double, the total number of interactions more than doubles. This generates a superlinear scale on opportunities for innovation, creativity, and dissemination of information (as well as violence and pollution).

But we don’t need physical proximity for creative collaboration, anymore. Twitter murders the intellectual distance between two parties, allowing for rich propagation of information, as well as creative speculation thereof. I see job offerings for remote positions advertised on my timeline, and too see the violence and incivility one would expect of a large physical gathering.

Cities allowed grand old factories to capitalize on economies of scale. But as the factory share of our economy shrinks, the Internet will become the driving force of most economic agglomeration. (I’m not as confident that the Internet will ever replace San Francisco or Manhattan as the hubs of social agglomeration).

Take etsy.com. I live in India, and know someone that weaves traditional handicrafts here and sells them for a good markup to an American market. The distributed apparatus handles shipping, handling, and any similar frictions. Outlets like this are making labor as mobile as capital. Indeed, part of Tyler Cowen’s “reset” world is deep factor price equalization in some industries. (A plumber’s service is not mobile, for example).

But as the labor market moves online, jobs are sourced through Craigslist the concept of quitting, firing, and hiring is shaken completely. Ozimek’s measure of dynamism through labor market churn will begin to capture an increasingly smaller aspect of the American economy. If you read the Harvard Business Review, you’re probably familiar with “supertemps” who are high-end professionals by definition in constant churn. Networked labor markets (on steroids via the Internet) make this a reality.

That’s the top 1%. But I believe cheap forms of Craigslist service are on rapid rise among the poor, too. Incorporated self-employment is on the decline, but what of forced entrepreneurship and dogsitting made possible because of the Internet? What of the sharing economy?

There are both cyclical and structural policy implications:

Flexible labor markets suffused with social insurance should take the form of strong unemployment benefits and reemployment credits, the latter scaled by length of unemployment.
Minimum wage restrictions will become increasingly irrelevant. A basic minimum income, on the other hand, less so. (This is another post, but I don’t think America is yet rich enough for the UBI we need, but will be soon).
Increasing frictional unemployment encouraged by a discount version of unemployment benefits offered to “quitters”.
The emergence of government-handled job auction markets as a means of depression management.

The Internet is a city that’s growing faster than New York or Mumbai ever did or will. This is the reset. For not much longer will quits+separations be a reliable statistic on job market health. Indeed, the Beveridge curve shows a weak economy in need of rejuvenation, but this is the dreamtime for the old labor market. Something new is coming. I think for the better.

On Labor and Its Share

June 8, 2013

the Economy: Home and the World

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A lot of people are talking about labor’s declining share of economic output, de-unionization, and stagnating median wages. These three phenomena don’t have to be causally linked, but there tends to be a bit of hand-wavy rhetoric to this effect. Considering the political centralism of labor as an idea, this isn’t surprising.

The link between the median worker and labor share is today tenuous at best. Labor share falls when investment analysts or doctors are replaced with high speed algorithms and robots. Labor share also falls when a farm hand is given a high-powered tractor. I happen to think that both of these are great trends. Remember, capital productivity is the only way to keep expensive American labor competitive on an international market.

A conversation about “labor’s share” divorced from one about distribution of human and physical capital will lead us to profoundly confusing results. Important to note at this point, division of income is not a question on redistribution. Certain European countries have deeper safety nets, and that may well be a desirable goal, but it’s ridiculous to think that we’re at a point where more redistribution, especially through the right channel, will fundamentally distort the labor-capital dynamic. This is relevant both to conservatives who believe a higher tax rate is inherently distortionary as well as liberals who want bigger labor as an end in and of itself. I don’t want people to think that accepting a declining labor share requires an abdication of the welfare state.

The debate about labor share is often intimately connected with that about unionization across the rich world, which has been in secular decline for the past quarter-century. However, it’s unreasonable to think that reunionization, by itself, would elevate labor. To maintain employment with high union density, we would need to make it difficult to hire and fire workers. We would need to reinstitute protectionist tariffs. We would have to devalue the dollar more than otherwise. In other words, we would need to dismantle the very system of free trade we’ve built for over half a century. So the question about share of GDP is more about overall labor policy, than unionization itself.

This is to say that, in a globalized world, were we to reinstitute industrial policy, corporations would flee. This assumes that a large part of labor’s decline has come from international competition but, as Timothy Taylor here notes, the decline is shared across capital and labor intensive sectors; murky factors at least vaguely connected with globalization are key.

None of this would make labor richer. It would increase its share of the income and, perhaps, even decrease inequality. Let’s consider the counterfactual wherein we maintain our unions in relative strength over the past three decades. We would probably look like France (where capitalists can’t close factories).

In France:

Labor protectionism (like making impossible to fire workers or close factories) is the mantra versus America’s “flexicurity” (things like unemployment insurance or reemployment credits).
Labor share is of GDP is about 70% versus America’s 50%.
Labor share has increased by 10 percentage points over the past two decades; it has decreased by the same amount in the United States.

Also:

America has the highest disposable income in the OECD (a measure I like much more than pure per capita GDP; and this includes oil-crazy Norway). Compare its $42,050 with France’s $27,452. That’s 155%.
But I don’t need tell you America’s rich. Our labor force is also pretty robust. We have a natural rate of unemployed at about 5%. It’s 7.7% in France. Another way to read that is our unemployment during a cyclical-crash is better than theirs in equilibrium.

But hey, at least labor gets all the income, right? Oh, and as it turns out – this is news to me – union density is actually a little higher in the United States. I don’t take this to mean much as we’re gouging organized labor here across the pond, but it does refute the naive “unions increase labor share” theory some advance. It also confirms my point that successful unionization (in the sense of a higher labor share) requires locking labor markets like the French.

America is no doubt richer than most countries for a variety of reasons entirely independent of flexible labor policy. But generally low unemployment rates (we’ve adjusted rather well to China so far, and employment didn’t plummet after the construction bubble blew) are a sign that labor policies don’t benefit, well… labor.

Median wages have stagnated this decade. That’s sad. But maybe it has nothing to do with the fall of unions and/or labor share of GDP. It’s better than wage decline which might have been the result of confused policies. There are two reasons it sucks to be a median worker in America today:

Physical capital is exceedingly owned by the rich, so you can see where a rising capital share goes.
Human capital is a big part of “labor’s” share, and that’s also disproportionately spread.

To fix this, we need an imaginative safety net that distributes capital, not cash. Ideally, we would have some kind of inheritance tax that takes all capital stock at death, throws it into a fund, and progressively distributes ownership thereof. This becomes hectic with family-owned businesses and small plots of land, and requires another post to tease out, but in theory it does the job.

We also need to educate the “poor” in a better way. This means more blue-collar jobs, believe it or not. We’ve been spending lots of money on graduating Bachelors, but what we need is technical schools that teach everyone solid engineering and calculus. Not the kind that you need to understand marginal economics, but make America competitive in the “upper blue collar” category. (And, for what its worth, “lower blue collar” guys also use more math than the median white-collar worker). We also want doctors to be paid fairly, which is to say a lot less than what they are now. How do labor share advocates support that?

Two-year colleges are cheaper and, most importantly, let you live with your parents. This is an inexpensive, supply-side tool that’s woefully underutilized as far as “labor” is concerned. By the way, this might cause capital share of income to increase: but only because the median worker can use advanced tools more efficiently.

It’s vogue to criticize the marginal productivity theory of wages because workers have gotten a lot more efficient without seeing a commensurate increase in wages. There’s a lot of merit to this claim, but it’s important to note that global competition has eaten any would be raises; the question is to track wages in the counterfactual exclusive of India and China.

Ultimately, fighting capital as France does is a loosing battle for labor. The safety net should come from capital redistribution and flexible stabilizers like unemployment insurance and reemployment credit. This makes it easier to hire and fire, both signs of a robust labor market. It’s time to start talking about labor and not Labor.

Of Markets and Migrants

May 20, 2013

the Economy: Home and the World

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It’s not secret that America has a rusty immigration policy that’s costing us billions. Almost everyone seems to agree that we could use more talented doctors and engineers, presumably from India or China. There’s even considerable consensus that tolerating unskilled (mostly Latin American) workers has huge long-run benefits.

But there’s a pretty vocal contingent – left and right – that believes other things equal more unskilled workers are bad thing. Take Madeline Zavodny from the American Enterprise Institute, what we might take as a reasonable barometer of center-right market-oriented thinking:

The fact that these immigrants would receive more in benefits than they would pay in taxes if they legalize their status does not mean that the US should not have an earned legalization program — it means that the US should reform its government transfer programs.

Tethering freer borders to the “reform” of America’s safety net is not only counterproductive, but effective political suicide on our third rail. Not to mention study after study has shown immigrants will increase America’s tax base (satisfying conservatives) as well as working-class salaries (satisfying liberals).

No matter, there is a superior alternative that would definitely raise revenues, and attract the most valuable immigrants: permit auctions. Australia and Canada are both cited as having relatively robust “point based” immigration policies. However, the market is a far more efficient and fairer arbiter potential immigrant competence than a bureaucrat in government.

America’s first-come-first-serve (FCFS) system is even worse. I propose that the government should electronically auction some anticipated number of permits at the beginning of each month on a free market. Similar ideas have been floated by economists like Giovanni Peri at the University of California at Davis, but my idea would be quite a bit different:

There are no different classes of permits for “high” and “low” end workers. Skill is determined only by the market.
There is no price floor, the government can tighten labor supply by supplying fewer permits on the open market.
The auction would not be limited to firms – it would include individuals as well as local and state governments.
Would shift the focus to employers rather than more common residency permit auctions, like the ones Matt Yglesias discusses here. The idea behind this is to attract the most productive, not the richest, people – though you could say the spirit of our proposals is quite similar.

To the extent that we cannot tolerate purely open borders, a consistent permit auction is the most optimal choice. Right now, family members and bad FCFS policies don’t ensure that each immigrant we accept is better than all potential immigrants. That is far from Kaldor-Hicks efficient.

But if permits are auctioned on the open market, only the agents that will maximize the resultant marginal revenue product (MRP) receive clearance. Furthermore, this will end the need for the cruel government practice of tethering visas to employment, which certainly depresses wages in the lab sciences. Rather, employers themselves will sign contracts with foreigners only on the condition of sustained employment, thereby mitigating the risk of purchasing permits.

Left-leaning liberals like Dean Baker should also be pleased. While I believe his concern that immigration decrease native wages is false (studies actually show it has a 2-3% positive effect), my proposal deals with this in two ways:

Especially with minimum wage laws in full-force, the MRP of high skilled workers is almost certainly higher than unskilled workers. The only other purveyors of such permits might be the North Carolina Growers Association which couldn’t find a single American to do the job. (Okay, I lied, they found seven).
Consistent auctions would lend a steady stream of revenue which can be used to finance education and employment for the poorest Americans, who those like Baker claim to care the most about.

Furthermore, this is a great way to increase partnership between the Federal government and immigration-friendly states. Piggybacking on the spirit of regional visas from Adam Ozimek, state politicians should be given the right to petition the Federal government for an increase in the supply of permits. I do not endorse that they be traded on a separate exchange, which would too strongly favor public sector work. Rather, this is a means by which interested states (like Michigan) can bring down the permit cost. If states buy large quantities thereof, they me operate a secondary market within their state, to identify the most competent local businesses.

Here itself, we can observe the deep flexibility of this market-oriented proposal. Secondary and tertiary markets allow for a reallocation of permits in a far more efficient manner than centralized bureaucracy can ever dream of. Further, the high-skilled immigrant labor market will become rather more competitive when employer restrictions imposed by the government are removed, thereby enhancing regional mobility and hence overall welfare.

The revenue potential is not insignificant. Just at this moment, the United States has almost 150 million potential migrants. The United Kingdom is a laggard runner-up with a figure of 42 million. Assuming each permit floats at $5,000 – and this is conservative based on Peri’s work – the United States has a potential revenue of $750 billion. Indeed, a market-based immigration reform would further accelerate demand to become American.

It’s crucial to note that the burden of permit financing would fall on both employers and employees, depending on elasticities of demand and supply. The dearer the permits, other things equal, the less a potential employer is willing to pay for the same level of output, realized as a lower wage. This can be thought of as a migrant financing his own permit.

Therefore, if the USA manages to bring more people today – who will then want to bring their friends, families, and loved ones – a naturally captive demand for American visas will alleviate the employer’s share of the permit burden.

Most economists firmly believe that tax is an evil far kinder than bad regulation. The American bureaucracy is rusty, expensive, and highly detrimental to long run growth prospects. A market (ultimately) for citizenship would increase government revenues, per capita income, labor market flexibility, and innovation. Markets lend themselves to a devolution of regulation to state and local governments, which can then compete with each other as centers of immigrant activity.

To maximize growth in a time of debt immigration market reform is the clearest step. And can perhaps command bipartisan support. Market framework also helps us clarify foggy thoughts. Why do we regulate migration, anyway? Would anyone even dream of something as nutty as a “permit to innovate robots”? No! But why is immigration any different?