Another solid jobs report, with lots of evidence that there’s still room-to-run in this labor market.

February 7th, 2020 at 9:47 am

Employers added 225,00 jobs last month as the unemployment rate ticked up slightly to 3.6 percent, largely due to more people entering the job market, yet another sign that there’s still room-to-run in this long labor-market expansion. Wage growth, a perennial soft spot in recent jobs reports, ticked up slightly to a yearly rate of 3.1 percent, around where it has been for much of the past year. That’s ahead of inflation, last seen running at 2.3 percent, but the fact that the wages have not accelerated suggests some degree of slack remains in the job market (other wage and compensation series show roughly similar stability).

Our monthly smoother pulls out trends in job growth by averaging monthly gains over 3, 6, and 12 months. The pattern it shows is interesting and revealing. Over the past 12 months, job gains average 171,000 per month. Yet that average has accelerated over the past 3 months. Typically, as the job market closes in on full capacity, job gains tend to decelerate, much the way you have to pour more slowly as you reach the brim of a glass to avoid spillage (which, in this analogy, is inflation). Instead, we’re seeing no such deceleration, another sign of room-to-run.

In a similar vein, the closely watched employment rate for prime-age workers (25-54) continues to rise, and at 80.6 percent now stands above its 2007 peak of 80.3 percent. However, that’s more of function of job gains for women than for men. Prime-age men’s employment rate is still 1.4 percentage points short of its 2007 peak, while women have surpass their peak by almost 2 points. This partially reflects job gains is services versus recent job losses in manufacturing.

Factory employment fell again last month, down 12,000. Over the past 12 months, factory jobs are up just 26,000, one-tenth their gains over the prior 12 months (267,000). This clearly relates to Trump’s trade war, and while the recent “phase one” agreement with China may improve conditions in the sector–though I doubt it will have much impact–it will take time for trade flows to recover. Note also that blue-collar weekly earnings in the sector are up just 1.3 percent over the past year, a full point below inflation, meaning weekly paychecks for blue-collar factory workers are falling in real terms.

Today’s report includes the BLS’s annual benchmark revision to the payroll jobs data. In order to adjust the jobs data to more closely reflect a true census of the underlying jobs count, once a year the Bureau adjusts the level of jobs in the previous March up or down by factor based on more complete data. That factor this year was -514,000, a larger than average downward revision (the average revision, without regard to its sign, is 0.2% of payrolls; this one was 0.3%). The revision is “wedged” into the jobs data at a rate of -43,000 per month between April 2018 and March 2019. The negative revision for retail trade was particularly large, at -159,000, or 1 percent, likely a symptom of the accelerating loss of brick-and-mortar retail outlets at the hands of online competition.

The figure shows the difference between the level of payrolls before and after the revision. The new results do not change the fact that the historically long jobs recovery has been solid in terms of job quantity (job quality remains a significant problem). But the new trend is notably less robust than was previously recognized.

The wage-growth story remains much the same as it has been in recent months: stable gains but, despite the tight job market, no acceleration. The figures show annual, nominal wage gains for all and middle-wage private sector workers (the dark lines are 6-month trends). In both cases, we see clear evidence of slowing gains. Both series are beating inflation, so hourly wages are growing in real terms, but the pause in their upward trajectory is evidence that there’s still slack in the job market. Other wage series show similar, though less stark, stabilization in recent months.

Another critique of recent wage trends is that while they’re clearly being nudged up by the tight labor market, the trends are not as positive as you’d expect given the lowest unemployment rate in 50 years. One way to investigate this claim is to construct a statistical model, including labor market slack, to predict wage growth. If the predictions map closely onto the actual series, then perhaps wage growth is about where you’d expect, i.e., not too low, even given the tight job market.

Source: BLS, see text

The “full smpl” line in the figure below shows the results of such a model for mid-wage workers. The line cuts right through the actual trend in hourly wage growth, suggesting there’s no gap between expected and actual wage gains.

However, this isn’t quite the right way to do test this question. If the relationship between unemployment and wage gains has diminished over time, that change gets built into model estimates like this one. The way to account for that potential problem is to run the model through an earlier year and predict “out-of-sample.” The “smpl thru 2010” line shows the result from this approach. Sure enough, it predicts wage growth closer to 4 percent than the current growth rate of X percent. In other words, at least by this simple model, it’s not unreasonable to expect faster wage gains than we’re seeing.

See the data note below for details and caveats.

Summing up, labor demand remains admirably strong in the US job market, which shows few signs of age. And equally importantly, labor supply is responding to the demand, as the job market continues to pull people in. On the down side, the trade war has clearly damaged export-oriented sectors, especially manufacturing, both on the job and wage side. Moreover, even with unemployment persistently near a 50-year low, wage growth, at least in these data, has stopped climbing. This, along with low, steady inflation data, clearly implies there’s still slack left in the job market, with no rationale at all for the central bank to tap the brakes on growth.

Data note on wage model: The model’s dependent variable is year-over-year quarterly hourly wage growth for production, non-supervisory workers. Regressors include a constant, the unemployment rate minus the CBO estimate of the natural rate, two lags of the DV, and “expected trend wage growth” taken from a recent Goldman-Sachs analysis. They define this variable as follows: “Trend wage growth is estimated as the sum of the Fed’s measure of inflation expectations and a simple average of the backward-looking productivity growth trend and the Survey of Professional Forecasters’ estimate of productivity growth over the next 10 years.” The full sample goes for 1992q1 through 2019q4. The “out-of-sample” model runs through 2010.

Some analysts have correctly noted that unemployment doesn’t capture slack as well as the prime-age employment rate, especially when it comes to correlating with wage growth. If I substitute the prime-age employment rate into the model, the difference between the two predictions is negligible. My point here is simply that those who think wage growth should be faster at 3.5 percent unemployment are not necessarily wrong.

Dr. King knew that full employment raises the price of prejudice

January 20th, 2020 at 9:10 am

There are so many reasons to celebrate the life, work, and legacy of Martin Luther King, Jr., whose birthday we celebrate today. The dimension I like to elevate is Dr. King’s profound understanding of the importance of full employment to the opportunities of black Americans. Remember, the full name of the March on Washington was the March on Washington for Jobs and Freedom (my bold). A sign some of the marchers held that day told of a simple but powerful equation: “Civil Rights Plus Full Employment Equals Freedom.”

Dr. King’s insight was born of the recognition that racial discrimination by employers is costless in slack labor markets. With abundant excess labor, racist employers could handily indulge their prejudices. But when the job market tightens up and stays tight, that strategy becomes increasingly costly until avoiding non-white hires means an inability to meet consumer demand and leaving profits on the table.

In fact, last year, with overall unemployment near a fifty-year low at 3.7 percent (the average for 2019), the black jobless rate was 6.1 percent, its lowest on record, with data going back to the early 1970s. The average black rate since then was twice last year’s level, about 12 percent.

We mustn’t, of course, overlook the racial context that so motivated King: the 2019 white jobless rate was 3.3 percent, not quite half the black rate, but close to it. As followers of these data know, that ratio has been persistent.

It’s common, though incorrect, to suggest that the elevated black/white jobless-rate ratio is a function of educational differences. In fact, as economist Valerie Wilson often emphasizes, racial unemployment gaps persist at each education level. Using BLS data for those 25 and up for 2018, the ratio of black-to-white unemployment is around 1.5-2 across education groups (with lower ratios for those with more education).

Another way to show this persistence—and belie the claim that it’s all just about educational attainment—is to imagine that blacks had the same educational attainment as whites. That is, calculate the total black unemployment rate for the 25+ group using white labor force shares by education but black jobless rates. The resulting rate for 2018—5.1 percent—is just slightly below the actual black rate of 5.3 percent. In other words, at least by this simple simulation, even if blacks had white attainments, their unemployment would still be well about whites’ 2.9 percent unemployment rate.

Much research has found this gap to be associated with racial discrimination, against which, as Dr. King argued, full employment remains a potent weapon. We thus must ply macro policy get to and stay at full employment for long enough so that those victimized by racial prejudice can get a foothold in the job market. Moreover, in order to push back against last hired, first fired dynamics, we need micro policies to cement these racial gains.

At the macro level, this implies using fiscal and monetary policy to achieve and sustain truly full employment. There’s of course been a sharp debate as to what is the lowest unemployment rate consistent with stable prices. Clearly, based on especially inflation (both realized and expected) but also wage data, we’re not there yet, and I much endorse Fed Chair Jay Powell’s view of being data dependent on this, versus trying to estimate a “natural rate.”

If you must have a number, though, the little exercise above suggests that any target that includes black workers is biased up by racial prejudice. If some employers resist hiring workers of color for prejudicial reasons, that says nothing about the correlation between unemployment and inflation. Thus, a simple metric, purged of this racist impulse might be the white rate. Last year, that was 3.3 percent; 2.7 for the 25+ group. Such rates, for the record, are at least a full point below most estimates of the natural rate.

The tight labor market has helped propel an almost 10 percentage point gain in prime-age (25-54) black employment rates (the comparable white rate is up just 4 points). How do we sustain these gains when the inevitable downturn hits?

By liberal [sic] application of fiscal policy designed to keep recent entrants in the job market! Subsidized employment opportunities, including public jobs if, in a deeper recession, private sector employment is not available. Also helpful would be infrastructure projects with local hiring ordinances, as would apprenticeship programs targeting persons of color.

The key is to be driven by King’s insight that in slack labor markets, the price of prejudice falls. Yes, the larger project must be to prosecute such illegal practices—that’s why we have an EEOC. But while we celebrate Dr. King’s legacy, we must acknowledge that his work is far from complete, a fact that is glaringly obvious in the age of Trump. And one way to fight back, as Dr. King taught us, is through the relentless pursuit of racial justice and opportunity through full employment labor markets.

2019: A robust year for job growth; less so for wage growth

January 10th, 2020 at 9:59 am

Payrolls rose 145,000 last month, capping off a strong year for job gains with payrolls up 2.1 million over the year, an average of 176,000 per month. These are solid numbers, especially at this stage in a uniquely long expansion, but as we show below, their magnitude is well within historical context. In fact, in percentage terms, employment growth in 2019 posted the slowest growth rate (1.4%) since 2010. This, however, is to be expected, as such growth rates typically decelerate as recoveries grow older and the labor market closes in on full capacity (see data note at the end of this post).

The unemployment rate ended the year at 3.5%, a fifty-year low. Wage growth, however, disappointed last month, and has clearly decelerated in recent months, even at low unemployment. This important finding suggests a) job quantity in this labor market expansion is stronger than job quality, b) many workers still suffer weak bargaining clout, and c) based on both recent wage and price movements, we are not yet at full employment.

Our monthly smoother shows monthly gains using 3, 6, and 12-month averages. All three bars are of a similar height, meaning the underlying trend of monthly payroll gains is around 180,000, an impressively large number for a record-long job recovery that’s been ongoing for about a decade.

The figure below provides more context, showing average monthly payroll gains since 2000. Last year was around the middle of the pack in terms of its magnitude, but the figure provides a good look at the cumulative job gains that occur in a long, robust jobs expansion compared to the much shorter one in the 2000s.

While both nominal and, more importantly from the perspective of workers’ living standards, real paychecks have gotten a boost from the tight labor market over the past few years, they remain a soft spot. The figures below show hourly wage gains, year-over-year, for all private sector workers and for mid-level workers. The figure for all workers rose a lot more strongly last year than in 2019, when, despite a tight labor market, it began to decelerate (this series is more pessimistic than some, but others series show a similar flattening).

The next figure provides similar context showing nominal hourly wage gains for each year, 2000-19 (wage growth for the “all” group is only available since 2007). Last year’s deceleration is clear, but the height of the bars is still commensurate with earlier periods of tight labor markets.

The next figure shows real wages (with 2019 values based on my forecast of December’s inflation rate). Here again, we see real gains for workers in 2019, but less so than both last year and earlier years in this expansion (one reason for this finding is that inflation was exceptionally low in 2015). A relevant input to this real wage analysis is the fact that productivity growth has slowed over this period. Higher productivity growth allows firms to pay more while maintaining profit margins. Conversely, at lower productivity growth, workers’ diminished bargaining power becomes a bigger constraint on their pay, a factor that is increasingly disadvantageous in our era of growing employer power in key industries such as retail, health care, and technology.

Another clear labor-market soft spot is the manufacturing sector. The year ended with a loss of 12,000 jobs; the sector added just 4,000 jobs per month in 2019 compared to 22,000 in 2018. As a share of total employment, manufacturing was 8.4% last month, its second lowest share of record going back to 1939. Of course, this is the result of a long-term shift from goods to service production, one that is common to advanced economies, but research clearly links the recent decline in manufacturing to Trump’s trade war.

In sum, 2019 was a good year for low unemployment and job gains. Yes, the latter is down relative to earlier years in the expansion, but that’s expected at this stage (see data note below). The crucial macroeconomic lesson is that the U.S. can run a much hotter for much longer labor market than many economists and Federal Reserve policy makers heretofore believed. Even at a 50-year low for unemployment, wage and price pressure remain at bay.

That said, wage trends and manufacturing employment remain conspicuous and important problems, however, and both should be addressed by policies that strengthen worker bargaining power and boost the international competitiveness of exporters.

Data note: There are various ways to calculated annual changes over calendar years. In the above analysis, we take employment and percent changes from December over December, e.g., from December 2018 to December 2019. In our view, this is the best way to summarize the growth over the year versus, say, compared the average payroll level for year t with year t-1. We also note that these payroll values will shortly be revised, though the broad trends described above will remain intact.

Evidence for the claim that employment growth eventually slows as expansions age can be seen in the figure below, which plots year-over-year percent changes in payrolls, with recession shading. As expansions age, this variable eventually decelerates. We quantify this by regressing the change in payrolls (either raw numbers or percent changes) on a trend and trend-squared that grows with each expansion (so the first month in each expansion is ‘1’, the second is ‘2’, etc. and recessions are ‘0’s’) we find a significantly non-linearity in this variable. That is, the trend expansion variable is positive (as expected) and the squared value is negative, with both coefficients highly significant.

Source: BLS

None of this should be taken to imply that the expansion is soon to fade to recession. First, there is no evidence of labor market or broader economy overheating, either in the wage or especially in the inflation data. Moreover, there are no obvious credit bubbles of the type that have ended recent expansions. In fact, as Goldman Sach’s Jan Hatzius has pointed out, household and firm balance sheets look fairly healthy. In fact, our simple payroll model described above predicts considerably slower payroll growth right now relative to the actual growth rate—about 1% vs. the actual 1.4%–implying this expansion, even at its advanced age, is chugging along at a safe clip, at least for now.

Back-up evidence for WaPo piece on most important econ lessons of the decade

December 23rd, 2019 at 7:36 am

Here are the companion figures to my WaPo piece today on econ lessons of the decade.

1) The unemployment rate can fall a lot lower than most economists thought without triggering inflationary pressures.

2) Budget deficits cannot be assumed to place upward pressure on interest rates.

3) Weak worker bargaining power has long been a factor driving inequality. In the last decade, the increasing clout of certain employers has joined the mix.

Source: NY Times

4) Progressive health care reform, wherein the government plays a larger role in coverage and cost control, works.

Source: Paul Van de Water, CBPP

5) [Lesson re-learned] Trickle-down tax cuts don’t work.

Source: Goldman Sachs

6) Antipoverty programs don’t just reduce poverty today; they improve the outcomes of their beneficiaries many years hence.

Source: CBPP

CBPPs best graphs of 2019!

December 19th, 2019 at 3:45 pm

For a certain breed of wonk and nerd, it’s not the holiday season until some of CBPP’s best graphs of the year are collected and briefly annotated. This year, Kathleen Bryant and I took a stab at picking some of the figures we thought were most important to document the economic and policy landscape facing economically vulnerable people.

One of the most important and positive trends of the last decade was the decline in share of Americans without health coverage due to the Affordable Care Act. Their numbers fell from about 45 million to 27 million, a gain in coverage for ~18 million people. But this year’s release of the Census Bureau’s health insurance data revealed a troubling reversal of this trend. In 2018 (the data lag one year), the uninsured rate increased for the first time since the ACA’s passage. These findings illustrate the grave consequences of the Trump Administration’s repeated attempts to undermine the ACA over the past several years.

One reason the reversal shown above is of such concern is that health coverage saves lives. Reviewing a recent academic study, Matt Broadus and Aviva Aron-Dine report that the ACA’s Medicaid expansion prevents thousands of premature deaths each year and saved the lives of at least 19,200 adults aged 55 to 64 between 2014 and 2017. Matt and Aviva find that if all states had expanded Medicaid in 2017, the number of lives saved by full expansion would almost equal the number saved by seatbelts. Given such magnitudes, and considering that the federal government pays 90 percent of the costs of the expansion, these findings underscore the cruelty of remaining state resistance to the expansion.

The positive aspects of the current U.S. economy, such as our low unemployment rate, mask the fact that there’s an affordability crisis for low- and middle-income housing, both purchased and rental. Alicia Mazarra’s analysis shows one reason why: a large, persistent gap in the growth of incomes and rents of the median rental household. Federal rental assistance programs make a dent in the income-rent gap by helping 10 million people keep roofs over their heads – but these programs are woefully underfunded: only one in four eligible families get the rental vouchers to which they’re entitled, a huge shortfall that could be ameliorated simply by adequately funding the voucher program.

The official poverty measure leaves out the impact of some of our most important anti-poverty programs, including the market value of SNAP and tax credits for working families. CBPP’s Danilo Trisi and Matt Saenz showed that when we account for the full spate of anti-poverty programs (some of which are counted in the official measure), the national poverty rate falls by almost half, from 24 to about 13 percent. That amounts to 37 million people, including 7 million kids, lifted out of poverty. We can and should argue that 13 percent is still far too high in the world’s richest economy, but claims that the safety net fails to cut poverty are demonstrably wrong.

As just noted, one of the programs that reduces poverty is the SNAP program. Most people reasonably think of SNAP as a consumption program; i.e., it raises recipient families’ ability to meet their basic needs. But as the figure shows, it’s also an investment program, with long term benefits for children in households that receive it. Because the national program was originally phased in state-by-state, researchers were able to compare adult outcomes of kids in SNAP households to those in households that did not receive nutritional assistance. SNAP receipt had long-term benefits, improving both health and educational outcomes.

The U.S. labor market creates a lot of jobs, which is, of course, a good thing. But too many of those jobs are of dubious quality. About half of working-age Black and Latino workers are in low-wage jobs (it’s about a third for whites). That’s one reason why CBPP’s tax team touted the Working Families Tax Relief Act, an earnings subsidy for low- and moderate wage workers which builds on the EITC. The WFTRA “would improve the economic well-being of 46 million low- and moderate-income households with 114 million people.” Along with higher minimum wages, it’s a surefire way to improve the quality of lower-paid jobs.

As I argued in recent testimony before the House Budget Committee, the 2017 Trump tax cuts have broken a key linkage in advanced economies: that between a strengthening economy and more tax revenues flowing into the Treasury. The figure above shows that the average revenue flow as a share of GDP is about 17 percent, but in periods like the present, with low unemployment, that share rises to 18 percent. However, in 2019, it fell to 16.3 percent, about two percentage points of GDP, or over $400 billion, below where it should be.

Source: Goldman Sachs Research

Sticking with the Republican tax cuts, the package was sold as not only “paying for itself,” an obviously false claim, but as a stimulus for business investment. The cuts were particularly generous to corporate shareholders and wealthy households, and trickle-down tax lore maintains, against decades of evidence, that such tax cuts will boost business investment. As the above chart shows, the opposite occurred: since the tax cuts were passed, investment in plants, equipment, and research have grown more slowly.

One of our more important papers from the past year was Chye-Ching Huang and Roderick Taylor’s analysis of ways the federal tax code maintains racial inequality in income and wealth. Of course, the code does not explicitly target race or ethnicity but centuries of racist policies – such as the laws upholding slavery, the confiscation of Native American tribal lands, and the policies that racially segregated schools and neighborhoods – have so dramatically shaped today’s income and wealth distributions that almost any federal tax policy change will inevitably raise or lower racial barriers and disparities. The gif illustrates the racial disparities that are the culmination of centuries of barriers that people of color have faced to accruing wealth.

And, with that, thanks for following these econo-musings, and seasonally-adjusted greetings to all!