March jobs: Topline miss but solid trend, plus a deeper dive into the current wage story

April 6th, 2018 at 9:31 am

Payrolls were up 103,000 last month, well below expectations for about 180,000, but this miss should not be taken to mean that the job market is in trouble. To the contrary, the trend of job growth remains strong and unemployment is at a 17-year low. Remember, these monthly data are noisy and you must average over numerous months to extract a meaningful trend—see “smoother” figure below. Consider, for an example of the monthly swings in these data, February’s gain, revised up now to 326,000 (the larger downward revision to January led to a decline of 50,000 from the combined previous reports of job gains in those months).

Wages, before inflation–a closely watched gauge of the extent to which the tightening job market is boosting workers’ bargaining clout–rose 0.3% in March, and 2.7% year-over-year, a slight bump over last month’s 2.6% rise. However, this is far from an inflationary number, and the production/non-supervisor wage was up only 2.4%, and that’s 80% of the workforce. (Yes, that implies outsized gains to higher-paid workers, but again, some of that is monthly noise.) I dive more deeply into the wage story below

Our smoother wrings out some of that noise by looking at average monthly job gains over 3, 6, and 12-month periods. As you see, the underlying trend is around 200,000 a month. This is a very solid trend of job growth, especially considering a job market closing in on full capacity.

But the key words there are “closing in.” The employment rate of prime-age workers (25-54) still implies room-to-run (as does the lack of pressure from price measures, including inflation and wages). The peak in the prime-age rate was 80.3% in January 2007; its trough in 2011 was 74.8%, an historically sharp decline as these workers got seriously slammed by the Great Recession. But the persistently tight job market is enabling them to claw back their losses, against many predictions that they were lost forever (a reminder to economists that it’s tough in this space to know what’s cyclical and what’s structural).

Their employment rate in March was 79.2%. Thus, prime-agers have recovered 4.4 out of 5.5 percentage points, or 80%, of their decline over the course of the recession. Prime-age men, whose employment rates have suffered a longer-term decline, have made back 76% of their loss; women have done better, clawing back 90%.

Deeper wage dive

This month, we (Lexin Cai and I) dig a bit deeper into the wage story. Much wonkiness follows, but the punchline is that slow productivity growth poses a clear constraint on wage growth. However, there’s a lot more room for wage growth through labor clawing back some of its lost share of national income. Importantly, from the Fed’s perspective, that’s source of wage growth is non-inflationary.

As noted, nominal hourly wages rose 2.7% over the past year. For the 80% of the workforce in blue-collar, non-managerial jobs, wage growth was up 2.4%. The figures below show yearly wage growth since the downturn along with a smooth trend (a 6-month rolling average) for both series. After falling in the recession, nominal wages settled at about 2%, year-over-year, and, as unemployment fell further, which typically creates more pressure on wage growth, climbed to about 2.5%.

But, as the scatterplot below shows, they’ve essentially plateaued at that level, which the figure reveals to be somewhat unusual.

The figure plots yearly, nominal wage growth for blue-collar, non-supervisory workers (this data series goes back to 1964, far enough to enable this analysis) in every month that the unemployment rate was between 3.5-4.5 percent. The average wage growth in these months was about 4%, but as you see in the cluster we’ve circled, all the recent observations have been significantly lower than that, at around 2-2.5%.

What gives? Why is that cluster such an outlier?

First, there’s a bit of apples-to-oranges in this comparison. The demographics of the workforce, inflation, and most importantly, productivity growth–all of which influence wage growth–have all changed a lot over these years, such that even conditional on low unemployment, we’d expect different outcomes. I don’t think changing demographics is much of a determinant of this outcome. To some extent, pulling less skilled people into the job market may be putting some downward pressure on wage growth, but I’m sure low inflation and especially our current slow productivity growth are more consequential.

What you see in the figure are essential three different wage growth regimes at low unemployment. The top one—the dots clustered around 6%–occurred mostly in periods of very high inflation, like back in the 1970s, when big Paul Volcker shut down wage and price inflation with massive, recession-inducing interest rate increases.

The middle cluster partially reflects the strong wage growth of the full-employment latter 1990s, when much strong productivity growth (2.5% versus today’s 1%) helped pay for non-inflationary wage growth while enabling firms to maintain high profit margins.

The bottom cluster—the one we’re currently living through—reflects both low inflation and low productivity.

Does that mean workers, especially these middle-wage folks, must be resigned to being stuck in that bottom group of dots? No! Prices should, and to some extent are, rise some as the economy continues to tighten, and that could help push up nominal wage growth (though not real, since higher wages would be met with higher prices). The problem is slow productivity growth.

We don’t know much about how to get faster productivity growth, but there’s another path toward wage gains for these workers: redistribution from the inflated profit share of national income to the labor share. Under that scenario, very tight labor markets—I’m talking about the left side of this scatterplot—create the pressure for faster wage gains that shift income from profits to wages.

Yes, that crimps corporate profit margins and the stock market will hate it. But it is precisely the rebalancing that should occur in a truly full employment labor market. In fact, the absence of such a rebalancing is one signal that we’re not yet at full employment.

Enough already with GDP growth…

April 2nd, 2018 at 9:01 am

Readers know I’ve long been noodling over measurement issues, whether it’s accurately measuring the economy’s capacity–and admitting we don’t have reliable, policy relevant gauges of potential GDP or a “natural rate” of unemployment–or maybe most importantly, measuring well-being versus growth. See this in today’s WaPo.

Like David Pilling, whose book The Growth Delusion I highly recommend in this space, the idea is not to toss GDP growth rates and other aggregate measures. It’s to put them in perspective, and critically: be aware of what they leave out. In that regard, I think one of the most important points in the WaPo piece is the need to net out environmental degradation (which, as I point out, includes adding back in some positive developments, like less use of coal, more use of renewables).

Source: WSJ

The WaPo piece barely scratches the surface of this conversation, of course. The punchline–it takes a village of metrics to begin to characterize the well-being of a populace–invokes the need to evaluate many more metrics, including:

–Are people meeting their basic needs (housing, food, child and health care, etc.); do their incomes come close to what’s needed given the cost of living where they live? Such data exist.

–How can we best net out environmental degradation and any progress we’ve made against it?

–How valid/useful are existing well-being measures, like the Happiness Index in the WaPo piece, the Genuine Progress Indicator, Bhutan’s Gross National Happiness, etc.?

All fodder for future work in this space. Perhaps we can tap this disconnected moment (between growth and well-being) and elevate the need to get away from the usual GDP/stock market etc. and take these measurement challenges much more seriously.

One other point which have space to get into in the piece. This disconnect has obvious political implications. Here’s a figure showing the gap between Trump’s approval and the unemployment rate–he’s uniquely far from the best-fit line. True, LBJ was too, but that was Vietnam (though Trump/war anxiety looms very large for many of us, I’m sure).

Source: Nat Cohn, NYT

Sometimes it’s a lot more than the economy, stupid.

Much more to come on this…

Musical interlude: Steve Winwood can’t find his way home.

April 1st, 2018 at 9:53 am

I haven’t posted one of these for awhile, but I stumbled on this gem on YouTube the other day and had to share it. It’s the grown-up child prodigy Steve Winwood just sitting there, letting loose with some pure music. I recall the song from my younger days from the rock-star-studded band Blind Faith.

These days, I’m finding musical respites like this one increasingly essential.

NYT oped: When it comes to trade-induced job loss, “don’t worry, be happy!”

March 29th, 2018 at 9:35 am

I’ve long hoped, probably naïvely, that one of the benefits of team Trump’s promotion of generally ineffective (or worse) solutions to the downsides of trade could engender a debate about better ideas. Of course, the debate will also generate some really bad arguments, like this one from economist Donald Boudreaux in this AM’s NYT.

Boudreaux argues that trade (and, implicitly, anything else) can’t be a problem for jobs because the US economy creates and destroys tons of jobs all the time. The nub of his case comes down to:

“…estimates of jobs destroyed by trade sound big, but they’re actually tiny. Relative to overall routine job destruction and creation — “job churn” — the number of American jobs destroyed by trade is minuscule.

In January alone, the number of American workers who were laid off or dismissed from their jobs was 1.8 million. The number of workers who quit their jobs that month was 3.3 million. Adding in workers who left their jobs for other reasons, such as retirement and disability, the number of job separations in January was 5.4 million. But there were 5.6 million hires in January, too. Those numbers are typical of most months.

Awareness of job churn should calm Americans’ fears about imports [good luck with that–JB]…Compared with the number of total annual job losses…job losses from trade shrink into insignificance.”

He then cites some estimates of trade-induced job losses:

“Ms. Wallach’s estimate that Nafta destroyed one million jobs in its first 20 years means that it took freer trade with Mexico two decades to destroy as many American jobs as are now destroyed every 18 days on average. Mr. Autor, Mr. Dorn and Mr. Hanson’s calculation that 2.4 million American jobs were ended by trade with China from 1999 through 2011 implies that the 13-year “China shock,” as the paper called it, eliminated as many jobs as are eliminated, on average, every 41 days.”

By this measure, almost any amount of job loss attributed to any cause will be insignificant. Boudreaux has taken Panglossian economics (“don’t worry—be happy!”) to a new high. His trick, if you didn’t notice, is a) conflating gross with net flows, and b) not giving a crap about the pain of job loss, dislocation, and the damage done to whole communities that found themselves on the wrong side of these global dynamics.

I asked David Autor—he’s one of the economists whose work Boudreaux critically cites—what he thought about this argument that job churn somehow negates job loss. His response follows:

“It’s unfortunate that a Ph.D. economist would not recognize the crucial difference between gross and net job losses. By Boudreaux’s logic, since “in a normal year, then, the number of workers laid off or dismissed averages 21 million,” the U.S. Great Recession was a negligible event: the U.S. lost fewer than 4 million jobs in the first year (a mere one-quarter’s worth of job losses) and no more than another 2 million in the second year (only a month’s worth). It’s remarkable that we even noticed!

Yes, when the U.S. loses and gains 21 million jobs in a year, this is the normal ebb and flow of the labor market. Large gross job flows need not imply any net loss of employment. But when sharp changes in world trading conditions cause the U.S. manufacturing sector to close up shop on 14 percent of its base employment level (2.4 million of 17.3 million manufacturing jobs) in the space of a few years, and many of these displaced workers leave the labor force, that’s a huge rise in concentrated net job loss that is not part of the normal ebb and flow. (By the way, 2.4 million is the conservatively estimated trade-induced fall. U.S. manufacturing jobs plummeted from 17.3 million in 1999 to 13.8 million in 2007, a net reduction of 3.5 million, followed by another 1.9 million net fall between 2007 and 2010).”

So, if you happen to read Boudreaux’s oped and it seemed inconceivable to you that millions of net job losses magically “shrink into insignificance,” be assured that you were right and he was very wrong.

As I’ve tried to stress in much recent work, this moment does, at least it should, create a moment to talk about what we should do for those hurt by trade.

I’ve argued:

–Much better work supports for job losers, including direct job creation in places with persistently weak labor demand.

–Improve the quality of existing jobs through much better labor standards (see Heidi Shierholz’s recent work on this). Though there are definitely pockets of weak labor demand, even today, broadly speaking, our labor market problem is less job quantity than quality.

–Help our smaller manufacturers by expanding the Manufacturing Extension Partnership (it’s a small but venerable part of the solution—I’ve got a piece coming out soon on this with the details).

–Push back on currency intervention by trading partners with “countervailing currency purchases” (see Gagnon/Bergsten on this). Trump’s new South Korean trade deal relegated currency rules to a toothless side agreement.

–See Lori Wallach and my agenda for more inclusive trade deals, including taking ISDS out of these agreements, putting a currency chapter in the deal with enforceable disciplines, and ensuring a much more balanced set of interests around the table when these deals are cast.

[Whoops: an earlier version got Boudreaux’s fist name wrong.]

Newsflash: The Libor’s outpacing the Fed funds rate. Whussup with that?

March 27th, 2018 at 9:30 pm

Financial markers are on shpilkes. Stocks, after crushing it Monday, with the Dow up almost 3%, gave back about half those gains the next day, dragged down by a tech sector spooked by potentially forthcoming regulation around data privacy.

Readers know I don’t try to explain daily ups and downs in equity markets. My mantra remains: the stock market ain’t the economy, and the latter, which matters a lot more important for many more people, remains pretty solid. But is there anything to be learned from this latest bout of market volatility?

Clearly jitters about a trade war are in the mix, as are higher interest rates. It’s that last bit that interests [sic] me, as for years, the cost of borrowing was uniquely low, both here and abroad. As that changes–and we’d certainly expect rates to be rising this deep into the expansion–it introduces some new dynamics both in financial markets and the real economy.

Higher rates are partly due to the Fed, of course, as they’re well into their “normalization campaign.” They’ve diligently telegraphed their every move, so little surprise there. Other rates tied to the Fed’s, like mortgage rates, are going up as well, and that’s weighed a bit on mortgage lending and refis. But rates still remain low, historically speaking–the Fed’s now targeting an FFR (Fed funds rate) of just 1.25-1.5%–and inflation remains below the Fed’s target. The job market is particularly solid, and real US GDP growth continues to wiggle about its long-term 2% trend.

So, WTF (that’s “why the face?”), markets?

Well, there are a few anomalies in play. Despite rising rates, which should boost the value of the dollar, it’s been on a slide. It rallied a bit today on some weak European data, but a closely watched dollar futures index is close to a 4-year low. To be sure, a weak dollar is a positive for exporters, though if our trading partners retaliate with tariffs of their own, trade flows could take a hit (I’m pretty skeptical of that outcome; so far, it’s mostly been bluster, noise, confusion, and uncertainty; not helpful, of course, but not macro-economically important…yet). But currency risk is in the mix.

Another anomaly worth watching is the Libor running ahead of the FFR. The Libor–the rate at which international banks lend to each other–is the other main benchmark interest rate in the global economy, and as the figure shows it (that’s the 3-month Libor) closely tracks the FFR. Yes, the Libor spiked relative to the FFR back in the Great Recession, but that was a function of pervasive and well-founded fears over credit risk, while the Fed was quickly taking the FFR down to zero.

Why is the Libor ahead of the Fed now? I don’t know, but it’s raising the cost of debt servicing more than expected for lots of banks and businesses that borrow in the short-term debt market.

Rising yields across the maturities in the yield curve–the 10-year Treasury yield is up about 50 bps this year–are also putting pressure on stocks, as skittish investors who can’t take the heat finally view fixed income investments as a viable alternative. Speaking of the Treasury, they’ve got to pretty massively increase the supply of bonds to the market to fund the deficits induced by the tax cut and spending bill, which puts downward pressure on bond prices and upward pressure on yields. Of course, that also makes servicing our growing public debt more expensive.

Again, I wouldn’t read too much into all this market volatility. After a long, strong run, equity investors are spooked by growing uncertainty, political cray-cray, interest rates coming back from the dead (though still historically low), a new Fed chair, and who knows what else? Over in the real economy, jobs and moderate wage gains continue to support solid spending and steady growth not just here, but in most countries across the globe. Recession probabilities, for what they’re worth (not much), remain low.

So, as usual,  don’t pay too much attention to the market swings, but do keep an eye out for unusual developments, like the Libor>FFR. Watch the interest rate. It’s a key price in any economy, and after a long hiatus, it’s finally on the move.