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!

November job gains beat expectations, as Wal S’yas (reversed Say’s Law) takes hold

December 6th, 2019 at 9:29 am

Payrolls rose by 266,000 last month and the unemployment rate ticked down slightly to 3.5%. Hourly wage growth for all private sector workers remained where it has been, up 3.1%, year-over-year, while the pay of lower-wage workers–the 82% of payroll employment that’s blue collar in factories and non-managers in services–has been trending up a bit, and was up 3.7% last month (a slight tick down from 3.8% in October). With inflation running around 2%, this translates into solid real wage gains for these workers. The stronger trend for lower-paid workers is also a reminder of who disproportionately benefits from persistently high-pressure labor markets.

The November jobs number of 266K was boosted by the return of almost 50,000 strikers due to the end of the GM strike. Thus, much like we discounted the loss of those workers in the previous month’s jobs report, we should discount their return (I discuss the trend in manufacturing employment below). Even so, our monthly smoother implies, if anything, there’s been a slight acceleration in job gains in recent months (the smoother averages monthly payroll gains over 3, 6, and 12-month windows, and thus smooths out the strike effect).

In tandem with the wage results, payroll gains of this magnitude suggest that the persistently high-pressure labor market is boosting labor supply at both the extensive and intensive margins, i.e., pulling people in and adding hours for incumbent workers. I often stress the positive wage effects of high pressure labor markets, but the supply effects are structurally important, as they imply the potential for increased economic capacity. Fans of economic theory will recognize this as reversed “Say’s Law.” That is, Say’s Law, which is now widely viewed as erroneous, argued “supply creates demand.” It appears more accurate to argue that demand–in this case, persistently strong demand for labor–creates (labor) supply.

A hugely important policy question is whether that supply lasts past the next recession. This will surely require employment-oriented policies to avoid last-hired, first-fired outcomes when demand eventually lags. Such policies include subsidized employment, training, and apprenticeship programs.

Turning to one key, and less favorable, recent sectoral development, many different data sources have shown weakness in manufacturing employment, driven by the trade war and slower global growth. What is sometimes not emphasized enough in this context is that both of these factors tend to put upward pressure of the US dollar. As trade economist Rob Scott pointed out in a recent op-ed: “The dollar has climbed 10 percent since the tariffs first took effect in March 2018, and has also risen 11 percent against the [Chinese] yuan in the same period. This lowers the cost of imports and raises the cost of U.S. exports…”

As the next figure shows (and note the figure smooths out the strike effects), there’s but a large deceleration in manufacturing job gains as the above-named factors have seriously dinged manufacturing activity.

The U.S. job market continues to post impressive job gains. While overall wage trends remain stalled, those of lower-paid workers serve as a reminder of one of the benefits of high-pressure job markets. At the micro-level, especially given low inflation, this means real paycheck gains for working Americans. At the macro-level, it means we can expect the American consumer to continue to fuel the already record-long expansion. Against this broadly favorable backdrop, Trump’s trade war is a clear negative, demonstrably hurting factory workers.

 

 

Things to like, not like, and to be unsure about re Sen. Warren’s M4A plan (along with a mea culpa)

November 5th, 2019 at 3:25 pm

Along with many others, I’ve had lots of things to say about Sen. Warren’s Medicare for All (M4A) plan, some positive, some negative, some head-scratchy. But because the issue is so politically loaded, both in terms of the Democratic primary and conservative antipathy toward this or any other idea that expands government’s role in health care, and also because of my association with VP Biden, it’s been hard to have a straight up policy discussion.

In a CNBC TV debate, for example, I was asked what I thought about how Sen. Warren’s numbers added up. I responded, “In terms of making the numbers add up — yeah, there are a lot of questions there, but in fact I think she’s done a very good job of focusing the debate on those questions.” Later, an article showed up without the last half of the sentence (“she’s done a very good job…”), leaving a pretty different impression of my view, I thought.

It’s hard to do nuance is this context, at least for me, apparently, so I decided to write down what I like, dislike, and am not sure about re the plan.

Things to like about Warren’s M4A plan:

–It’s a detailed policy road map. It’s not legislation, of course, but it’s probably got enough detail to write legislation around, making it the first time a presidential candidate has gone beyond the hand-waving we usually see around single-payer ideas in election cycles. Whether you like the plan or not, that focus clarifies the debate in a useful way.

–Its aggressive cost controls squeeze a lot of excess profits out of our bloated health-care-delivery system. Some experts who know a lot about this claim (like those at the Urban Institute) think she’s too optimistic on this front; that it’s unrealistic to, for example, score cuts to health care administration, drug costs, and the overall growth rate cost growth by the amounts her plan assumes. But she pushes each of these areas in the right direction, as must any serious health care reform plan.

–Reasonable folks will argue about the reality of how she gets there (as I’ll stress below), but she pays for the plan. She resists the magic asterisk (“payfors to come”) or the who-cares-about-deficits crowd.

–Though she is arguably again too optimistic about the amounts they’ll yield, many of her financing ideas are worthy in their own right, including the financial transaction tax, closing the tax gap (taxes owed but not collected), and welcoming immigration reform.

Things to dislike about the plan:

–To move the ~$9 trillion over 10 years that employers currently contribute to their workers’ health care, Sen. Warren’s plan has a kind of head tax, initially scaled to a bit less than employers are currently paying. That way, no one can claim the plan is a big burden on businesses right out of the gate. But as I (and Matt Bruenig) understand it, eventually this per-worker fee converges to a head tax that’s the same amount per employee in covered firms (with more the 50 workers). By itself, this would be a regressive tax for low-wage firms and workers, though a fulsome judgement requires factoring the distribution of all the other, progressive, aspects of the plan. If, however, I’m right about it, I expect team Warren to revisit this part of the plan.

[Note: I think the theory of the case for team Warren is that if you’re doing a head tax, you either converge to the average or you lock in the initial unfair distribution, where crappy-plan firms get an advantage.]

–The financing is structured to buy into the “not one penny in higher taxes from the middle class.” I grant that it’s easy for me to say, as I’m not running for office, but the idea that every progressive idea has to be financed by taxes solely on the wealthy is ultimately contrary to health democracy. No question, the top of the scale is the right place to start re financing, but Democrats must reestablish the norm of broader, yet still progressive, taxation. (Some may respond to this critique by citing the head tax, but as noted, I fear that’s a regressive approach.)

–David Leonhardt from the Times makes a fair point about the least popular aspect of M4A: the fact that it replace private coverage, most notably for the almost 160 million covered through employers. He writes:  “The biggest weakness of Warren’s approach is that it tries to bulldoze through the sizable public anxiety about radical changes to the health care system. Warren would not let people opt into Medicare, a wildly popular idea. She would force them to join.” M4A proponents stress the problems with such coverage, and I’m not suggesting that everyone of those 160 million loves their plan. But there are, in fact, relatively good plans out there and when it comes to health coverage, people are intensely risk averse. Much more thought must be given to transition or to alternative plans, like one I highlight below, that get to (or close to) universal coverage without ending private coverage.

Things I’m unsure about re the plan:

–I’ve written that one advantage of this M4A debate—now venerably reified—is that it potentially raises the public’s demand to plot a path to universal coverage, even if it’s by a less interventionist path, the path I myself view as preferable. From my recent Vox piece (italics added):

[The Urban Institute has scored] plans that look a lot more politically plausible to me and get to near-universal coverage for far less. Their analysis of a “single-payer lite” plan, which involves income-related cost-sharing but no premiums, less-comprehensive (but still decent quality) benefits, and no coverage for undocumented persons, costs half that of the “full-Bernie” enhanced plan. Remarkably, a public-option plan that requires more cost-sharing than single payer but significantly less than current law gets to near-universal coverage for less in additional federal costs than the Trump tax cuts ($1.8 trillion over 10 years for the plan vs. $1.9 trillion for the tax cuts).

But I readily admit that this is chin-stroking punditry with which reasonable people will disagree.

And while I suppose primary candidates must fight for votes, if I’m right about the above, then the Warren/Sanders approach is complementary to the more incremental Biden/Buttigieg approach. Like they say, “politics ain’t beanbag.” But attacking Warren for “raising taxes on the middle class” or abandoning the goals of Obamacare seems as false and counterproductive as attacking the more moderate candidates for not going all the way to M4A. All the D’s want to get to universal coverage, but they take different paths to get there.

–I’ve long thought that arguing the minutiae of health reform plans is somewhere between the Afghanistan and Hotel California of domestic policy debates, with no political upside. But given her I’ve-got-a-plan brand, Sen. Warren may consider this an unavoidable risk. Moreover, she may well be turning this view on its head: she’s sees an unjust problem, diagnoses it, and prescribes pretty granular solutions, with numbers and appendices. And based on her poll numbers, a lot of people like it!

–The likelihood of M4A in the near (the next Congress) and probably medium term (the Congress or two after that) is close to zero. If you pull back from the wonky discussions of how realistic the cost savings and revenue raisers are, the debate can sound like it’s between avid members of a fantasy football team. I argued above that this widens the potential policy landscape and creates a more incremental reform path but there’s a cogent argument that the political downsides to not delivering single payer won’t be trivial.

IN conclusion, a mea culpa: In the CNBC debate cited above, I made snarky comments about the plan and its payfors being unicorns. That was unnecessarily disrespectful to many who believe otherwise, to whom I apologize. I was really thinking about the last point re my perception of legislative realities, around which, ftr, there’s wide agreement. As I hope I’ve conveyed, I admire the progressive, aspirational energy around M4A. I just want to hear more about plan B. Don’t just tell us what you want to do were this a better world. Tell us what you believe you can do given realistic political constraints.