Jobs Report: Another solid month, LFPR on the rise, but manufacturing hit by the strong $

April 1st, 2016 at 9:18 am

In yet another in a series of solid monthly reports on the status of the US labor market, payrolls rose 215,000 last month and the unemployment rate ticked up slightly, but for a good reason: more people entered the labor force looking for work. Wage growth remains subdued, up 2.3% over the past year. That’s a bit faster than earlier in the recovery, but still reflecting the fact that while the job market is clearly on a reliable, tightening path, some slack remains and many workers still lack the bargaining power they’d have at full employment.

I’ll get into this a bit more below, but as noted, the labor force participation rate (LFPR) ticked up to 63% last month, back to where it was in early 2014, and half a point higher than its recent trough, representing about 800,000 more people in the job market. Especially given the fact that unemployment’s stayed nice and low as these folks have joined the fray, this is, as noted, a positive development.

Smoothing out monthly bips and bops, we get JBs patented Jobs Smoother, which shows average monthly gains over 3, 6, and 12 month intervals. Basically, what we’re looking for here is bars consistently north of 200K, and that’s what we’ve got. Despite some negative headwinds, including volatile financial markets, weakening GDP growth, slower growth abroad, and the strong dollar hurting our exports, we’re still cruising along with employers reliably adding 200K+ jobs per month. (More on these dynamics below.)

BLS: my analysis

BLS: my analysis

With consistent job growth of this magnitude, we should hope to pull more labor market sideliners back into the game, and that may be occurring as per the recent uptick in the LFPR shown below. This critical metric has far from recovered off of its recessionary lows, but since the LFPR reflects demographic change–more retirees will lower it in a way that says more about aging boomers like myself than labor demand–we shouldn’t expect to go back to levels that prevailed under a younger age structure. That said, at least some of the loss in the LFPR could and should be recouped, and I’ll vigilantly track this apparent trend reversal circled at the end of the figure to see if it sticks.

Source: BLS

Source: BLS

As noted, a blemish in recent jobs reports is the impact of the strong dollar on manufacturing, which shed 29,000 jobs last month and 18,000 in February. When the dollar strengthens relative to the currencies of our trading partners, it makes our exports more expensive to them and their exports to us cheaper, thus exacerbating our trade deficit and hurting export-oriented sectors, like manufacturing. The figure below, which indexes overall payrolls without factory payrolls and also plots the latter, shows the sharp divergence since the dollar picked up strength around a year ago.

BLS: My analysis

BLS: My analysis

Wage growth was 2.3% over the past year, the same pace as in February. That’s a bit off its faster pace towards the end of last year, and is a notable indicator that slack remains in the job market (workers still don’t have the bargaining power they’ve long lacked). The underemployment rate, which adds in the approximately 6 million involuntary part-timers, ticked up slightly to 9.8% and remains highly elevated. My estimate of the underemployment rate commensurate with full employment is 8.5%, so we’ve a ways to go there.

Finally, let’s take a bit of a bird’s-eye view of the US economy and job market. Broadly speaking, we know three things (don’t laugh, three’s pretty good for economics): 1) GDP growth has been on the slow side; we’re almost 7 years into an economic expansion and we still haven’t closed the output gap (i.e., the gap between real GDP and where real GDP would be if labor and capital were fully utilized) or achieved truly full employment, 2) job growth has been consistently solid, and 3) therefore, productivity growth–the growth of output per hour–has been decidedly weak.

This is actually simple math, because job growth = GDP growth – productivity growth (technically, it’s “total hours worked” growth left of the equals sign, but that doesn’t affect the bird’s eye analysis). In fact, economists of all stripes would agree that productivity growth, currently running at trend levels below 1 percent, is our biggest problem right now, though yours truly would add “the absence of full employment” to the top of that list. And, importantly, they’re related.

Intuitively, if demand/growth/output is on the weak side, yet the pace of the efficiency gains with which we produce that output is also weak, then you need more workers to generate a given level of output–that’s all the little formula above is saying.

Given that fact, you might argue: well, if that’s the arithmetic, then why in Buddha’s name would we want faster productivity growth? Wouldn’t that just whack the one reliably solid thing we’ve got going right now (job growth)?

Not necessarily at all, as faster productivity growth translates into faster GDP growth (ask your fifth grader to rearrange the equation above if you want to prove that). But also consider this: low productivity growth may get you more jobs, but it doesn’t help you with job quality. There are critical distributional issues to consider–far too little of the benefits of productivity growth flow to middle and low-wage workers. But unless the productivity pie starts growing faster, it will be even harder to cut bigger slices for working class families.

Simply put, the progressive goal is not simply a greater quantity of jobs; it’s jobs of decent quality.

Importantly, lasting full employment helps with both of those problems. By definition, it implies enough jobs to meet the supply of workers. But when the job market is at full employment, pressure builds to push up labor costs and wages and compensation begin to get a bit of traction, as we’ve begun to see in recent job reports.

At the same time, employers seeking to maintain their profit margins must find new efficiencies and shed sloppy inefficiencies that were affordable in periods of persistent slack, with no pressure from labor costs. I’ve called this the full employment productivity multiplier.

So, steady as she goes. The job market continues to firm up and labor force participation is finally getting what looks like a nice bump. That said, the strong dollar is taking its toll of factory employment and underemployment remains much too high. There’s a lot more room for wages to pick up as well, which is what it will take for working people to feel the benefits of overall growth.

 

True and important: trade deficits are not scorecards. But under certain conditions, they’re far from benign.

March 28th, 2016 at 1:49 pm

Neil Irwin over at the NYT has apparently drawn the unenviable job of explaining what’s wrong with Trumponomics. His latest entry, on trade deficits, is framed around an important, overlooked point, but he misses some important nuances, and his conclusion re trade deficits as conditionally benign seemed pretty far off to me. As this is such an important point to my work—the economically large and persistent US trade deficits have become both a source of damaging bubbles and a steep barrier to full employment—let me elaborate. (For way more then you bargained for on the issue, see Chapter 5 in the Reconnection Agenda.)

Irwin’s point is that trade deficits are not inherently bad, nor surpluses good.

Tru dat. As long as there’s been trade, there’s been imbalanced trade, as countries invariably produce more than they consume, i.e., they’re run a trade surplus, while others, like us, will do the opposite. To somehow insist on balanced trade for all would be a huge policy mistake, one that would preclude billions of people from the reaping the benefits of trade, both as consumers and producers.

Irwin’s piece is thus a good antidote to the current trade debate, which sometimes claims not simply that trade deficits are always bad, which is false, but that trade itself is bad for America. As Paul Krugman underscores, the protectionism of today’s conservative demagogues is as ill-founded as it is predictable. When your MO is “blaming the other,” why not extend that from Muslims and immigrants to our faceless trading partners? (I’ve argued that trade agreements have become problematic and non-representative of working people both here and abroad, but that’s a different point. I’ve stressed the benefits of expanded trade, which will continue apace either way.)

But persistent deficits of the magnitude we’ve had here in the U.S. have, in fact, been highly problematic. Moreover, they are a symptom of global imbalances—a savings glut, in Ben Bernanke’s terminology—that have been, and remain, a serious problem for macro-economies across the globe. Trade deficits are not bad in a “scorecard” sense, but when they persist because they are part of a strategy of mercantilist countries to over-save, under-consume, and under-invest, big problems evolve in lots of other places.

The first problem with the persistent U.S. trade deficits (see figure below) is the extent to which they’ve displaced U.S. workers. This is not something economists, at least reasonable ones, disagree on (Irwin gets this too but gives it too short shrift here, I thought). It’s even in the models—“factor price equalization,” the idea that when you expand trade with low-wage countries, putting your relatively high-paid production workers into head-to-head competition with their low-paid workers, wages must fall here.

US Trade Deficit as Share of GDP

Source: BEA

Source: BEA

As displaced production workers move over to low-end service-sector jobs, the supply effect puts downward pressure on wages in that part of the job market as well. Economist Josh Bivens finds that non-college educated workers have lost around $1,800 in earnings per year through this channel. That’s a lot of money for them, and surely the root of a lot of the anger being stoked by the campaign.

What is less well understood is the impact of large, lasting trade deficits on investment flows. Neil argues that such flows can be either beneficial or harmful to deficit countries, but he fails to explain other key moving parts here that determine which of those outcomes are more likely. Here’s where the process—and the U.S. outcome shown in the figure above—gets far less benign.

When one country runs a trade surplus, another country must run a trade deficit. That right there tells you that the scolds who say “if only we were more frugal” are wrong about this. We are not the masters of our fates here that Neil’s rap suggests. As Bernanke intimates in the above link, when Germany runs an 8 percent trade surplus (!), other countries must consume that much more than they produce. It is in this manner that surplus countries not only export goods to deficit countries. They also import labor demand from those countries, some of whom, like peripheral Europe, could really use that demand.

Of course, we could, too. Neil’s right that surplus countries lend their excess capital to us to invest as we see fit. The happy version of this is that those capital flows put downward pressure on our interest rates, and we build all kinds of productive stuff that wasn’t being built at the higher rates that prevailed before our trade deficit got larger. The sad, and I fear more realistic version (and Bernanke got this right too in his 2005 paper that introduced the “savings glut” concept), is our rates are already crazy low and thus these flows lead to overinvestment, in dot.com junk, fiber optics, houses, oil rigs, and whatever else looks like the next big thing (the flows also push up the value of the dollar, which worsens the trade deficit).

And when I say “overinvestment,” I mean bubbles. Yes, a country can demonstrably get to full employment with persistent, large trade deficits, but they/we do it with bubbles. And bubbles must burst, meaning that we can and do get to full employment in the presence of big trade deficits, but we cannot stay there, and we will often have a hard time getting back to full employment, as has been the case in recent decades.

Bottom line, always go with Neil over Trump. But persistent, large trade deficits and surpluses concentrated in specific countries (US, China, Germany) are bad news. They cost workers in deficit countries jobs and incomes, and they are functions of man (and woman)-made savings gluts that contribute to global instability and investment bubbles, particularly when interest rates are already near zero, where they are now and where they may well be for awhile.

NYT not equal to Fox

March 28th, 2016 at 8:44 am

President Obama makes some insightful comments in this piece about the toxic interaction between saturation political media and the terrible quality of the presidential campaign.

He definitely misspoke here, however:

“Some people are just watching Fox News; some people are just reading the New York Times,” Obama said in January during a YouTube interview...“They almost occupy two different realities in terms of how they see the world.”

No question, these two outlets provide different views of the world, but one must be careful not to be drawn to the mushy muddle of false equivalence. The “terms” by which the NYT “see[s] the world” are much less ideological and more fact-based than those of Fox News. Yes, the Times editorial page has an unabashed liberal ideology, but there, too, the arguments are invariably rooted in fact.

There’s also little equivalence between the D and R candidates in this context (to be clear, the article does not suggest that there is). Though every candidate from time immemorial will bend, if not break, the facts, Clinton and Sanders have of course been far more substantive and accurate than their counterparts in the other party.

As far as the role of the media, surely part of what’s going on is in the age of social media, with such deep outlet proliferation, there’s a huge collective action problem that wasn’t there before. The tonier outlets might well be happy not to get into the mud where Trump et al. are most comfortable. But let us not forget that these folks are in the eyeballs biz, and if everyone else is talking about what’s deep in the mud, they can’t afford not to.

The only way to solve collective action problems of this magnitude is through collective agreement on the supply side, which of course would be impossible if not un-Constitutional. The only answer is then on the demand side. Perhaps when enough of us become disgusted enough by the quality of debate to eschew the messengers, those messengers will lift their games.

[I loved the reference to the late Robin Toner at the end of the piece. I’ve missed her calm, sage voice for years, but never more than now.]

Musical Interlude: Beautiful music of which I was previously unaware…

March 25th, 2016 at 2:00 pm

I clearly haven’t listened to enough Monteverdi as I was unaware of this absolutely lovely romp “Zefiro torna,” a 3/4 time vocal duet that swings along like a stag running through the forest until it hits a recitativo; then it picks up again through the end.

I would prescribe this as a highly potent antidote to the current political discourse. Shut off the noise and sooth your senses with this madrigal that has somehow eluded my ears for 384 years. My bad!!

Rebalancing factor shares: Another (great) source of non-inflationary wage growth

March 25th, 2016 at 12:32 pm

As Dean Baker pointed out to me this AM, the labor share of national income is slowly gaining back some of its losses, as shown in the figure below (see circled part at end). This is a good thing, and should, to some extent, reduce inequality by shifting some of the growth from profits into paychecks.

Since there’s a lot of inequality within labor’s share of national income, this development won’t reduce inequality that much. That is, income growth is still disproportionately going to higher paychecks, as Elise Gould shows here. But the shift you see below is a distributionally positive development, and evidence that the tight job market is delivering a bit more bargaining power to workers (these shares don’t sum to 100 percent because they leave out proprietors’ incomes, as it’s hard to break that down between wages and profits).

Source: NIPA tbl 1.12

Source: NIPA tbl 1.12

My point here, however, is a bit different, and it’s one targeted at the Federal Reserve. Nor is my point simply to badger them not to raise rates pre-emptively, potentially slowing the progress you see in the figure.

Um…well, maybe it kinda is, but with a bit of the sort of math they enjoy over there.

Chair Yellen has consistently maintained that as long as nominal wages grow no faster than the Fed’s inflation target of 2 percent plus productivity growth, which is running at (a truly yucky) 1 percent these days, wages can grow 3 percent without generating inflationary pressures.

In other words, in Fed land non-inflationary wage growth (NIWG) = i + p, where i is the inflation target and p is productivity growth. When last seen, wages were growing between 2-2.5 percent, so steady as she goes, based on this rule.

But based on the figure above, I’d like to add an x-factor to that above equation, such that:

NIWG = i + p + x

…where x represents the pace at which the gap you see above is closing. That is, there’s another component to NIWG: rebalancing labor’s share of national income. Usefully, the math of how that gap closes reduces to how much faster average compensation is growing compared to productivity (as the gap opened up post-2000, average comp growth consistently outpaced productivity).

In other words, if you’d like to see “factor shares”—the shares of income going to capital and labor—rebalance, then you want to allow for another source of non-inflationary wage growth: redistribution from profits to wages.

Thankfully, economist Josh Bivens, who wrote about all of the above for CBPPs full employment project, figured out that if x were, say 1 percent—i.e., if average compensation grew 1 percent faster than productivity growth—it would take over eight years for the gap to get back to its pre-recession level.

More to the point, it would lead the Fed to tolerate 4 percent versus 3 percent wage growth.

I don’t mean to push the precision of any of this too far. For one, p is, as noted, pretty depressed right now, and it could accelerate, providing more oxygen for NIWG. More importantly, the evidence of wage growth bleeding into price growth has been pretty hard to come by in recent years, so I wouldn’t put a ton of weight on the basic model in the first place.

My only point is that if, like the Fed, this is the model you’ve kind of got in your head, then there’s another factor—another source of non-inflationary wage growth—that you should seriously consider.