Thursday, June 13, 2013

Job market doldrums

Three recent views on the dismal labor market pose an interesting contrast.

Alan Blinder wrote a provocative WSJ piece on 6/11, Fiscal Fixes for the Jobless Recovery. A week prviously, 6/5, Ed Lazear wrote about The Hidden Jobless Disaster. And John Taylor has a good short blog post Job Growth–Barely Keeping Pace with Population

All three authors emphasize that the unemployment rate is a poor measure of the labor market. Unemployment counts people who don't have a job but are actively looking for one. People who give up and leave the labor force don't count. Employment is a more interesting number, and the employment-population ratio a better summary statistic than the unemployment rate. After all, if unemployment falls because everyone who is looking for a job gives up, I don't think we'd see that as a good sign.

Source: Wall Street Journal
Ed Lazear made this interesting chart. As he explains,

Every time the unemployment rate changes, analysts and reporters try to determine whether unemployment changed because more people were actually working or because people simply dropped out of the labor market entirely... The employment rate—that is, the employment-to-population ratio—eliminates this issue by going straight to the bottom line, measuring the proportion of potential workers who are actually working.

While the unemployment rate has fallen over the past 3½ years, the employment-to-population ratio has stayed almost constant at about 58.5%, well below the prerecession peak. Jobs are always being created and destroyed, and the net number of jobs over the last 3½ years has increased. But so too has the size of the working-age population. Job growth has been just slightly better than what it takes to keep the employed proportion of the working-age population constant. That's why jobs still seem so scarce.

The U.S. is not getting back many of the jobs that were lost during the recession. At the present slow pace of job growth, it will require more than a decade to get back to full employment defined by prerecession standards....

Why have so many workers dropped out of the labor force and stopped actively seeking work? Partly this is due to sluggish economic growth. But research by the University of Chicago's Casey Mulligan has suggested that because government benefits are lost when income rises, some people forgo poor jobs in lieu of government benefits—unemployment insurance, food stamps and disability benefits among the most obvious. The disability rolls have grown by 13% and the number receiving food stamps by 39% since 2009.
John Taylor makes the point nicely with another graph, which contrasts the labor force participation rate to the BLS' forecast of what should have happened from demographic effects.

The graph comes from a recent paper Chris Erceg and Andrew Levin.

I part company a bit with Lazear on his conclusions
... the various programs of quantitative easing (and other fiscal and monetary policies) have not been particularly effective at stimulating job growth. Consequently, the Fed may want to reconsider its decision to maintain a loose-money policy until the unemployment rate dips to 6.5%.
If low employment is "structural," resulting from the worker-side disincentives as well as employer-side disincentives -- policy uncertainty, regulatory threats, NLRB, Obamacare, Dodd-Frank, EPA, and so on -- then the problem isn't lack of "demand" in the first place. If the problem has nothing to do with the Fed, and if $2 trillion of QE didn't do anything to help it, why does the solution have anything to do with the Fed?

The greater surprise is to hear so much agreement from Alan Blinder:
The Brookings Institution's Hamilton Project, with which I am associated, estimates each month what it calls the "jobs gap," defined as the number of jobs needed to return employment to its prerecession levels and also absorb new entrants to the labor force. The project's latest jobs-gap estimate is 9.9 million jobs. At a rate of 194,000 a month, it would take almost eight more years to eliminate that gap.

.... policy makers should be running around like their hair is on fire.
Lazear said "a decade."  More suprising agreement on the impotence of monetary policy:
The Federal Reserve has worked overtime to spur job creation, and there is not much more it can do.
As you might imagine, I'm not such a fan of Blinder's suggested fixes. He starts with traditional simple Keynesian recommendations that  the government should hire people and "spend" more. No need to refight that here. The more interesting recommendations follow as he warms up to his latest clever scheme.
... the basic idea is straightforward: Offer tax breaks to firms that boost their payrolls.

For example, companies might be offered a tax credit equal to 10% of the increase in their wage bills over the previous year. ...

Another sort of business tax cut may hold more political promise....Suppose Congress enacted a partial tax holiday that allowed companies to repatriate profits held abroad at some bargain-basement tax rate like 10%. The catch: The maximum amount each company could bring home at that low tax rate would equal the increase in its wage payments as measured by Social Security records.

For example, if XYZ Corporation paid wages covered by Social Security of $1 billion in 2012 and $1.1 billion in 2013, it would be allowed to repatriate $100 million at the superlow tax rate. The reward for boosting its payroll by $100 million would thus be a $25 million tax saving. That looks like a powerful incentive.

...companies could claim the tax benefit only for individual earnings below the Social Security maximum ($113,700 in 2013). No subsidies for raising executive pay.
I find this most interesting at the level of basic philosophy; how we think about economic policy.

There are huge, longstanding, tax and regulatory disincentives to hiring people. Income tax, payroll taxes, health care and other mandates, and NLRB, OSHA, and so on. There are the high marginal taxes to labor implied by social insurance programs, as Mulligan points out.  If we want to increase the incentive for companies to hire people and people to take the jobs, why add another tax break to an obscenely complex tax code, rather than fix some of the existing disincentives? 

Is this really the right way to run a country? When "policy makers" want more employment, they slap on a complex, tax break on top of a mountain of disncentives. Presumably they then will remove this tax break, and pages 536,721 to 621,843 of the tax code describing it, despite the lobbying by large corporations who have figured out how to exploit it for billions of dollars, once the Brookings Institution decides that there is "enough" employment (!), and "policy-makers" no longer need to encourage it? 

How are the existing hundreds of bits of social engineering in the tax code working out? Do we really need more of this?  Isn't it time to return to a tax code that raises money for the government at minimal distortion?

The contrast between the benevolent "policy-maker" (no dictator ever had such power) and the reality of how the tax code in this country is actually enacted is pretty striking.

I have to say, I'm a bit disappointed in the end by both. They agree that the US economy is about 10 million jobs short. Something big is in the way. Lazear at least mentions some candidates, though many are long-standing. But the stirring conclusion from Lazear is only to continue a loose monetary policy that he says has been ineffective so far, and the conclusion from Blinder is the sort of clever scheme that economists cook up in late-night cocktail parties piling one more quickly-exploitable bit of social engineering on top of a tax code rife with them. Neither recommendation comes close to 10 million jobs, or addressing any sort of clear story why those jobs have vanished.


  1. What does it mean to say "the Fed has worked overtime"?

    People say it all the time, yet inflation is trending down

    Is that easy money? Why do so many commentators measure the "easiness" of money by what the Fed does, (interest rates, size of the monetary base) rather than the macro variables the Fed targets (inflation, NGDP growth)?

    1. I believe it means Ed Lazear has not been following monetary policy in the US very closely since 2008.

      Let's recap -- during the financial crisis in 2008, the Fed increased its balance sheet to over $2 trillion. So far so good. But then, in 2009, while employment was dropping like a stone and the CPI was deflating, the Fed was actually shrinking its balance sheet instead of "working overtime". In 2010, the Fed was "gone to November" -- it twiddles its thumbs as the economy burned, acting only after the election. This was good, but then the Fed didn't act again until the fall of 2012... Thus in 4 1/2 years the Fed has made two moves.

  2. Also, speaking of ineffective central bankers, what do you think about the role of "open-mouth" operations in setting monetary policy? The Fed and the BOJ haven't adjusted their market participation (i.e. rate of bond-buying)in the last month, but markets are going nuts over what their latest comments might signal about future policy.

    1. It worked great in Europe last year. Draghi said he was going to buy-buy-buy! The ECB never bought anything but the crisis passed and EZ interest rates dropped like stones.

      Until now . . .

  3. Blinder suffers from the common delusion that people can't be trusted with their own money. It has to be rinsed through the wisdom of Congress and executed by the streamlined efficiency of the bureaucracy before it can be spent.

    Businesses would hire more people if they had better sales and if they had the faintest clue what to expect from a dithering government.

    I agree we need to pump more money into circulation but thus far we have tried convoluted methods involving everything except putting money directly into the hands of the people who actually purchase most of the goods and services.

    Cut middle class taxes and let people spend their money into the economy in their own self-interest. However foolishly some people might use their money I doubt they would use it to subsidize a solar panel company or buy a new stealth bomber. They certainly wouldn't spend it on a huge data storage facility in Utah.

    If nothing else comes out of this mess I hope there will eventually be a revulsion toward government meddling that will last a long time in the cultural memory.

    1. JB,

      "Blinder suffers from the common delusion that people can't be trusted with their own money."

      Blinder suffers from the liberal delusion that Government makes good spending and investment decisions with money. How the government obtains that money (taxes, borrows, etc.) is a completely separate discussion.

      Ultimately, those notes in your pocket are the Government's money on loan to you. You and I will leave this earth and the Government will still be around.

    2. I guess my sarcasm wasn't clear enough about government spending. People directly spending money into the system on things they actually need/want is far more efficient than running money through all the frictions, malinvestments and inefficiencies of government.

      I disagree with you about what Federal Reserve Notes actually are but it's off-topic.

    3. JB,

      You have hit on something that I have been thinking about for a couple of years.

      You point out that government creates uncertainty with its schizophrenic policies. Then you say, cut taxes for the middle class.

      Tax policy has been some of the most schizophrenic policy! There should be a moratorium on tax policy changes. Every year congress closes a set of loopholes and opens up a new set of loopholes. Every year, half of congress says raise taxes on the rich, and the other half say cut taxes for everybody.

      I would like to pay less taxes, personally. And the current tax code is byzantine, slightly corrupted, and inefficient. Comprehensive tax reform might be a good thing. But, if congress actually does get their heads together to tackle the subject, the new tax law should include a provision that would make it require a super-majority to any further changes to the tax code.

    4. I concur, a small decrease in our taxes will hardly make up for the damage caused by endless changes to the tax code. This means that business cannot plan ahead. The increased uncertainty is bad both in tax and regulatory policy.

  4. "If low employment is "structural,""
    That's a big "if". It's plausible that some is structural, but the rest of your statement indicated that demand is irrelevant. And that really needs some support. When you compare the U.S to the Eurozone then Lazear seems dead wrong when he claims QE has been ineffective. Japan's stock market also seems strongly responsive to indicators about expected inflation from its central bank.

    The "philosophical" question of whether Blinder's meliorism at the expense of complexity is worthwhile is interesting, but you're right to focus on the massive numbers of jobless rather than such minor tweaks at the moment. What might have such massive effects? Monetary policy, of course! Many of the nations that weathered the global recessions best engaged in significant devaluation. Australia hasn't had a recession in decades because it maintains a 4% inflation rate.

  5. "Suppose Congress enacted a partial tax holiday that allowed companies to "repatriate profits held abroad at some bargain-basement tax rate like 10%."

    There seems to be about $2 trillion in profits which are effectively stranded "offshore" as companies hope for a tax break. The reality of international banking is probably that most of that money is only "offshore" in an accounting sense and is actually invested in US dollar bank deposits and Treasuries (even if nominally held through a tax haven). My personal bias is that a lot of that profit is "off shore" simply as a result of transfer pricing schemes which should be illegal.

    Rather than try to bribe companies to hire more people and make the tax code even more complex, I would favor the following proposal:
    1) companies can repatriate off shore profits before December 31, 2013 and pay tax at 15% to 20%
    2) no company will be prosecuted for prior tax frauds related to the money "off-shore"
    3) the money repatriated (net of the taxes) must be paid out as dividends or share buy-backs before December 31, 2013.
    4) individuals who want to repatriate money from tax havens can do it at a tax rate of 20% with no questions asked and amnesty for any past "mistakes"

    This scheme should (1) increase tax collections for corporate tax and taxes on dividends and capital gains (perhaps as much as $400 billion); and (2) increase the velocity of money.

  6. If there's one universal thing all economists(both left and right) agree on, its the current tax code is horrible. Just flat out awful with no sound economic logic to it whatsoever. The real question is, what bolder is in the way that is squashing any discussion about reforming the tax system, not just modifying it for rates on the rich or tax credits for the poor and middle class?

  7. Have you considered the following: fundamentally, our economy is built on the fact that we constantly spend a bit of extra income on stuff that goes above and beyond purchasing food and basic necessities. And when economy is weak, we cut back on purchasing all that stuff - we probably didn't need it in the first place. And that will result in lower employment, because a lot of the stuff that makes up our GDP, we don't need even at lower prices.

    1. If people are unemployed then there are idle resources that could be applied to create more stuff. And if there were more stuff we would all be richer.

  8. I suppose that the costs and uncertainties generated by the Affordable Care Act had a little bit to do with these numbers.

    1. People on the other side of the partisan divide would say that the biggest political risk is that the Republicans will trigger a financial crisis on the debt ceiling issue.

  9. Low unemployment isn't predominantly structural.

    If it were, the unemployment rate, would be something like 5%, resulting from a higher employment population ratio, rather than people dropping out.

    Take a look at Europe, particularly countries like France and Spain. Spain's unemployment rate is a disastrous 27%. If it were structural, the unemployment rate would be more like pre-great recession france- 10%.

    I'm not denying that there are of course structural problems that make AD problems much worse.

    But why is so difficult for some people to comprehend that its all about. A.D. right now and that the Fed needs to do vastly more?

    Professor Cochrane, Akerlof, Dickens, and Perry demonstrated that low inflation, (not deflation) can persist for in PLOG (Prolonged output gap) and far from a sign that the CB is doing its job, it means that the CB is disastrously underperforming. The reason this is true is that nominal wages are super-sticky according to their study even more so than originally thought,
    The Fed is undershooting its "price stability" mandate as well. Current core CPI increases is 1.1, one the lowest recorded. So even if you don't believe in the "full employment" part of the Fed mandate, the Fed is failing its price stability mandate as well.

    I have a question for you, Professor. You believe in the EMH, right? What does it say that their was turbulence in the stock markets around the world because of fears that the Fed would taper off its purchases and the BOJ would wobble on 2% inflation? The markets are screaming, yelling at the tightfisted Fed for easier money.

    Finally, I hear this all the time. the fed has been ultra easy. (It hasn't) You often hear about the "unprecedented" increase in the MB. It may be unprecedented, but thats not how we should judge things. When there is a raging firestorm in a national forest, you don't judge the correct amount of water by how much you used to fight previous fires! You do what is necessary to fight this one. Buy the entire national debt if need be. Obviously I'm being facetious, but all the FED needs to do is make the markets BELIEVE that they'll do that, by buying 1 trillion a month instead of a pathetic 85 billion. People and businesses will attempt to spend cash before it loses its value, and the markets will clear

    1. The far more likely outcome is that the money will go into banks' excess reserves and just sit there. It's not like their vaults are a hole that you can fill up by throwing enough money into them in the hope that it'll start to spill out into the rest of the economy.

      That's where the money has been going, and why monetary policy isn't having much of an effect.

    2. Edward: You are bonkers. Go to Zimbabwe and try your theories out. Maybe they will want a second helping of what they had.

  10. That would be a complete catastrophe. That's the kind of irony tower thinking that needs to go away. You won't fix the economy turning a deflation problem into an inflation problem. The fed hasn't been able to conquer deflation. What makes them so sure they could ring inflation out?

    1. "What makes them so sure they could wring inflation out?"

      They could just ask Paul Volcker.

  11. Conquering inflation is technically a very easy thing to do. Either slow down the growth of the base to zero, i.e., buy zero bonds, even regular t-bills, or raise interest rates sky high, past the inflation rate. Paul Volcker did it.

    What's difficult is the political costs. You have to have a brutal recession to stop inflation. Yet, when Volcker lowered interest rates, the recession in the early 80's stopped, and inflation did not return to its previous levels.

    And I reject your ridiculous premise that the Fed cannot conquer deflation. There has never been in history an example of a determined central bank that has truly tried to conquer deflation and failed

  12. I ask again

    WHY is it so hard for "structuralists" to admit a demand problem?

    Professor Cochrane, you might be a spiritual descendant of the people on the Fed board who oversaw the great contraction that Milton Friedman was talking about. in the Monetary History. I'm curious, why are you SO determined to find anything other than demand to explain our slump?
    Many "structuralists" saw causes other than demand for the length of the Great Depression, FDR policy (high wages) skills mismatch, zero marginal revenue product, etc.

    In the buildup to war in the late 1930'sa early 40's unemployment was solved in a matter of months with a big enough stimulus, both monetary and fiscal

  13. Stop thinking the economy is like an engine. They are similar but human beings are much more complicated. So the structural problem is there is no demand because people won't borrow? People won't borrow because of the dumb decisions they made from borrowing already. Young people have debts they can't pay? Why does are genius fed chairman think giving them more credit is going to make a difference. This is bad Keynesism that dr cochrane has been highlighting in this blog

  14. More Inflation helps debtors, James

    1. Unless it puts the debtors out of work.

    2. "More Inflation helps debtors"

      True, but only if debtors have locked in interest rates. If debtors have floating rates, the cash flow demands of their debts go up and the fact that inflation is reducing the real principal does not help them much with the resulting cash flow squeeze.

  15. "The Federal Reserve has worked overtime to spur job creation, and there is not much more it can do."

    I have always found the idea that monetary policy could help with unemployment completely fanciful. It is an idea born out of misconstrued academic research. In essence, the idea is that one can take the Phillips curve and reverse the causality flow, whereby employment can be created by influencing inflation. This defies any possible common sense.

    Let's go back to basic. The US and Europe face major structural problems with their economies. There is an increasing low-income class that has less and less skills and is increasingly dependent on government handouts. On the other hand, there is a high-income class that controls and increasing proportions of the resources and capital. Such is the result of misconstrued, old-keynesian, elitist socialist thinking that has prevailed mainly in Europe but even in the US to a larger extent that was preciously thought.

    Fixing this requires that especially the younger generations regain the taste for developing skills and entrepreneurial initiatives. At the moment young people are over-burdened by and over-inflated education that provides little in terms of real skills and knowledge.

    Tax incentives are just another way to conduct monetary policy, so they are likely to remain ineffective. What is needed is a set of regulations that favor small enterprises and not only large corporations.

    Unfortunately this is not what the US governing class is interested in.

  16. Time to get serious about growth.

    Forget punk "helicopter drops."

    Send in the money B52s for blanket bombing runs.

    Cut federal taxes by a trillion dollars or two, and monetize all of it through QE and maybe more.

    Dudes, the problem is not inflation. We are now at 0.7 percent, btw, on the PCE headline y-o-y. The inflation-hysterics are right: The Fed could not keep inflation at single digits if it went to QE. It is now below single digits.

    We have an economy much less inflation-prone than in the 1960s, and we were in single-digit inflation then. That was before we deregged transportation, telephones, banking, and with a 91 percent top tax rate, and a unionized workforce and with a Fed that opined that a monetary policy could not fight inflation. In other words, a perfect storm for inflation But that has changed now.

    Today, little-boys-in-short-pants half measures do not do the trick. Forget your namby-pamby "helicopter drops" and $85 billion a month in QE.

    QE $3-4 trillion and cut taxes by an equal amount in next two years.

    Send in the B52s, and do not make "drops," make multiple blanket bombing runs. Monetize federal debt until there isn't any left, if you have to. Yes, how terrible to pay down the federal debt.

    Jeez, how much more sissy-talk about macroeconomics do we have endure before we get serious about growth?

  17. Look to demographics, capabilities of replacements...
    look to feminism, reporting today that one class population has collapsed
    not to mention the idea that fathers teach sons (and daughters) how to do things more than moms do, and that with a over 40% single parenthood social situation, all that information that existed hand me down has been erased and cant be depended on as a way to be resourceful.
    add to it programs that so overwhelmingly help protected classes the one unprotected class, if not already successful, cant not get capital or a hand in the game (i know, i have tried, and can tell an interesting story given family coming from refugee dp status in Europe, and so on, including bronx science, and self making despite such situations, but never quite making it. there is even a control in the experiment)

    then add the taking of resources to fund those things making it nigh impossible to get enough capital. the destroying of rights in the removal of first to invent ie. the right of the discoverer has been supplanted by the right of the economically and politically strong.

    third generation engineer... son was to be a geneticist, graduated with honors, then the social engineers declared that there was too many of him in STEM, so now he has to give that up as he nor i are wealthy enough.

    [many articles on plummeting birth rate in the news ranging from psychology today feminist claiming victory in replacements, to others taking other angles to the census announcements]

    right now, i am looking to see if i can do stuff outside the US. from taxes, to laws against me that negate any effort in merit (being informed i will never have promotions or raises, and foul treatment too at a medical school). I know lots of others are looking to do the same, as the weight is way too heavy to get anything going.

    this is why you have so many experienced, skilled people who cant meet at a coffee shop, link up and do something. they havent the capital given the fixes to our culture, society, relationships, schooling, asymmetric laws of race and gender, and on it goes.

    you don't have to look farther than that to see a larger population attempting to live off of the smaller dwindling population that they openly hate and despise under social justice (forgetting father Coughlin, and lots of other things).

    kind of obtuse to have people celebrating it and crowing how good it is, but it not being PC to be part of assessments and influences in economics. after all, people not born do not economically output much, do they?

  18. Yaron Brook referred to this economist in a debate with respect to the peak wage assertion of 1973 (J.C. refutes this claim).

    Anyone know where I can find his work on it?


  19. I see you cite (without link) Casey Mulligan, who sometimes seems to be making a career of contriving ways to see worker benefits as abuses. On the issue of abuse of disability readers might be interested in research reported in a 6/13/13 WSJ story, "Are Long-Term Unemployed Taking Refuge in Disability?" The study shows that the rise in disability claims does not come from people "exaggerating real disabilities or through outright fraud."


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