Monday, April 7, 2014

Weekend Labor Markets

This weekend produced several interesting readings on the state of labor markets.

1. Glenn Hubbard,

In the Wall Street Journal on "The Unemployment Puzzle: Where Have All the Workers Gone?" Like economists of all stripes, the fact that the unemployment rate -- the fraction of people looking for jobs -- is down masks the deeper problem, that so many people are not working and not looking.

Glenn sets out well the basic question:

In one view, this decline is just a temporary, cyclical result of the Great Recession. If so, we should expect workers to come back as the economy continues to expand...But structural changes are plainly at work too, ...
This part of the drop is a function of various factors, including simple discouragement, poor work incentives created by public policies, inadequate schooling and training, and a greater propensity to seek disability insurance.
Glenn advocates a mix of serious fundamental get-out-of-the-way reforms, with some puzzlingly dirigiste tinkering.
A sustained infrastructure program, rather than a temporary one for "shovel-ready" projects, would have provided more reassurance of longer-term demand. 
Infrastructure is fine for building infrastructure. But the idea that unemployed middle-age mortgage brokers are going to get jobs running a backhoe on a road crew, or the idea that building roads creates "demand," are both a bit far fetched.
...far-reaching tax reform 
is a good idea, but not because it
could have provided both a near-term fillip from front-loaded business tax cuts and a credible prospect for future growth.
Again, Keynesian thinking at least in the former. Economists should focus on margins, which is what drives the growth.
What we need most urgently is to rethink the federal government's wider role in the labor market. 
Now we're getting somewhere, and it is a great point that
The fierce debate now going on in Washington about extending unemployment insurance and raising the minimum wage largely ignores these issues. Such policies may affect the incomes of some Americans, but they won't do much to expand opportunity and bring more people back into the labor force.
But then Glenn goes back to  tweaking the earned income tax credit, and trying to fix social security disability by providing
the employers of disabled employees with tax advantages for retraining them to remain on the job.
Really, long term growth and employment doesn't come from more clever little tax credits. That contradicts "far reaching tax reform."

Noting 80 - 100% marginal tax rates,
A broader tax reform that gives a more uniform subsidy for health insurance and health spending 
is a great idea. But then
complement traditional unemployment insurance with block grants to states to support training and workforce development through community colleges and vocational education...Advancing and updating skills are also important: Funds currently in other federal training programs could be repurposed to provide this pro-work support.
There's that regulatory passive and layers more tweaking.

Overall, I rate it a nice essay on the problem, but I'd rather see more detailed analysis of just what causes the problem and get-out-of-the-way solutions before we start passing around more tax credits here and there.

2. Tyler Cowen and driverless cars. 

Tyler Cowen chipped in with a Marginal Revolution blog post, and a New York Times Column. The Times column starts on the same track,
employment opportunities remain stubbornly low in the United States, 
But Tyler is after something other than social program disincentives. Rather
giving new prominence to the old notion that automation throws people out of work.
For example
Driverless vehicles and drone aircraft are no longer science fiction, and over time, they may eliminate millions of transportation jobs
Why is this more of a problem than, say, the steam engine?  Why has
history ... seen many waves of innovation and automation, and yet as recently as 2000, the rate of unemployment was a mere 4 percent.[?]
His worry,
Labor markets just aren’t as flexible these days for workers,...Many of the new jobs today are in health care and education, where specialized training and study are required.
...young men...with especially restless temperaments.. aren’t always well-suited to the new class of service jobs, like greeting customers or taking care of the aged, which require much discipline or sometimes even a subordination of will. 
Many expanding economic sectors are not very labor-intensive, be they tech fields like online retailing or even new mining and extraction industries. That means it’s harder for the rate of job creation to keep up with the rate of job destruction, because a given amount of economic growth isn’t bringing as many jobs
Here, I think Tyler is making a classic mistake. Over the long run -- the kind of long run where technical change like driverless cars and a shift to high education service jobs matters -- changing demand for worker characteristics changes wages, it does not cause unemployment or joblessness.  "Jobs" are not created in fixed quantity independent of wages, skills are not acquired in fixed quantity independent of wages, and wages are not sticky forever.  This is econ 101 supply and demand.

Driverless cars and trucks will, after the 20 years they take to become introduced, lower wages of people who formerly drove cabs and trucks -- a serious worry -- but that does not mean millions of people sitting idle on the street corner.  Low wages alone do not cause people to stop working unless they have an alternative. Tyler knows that, I know that he knows that, and he's writing for a popular audience. But I don't think using popular fallacies to communicate is a good idea.

Like Glenn, when he gets back to the immediate problem, he spies what I think is a central part of the story. The recession led to long term joblessness because inefficiencies, private and government induced, that are papered over in a boom, make it harder for the economy to recover.  One of many little inflexibilities.
The law is yet another source of labor market inflexibility: The number of jobs covered by occupational licensing continues to rise and is almost one-third of the work force. We don’t need such laws for, say, barbers or interior designers, 
i.e. making it harder for an unemployed taxi driver to take up such professions. "Sticky" wages, "inflexible" labor markets are not mysterious, they are born of a thousand grains of sand in the gears.

3. Temporary workers

Damian Paletta at the  Wall Street Journal Monday notices the surge in temporary employees.

Why is there even a distinction between "temporary" and "permanent" employees? Aren't we all "temporary employees?"

Well, no. We have a system, largely because of labor laws, where there is a large fixed cost to hire "permanent" employees. Obamacare has added substantially to that. So you only hire a "permanent" employee if it overcomes the fixed costs to doing so.

The worry is that we are more and more bifurcating into a market with a small number of "permanent," high benefit, high hours worked, career jobs, and a larger group of "temporary" employees, limited in hours and incidentally limited in career and human capital development.

4. Claudia Goldin and women.

High fixed costs, and the need to work employees long hours to recoup them, is particularly a problem for women. Claudia Goldin's Presidential address is out at the American Economic Review and it's a must-read.  It deserves its own blog post (and will get one). One big point from the abstract
The gender gap in pay  would be considerably reduced and might vanish altogether if firms did not have an incentive to disproportionately reward individuals who labored long hours and worked particular hours. Such change has taken off in various sectors, such as technology, science, and health, but is less apparent in the corporate, financial, and legal worlds.
As our president will apparently be championing "wage equity" this week, the speech is particularly topical.

5.  Casey Mulligan

His latest, The ACA: Some Unpleasant Welfare Arithmetic adds up some more disincentives
Under the Affordable Care Act, between six and eleven million workers would increase their disposable income by cutting their weekly work hours. About half of them would primarily do so by making themselves eligible for the ACA's federal assistance with health insurance premiums and out-of-pocket health costs, despite the fact that subsidized workers are not able to pay health premiums with pre-tax dollars. The remainder would do so primarily by relieving their employers from penalties, or the threat of penalties, pursuant to the ACA's employer mandate. Women, especially those who are not married, are more likely than men to have their short-term financial reward to full-time work eliminated by the ACA. Additional workers, beyond the six to eleven million, could increase their disposable income by using reduced hours to climb one of the "cliffs" that are part of the ACA's mapping from household income to federal assistance.
Note that some of these also push people to the part-time world.

6. Long term unemployed and Phillips curve

Tyler brings up the very interesting Kruger, Cramer and Cho paper, Are the Long-Term Unemployed on the Margins of the Labor Market? which I've been meaning to blog about.

Their basic view is that long-term unemplyed are not on the margins, which means that monetary policy -- "demand" -- really can't help them much (my conclusion, they're a bit softer).  One piece of evidence, Phillips curves (Figure 1) fit better with short-term unemployment.

Their conclusion gives interesting meat to "margins"
Although the long-term unemployed have about a one in ten chance of moving into employment in any given month, when they do return to work their new jobs are often transitory.  After 15 months, the long-term unemployed are more than twice as likely to have withdrawn  from the labor force than to have settled into steady, full-time employment. And when they exit  the labor force, the long-term unemployed tend to say that they no longer want a job, suggesting  that many labor force exits could be enduring. The subset of the long-term unemployed who do  regain employment tend to return to jobs in the same occupations and industries from which they  were displaced, suggesting that significant challenges exist for helping the long-term unemployed to transition to growing sectors of the economy. A stronger macroeconomy helps the long-term unemployed in part because it raises demand in their previous sectors. But even in  good times, the long-term unemployed are often on the margins of the labor market, with  diminished employment prospects and relatively high labor force withdrawal rates
If you otherwise read the New York Times you think all macro is preordained by political persuasion. This interesting paper is a great counterexample.

7. Discrimination against the long-term unemployed

Cowen again, in the blog post, brings up the issue. Are employers "discriminating" against long-term unemployed? We know they are less likely to hire them. I asked an employer once, who said he didn't want to hire "people on the way down," an interesting comment.  Kruger, Cramer and Cho think of the long-term unemployed as "unlucky". Tyler:
I think attributing all of this labor market misfortune to luck is unlikely...
There were two classes of workers fired in the great liquidity shortage of 2008-2010.  The first were those revealed to be not very productive or bad for firm morale.  They skew male rather than female, and young rather than old.  The second affected class were workers who simply happened to be doing the wrong thing for shrinking firms: “sorry Joe, we’re not going to be starting a new advertising campaign this year.  We’re letting you go.”
The two groups have ended up lumped together and indeed a superficial glance at their resumes may suggest — for reemployment purposes — that they are observationally equivalent.  This discriminatory outcome is unfair, and it is also inefficient, because some perfectly good workers cannot find suitable jobs.  Still, this form of discrimination gets imposed on the second class of workers only because there really are a large number of workers who fall into the first category.
In short, is it discriminatory and "unfair" to use conditional probability and Bayes' theorem, in a world where information is expensive? A deep question.


  1. In the long long long run, when everyone is driven, fed, and read to by robots, how will wealth be distributed?

    Sure we are not there yet, and probably wont be close enough for currently new technologies to replace all income and employment, but at some point, we may have to cross that line...

    1. Does it matter? If robots create massive resources, there will be plenty to around.

      I suppose, the people who own the capital will control and out sized share of the wealth. Invest in robots.

      But, I would also say that robots will never produce everything. People will be paid proportional to their ability to provide services that others are willing to pay for.

  2. This is really, really simple:

    1. To get low inflation, raise the pretax cost of capital
    2. To get full employment, lower the after tax cost of capital

  3. Part of the reason for the declining participation rate is the increased number of over 65 year olds looking for and getting work. See:

    On a completely different point, Grumpy says “Economists should focus on margins, which is what drives the growth. What we need most urgently is to rethink the federal government's wider role in the labor market. Now we're getting somewhere, and it is a great point that…” I quite agree.

    In particular, as unemployment falls, the marginal product of labour falls till it reaches the minimum wage / union wage or whatever. At which point the economy hits NAIRU, i.e. employers start bidding up the price of “already employed” labour rather than take more labour from the ranks of the unemployed.

    In principle there is a way round that, i.e. a way of cheating NAIRU: it’s to subsidise marginal workers. But to do that means one has to distinguish GENUINELY marginal employees (i.e. genuinely unproductive employees) from the rest. I actually think there is a way of doing that, as I explain here:

  4. There is a long term secular trend of declining male labor force participation (particularly concentrated in the less educated/skilled segment). You can't just respond "Wages rather than employment goes down, econ 101". Our society is not the same as the one that saw the introduction of the steam engine, in ways other than the ones macroeconomists might focus on. Gary Becker types engaged in imperialism over the ground of sociology are likely to have more insight.

    Long-term unemployed may be less marginal than short-term unemployed, but I don't think that's the same as saying monetary policy can't help. Didn't the booming 90s economy draw more workers into the labor force who were previously outside of it?

  5. Very clear, thoughtful post. I find it interesting (even if a bit disheartening) that it's followed by comments that include simple examples of the "Luddite" and "lump of labor" fallacies.

  6. "Why is this more of a problem than, say, the steam engine?"

    I understand your point, but I can actually think of two reasons:

    1) Because, unlike steam engines (at least initially), the robotic devices will most likely be mostly made made overseas. (Especially the electronics within them, but probably also most of the the assembly and software as well.) Meaning the potential for net job loss.

    2) The jobs being displaced by the robotics pay an artificially high wage due to various (labor and other) laws. (Which isn't good for the economy overall, but from the point of view of the higher-paid workers it certainly is a major issue that they will be trading a higher paying job for a likely much lower paying "burger flipping" type job.)

    Anyway, excellent point about the medical costs making employers want to have fewer employers working longer hours. Which is bad for both the workers (no time for a quality life) and the unemployed (no money for a quality life).

    But still, even if we had a libertarian society there would still be massive unemployment because, as I stated a while back (Neal's law #1?), buying foreign products instead of domestic ones DOES (despite what so many otherwise-accurate free-market economists insist) often does increase cause unemployment, because those dollars we send overseas for manufactured goods (and increasingly services) don't come back in payment for products or services Americans provide (creating/supporting jobs), but to buy assets we inherited from previous generations or nature.

    Here's an Einstein-like "thought experiment" to make this clearer: One can posit a country where NOBODY works in a factory or other manufacturing jobs; all manufactured items are imported. How? Simply by paying for the items by selling off buildings, forests, etc.

    This can't keep up forever obviously, but it could keep up for decades. And during this time, for a whole generation (and others) the only jobs are low-paying service jobs, and everyone else is on welfare. And both are just barely scraping by, barely able to afford the necessities of life.

    Although they do have great flat-screen TVs and other manufactured items! So they watch their endless murder mysteries and tell themselves how wonderful they are for voting non-white males and non-males and thus someday the economy will be better... even as it continues to get worse every day.

    Sound familiar?

    I wonder if when there is absolutely no manufacturing left in the U.S. if the free-market economists will still insist that "there's no such thing as a trade deficit!" and keep buying their foreign products.

    Of course even if they do finally wake up then it will likely be too late, for the country will be completely owned by foreign, mostly communist countries.

    Which is why I keep mentioning this principle, in the hope that if I do someone in a position of respect and influence will see the light and run with it. I'm not in a position to spend several years going to college and grad school, regurgitating what I'm supposed to, just on the off chance that someday I'll get to be a professor at a distinguished university and can get a paper on all this published in a scholarly journal that the Pulitzer and Nobel committees read.

    Is there anyone out there who is, and desires to, write such a paper?

  7. An additional factor may be immigration of low skilled workers.

  8. "Why is this more of a problem than, say, the steam engine?"
    Steam and internal combustion engines and electric motors certainly eliminated many jobs which were eventually replaced by new jobs in health, entertainment,volumes of cheap food & clothing, electronics, education, travel. These new things were at levels undreamt of by the Luddites. What could be different with robots disrupting current jobs is that there may not be huge numbers of undreamt of luxuries awaiting us. At least I have trouble imagining what they are. I hope the problem is my lack of imagination.

  9. "The fierce debate now going on in Washington about extending unemployment insurance and raising the minimum wage largely ignores these issues. Such policies may affect the incomes of some Americans, but they won't do much to expand opportunity and bring more people back into the labor force."
    I kind of disagree with this because I don't think that raising the minimum wage ignores the issue of bringing in more people into the labor force. The labor force is defined as people that are available to work, which includes employed and unemployed. Now with that said, if the minimum wage were to increase people be more elastic to work and more people would be willing to work if the wage went up. If you are just talking about the labor force, then it is important because the labor force would go up. The problem is that with a higher minimum wage the unemployment rate goes up because the demand for labor decreases. And so no one wants the unemployment rate to go up, that would mean more people with out a job.


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