Brad DeLong's Semi-Daily Journal (2004)

It would be more interesting if you took it back to 1990 to see the history.

It's clear what's happening here: factories are churning out fantastically productive robots at a good rate that are in turn taking our jobs.

The full picture is at:

http://research.stlouisfed.org/fred2/series/EMRATIO/12/Max

There were comparably big shifts in the 50s (twice) and early 80s. Add the fact that Europe has a generally lower ratio than the US, and I don't think I'll be stretching the truth to say that this issue is not well understood.

Also worth considering is the composition of jobs. Roach had a nice little piece on it at http://www.morganstanley.com/GEFdata/digests/20040709-fri.html#anchor0

Annenberg responded to the general comment with a weak piece based on the population survey (er.. yuck) at http://www.factcheck.org/article.aspx?docID=208

Of course, if you check the recovery period of Feb-June inclusive, you'll find substantially all the wage growth occurring in bottom-quartile (by total wages) occupations and wage losses in the top quartile. Oopsie number two.

How one can make such a sweeping assessment of the labor market based on a few months' data is beyond me. The graph shows a similiar "stabilization" pattern in 2002 (the previous "recovery leg").

"It is hard to stress enough the extraordinary contrast in this business cycle between the (lousy) labor market situation and the (good) output growth situation and the (fantastic) productivity growth situation."

(1) I think we are putting far too much faith in the latter two number here. The hedonic adjustments in the GDP inflate those numbers quite a bit. (My computer _is_ much more powerful these days, but that does not mean I'm writing emails or programs 10X faster.)

(2) A lot of the output & productivity growth appears to come from imports at sub-par cost, or in other words squeezed-out externalities like workers' living standards, environmental regulations, etc.

For example, a domestic product may cost (manufacturer price) $100, incorporating a domestically produced part @ $40. The part will be offshored @ $10, reducing total cost to $70 or so, but the manufacturer price will only drop to let's say $90. Even if all imports are properly accounted for, you will get "fantastic" growth.

Am I missing something? What say you?

I hate to be obtuse, but if you have increased output without increased employment, isn't that by definition a productivity increase? So why is this spoken of as a big mystery?

I'm with cm.

The "stabilzation" could be nothing more than a blip in an otherwise downward longer term trend.

No?

CM, in your model there must be very little competitive pressure on the manufacturer, or else the price of the product would drop to $70. Where's the evidence for this? And if there is little competitive pressure, then why is the price falling to $90 at all? Why doesn't the manufacturer keep it at $100? For that matter, why is the price at $100 in the first place?

Steve,
RE: CM's model

Is it possible that the price=cost equalibrium due to the force of competition of classic economics is being trumped, to some extent, by pressure to maintain high levels of profitability and to justify stock market valuations that seem to have settled in at relatively high multiples of earnings?

I don't have any real evidence for this at this time. Just asking.

Ah, the long awaited (very important) ratio...

What is the extreme spread on that graph again? If you really wanted a story, you could make the graph 10 feet high and six inches wide.

As Brad and everyone else has been saying, we really need to look inside those productivity numbers to have anything intelligent to say. While it may be politically convenient to call it all offshoring, from ground zero in corporate america, that isn't what it looks like to me. Technology utilization is driving tons of productivity gains. Customer service may be more annoying when required, but overall use is WAY down from five years ago. Well designed web pages take a ton of pressure off of telephone services, and fewer people are needed period. We can all take a deep breath and remember that as long as everyone doesn't suddenly become unemployed, this is a good thing.

After all, we could be at full employment growing our own food and sewing our own clothes.

I have a question that the economists are likely to be able to clear up easily:
Looking at the historical data back to the 50's, it is clear that large dips like the current one are cyclical and come with recessions. Where in the recovery cycle does the ratio begin to improve? Should the trough (if it is indeed a trough) be at the very beginning of a recovery or is it typically delayed, historically speaking.

Why would those in control of capital compensate labor when their own compensation is mostly capital (viz, stock)? We're in Ricardoworld, where capital is hypermobile and labor has no bargaining power. Welcome to the late 19th century....

NM

Christopher,

Go to www.economagic.com. At the bottom of the page, very small print shows "US Macro 1" Click it. The click "US employment data." Scroll down to "employment ratio." You'll get a list of data with the option (again very small print) to get a "GIF chart." Adjust the start date backward (as far as 1948), and poke the "show recessions" botton. Then scroll down to "make chart" and click it. You'll see that this period and the prior recession are among the slower for employment participation turning higher. Typically, employment participation has turned higher right after the end of recession. The one other obvious case of persistent low participation is in the early 1960s. Participation continued to fall in this cycle far longer than after the prior recession, and has stayed low longer than in any period than the early 1960s. What's it all mean? Lot's of folks would like to know.

There has been an absolutely huge loss of manufacturing jobs.
Total mfg employment dropped from a 1998 high of 17.6 million to 14.38 million today. The recent low was 14.31 in 01/04.

http://www.economagic.com/em-cgi/data.exe/blsce/ces3000000001

This constitutes a loss of almost 1 in every 5 manufacturing jobs. Of the 3.2 million maunfacturing job loss, 0.6 million was between 98 and 2001. 2.6 million have been lost 2001 to present.

After 4 decades of cycling between about 16 and 19 million, mfg jobs took a plunge. 14.3 million is the fewest manufacturing jobs since 1950.

This is structural and technology driven. In the Midwest we don't think those jobs are coming back. We may get some jobs from nanotech and biomed mfg.

http://www.bea.gov/bea/newsrel/intinvnewsrelease.htm

kharris:

That is a way cool link. Thanks!

"It would be more interesting if you took it back to 1990 to see the history. "

Aw, if you go include the whole business cycle instead of just the peak-to-trough half of it, one would see that the recent low didn't even match the low of last time around.

Who's interested in that?

Ah, the power of the suppressed zero! It really adds drama, doesn't it?

Steve Carr: I was just throwing around random numbers. Maybe $80 would have illustrated things better. Moderate competition does not (at least immediately) drive prices to cost-of-business; profit margins are in part a function of the degree of competition (relative to market size and capacity limitations of individual competitors), commoditization of the value added, and barriers to entry. Even in the face of competition, everybody still has to (or at any rate wants to) make some kind of profit. Even if a competitor can significantly undercut you in price, they may not be able to deliver enough volume, or sign up enough sales channel, to seriously force you to match. You will have to give a bit, but likely not all.

And then there is the phenomenon of inertia -- in the initial phase where an industry ramps up to increased productivity or cost-cutting, extra profit can be taken while customers and competitors catch on to the news; squeezing out "inefficiencies" takes time. Product "innovation" or at least turnover ensures continued opportunities to reap such profits. (Why do you think marginally different products are appearing all of the time?)

zizka: You are not obtuse, and my point(s) were mostly aimed at the attributes "great" or "fantastic". Growth is "fantastic" when it is real, less so when it is a statistical artefact (but maybe then it is "truly" fantastic, in the literal sense). Employment _has_ grown, look at Asia. As I said elsewhere, at work we are getting several "welcome a new team member" emails per week from India and China. Not that I object; those are nice people and it's very good for them.

Jason Ligon: "Customer service may be more annoying when required, but overall use is WAY down from five years ago. Well designed web pages take a ton of pressure off of telephone services, and fewer people are needed period."

Use is way down, right? As in "I'm not telling you guys the phone number (neither on the website), and oh, nobody's calling"? Or as in: "Your call is important to us. All customer service representatives are currently busy assisting customers. You may also check 'www.whatever.com/support'." Etc.

"We can all take a deep breath and remember that as long as everyone doesn't suddenly become unemployed, this is a good thing."

... for whoever doesn't suddenly become unemployed.

"After all, we could be at full employment growing our own food and sewing our own clothes."

This looks like a strawman. Technically it is a correct statement, but nobody is asking for full employment via lowering productivity and technological standards. In fact, nobody (who has thought things through) is asking for full employment no matter what. The "obsession" with full employment comes largely from the fact that in this country basic living and healthcare are tied to having a "good" job.

bakho: "This is structural and technology driven. In the Midwest we don't think those jobs are coming back. We may get some jobs from nanotech and biomed mfg."

Good luck. (No sarcasm.)

On a different note, "structural" covers it nicely and crisply.

Jim Glass, Mushinronsha:

Here we go with as much as I could find quickly:

http://research.stlouisfed.org/fred2/series/EMRATIO/12/Max

Drama is not the point. Neither is the point of the article to suggest we are in an all-time or long-time low. If you read Brad's short remark, you will find that his point is that the fall in participation has stabilized. (Although I'd say it is too early to tell.)

What the Fed graph suggests is that there is a long-term "secular" trend of increasing participation. (What a "reasonable" range is has to be left to the future to show.) The recessions have historically broken that trend temporarily, but it has afterwards recovered. I think it is obvious that we (or, rather, the numbers) are in a _relative_ low comparable in proportion to that of the 90's. Whether one would consider the shortfall "larger" than in the 90's depends of how much one considers the dot.com time an "overshoot".

As a side note, it is always easier to deal with other people's misfortune than one's own. So we shouldn't get too smarty-pants.

The long term trend of increasing participation was more or less mandated by welfare reform. Welfare reform falls flat if there are no jobs. There are plenty of jobs that need to be done and are going begging because the government won't properly fund infrastructure.

bakho: Good points. What exactly do you mean by "welfare reform"? I'm aware of the Clinton-time (?) welfare-to-work "programs", otherwise I'm not much familiar with US legislation before Y2K. Thanks.

Otherwise, there have been changes of & pressure on general living standards as well, and I suppose more spouses were compelled or forced into obtaining paychecks independently of welfare reform, to maintain an increasingly expensive lifestyle, or in an attempt to attain a lifestyle propagated in the media.

Do you not think this is a major source besides welfare cuts? I would be interested to hear your perspective. But maybe welfare reform and the other phenomenon are linked by a "trickle-up" effect of purchasing power shortfalls.

I do not suggest that workfare is driving the job participation. The job participation goes up prior to the enactment of workfare. Workfare came in as the participation was rising. It only worked because jobs were available. No jobs and it starts to fall apart. In other words, workfare could not have been enacted without the availability of jobs and the already high participation rates. However, workfare locks in a high participation rate whether the jobs are there or not.

Since the early 70s there has been an erosion of the percentage of jobs that allow for 1 worker households. That is driving the increase in participation. Yes, the data are clear that 2 workers are needed to make ends meet.

Productivity gains will continue to be a drag on manufacturing employment unless new categories of products are developed or expanded. About 1 in 7 workers are in the auto industry that has had productivity gains of between 3-4% per year for decades. Auto mfg employs so many people that labor efficiency is critical. Still there is room for improvement. Among the top 10 models, the range is 15.74 to 20.06 labor hours per unit. So even within the top 10, the least efficient has great potential for productivity increase. And auto plants are some of the most efficient.

There are a lot of mfg plants that still do things the way Henry Ford did them in the 20s (maybe even the way Eli Whitney or James Watt did them). Many of these do not change until forced to change. That is part of what we are seeing today. Making steel in a mini mill is about 7 times more labor efficient than a dinosaur. How much angst has been required to close up shop? Steel tariffs, etc.

There are lots of Ma and Pa mfg shops that have workers doing mind numbingly boring jobs that could easily be done by robots or cheap overseas labor. Like anything else, there is a learning curve to developing overseas production, but once that curve is established, the barriers to using overseas talent are very low. The same is true for computerization. The people that have recently retired are not computer savvy while most of their replacements have grown up with computers. The children of Ma and Pa grew up with video games and are ready to bring the business into the future. The barriers for computure aided manufacture have dropped. Add to that the improvements in computer software that make it easier to adapt computers to mfg and even more barriers are reduced.

The large increase in productivity in mfg in the US should be no surprise. If you step away from the modern auto assembly plants and tour the small shops of the US, it is clear that there is a lot of room for improvement. The big secret to increases in US productivity is that much of the US manufacturing infrastructure is a backwater that has improved little since it was first put in place.

bakho: It is very plausible and consistent w/ observations what you are saying. The implication about your remarks on productivity improvements is that in order to maintain living standards, it needs a social safety (welfare, horrors!) net financed not just from labor income & payroll taxes. If good living remains tied to having a "good" job, things will look bleak. On the other hand, if there is no discernible difference in living standard based on your contribution, there will be little incentive to contribute. But then today most of the "rich" are arguably not contributing a lot but live "richly".

And please point us to your data sources if it is not too much effort. Thanks.

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