January 09, 2005
State of the Labor Market
Roger Ferguson thinks about the state of the labor market. Greg Ip and Kemba Dunham report:
WSJ.com - Labor Market Shows Some Strength: Fed officials are beginning to re-examine their long-held assumption that an ample supply of unemployed workers and new labor-market entrants would ensure plenty of competition for the jobs being created, which would keep wage and inflation pressure under wraps. Officials have felt the drop in the unemployment rate from 6.3% in June 2003 overstated the improvement in the job market because many people had simply stopped looking for work, and thus were no longer counted as unemployed. The share of the working-age population either working or looking for work has remained stuck at 66% for the past year, down from its prerecession peak of 67%.
But in a presentation Friday at the American Economic Association in Philadelphia, Fed Vice Chairman Roger Ferguson noted that very few of the people who have dropped out of the labor force in the past few years say they have done so because they can't find work. Rather, most have done so to attend school, because they are ill or disabled, or because they retired. "It is an open question how quickly, if at all," that exodus "will be reversed."
Mr. Ferguson also said the bulk of the job loss earlier this decade appears to have been caused by industrial restructuring, which will make it harder for those laid off to find new work. He said the companies hit hardest in the downturn appeared to see their hardship as permanent because they didn't try to hold on to their workers, as companies facing a temporary setback typically will. He said this could depress the supply of readily available workers since "workers displaced by restructuring must either search longer to find a job appropriate for their skills, or seek retraining."
If indeed there is less readily available labor than previously thought, Mr. Ferguson said, "the amount of economic slack could be very small, and thus expansive monetary policy could lead to a pickup in inflationary pressures. That need not be the case, he added: "A substantial pool of unused labor may remain in the labor market, and an overly restrictive monetary policy could" slow the return to full employment. "The evidence is more ambiguous than one would like," Mr. Ferguson said. Still, Fed officials appear to believe there remains a lot of slack in the labor market, even if it is less than they thought. The main evidence is that wage growth remains subdued. Hourly wages rose just 0.1% in December from November, though they were up 2.7% from a year earlier....
The widening gap between productivity and wages is the decisive factor as far as I'm concerned. I cannot wrap my mind around the idea of a labor market near full employment in which the gap between wages and productivity continues to widen.
Posted by DeLong at January 9, 2005 07:53 PM
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"Rather, most have done so to attend school, because they are ill or disabled, or because they retired."
this is absolute bullshit. people have gone back to school trying to requalify for some kind of new job. they have tried to apply for SSI disability from anxiey and depression. or they have just decided to call themselves "retired" when their employers either bought them out or laid them off and they can't find work because they are over 55. that's what i say when people ask me what i am doing now.
this is right up there with Cheney trying to point out that people are making lots of money on eBay.
a guy gets desperate for cash, throws his tools in the back of a truck to go paint houses and trim trees and, voila, he's a self-employed small businessman, off the unemployment list and into the fastest growing segment of the economy.
By God, these people make me sick. Hoover said that a lot of people were making money selling apples.
Posted by: pragmatic_realist at January 9, 2005 08:05 PM
But did the Fed foster this policy of people looking/people not looking/people entering in order to keep inflationary pressures in check while it kept interest rates low? Were Greenspan's constant rosey scenarios about the labor market during the election cycle a fraud? These are different points than what the Prof. has raised, but I'm beginning more and more to believe that Greenspan is a scammer and shill for Bush and not a serious steward of the economy.
Posted by: cal at January 9, 2005 08:22 PM
I know the effect of outsourcing is overstated, but for a moment let's imagine a world where a significant amount of outsourcing goes on, and it's not terribly expensive to companies. Rather than looking at the US labor market and say it's near full employment, couldn't you look at the state of the world labor market? If right now there is a huge surplus of labor in the world as whole, wouldn't that allow one to accept productivity rising faster than wages?
Posted by: Ian D-B at January 9, 2005 08:32 PM
An article in one of Japan's business magazines this week noted the fact that in the previous two cycles of corporate profit recovery wages had risen along with profits (though less so in the previous recovery than the one before that), but in the current cycle wages were continuing to decline. Unemployment in Japan is now 9.8% in the 20-24 age bracket, and 7% in the 25-29 bracket, and many of those employed have been able to find only part-time work.
Posted by: jm at January 9, 2005 08:43 PM
I recently read something about a similar difference in the U.S. In this recovery far more of the money produced by the improving economy is going to corporate profits than used to because less is going to hiring new employees and raising wages for existing ones.
Posted by: Jim S at January 9, 2005 09:16 PM
"The widening gap between productivity and wages is the decisive factor as far as I'm concerned. I cannot wrap my mind around the idea of a labor market near full employment in which the gap between wages and productivity continues to widen."
Please forgive a question from someone outside the field.
The term "gap" seems to imply an additive quantity. Would we not be looking for a ratio of gross revenues to gross wages, measured per worker, per year, or even just as a whole-company result, namely gross revenue divided by gross payroll, or (as I recently learned), unit labor cost?
If so, is it your point to say that this calculated quantity, which appears to be a pure ratio, is currently increasing?
In the presence of full employment, you believe that the ratio should remain approximately steady, or even decline slightly, as companies are forced to compete by paying up to their greatest ability for whatever labor they are able to procure?
Posted by: Ralph at January 9, 2005 10:08 PM
On the subject of US economy being a wonderful flexible job-creation engine (a typical excuse for third-world job protection and unemployment benefits), may we bring you the slide 1a (http://nces.ed.gov/surveys/international/IntlIndicators/index.asp?SectionNumber=5&SubSectionNumber=2&IndicatorNumber=8). It shows that the labor force partricipation in US is not substantively different from the other developed countries. In other words, lower US unemployment rate is produced simply by not counting (some of the) unemployed.
Posted by: a at January 10, 2005 02:52 AM
What does a widening gap between producitivity and wages do to Social Security projections? If wages don't go up, then give SS indexing to wages, perhaps the $3.7t shortfall is reduced or even vanishes?
Posted by: red at January 10, 2005 05:25 AM
The UK, when it had a Conservative government, used to define the level of unemployment as "the number of people out of work and claiming benefit". I think this really meant "and receiving benefit". They changed the definition of unemployment a number of times, largely by altering the conditions under which benefit could be claimed.
The Labour government has, since 1997, been defining the rate of unemployment by reference to the "labour market survey", which is more-or-less what it says, a survey defined by (I think) the International Labour Organisation (is it "organisation" or "office"?) to determine people's true employment status. The ILO figure is used throughout the EU, allowing for straightforward comparison, and in the UK the number unemployed on this measure works out about 30% higher than on the "out of work and claiming benefit" measure.
Which measure does the US use? I can never work out what the situation really is. Perhaps because, as pre-1997 in the UK, there are people in power with an interest in maintaining imprecision.
Posted by: dave heasman at January 10, 2005 05:45 AM
he's a self-employed small businessman
And don't forget Cheney's millions of ebay entrapreneuers.
Posted by: me at January 10, 2005 05:56 AM
I have a wage equation that makes wages a function of inflation expectations, the unemployment rate and capacity utilization.
It has a great record over the history of average hourly earnings since 1965 and has worked great on a live time basis for over a decade. It now says wages are bottoming and are starting to rise.
Moreover, productivity growth is slowing sharply -- in the 4th Q hours worked were up 2% and real GDP probably rose under 2%,
this implies 4th Q productivity growth is about 2%. Moverover, y/y ch of productivity is also slowing to about 2%. Unit labor costs and prices now growing at 1% - 2% rates, implying strong profit gowth requires higher prices or stronger productivity. Fed seems to believe it will be higher prices. Seems most likely with signs of rising core inflation showing up accross a wide range of measures.
But if economy near full capacity it raises questions about assumption of 3% trend productivity. If trend productivity since 1995 was 3% the GDP gap would be large. But if you use the official CBO estimate the gdp gap as a % of gdp never did get very large this cycle.
Posted by: spencer at January 10, 2005 06:06 AM
Mr. Ferguson is too 1950s in his labor outlook. Today there are a lot more options for increasing production other than hiring more domestic workers. Automated tasks that are undercapacity can accomodate production increase with nothing more than increases in inputs. Automated tasks that are at capacity can be increased by purchasing additional automated units (servers / robots). Production can be increased by using more offshore workers. Production increases can lead to circumstances economically favorable for replacing inefficient operations with more efficient ones and actually lead to net job loss in a sector (for instance steel manufacturing in mini-mills compared to dinosaurs). The idea that increased profits/decreased losses must come from inflation is not necessarily true for competitive industries with over capacity. How many employees will the airlines industry shed? With bankruptcy and consolidation, fewer workers will be needed for the same output.
The idea that our manufacturing is anywhere near capacity is nuts, except for refining capacity and energy inputs that in some cases are at capacity. High energy prices are causing inflation and will cause inflation in the future. However, the solution to high energy prices is not action by the Fed, but increased energy efficiency and conservation. Conservation programs initiated in the late 1970s finally bore fruit in the early 1980s. Raising interest rates to double digits nearly wrecked the economy and were unnecessarily harsh.
The Fed needs to maintain a stimulatory monetary policy to improve the employment picture. Our government needs to get busy with energy conservation programs to prevent high energy prices from driving inflation. Government also needs to support research and emerging technologies that will be the new engine of job growth. Right now we are ceding stem cell research to overseas companies and much less competitive for the best and brightest foreign students that have contributed so much to the US economy.
Posted by: bakho at January 10, 2005 06:47 AM
"Relative to last December, the hourly wage is up 2.7%, likely below inflation, which was up 3.5% in the most recent data for November 2003 through November 2004. Wage growth started the year considerably slower than in 2003, and averaging over all of 2004, hourly earnings were up only 2.1%. This increase was well below inflation and marked the lowest growth rate for hourly earnings on record, going back to 1964."
Though the dollar has fallen in value and commodity prices have climbed, labor costs for employers have been constrained these last 5 years. Labor is easily the most expensive component of production, and as long as labor costs are constrained there seem little reason to expect much inflation. Also, unless the competitive position of labor has structurally weakened, the limited gains in wages and benefits indicate that corporations have no trouble finding workers.
Posted by: anne at January 10, 2005 07:16 AM
pragmatic_realist: I agree with your assessment, but to add some perspective to your "desparate for cash" remark, consider how many job holders, present, past, and future, wouldn't be working in their particular jobs if they didn't need a paycheck/regular income. Which is not to say they wouldn't work otherwise, but I contend many would prefer to do something else. Of course, that does not explain anything away, or make anything better.
dave heasman: The US criteria appear to me quite similar to the ILO criteria. Essentially it counts those above 16 who have made efforts to find employment in the 4 weeks prior to the survey among the sampled population, and uses models to scale up the number. This is the household survey; note that it also produces more and less inclusive measures in table A-12. The establishment survey (B tables) is based on employment reports by businesses. The methodologies used to select the surveyed population (household survey) and scale/model the numbers to correct for sampling deficiencies (both surveys) have been suspected of systematic biases and even fudging by some.
Refer to the explanatory note in http://www.bls.gov/news.release/empsit.toc.htm and other links in the "Employment" section on www.bls.gov.
Posted by: cm at January 10, 2005 07:39 AM
Please continue your surmises. Why should there be a slowing of productivity growth other than a typical bouncing of figures quarter to quarter? Why has the bond market been so calm if labor cost pressures are starting to build? Interesting, but I am not convinced.
Posted by: anne at January 10, 2005 07:42 AM
Living in Silicon Valley I have to wonder how the information channels have become so ... wrong! I know this is just one area of the country, but with the numbers of unemployed or underemployed here...
Pretty much every single person I know is STILL unemployed or working at 50% of their previous wage, or is a "consultant" (a title used to preserve dignity) or something like that. I mean, PLEASE, why is it that the people who have jobs are so BLIND to the people who do not? Is it fear - but for the grace of God, etc.?
And I know it's just as bad in other parts of the country. One friend returned from Michigan to Silicon Valley to take a job at half wages (and they only pay him for 40 hours but he works about 60). He left for Michigan after looking for a job FOR A YEAR here. In Michigan he was working nights at a bakery, living at his parents', because there were no jobs there.
This is anecdotal but I think something is being missed. Look at the household debt numbers, for example... THEY don't reflect a growing, thriving economy.
Posted by: Dave Johnson at January 10, 2005 10:02 AM
Slow labor force growth is masking the difficult job market.
From the Economic Policy Institute:
Had the decline in labor force growth not occurred, the unemployment rate would likely be higher, since only those actively looking for work are counted as unemployed.
One corroborating sign that slow labor force growth is a function of relatively weak employer demand is the steady increase since the recession of 2001 in the number of persons not in the labor force who currently want a job. After falling about 6% per year between 1994 and 2001, this group has grown by about 5% annually since the recession began in March 2001.
Posted by: bhaim at January 10, 2005 10:18 AM
A 2% rise in hours and a 2% rise in GDP is a 2% rise in productivity? Is that a typo or am I misunderstanding something? I'm guessing you mean GDP growth around 4%. Good to see you back.
Additive, that's right. If productivity gains mean you have gone from producing $45 worth of value for the firm in your last hour of work to $50, then the firm gives you a $5 pay hike to make sure you stay put. That's not perfectly true (not true at all recently, which is why Brad has his doubts about Ferguson's notion of labor market zombies with no power to influence wages), but it is a good approximation of what marginal analysis and common sense suggest.
The problem seems to be that conditions in the economy and the labor market have changed rather abruptly, in ways that disadvantage workers. One possible explanation is that demand for labor has been quite slack, killing off demands for higher wages. This actually fits pretty well with one story of productivity gains, which is that people just worked lots longer and harder to keep their jobs over the past 3 or 4 years, so that measured productivity gains were partly just bad measurement - lots of hours were being worked without being reported in the official stats.
Posted by: kharris at January 10, 2005 10:30 AM
By the way, Atlanta Fed President Guynn just said some pretty hawkish sounding stuff. While the content was not the same as heard from Ferguson, it had the same general drift - the economy may not be in as good shape to stem inflation as recent Fed chatter has suggested. This, along with recent FOMC minutes that had a slightly more hawkish tone, and we may guess that Fed officials are carving out some room for more rapid rate hikes if that is seen as necessary.
Posted by: kharris at January 10, 2005 10:35 AM
The Fed governors may well be preparing us for faster short term interest rate increases, but long term bond investors just do not react. I am astonished at the lowness and quiteness of long term rates. Is growth solid enough that the economy would be little slowed by a sharper pattern of interest rate increases? I worry.
Posted by: anne at January 10, 2005 11:30 AM
Stephen Roach has a powerful article questioning the policy approach of Alan Greenspan, in "Foreign Policy." What I have to ask is whether the Fed was actively targeting asset prices from 1998? Similarly the Fed may have done just this from 1990 to 1994, as banking soundness appeared at risk. Then, too, the Fed Chair made what I consider a major mistake in supporting our turn to severe long term tax cutting in 2001.
Though I can grumble about Stephen Roach for too much of a propensity to ask for austerity measures to correct economic imbalances, I am increasingly wondering whether monetary policy has been as helpful as it might have been for smoothing our growth pattern since 1999.
Posted by: anne at January 10, 2005 11:34 AM
Would Ferguson be using the wage inflation argument to support a Fed interest rate designed to curb deficit related inflation? Were his comments accurately and completely reported?
Posted by: bakho at January 10, 2005 01:21 PM
Anne, is that 'Foreign Policy' magazine?
Posted by: Barry at January 10, 2005 01:27 PM
By my count at least 3 members of the Fed are giving the same line. The look to the future and not the present. The quotes below suggest that the Fed is not worried about employment except as it affects pricing. The over riding concern seems to be price increases. Price increases should be expected to help cover increased energy costs. What information are the using that the rest of us don't have? The quotes for sure mean at least another .25 increase at the next meeting.
By Alister Bull
WASHINGTON (Reuters) - The Federal Reserve has never pledged to hike interest rates only at a measured pace and is closely watching inflation, a top policy-maker said on Monday in a possible sign of faster rate moves than expected.
Atlanta Fed Bank President Jack Guynn, who votes at the next two Fed policy meetings as a stand in for the Dallas Fed, warned markets not to assume the U.S. central bank will continue raising interest rates in quarter-percentage-point increments.
"It is vital that we maintain the flexibility to respond with the best policy action that comes from each FOMC (Federal Open Market Committee) discussion, even if sometimes that has the potential to surprise some in financial markets," he told the Rotary Club of Atlanta.
Guynn's comment echoed Fed Board Governor Donald Kohn, who said on Sunday that initiatives to boost Fed transparency must not lock the bank into a predetermined course of action.
While Guynn saw no imminent threat of inflation, he cautioned that signs of wages and price increases demand close scrutiny, although he said he was comfortable, "at least for now," with the Fed's current policy to gradually raise rates.
"Although I do not think a significant pickup in inflation is imminent, I continue to be struck by talk of price increases that my business contacts say they are planning as the economy expands," he said.
Guynn warned the argument that excess slack in the economy would curb prices might be flawed, and he worried that businesses were running out of the ability to use new technologies that made them more efficient.
"There probably is a limit to how long businesses can leverage productivity gains to hold prices down," he said.
Posted by: bakho at January 10, 2005 02:13 PM
Ferguson's speech with Table 1 showing manufacturing and information sectors (hi-tech) doing terribly as far as job creation.
This might support pragmatic realist and Dave Johnson's points.
Underperforming Industries in Terms of the Change in Employment since the Latest Cyclical Peak (March 2001) Industry Performance Ranking
Durable manufacturing 1
Nondurable manufacturing 2
Posted by: bhaim at January 10, 2005 02:30 PM
The Fed really does seem to be telling us growth is fine and employment is fine, so a hint more of inflation and the tightening sequence will speed. Still, long term bonds are not effected.
Stephen Roach's article is in Foreign Policy Magazine.
Posted by: anne at January 10, 2005 03:02 PM
I was working as a security guard in the San Francisco Bay Area. When the other guys aren't really security guards, but QA types, high voltage electrical equipment technicians, radiofrequency design engineers, and like that, you know the economy is bad.
I don't worry about them, I worry about the guys whose jobs they took, who used to be security guards.
Posted by: wkwillis at January 10, 2005 11:44 PM
Here in Massachusetts ex-engineers aren't security guards. They're motel desk clerks and convenience store checkers, that is, when they can get work at all.
Posted by: Jon Meltzer at January 11, 2005 12:30 PM