15/4/19: One order of "Bull & Sh*t" for the U.S. Labor Market, please

The 'strongest economy, ever'...

Despite a decade-long experiment with record-low interest rates, despite trillions of dollars in deficit financing, and despite headline unemployment numbers staying at/near record lows, the U.S. economy is not in a rude health. In fact, by two key metrics of the labor force conditions, it is not even in a decent health.

As the chart above clearly shows, both in terms of period averages and in terms of current level readings, Employment to Population Ratio (for civilian population) has remained at abysmally low levels, comparable only to the readings attained back in 1986. Meanwhile, labor force participation rate is trending at the levels consistent with those observed in 1978.

Dire stuff.

Update: Here is a chart showing how the current recovery compares to past recoveries (hint: poorly):

17/5/18: U.S. Labour Markets and the Trump Administration Record

The Global Macro Monitor have published an exhaustive study of the U.S. labour market trends over the first 15-16 months of the President Trump's tenure. The  post is long, brilliantly detailed, and empirically and intuitively flawless (yeah, I know, I don't think I ever used this descriptor of an economics research piece before). So read it in full here: https://macromon.wordpress.com/2018/05/15/deconstructing-the-u-s-jobs-market/.

Top line conclusions are:

• Comparing the "first 15 [monthly] payroll reports of the Trump administration to the last 15 of the Obama administration",  "as of the end of April 2018, the Trump economy has generated 2.7 million jobs versus 3.1 million in Obama’s economy, or 373k fewer workers added to payrolls"
• Growth in employment was of lower quality during the Trump tenure to-date too: "the private sector has also added 124k fewer jobs in the Trump economy. Net job creation in the government sector under President Trump is relatively flat." The latter metric puts a boot into the arguments that President Trump is a fiscal conservative aiming to reduce public sector weight in the economy. 
• Earnings comparatives are also wobbly: "There is relatively little difference in the growth of average hourly earnings in the Trump and Obama employment reports." Which is more striking when one recognises that the Trump Administration inherited a tightening labour market, in which, normally, one would expect more wages inflation.
• "Job creation in President Trump’s economy outperforms the Obama economy in 5 of the 13 private sector industry groups, most significantly in manufacturing and mining", but "Almost all of the relative outperformance in mining is the result of the reversal in oil prices. Coal mining and auto manufacturing employment has not recovered". In other words, even in the core industries targeted by the Administration for growth, the Administration efforts have little to do with any recovery in the mining sector./ 
• Cyclically, the authors note that "The results are surprising as GDP growth was significantly higher during the Trump payroll reports, averaging of 2.53 percent on an annual basis, versus 1.56 percent during the last five quarters of the previous administration". However, this also means that current jobs creation is coming toward the end of the expansion cycle, and can be expected to be lower due to constraints of labour supply.
• Key observation, from macroeconomic environment point of view is that "the economy continues to reward capital over labor disproportionately". There is a fundamental problem with this development. The U.S. labour markets flexibility represents a net positive for the private sector productivity in the short run. However, as capital and technological deepening of production processes progresses, the very same flexibility leads to lower degree of upskilling and re-training of the existent workforce. This is a huge source of risk and uncertainty for the U.S. economy forward in terms of longer run potential growth and productivity growth.

In short, read the original post - it is packed with highly informative and very important data and observations!

Source: https://macromon.wordpress.com/2018/05/15/deconstructing-the-u-s-jobs-market/

27/7/17: U.S. labor markets are not in rude health, yet

As we keep hearing about the wonders of the U.S. labor markets, there is an uneasy feeling that the analysts extolling the virtues of the Great Non-recovery are bending the facts. Yes, unemployment is down significantly, and, finally, in recent months the participation rate started to climb up, although it remains depressed by historical norms. But these are not the only metrics of jobs creation or employment. Much overlooked are other figures, that paint a much less pleasant picture.

So with this in mind, lets update some of my old charts relating to the side of the labor markets than majority of analysts have forgotten to mention.

First up: average duration of unemployment. In other words, a measure of how long it takes for a person to get back into the job.

Good news is: the decline in duration of unemployment continues.  Better news: we are well past the crisis-period peak. Bad news: duration is at around 2009 levels, so not even at the levels pre-crisis. Worse news: current duration is higher than that recorded at the peak of any other recession in modern history. That's right: with miraculous recovery, we have folks collecting longer unemployment benefits than at the peak of any previous recession.

That was in absolute terms. Now, let's look at how we are performing relative to each pre-recession expansion:

Again, good news: the horror show of the peak during the height of the Great Recession is gone now. But, again, bad news: we are still at the levels of relative duration comparable to 15 months into the Great Recession. And, again, the worst news: after 108 months of 'recovery' we are much worse off in terms of duration performance than in any other post-recessionary recovery since 1948.

But what about employment, you might ask? Aren't U.S. companies generating huge numbers of jobs that are being filled by the American workers? Err... ok...

No. Employment is not performing well. Current cycle (from the start of the Great Recession through today) is long. But it is also extremely shallow when it comes to employment. So shallow, that it marks the worst long cycle in history (per above chart) and, when compared to shorter cycles, ... again, the worst cycle in history. 1953 cycle was bad - sharper jobs destruction than current, but it ended faster and on a higher employment index level than the current one.

So no, things are not fine in the U.S. labor markets. Not by the measures which are harder to game than standard unemployment stats.

28/6/17: Seattle's Minimum Wage Lessons for California

Two states and Washington DC are raising their minimum wages comes July 1, with Washington DC’s minimum wage rising to $12.50 per hour, the highest state-wide minimum wage level in the U.S. This development comes after 19 states raised their minim wages since January 1, 2017. In addition, New York and Oregon are now using geographically-determined minimum wage, with urban residents and workers receiving higher minimum wages than rural workers.

Still, one of the most ambitious minimum wage laws currently on the books is that of California. For now, California’s minimum wage (for employers with 26 or more workers) is set us $10.50 per hour (a rise of $0.5 per hour on 2016), which puts California in the fourth place in the U.S. in terms of State-mandated minimum wages. It will increase automatically to $11.00 comes January 1, 2018. Thereafter, the minimum wage is set to rise by $1.00 per annum into 2022, reaching $15.00. From 2023 on, minimum wage will be indexed to inflation. Smaller employers (with 25 or fewer employees) will have an extra year to reach $15.00 nominal minimum wage marker, from current (2017) minimum wage level of $10.00 per hour. All in, in theory, current minimum wage employee working full time will earn $21,840 per annum, and this will rise (again in theory) by $1,040 per annum in 2018. So, again, in theory, nominal earnings for a full-time minimum wage employee will reach $31,200 in 2022.

In cities like San Francisco and Los Angeles, local minim wages are even higher. San Francisco is planning to raise its minim wage to $15.00 per hour in 2018, while Los Angeles is targeting the same level in 2020. This means that in 2018, San Francisco minimum wage workers will be $8,320 per annum better off than the State minimum wage earners, and Los Angeles minim wage earnings will be $4,160 above the State level in 2020.

UC Berkeley research centre for labor economics, http://laborcenter.berkeley.edu/15-minimum-wage-in-california/, does some numbers crunching on the distributional impact of California minimum wages. Except, really, it doesn’t. Why?

Because the problem with minimum wage impact estimates is that it ignores a range of other factors, such as, for example the impacts of minimum wage hikes on substations away from labor into capital (including technological capital), and the impacts of jobs offshoring, etc. While economists can control for these factors imperfectly, it is impossible to know with certainty how specific moves in minimum wages will effect incentives for companies to increase capital intensity of their operations, change skills mix for employees, alter future growth and product development plans, etc.

What we do have, however, is historical evidence to go by. And that evidence is a moving target. In particular, it is a moving target because as minimum wages continue to increase, at some point (we call these inflation points), past historical relationships between wages and hours worked, wages and technological investments, wages and R&D, and so on, change as well.

Take the most recent example of Seattle.

In 2016, Seattle raised its $11.00 per hour minimum wage to $13 per hour, the highest in the U.S. Subsequent protests demanded an increase to $15.00 per hour in 2017. However, research by economists at the University of Washington shows that the wage hike could have
1) Triggered steep declines in employment for low-wage workers, and
2) Resulted in a drop in paid hours of work for workers who kept their jobs.

Overall, these negative impacts have more than cancelled out the benefits of higher wages, so that, on average, low-wage workers now earn $125 per month less than before the minimum wage was hiked in January 2016. In simple terms, instead of rising by $4,160 per annum, minimum wage earners’ wages fell $1,500 per annum, creating the adverse movement in earnings of $5,160. Given current minimum wage earnings, in theory, delivering $27,040 per annum in full time wages, this is hardly an insignificant number. For details of the study, see https://evans.uw.edu/sites/default/files/NBER%20Working%20Paper.pdf.

The really worrying matter is that the empirical estimates presented in the University of Washington studies do not cover longer-term potential impacts from capital deepening and technological displacement of minimum wage jobs, because, put simply, we don’t have enough time elapsing from the latest minimum wage hike. Another worrying matter is that, like the majority of studies before it, the Washington study does not directly control for the effects of Seattle’s booming local economy on minimum wage impacts: as Seattle faces general unemployment rate of 3.2 percent, the adverse impacts of the latest hike in the minimum wages can be underestimated due to the tightness in labor markets.

Now, consider the recent past: in her Presidential bid, Hillary Clinton was advocating a federal minimum wage hike to $12.00 per hour from $7.25 per hour. That was hardly enough for a large number of social activists who pushed for even higher hikes. This tendency amongst activists - to pave the road to hell with good intentions, while using someone else’s money and work prospects - is quite problematic. Econometric analysis of minimum wage effects is highly ambiguous and the expected impacts of minimum wage hikes are highly uncertain ex ante. This ambiguity and uncertainty adversely impacts not only employers, including smaller businesses, but also employees. Including those on minimum wages. It also impacts prospective minimum wage employees who, as Seattle evidence suggests, might face lower prospects of gaining a job. More worrying, the parts of the minimum wage literature that show modest positive impacts from minimum wage hikes are based on the data for minimum wage increases from lower levels to moderate levels, not from high levels to extremely high, as is the case with Seattle, San Francisco, Los Angeles and other cities.

That point seems to be well-reflected in the latest study from the University of Washington. In fact, June 2017 paper results stand clearly contrasted by 2016 study that showed that April 2015 hike in Seattle’s minimum wage from $9.47 per hour to $11.00 per hour was basically neutral in terms of its impact on wages. Losses to those workers who ended up without a job post-minimum wage hike were offset by gains for those worker who kept their employment. In effect, April 2015 hike was a transfer of money from jobs-losing workers to jobs keepers.

In a separate study, from the UC Berkeley labor economics center http://irle.berkeley.edu/seattles-minimum-wage-experience-2015-16/, the researchers found that Seattle’s minimum wage hikes were actually effective in boosting incomes of minimum wage workers, albeit only in one sector: the food industry, and the results are established on a cumulative basis for 2009-2016 period. In addition, University of Washington study used higher quality, more detailed and directly comparable data on minimum wage earners than the UC Berkeley study. However, on the opposite side of the argument, the former study excluded multi-location enterprises, e.g. fast food companies, who are often large scale employers of minimum wage workers. The UC Berkeley study is quite bizarre, to be honest, in so far as it focuses on one sector, while the study from the UofW clearly suggests that wider data is available.

In other words, the UC Berkeley study does not quite contradict or negate the University of Washington study, although it highlights the complexity of analysing minimum wage impacts.


PS: This lifts the veil of strangeness from the UC Berkeley study: http://www.zerohedge.com/news/2017-06-28/fake-research-seattle-mayor-knew-critical-min-wage-study-was-coming-so-he-called-ber. It turns out UC Berkeley study was a commissioned hit, financed by the office of the Mayor of Seattle to pre-empt forthcoming UofW study. Worse, the Berkeley team were provided by the Mayor of Seattle with the pre-released draft of the UofW paper. This is at best unethical for both the Mayor's office and for the UC Berkeley team.