September 16, 2019

Economix Blog: Full Employment: The Big Missing Piece

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities in Washington and a former chief economist to Vice President Joseph R. Biden Jr.

While some important parts of the current economy are showing strength — housing, energy extraction, corporate profitability — demand for labor, or “job creation” if you prefer, remains weak.  That’s a huge problem because most of us depend on our paychecks, not our stock portfolios, so the fact that there’s still about 12 million unemployed (including four million who’ve been jobless for over half a year) in addition to about eight million involuntary part-timers (who want more hours, and can’t find them) should give one pause before declaring all clear on the economic front.

Today’s Economist

Perspectives from expert contributors.

Weak labor demand plays an integral role in these outcomes, but too much of the rhetoric I’ve been hearing lately ignores that reality.  In the immigration debate — and I’m a longtime active supporter of comprehensive reform — advocates in both parties argue that there are lots of job slots waiting to be filled, if only we had greater labor supply.  This claim is most commonly made regarding high-skilled workers, like programmers, but one advocate recently wrote a commentary arguing that we also face a shortage of low-wage workers.  Anyone with even cursory knowledge of employment or especially wage trends among such workers knows that this is not a credible claim.

It’s even worse over in the poverty debate, where contentions about the safety net, a topic I wrote about last week, suggest that the jobs are there for the taking if only SNAP (food stamps) and other benefits weren’t removing the incentives for low-income people to look for work.  (The Southerland amendment to the farm bill, a key reason the bill failed in the House, was very much written in this spirit.)

The extent to which such claims are misguided came back to me as I was working with some new data on the importance of strong labor demand, particularly to low- and middle-income workers.  The data are simply the annual hours of work by income group over the last few decades, with households split into fifths by income, from the poorest to the wealthiest 20 percent, or quintile (e.g., “Q1” in the figure below represents the lowest-income quintile).

The trends reveal the disproportionate impact of strong labor demand on low relative to high income workers.  Basically, using the economic model introduced in “Field of Dreams,” it’s an “if the jobs are there, they will come” story, which is decidedly different than “if they come, the jobs will be there” (economists will recognize the latter as Say’s Law).

A simple statistical model of the relationship between annual hours and unemployment shows that since the mid-1970s, for every point the unemployment rate falls, annual hours of work go up by 3.7 percent for low-income workers from the bottom fifth of the income scale, 1.7 percent (about half as much) for middle-income workers, and 0.8 percent (half as much again) for high-income workers.

But these are broad historical averages.  During the late 1990s, the last time the United States economy was at full employment, low-income workers were remarkably responsive to strong labor demand.  Between 1996 and 2000, for each point the unemployment rate fell, their hours of work rose more than 10 percent.

The figure below provides some historical context.  The first three bars for each income group shows the percentage change in annual hours worked over the last four years of the last three recoveries — if the recovery is going to reach full employment, that’s when it will do so.  The fourth bar in each set shows the most recent years of data, tracking the hours impact of the Great Recession.

Q1 represents lowest fifth of income distribution, Q5 the highest. Source: Author’s analysis of Census Bureau data (Annual Social and Economic Supplement), provided by Arloc Sherman of Center on Budget and Policy Priorities. Q1 represents lowest fifth of income distribution, Q5 the highest. Source: Author’s analysis of Census Bureau data (Annual Social and Economic Supplement), provided by Arloc Sherman of Center on Budget and Policy Priorities.

The first thing to notice is how much more responsive the trends are for lower relative to higher-income households: they go up more in good times and fall further in bad ones.  That doesn’t imply the rich are lazier.  To the contrary, it’s because they’re already maxed out on hours worked and their jobs tend to be much more insulated from changing demand conditions.

The second thing to notice is how much the 1990s recovery stands out.  There was a lot going on in those years — more on that in a moment — but the main factor was full employment: the demand for low-wage work in particular was stronger than it has been for years before or since.  Their average annual hours rose 17 percent, 1996-2000, amounting to almost three more weeks of full-time work.

Third, the 2000s were a uniquely weak period of labor demand.  Employment growth in those years was the worst on record, with data going back to the 1940s.  One is tempted to tell a failed supply-side economics story, but the Reagan years, which look good by this measurement, especially for middle-income families, complicate that explanation (the George W. Bush economics regime hewed much closer to trickle-down theory than did the Reagan team — taxes were actually raised numerous times in the Reagan years).

Finally, the benefits of full employment to the least advantaged are perhaps most clearly shown by the counterexample of the great crash, which slammed low- and middle-income families relative to the wealthy.

What other factors besides full employment, then, were in play in the 1990s?  For one, welfare reform pushed a lot of single mothers into work, a factor much more conducive to the “if they come, the jobs will be there” view that I dismissed above.  But careful research finds that welfare reform explains less than 15 percent of the increase in work among low-income single mothers, who themselves represent less than 20 percent of the bottom fifth in the figure shown above.  That’s not nothing, but it’s a relatively small part of the story.  Moreover, work-based welfare reform was there in the 2000s too, and that period doesn’t look so good.

Opponents of immigration reform should also note that while the 1990s was a period of strong immigrant flows of low-skilled workers, increased labor demand handily absorbed those flows.

I suspect that most objective observers will agree that full employment — strong labor demand, substantial job creation — is a (I’d say “the”) key economic, social, and poverty policy that’s missing from the current agenda.

So how do we get there?  Stay tuned…

(The findings discussed above are from a coming book on the importance of full employment, written with Dean Baker.)

Article source: http://economix.blogs.nytimes.com/2013/07/01/full-employment-the-big-missing-piece/?partner=rss&emc=rss

Today’s Economist: Uwe E. Reinhardt: Health Care as an Economic Stabilizer

DESCRIPTION

Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

It has become customary to see our health care sector as a burden on society. In some ways it is. We have developed a complicated system of financing the sector – one guaranteed to put stress on the budgets of many households and governments at all levels.

Today’s Economist

Perspectives from expert contributors.

Furthermore, we have structured the system so that prices for virtually any kind of health care in the United States are at least twice as high as prices for the same things in other countries. It is the main reason that health spending per capita in the United States is about double what most other nations spend. (Earlier this week, the Congressional Budget Office reported a sharp slowdown in the growth of health care costs, leaving budget experts trying to figure out whether the trend will last and how much the slower growth could help alleviate the country’s long-term fiscal problems.)

From a macroeconomic perspective, the health care sector has functioned for some time as the main economic locomotive pulling the economy along. In the last two decades, it has created more jobs on a net basis than any other sector.

Oddly, not much is made of the job-creating ability of the health care sector in political debate over health policy, in contrast to discussions of military spending, where employment always ranks high among the arguments against cuts. In October 2011, for example, Representative Buck McKeon of California, the chairman of the House Armed Services Committee, made that point, among others, in a commentary in The Wall Street Journal, “Why Defense Cuts Don’t Make Sense”:

And on the economic front, if the super committee fails to reach an agreement, its automatic cuts would kill upwards of 800,000 active-duty, civilian and industrial American jobs. This would inflate our unemployment rate by a full percentage point, close shipyards and assembly lines, and damage the industrial base that our war fighters need to stay fully supplied and equipped.


Not surprisingly, in its “Defense Spending Cuts: The Impact on Economic Activity and Jobs,” the National Association of Manufacturers makes the same point.

For what it is worth, economists do not view “job creation” as an industry’s valuable output. Instead, when Industry A creates jobs and with them additional output, economists ask where the workers filling these jobs would have worked instead and whether the value of their output there would be smaller or larger than the output they produce in Industry A.

But health care has one additional feature I stumbled upon while writing a recent paper: from a macroeconomic perspective, it serves as an automatic stabilizer that offsets fluctuations in the growth of gross domestic product. Corporate and personal taxes and transfer payments such as unemployment benefits or additional enrollment in Medicaid are classic forms. They actually change countercyclically with changes in G.D.P., but health spending levels remain fairly stable as G.D.P. fluctuates.

The chart below presents the year-to-year changes in total national health spending, in total private fixed investments and in the rest of the G.D.P. from 2000 to 2010. The second chart depicts the fraction of year-to-year changes in G.D.P. accounted for by year-to-year changes in national health spending, a component of G.D.P. In that chart, no column is shown for 2009, because from 2008 to 2009 private investment plummeted by $421 billion and total G.D.P. fell by $353 billion, while health spending rose by $107 billion.

The health spending data in these charts comes from Table 1 of the Centers for Medicare and Medicaid Services publication “National Health Expenditures,” which provides national health spending data for the years plotted in the graph. The data on G.D.P. and fixed private investments come from the President’s Economic Report 2012, Tables B-1 and B-18.

It can be seen that total private investment fluctuates considerably over booms and busts. By contrast, health care spending remains fairly stable over time. It does tend to growth less rapidly in times of deep recessions, but it has not declined in the United States.

The next chart depicts the fraction of year-to-year changes in G.D.P. that is accounted for by year-to-year changes in national health spending, a component of G.D.P. In that chart, no column is shown for 2009, because from 2008 to 2009 private investment plummeted by $421 billion and total G.D.P. fell by $353 billion while health spending rose by $107 billion.

One must wonder what would have happened in the presidential elections of 2004 and 2012 if health care had not buoyed G.D.P. in the recession of 2000-1 and the recession that began in 2008.

One does not have to be a blind devotee of the Yale economist Ray Fair’s economic model of presidential elections, which relies on only a few variables to predict vote shares, to believe that one or both elections might have had different outcomes, even though both Presidents Bush and Obama inherited the recessions over which they presided.

Article source: http://economix.blogs.nytimes.com/2013/02/15/health-care-as-an-economic-stabilizer/?partner=rss&emc=rss

Economix Blog: Uwe E. Reinhardt: Health Care as an Economic Stabilizer

DESCRIPTION

Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

It has become customary to see our health care sector as a burden on society. In some ways it is. We have developed a complicated system of financing the sector – one guaranteed to put stress on the budgets of many households and governments at all levels.

Today’s Economist

Perspectives from expert contributors.

Furthermore, we have structured the system so that prices for virtually any kind of health care in the United States are at least twice as high as prices for the same things in other countries. It is the main reason that health spending per capita in the United States is about double what most other nations spend. (Earlier this week, the Congressional Budget Office reported a sharp slowdown in the growth of health care costs, leaving budget experts trying to figure out whether the trend will last and how much the slower growth could help alleviate the country’s long-term fiscal problems.)

From a macroeconomic perspective, the health care sector has functioned for some time as the main economic locomotive pulling the economy along. In the last two decades, it has created more jobs on a net basis than any other sector.

Oddly, not much is made of the job-creating ability of the health care sector in political debate over health policy, in contrast to discussions of military spending, where employment always ranks high among the arguments against cuts. In October 2011, for example, Representative Buck McKeon of California, the chairman of the House Armed Services Committee, made that point, among others, in a commentary in The Wall Street Journal, “Why Defense Cuts Don’t Make Sense”:

And on the economic front, if the super committee fails to reach an agreement, its automatic cuts would kill upwards of 800,000 active-duty, civilian and industrial American jobs. This would inflate our unemployment rate by a full percentage point, close shipyards and assembly lines, and damage the industrial base that our war fighters need to stay fully supplied and equipped.


Not surprisingly, in its “Defense Spending Cuts: The Impact on Economic Activity and Jobs,” the National Association of Manufacturers makes the same point.

For what it is worth, economists do not view “job creation” as an industry’s valuable output. Instead, when Industry A creates jobs and with them additional output, economists ask where the workers filling these jobs would have worked instead and whether the value of their output there would be smaller or larger than the output they produce in Industry A.

But health care has one additional feature I stumbled upon while writing a recent paper: from a macroeconomic perspective, it serves as an automatic stabilizer that offsets fluctuations in the growth of growth domestic product. Corporate and personal taxes and transfer payments such as unemployment benefits or additional enrollment in Medicaid are classic forms. They actually change countercyclically with changes in G.D.P., but health spending levels remain fairly stable as G.D.P. fluctuates.

The chart below presents the year-to-year changes in total national health spending, in total private fixed investments and in the rest of the G.D.P. from 2000 to 2010. The second chart depicts the fraction of year-to-year changes in G.D.P. accounted for by year-to-year changes in national health spending, a component of G.D.P. In that chart, no column is shown for 2009, because from 2008 to 2009 private investment plummeted by $421 billion and total G.D.P. fell by $353 billion, while health spending rose by $107 billion.

The health spending data in these charts comes from Table 1 of the Centers for Medicare and Medicaid Services publication “National Health Expenditures,” which provides national health spending data for the years plotted in the graph. The data on G.D.P. and fixed private investments come from the President’s Economic Report 2012, Tables B-1 and B-18.

It can be seen that total private investment fluctuates considerably over booms and busts. By contrast, health care spending remains fairly stable over time. It does tend to growth less rapidly in times of deep recessions, but it has not declined in the United States.

The next chart depicts the fraction of year-to-year changes in G.D.P. that is accounted for by year-to-year changes in national health spending, a component of G.D.P. In that chart, no column is shown for 2009, because from 2008 to 2009 private investment plummeted by $421 billion and total G.D.P. fell by $353 billion while health spending rose by $107 billion.

One must wonder what would have happened in the presidential elections of 2004 and 2012 if health care had not buoyed G.D.P. in the recession of 2000-1 and the recession that began in 2008.

One does not have to be a blind devotee of the Yale economist Ray Fair’s economic model of presidential elections, which relies on only a few variables to predict vote shares, to believe that one or both elections might have had different outcomes, even though both Presidents Bush and Obama inherited the recessions over which they presided.

Article source: http://economix.blogs.nytimes.com/2013/02/15/health-care-as-an-economic-stabilizer/?partner=rss&emc=rss