The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.
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April 19, 2017
The Fed’s Inflation Goal: What Does the Public Know?
The Federal Open Market Committee (FOMC) has had an explicit inflation target of 2 percent since January 25, 2012. In its statement announcing the target, the FOMC said, "Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances."
If communicating this goal to the public enhances the effectiveness of monetary policy, one natural question is whether the public is aware of this 2 percent target. We've posed this question a few times to our Business Inflation Expectations Panel, which is a set of roughly 450 private, nonfarm firms in the Southeast. These firms range in size from large corporations to owner operators.
Last week, we asked them again. Specifically, the question is:
What annual rate of inflation do you think the Federal Reserve is aiming for over the long run?
Unsurprisingly, to us at least—and maybe to you if you're a regular macroblog reader—the typical respondent answered 2 percent (the same answer our panel gave us in 2015 and back in 2011). At a minimum, southeastern firms appear to have gotten and retained the message.
So, why the blog post? Careful Fed watchers noticed the inclusion of a modifier to describe the 2 percent objective in the March 2017 FOMC statement (emphasis added): "The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal." And especially eagle-eyed Fed watchers will remember that the Committee amended its statement of longer-run goals in January 2016, clarifying that its inflation objective is indeed symmetric.
The idea behind a symmetric inflation target is that the central bank views both overshooting and falling short of the 2 percent target as equally bad. As then Minneapolis Fed President Kocherlakota stated in 2014, "Without symmetry, inflation might spend considerably more time below 2 percent than above 2 percent. Inflation persistently below the 2 percent target could create doubts in households and businesses about whether the FOMC is truly aiming for 2 percent inflation, or some lower number."
Do such doubts actually exist? In a follow-up to our question about the numerical target, in the latest survey we asked our panel whether they thought the Fed was more, less, or equally likely to tolerate inflation below or above its targe. The following chart depicts the responses.
One in five respondents believes the Federal Reserve is more likely to accept inflation above its target, while nearly 40 percent believe it is more likely to accept inflation below its target. Twenty-five percent of firms believe the Federal Reserve is equally likely to accept inflation above or below its target. The remainder of respondents were unsure. This pattern was similar across firm sizes and industries.
In other words, more firms see the inflation target as a threshold (or ceiling) that the Fed is averse to crossing than see it as a symmetric target.
Lately, various Committee members (here, here, and in Chair Yellen's latest press conference at the 42-minute mark) have discussed the symmetry about the Committee's inflation target. Our evidence suggests that the message may not have quite sunk in yet.
April 11, 2017
Going to School on Labor Force Participation
In the aftermath of the Great Recession, labor force attachment declined. However, that pattern has been reversing itself lately. In particular, the labor force participation rate (LFPR) of the prime-age (25 to 54 years old) population, the core segment of the workforce, has been moving higher since late 2015. While this is good news, the prime-age LFPR remains well below prerecession levels, meaning that there are more than two million fewer prime-age people participating in the labor force. What factors have contributed to that decline? Where did those people go?
The Atlanta Fed LFP dynamics web page has an interactive tool that allows users to drill down into the drivers of the change in LFPR. The tool breaks the change in LFPR into two parts. The first part is the effect of shifts in the share of the population in different age groups (we use five-year age groups). The second part is the change attributable to shifts in the rate of nonparticipation. Using a methodology described here, we can drill deeper into the second part to learn more about the reasons for not participating in the labor force.
The U.S. Census Bureau will make the first quarter 2017 microdata on the reasons for nonparticipation available in a few weeks, so the following chart shows a decomposition of the 1.8 percentage point decline in the prime-age LFPR (not seasonally adjusted) between the fourth quarters of 2007 and 2016.
In this chart, "residual" pertains to the part of the total change in the LFPR that is attributable to the simultaneous shifts in both age-group population shares and age-group participation rates. In the present case, the residual is zero.
Because we are examining changes in prime-age participation, and all age groups within prime-age have reasonably similar participation rates, a change in the composition of ages tends to have little impact on the overall prime-age LFPR. Instead, the decline is due to shifts in the nonparticipation rate within age groups (the orange bar). In particular, the decline could indicate an increased likelihood of being in school, having family responsibilities that prevent participation, being in the shadow labor force (wanting a job but not actively looking), and a disability or poor health.
Although all these factors put downward pressure on participation, an important countervailing influence is that the education level of the population has been rising over time, and participation tends to increase with more education. In 2007, 41.0 percent of the prime-age population had a college degree, and they had an 88.3 percent participation rate versus 79.5 percent participation for those without a degree. By the end of 2016, the fraction with a degree had increased to 47.3 percent, and that cohort's participation rate had declined 1 percentage point, to 87.3 percent, versus a drop of 3.5 percentage points, to 76.0 percent, for those without a degree.
To see the importance of rising education on participation, the following chart shows the decomposition of the 1.8 percentage point decline in prime-age LFPR based on education-group population shares (degree and nondegree) instead of age-group shares.
In this chart, "residual" indicates the part of the total change in LFPR due to the simultaneous shifts in both education-group population shares and education-group participation rates.
As the chart shows, the shift in the education distribution of the prime-age population from 2007 to 2016 by itself would have increased the prime-age participation rate by about 0.7 percentage points (the green bar). Conversely, if education levels had not increased then the participation rate would have decreased by even more than it actually did. The nonparticipation effect would be larger for most nonparticipation reasons and especially for reasons of disability or poor health (−0.8 percentage points versus −0.5 percentage points). See the charts and analysis in the "health problems" section of the Labor Force Dynamics web page for more information on health-related nonparticipation by education.
Despite some partial reversal over the last year and a half, the prime-age LFPR is still lower than it had been prior to the recession. However, the decline in participation could have been even larger if the education level of the population had not also increased. Rising education is associated with a lower incidence of nonparticipation than otherwise would be the case, and it's principally associated with less nonparticipation attributable to disability or poor health. While researchers agree on the positive association between education and health, pinning down the specific reasons for this remains somewhat elusive. Factors such as income, informational, and occupational differences—as well as public policy choices—all play a role. Recent research by Nobel laureate Angus Deaton and Anne Case suggests that both education and racial differences are important considerations—emphasizing the sharply rising incidence of health problems among middle-age, white families with lower levels of education—and this Washington Post article highlights rising disability rates in rural America.
March 30, 2017
Bad Debt Is Bad for Your Health
The amount of debt held by U.S. households grew steadily during the 2000s, with some leveling off after the recession. However, the level of debt remains elevated relative to the turn of the century, a fact easily seen by examining changes in debt held by individuals from 2000 to 2015 (the blue line in the chart below).
Not only is the amount of debt elevated for U.S. households, but the proportion of delinquent household debt has also fluctuated significantly, as the red line in the above chart depicts.
The amount of debt that is severely delinquent (90 days or more past due) peaked during the last recession and remains above prerecession levels. The Federal Reserve Bank of New York reports these measures of financial health quarterly.
In a recent working paper, we demonstrate a potential causal link between these fluctuations in delinquency and mortality. (A recent Atlanta Fed podcast episode also discussed our findings.) By isolating unanticipated variations in debt and delinquency not caused by worsening health, we show that carrying debt—and delinquent debt in particular—has an adverse effect on mortality rates.
Our results suggest that the decline in the quality of debt portfolios during the Great Recession was associated with an additional 5.7 deaths per 100,000 people, or just over 12,000 additional deaths each year during the worst part of the recession (a calculation based on census population estimates found here). To put this rate in perspective, in 2014 the death rate from homicides was 5.0 per 100,000 people, and motor vehicle accidents caused 10.7 deaths per 100,000 people.
It is well understood that an individual experiencing a large and unexpected decline in health can encounter financial difficulties, and that this sort of event is a major cause of personal bankruptcy. Our findings suggest that significant unexpected financial problems can themselves lead to worse health outcomes. This link between delinquent debt and health outcomes provides more reason for public policy discussions to take seriously the nexus between financial well-being and public health.
March 20, 2017
Working for Yourself, Some of the Time
Self-employment as a person's primary labor market activity has become much less commonplace in the United States (for example, see the analysis here and here ). This is a potentially important development, as less self-employment may indicate a decline in overall labor market mobility, business dynamism, and entrepreneurial activity (for example, see the evidence and arguments outlined here ).
Recessions can be particularly bad for self-employment, with reduced opportunities for potential business entrants as well as greater difficulty in keeping an existing business going (see here for some evidence on this). However, the rate of self-employment has been drifting lower over a long period, suggesting other factors are also playing a role in the decision to enter and exit self-employment.
One especially troubling development is the decline in the rate of self-employment for those in high-skill service providing jobs (management, professional, and technical services)—the people you might expect to be particularly entrepreneurial. For example, for workers aged 25 to 54 years old, the self-employment rate has declined from 13 percent in 1996 to 9 percent in 2016, and for those 55 years of age or older, the rate has dropped from 27 percent to 19 percent (using data from the Current Population Survey).
Not only are people in high-skill service jobs less likely to be self-employed than in the past, those who are self-employed are also less likely to be working full-time. The fraction usually working full-time has decreased from about 79 percent in 1996 to 74 percent in 2016. (The full-time rate for comparable private sector wage and salary earners has remained relatively stable at around 88 percent.) One possible explanation for the decline in hours worked is the last recession's lingering effects, which made it harder to generate enough work to maintain full-time hours. Another possibility is that more of the self-employed are choosing to work part-time.
It turns out that both explanations have played a role. The following chart shows the percent of part-time self-employment in high-skill service jobs. The blue lines are for unincorporated businesses and the green lines are for incorporated businesses. In order to distinguish cyclical and noncyclical effects, the chart shows the part-time rate for those who want to work full-time but aren't because of slack business conditions or their inability to find more work (part-time for economic reasons, or PTER), and those who work part-time for other reasons (part-time for noneconomic reasons, or PTNER).
In the chart, I classify someone as self-employed when that person's main job is working for profit or fees in his or her own business (and hence it does not capture people whose primary employment is a wage and salary job but are also working for themselves on the side). The self-employed could be sole proprietors or own their business in partnership with others, and the business may assume any of several legal forms, including incorporation. The chart pertains to the private sector, excluding agriculture, and part-time is usually working less than 35 hours a week.
On the cyclical side, the PTER rates (the dotted lines) rose during the last recession and have been slowly moving back toward prerecession levels as the economy has strengthened. In contrast, the PTNER rates (the solid lines) have moved higher since the end of the recession, continuing a longer-term trend. Choosing to work part-time has been playing an increasingly important role in reducing full-time self-employment in high-skill jobs. Note that there is not an obvious long-term trend toward greater PTNER for those self-employed in middle- or low-skill jobs (not shown).
Shifting demographics is one important factor contributing to the decline in average hours worked. In particular, the PTNER rate for older self-employed is much higher than for younger self-employed, and older workers are a growing share of part-time self-employed, a fact that reflects the aging of the workforce overall. (For more on the self-employment of older individuals, see here .) The net result is a rise in the fraction of self-employed choosing to work part-time. The higher rate of PTNER for the older self-employed appears to be mostly because of issues specific to retirement, such as working fewer hours to avoid exceeding social security limits on earnings.
The last recession and a relatively tepid economic recovery reduced the hours that some self-employed people have been able to work because of economic conditions. However, there has also been a longer-term reduction in how many hours other self-employed people (especially those in occupations requiring greater education and generating greater hourly earnings) choose to work. This increased propensity to work only part-time in their business is another factor weighing on overall entrepreneurial activity.
- The Fed’s Inflation Goal: What Does the Public Know?
- Going to School on Labor Force Participation
- Bad Debt Is Bad for Your Health
- Working for Yourself, Some of the Time
- Gauging Firm Optimism in a Time of Transition
- Can Tight Labor Markets Inhibit Investment Growth?
- More Ways to Watch Wages
- Unemployment versus Underemployment: Assessing Labor Market Slack
- Does a High-Pressure Labor Market Bring Long-Term Benefits?
- Net Exports Continue to Bedevil GDPNow
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