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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October 24, 2016
Is Wage Growth Accelerating?
The Atlanta Fed's Wage Growth Tracker came in at 3.6 percent in September, up from 3.3 percent in August and 3.4 percent in July, but the same as the 3.6 percent reading for June. By this measure, there are no obvious signs of an acceleration in wage growth for continuously employed workers during the last few months.
However, the headline wage growth tracker is a three month moving average of each month's median wage growth. Interestingly, for September, the median wage growth (using data that are not averaged, sometimes called "unsmoothed") was 4.2 percent, up from 3.6 percent in August, and the highest since late 2007. This pop in median wage growth can be seen in the following chart, which compares the median wage growth (smoothed using a three-month average) with the unsmoothed monthly median.
Even though this looks like a pretty large increase, the standard error on the difference between the unsmoothed August and September medians is also quite large at 0.5 percentage points. So the 0.6 percentage point difference in medians is not statistically significant—it could just as easily be sampling noise. But it is definitely something to keep an eye on going forward. As noted in a previous macroblog post, the correlation between the unemployment gap and the Wage Growth Tracker suggests that we should be seeing the wage growth tracker level off if the economy is stabilizing at full employment.
October 18, 2016
Unemployment Risk and Unions
A recent paper by the Economic Policy Institute (EPI) argues that increased unionization would have broad economic benefits and, in particular, could help improve the wage stagnation facing many lower-skilled workers. Yet union membership has been declining, down by about 3 million between 1983 and 2015, and membership is down 4.5 million in the private sector. (Union membership in the United States is discussed in this U.S. Bureau of Labor Statistics report and in this database, maintained by Barry Hirsch at Georgia State University.)
The overall membership decline in private-sector unions reflects a combination of lower employment in some traditionally unionized industries such as the steel and auto industries and lower unionization rates within industries. For example, the rate of unionization for goods-producing industries (largely manufacturing and construction) is down from 28 percent to 10 percent, and the rate in service-producing industries has declined from 11 percent to 6 percent. In contrast, union membership in the public sector has increased, mostly as a result of broad unionization among public safety, utility, and education occupations coupled with the fact that employment in these occupations has tended to grow over time.
For goods-producing industries in particular, unionized employment is down by about 4.2 million since 1983, and nonunionized employment is up by around 2.5 million. Many factors may have contributed to this shift away from union membership. A possibility I explore here is the role of wage rigidity. In particular, if union wage contracts prevent employers from adjusting wages in the face of an unexpected decline in output demand, then employers may adjust along the employment margin instead. The monopoly power of unions leads to higher wages for continuously employed union workers but also makes layoffs more frequent.
It is the case that unionized workers tend to earn more than their nonunion counterparts. For 1983 to 2015, I estimate that prime-age union workers in goods-producing industries earn an average of about 25 percent more (on a median hourly basis) than comparable nonunion workers (about 50 percent more in construction and about 10 percent more in manufacturing). In addition, the median wage growth of union workers is less cyclically sensitive. The following chart uses the Atlanta Fed's Wage Growth Tracker data, and it shows the annual median wage growth of continuously employed prime-age workers in goods-producing industries, by union status.
Not only is wage growth among union workers less variable over time as the chart shows, research has noted that union wages are less dispersed—even controlling for differences in worker characteristics. Joining a union leads to wages that tend to be higher, wages that vary less across workers, and wage growth that responds less to changes in economic conditions.
But what about unemployment risk? Do union workers get laid off at a greater rate than nonunion workers? Using matched data from the Current Population Survey, the following chart shows an estimate of the probability that a prime-age worker in a goods producing industry is unemployed 12 months later, by union status.
The probability of unemployment rises during economic downturns for both union and nonunion workers, but is higher for union workers. The union worker displacement rate reached 13 percent in 2009 versus 8 percent for nonunion workers.
However, recall provisions are often built into collective bargaining agreements, so perhaps looking at the total unemployment flow overstates the permanent job loss risk. To investigate, the following chart shows the likelihood of being on temporary layoff (expected to be recalled within six months) versus indefinite (permanent) layoff.
The likelihood of being recalled by your previous employer is much higher for union than nonunion workers, whereas the incidence of permanent layoff is about the same for both types of worker.
Admittedly, I'm not controlling for all the things about workers and employers that could influence employment and wage outcomes. But taken at face value, it appears that the likelihood of permanent job loss is no greater for union workers in goods-producing industries than for nonunion workers. At the same time, union workers are more likely to experience a spell of temporary unemployment. I view this as some evidence in support of my wage rigidity story, which holds that unionized firms use layoffs more intensively because wages are less flexible (I find that this same result holds if I look at the manufacturing and construction industries separately). However, this mechanism itself isn't able to account for much of the secular decline in union participation. The decline seems to be more about where the jobs are created than where they are lost.
October 14, 2016
Cumulative U.S. Trade Deficits Resulting in Net Profits for the U.S. (and Net Losses for China)
The United States has run trade deficits for decades (1976 is the last year with a recorded surplus). To illustrate this, chart 1 depicts the cumulative U.S. trade deficit since 1980, which now surpasses $10 trillion. As a result, a drastic deterioration in the U.S. net foreign asset position—the difference between the amount of foreign assets owned by U.S. residents and the amount of U.S. assets owned by foreigners—has occurred. That is, as Americans borrow from the rest of the world to finance the recurring trade deficits, the national net worth goes deeply into the red. Not long ago, many commentators predicted that as a result of this increasing U.S. foreign debt, the U.S. dollar was set to collapse, which would trigger a stampede away from U.S. assets. Of course, this has not happened.
Much of the rising U.S. deficit is the by-product of deficits with one country in particular: China. Chart 2 shows that U.S. bilateral trade deficits with China have been growing steadily during these years. In 2015, the total U.S. goods trade deficit was about $762 billion, and the goods deficit with China alone made up nearly half of that total ($367 billion). This situation is not unique to the United States, as many countries find themselves in similar trade positions with China. During the last few decades, China has been running protracted trade surpluses with the rest of world and has accumulated a positive and sizeable net foreign asset position.
Yet, despite accumulating a positive and sizeable net foreign asset position, China is facing increasing losses in net income on its foreign assets. Put differently, China has been accumulating negative returns on its increasingly large portfolio of foreign assets. Chart 3 shows this observation, made in a paper by Eswar Prasad of Cornell University at a recent conference cosponsored by the Atlanta Fed and the International Monetary Fund.
The net income on foreign assets measures the return a nation receives from the foreign assets it owns minus the return paid on domestic assets held by foreigners. In sharp contrast to China, however, the U.S. international net financial income has remained positive and has even increased. This increase comes despite the fact that the United States has consistently run trade deficits, and its net foreign asset position has deteriorated. Chart 4 shows the U.S. income from foreign assets and foreigners' income on U.S. assets, which is reported as a negative number for this series because it is regarded as a liability for the United States. The difference between these amounts is depicted by the middle line, which shows the net foreign income of the United States.
How is this possible? Ricardo Hausmann (Harvard University) and Federico Sturzenegger (currently, the chairman of Central Bank of Argentina) came up with an explanation more than ten years ago: the United States gets a far higher return on its foreign assets than the other way around. Indeed, U.S. foreign direct investments (FDI) often generate a relatively high rate of return. In part, U.S. FDI are benefiting from business expertise, brand recognition, and research and development in new product and service lines. Comparatively, foreigners tend to earn substantially less return on the American assets they own. Foreigners often desire to hold their dollar assets in the form of safe, liquid assets, which—following the "low-risk, low-return" principle—have relatively low returns.
To see this, chart 5 shows the sources of the net financial income of the United States. The U.S. government net income is negative—mostly the by-product of interest payments in government debt held by foreigners. The U.S. gets most of its financial return from FDI. Although much has happened in the world economy during the last decade, the implications of Hausmann and Sturzenegger's analysis remain intact. In sum, the differential return from these foreign assets and liabilities appear to largely compensate for the trade deficits.
Eswar Prasad also showed that China is in a starkly different situation. Most of its foreign liabilities are in the form of FDI, while the vast majority of the foreign assets are reserve assets and foreign exchange reserves—not surprisingly, largely U.S. dollars and U.S. Treasury securities. The rate of return foreigners make on Chinese assets is around twice the rate of return China gets on its foreign assets.
This analysis suggests that focusing on a country's net foreign asset position conveys an incomplete picture of the profitability of foreign assets because it fails to account for the differences in rates of returns that countries earn on their foreign assets. Overall, the United States makes a sufficiently high return on foreign assets that it maintains positive net income on foreign assets. The situation is similar to role leverage in investing; debt can be profitable if you can devote it to purposes that earn a higher rate of return than your cost of borrowing it. Therefore, when viewed in terms of the net income earned on foreign assets the United States holds, the sizable U.S. trade deficits may not be as much of a concern as commonly thought.
October 05, 2016
The Slump in Undocumented Immigration to the United States
Immigration is a challenging and often controversial topic. We have written some on the economic benefits and costs associated with the inflows of low-skilled (possibly undocumented) immigrant workers into the United States here and here. In this macroblog post, we discuss some interesting trends in undocumented immigration.
There are no official records of undocumented immigration flows into the United States. However, one crude proxy for this flow is the number of apprehensions at the U.S. border. As pointed out in Hanson (2006), the number of individuals arrested when attempting to cross the U.S.-Mexico border, provided by the Department of Homeland Security (DHS), is likely to be positively correlated with the flows of attempted illegal border crossings (see chart 1).
The apprehensions series displays spikes that coincide with well-known episodes of increased illegal immigration into the United States, such as after the financial crisis in Mexico in 1995 or during the U.S. housing boom in the early 2000s. Importantly, the series also shows a sharp decline in the flows of illegal immigration at the U.S.-Mexico border during the last recession, and those flows have remained at historically low levels since then.
A better proxy for illegal immigration from Mexico would adjust the number of apprehensions for the intensity of U.S. border enforcement (for example, the number of border patrol officers). The intuition is straightforward: for the same level of attempted illegal crossings, greater enforcement is likely to result in more apprehensions. Chart 2 shows the border patrol staffing levels as an indicator of enforcement intensity.
As the chart shows, the sharp decrease in apprehensions after the Great Recession occurred despite a remarkable increase in border enforcement, indicating that the decline in migration flows in recent years may have been even more abrupt than implied by the (unadjusted) border apprehensions shown in chart 1.
The measure of inflows shown in chart 1 is largely consistent with estimates of the stock of undocumented immigrants in the United States, such as those provided by a new study by the Pew Research Center based on data from the U.S. Census Bureau. After having peaked at 12.2 million in 2007, the stock of unauthorized immigrants fell during the Great Recession and remained stable afterwards, most recently at 11.1 million in 2014. Also, the composition of this stock has shifted since the Great Recession. Although the population of undocumented Mexican immigrants fell by more than one million from its 6.9 million peak in 2007, the number of undocumented immigrants from Asia, Central America, and sub-Saharan Africa remained relatively steady as of 2014 and even increased in some cases. For example, the population of unauthorized immigrants from India rose by about 130,000 between 2009 and 2014. However, a lot of this type of unauthorized immigration is a result of overstayed visas rather than from people crossing the border without a visa.
What do these numbers suggest about the future? It is likely that the flows of undocumented immigrant labor between Mexico and the United States reflect differences in demographic patterns and economic opportunities between the two economies. In the United States, the baby boom came to an abrupt halt in the 1960s, causing a notable slowdown in the native-born labor supply two decades later. In contrast, Mexico's fertility rate remained high for much longer, hovering at 6.7 births per woman in 1970 versus 2.5 in the United States (see chart 3).
Mexico's labor force expanded rapidly during the 1980s, which, juxtaposed with the Mexican economic slump of the early 1980s, unleashed a wave of Mexican migration to the United States (Hanson and McIntosh, 2010). Also encouraging this flow was the steady U.S. economic growth during the "Great Moderation" period from the mid-1980s up through 2007 (Bernanke, 2004). More recently, however, Mexico's fertility rate has fallen (as in some Central American economies), and economic growth there has mostly outpaced that of the United States. Therefore, it is perhaps not too surprising that demographic trends—along with greater enforcement—have caused the inflows of undocumented migration at the U.S.-Mexico border to slow in recent years. Shifts in demographic and economic factors across countries are likely to continue to influence undocumented immigration in the United States.
Note: The views expressed here are those of the authors and do not necessarily reflect the views of the Federal Reserve Banks of Atlanta or Boston.
October 5, 2016 | Permalink
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- Are Small Loans Hard to Find? Evidence from the Federal Reserve Banks' Small Business Survey
- Slide into the Economic Driver's Seat with the Labor Market Sliders
- 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
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