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April 02, 2015
What Seems to Be Holding Back Labor Productivity Growth, and Why It Matters
The Atlanta Fed recently released its online Annual Report. In his video introduction to the report, President Dennis Lockhart explained that the economic growth we have experienced in recent years has been driven much more by growth in hours worked (primarily due to employment growth) than by growth in the output produced per hour worked (so-called average labor productivity). For example, over the past three years, business sector output growth averaged close to 3 percent a year. Labor productivity growth accounted for only about 0.75 percentage point of these output gains. The rest was due primarily to growth in employment.
The recent performance of labor productivity stands in stark contrast to historical experience. Business sector labor productivity growth averaged 1.4 percent over the past 10 years. This is well below the labor productivity gains of 3 percent a year experienced during the information technology productivity boom from the mid-1990s through the mid-2000s.
John Fernald and collaborators at the San Francisco Fed have decomposed labor productivity growth into some economically relevant components. The decomposition can be used to provide some insight into why labor productivity growth has been so low recently. The four factors in the decomposition are:
- Changes in the composition of the workforce (labor quality), weighted by labor's share of income
- Changes in the amount and type of capital per hour that workers have to use (capital deepening), weighted by capital's share of income
- Changes in the cyclical intensity of utilization of labor and capital resources (utilization)
- Everything else—all the drivers of labor productivity growth that are not embodied in the other factors. This component is often called total factor productivity.
The chart below displays the decomposition of labor productivity for various time periods. The bar at the far right is for the last three years (the next bar is for the past 10 years). The colored segments in each bar sum to average annual labor productivity growth for each time period.
Taken at face value, the chart suggests that a primary reason for the sluggish average labor productivity growth we have seen over the past three years is that capital spending growth has not kept up with growth in hours worked—a reduction in capital deepening. Declining capital deepening is highly unusual.
Do we think this sluggishness will persist? No. In our medium-term outlook, we at the Atlanta Fed expect that factors that have held down labor productivity growth (particularly relatively weak capital spending) will dissipate as confidence in the economy improves further and firms increase the pace of investment spending, including on various types of equipment and intellectual capital. We currently anticipate that the trend in business sector labor productivity growth will improve to a level of about 2 percent a year, midway between the current pace and the pace experienced during the 1995–2004 period of strong productivity gains. That is, we are not productivity pessimists. Time will tell, of course.
Clearly, this optimistic labor productivity outlook is not without risk. For one thing, we have been somewhat surprised that labor productivity has remained so low for so long during the economic recovery. Moreover, the first quarter data don't suggest that a turning point has occurred. Gross domestic product (GDP) in the first quarter is likely to come in on the weak side (the latest GDPNow tracking estimate here is currently signaling essentially no GDP growth in the first quarter), whereas employment growth is likely to be quite robust (for example, the ADP employment report suggested solid employment gains). As a result, we anticipate another weak reading for labor productivity in the first quarter. We are not taking this as refutation of our medium-term outlook.
Continued weakness in labor productivity would raise many important questions about the outlook for both economic growth and wage and price inflation. For example, our forecast of stronger productivity gains also implies a similarly sized pickup in hourly wage growth. To see this, note that unit labor cost (the wage bill per unit of output) is thought to be an important factor in business pricing decisions. The following chart shows a decomposition of average growth in business sector unit labor costs into the part due to nominal hourly wage growth and the part offset by labor productivity growth:
The 1975–84 period experienced high unit labor costs because labor productivity growth didn't keep up with wage growth. In contrast, the relatively low and stable average unit labor cost growth we have experienced since the 1980s has been due to wage growth largely offset by gains in labor productivity. Our forecast of stronger labor productivity growth implies faster wage growth as well. That said, a rise in wage growth absent a pickup in labor productivity growth poses an upside risk to our inflation outlook.
Of course, the data on productivity and its components are estimates. It is possible that the data are not accurately reflecting reality in real time. For example, colleagues at the Board of Governors suggest that measurement issues associated with the price of high-tech equipment may be causing business investment to be somewhat understated. That is, capital deepening may not be as weak as the current data indicate. In a follow-up blog to this one, my Atlanta Fed colleague Patrick Higgins will explore the possibility that the weak labor productivity we have recently experienced is likely to be revised away with subsequent revisions to GDP and hours data.
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March 06, 2015
Signs of Improvement in Prime-Age Labor Force Participation
This morning's job report provided further evidence of a stabilizing labor force participation (LFP) rate. After falling over 3 percentage points since 2008, LFP has been close to 62.9 percent of the population for the past seven months. Although demographics and behavioral trends explain much of the overall decline (our web page on LFP dynamics gives a full account), there is a cyclical component at work as well. In particular, the labor force attachment of "prime-age" (25 to 54 year olds) individuals to the labor force is something we're watching closely. Federal Reserve Bank of Atlanta President Dennis Lockhart noted as much in a February 6 speech:
Over the last few years, there has been a worrisome outflow of prime-age workers—especially men—from the labor force. I believe some of these people will be enticed back into formal work arrangements if the economy improves further.
There are signs that some of the prime-age individuals who had retreated to the margins of the labor market have been flowing back into the formal labor market.For one thing, LFP among prime-age individuals stopped declining 16 months ago for women and nine months ago for men. By our estimates, declining LFP in this age category accounts for about one-third of the overall decline in LFP since 2007, so 25- to 54-year-olds' decision to engage in the labor market has a big effect on the overall rate (see the chart). Even with an improving economy, however, a turnaround in LFP among prime-age individuals might not occur.
The reason an improving economy might not reverse the LFP trends is that LFP for both prime-age men and women had been on a longer-term downward trend even before the recession began, suggesting that factors other than the recession-induced decline in labor demand have been important. But the decline in the "shadow labor force"—the share of the prime-age population who say they want a job but are not technically counted as unemployed—demonstrates the cyclical nature of the labor market. For the last year and half, the share of these individuals in the labor force has been generally declining (see the chart).
Moreover, the job-finding success of the shadow labor force has improved. Although the 12-month flow into the official labor force has remained reasonably close to 50 percent, the likelihood of flowing into unemployment (as opposed to employment) rose during the recession. But during the past two years, that trend appears to be reversing (see the chart).
The ability of the prime-age shadow labor force to find work is improving at the same time that the LFP rate of the prime-age population is stabilizing. Taken together, this trend is consistent with improving job market opportunities and further absorption of the nation's slack labor resources.For a more complete analysis of long-term behavioral and demographic effects on LFP for the prime-age and non-prime-age populations, see our Labor Force Participation Dynamics web page, which now includes 2014 data.
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November 20, 2014
For Middle-Skill Occupations, Where Have All the Workers Gone?
Considerable discussion in recent years has concerned the “hollowing out of the middle class.” Part of that story revolves around the loss of the types of jobs that traditionally have been the core of the U.S. economy: so-called middle-skill jobs.
These jobs, based on the methodology of David Autor, consist of office and administrative occupations; sales jobs; operators, fabricators, and laborers; and production, craft, and repair personnel (many of whom work in the manufacturing industry). In this post, we don't examine why the decline in middle-skill jobs has occurred, just how those workers have weathered the most recent recession. But our Atlanta Fed colleague Federico Mandelman offers an explanation of why this has occurred.
So how have workers in middle-skill occupations fared during the last recession and recovery? Let's examine a few facts from the Current Population Survey from the U.S. Bureau of Labor Statistics.
Only employment in middle-skill occupations remains below prerecession levels
Chart 1 shows employment levels by skill category (using 12-month moving averages to smooth out the seasonal variation). From the end of 2007 to the end of 2009, the overall number of people working declined by more than 8 million. Middle-skill jobs were hit the hardest, declining about 10 percent from 2007 to 2009. As of September 2014, the level was still about 9 percent below the 2007 level. In contrast, employment in low-skill occupations is 7 percent above prerecession levels, and employment in high-skill occupations is about 8 percent higher than before the recession.
For full-time workers (working at least 35 hours a week at all jobs) the decline in middle-skill occupations is even more dramatic. From 2007 to 2009, the number of full-time workers whose main job was a middle-skill occupation fell more than 15 percent from 2007 to 2009 and is still about 11 percent below the level at the end of 2007.
Those in middle-skilled occupations were most likely to become unemployed
In the 2001 recession, the chances of being unemployed after one year were similar for those working full-time in middle- and low-skill occupations. During the most recent recession, the likelihood of becoming unemployed rose sharply for everyone, but much more sharply for those working in middle-skill occupations. At the recession's trough, almost 6 percent of people who were employed in middle-skill occupations one year earlier were unemployed, compared with about 3 percent of workers in high-skill occupations and 3.5 percent of workers in lower-skill occupations (see chart 2).
Underemployment has improved only slowly at all skill levels
The share of people who are working part-time involuntarily about doubled for workers in low-, middle-, and high-skill occupations. For middle-skill occupations, the share rose from around 1.7 percent to 4.3 percent and is currently around 2.4 percent. For low-skill occupations, involuntary part-time employment increased from 2.4 percent to 5 percent and was still 3.8 percent as of September 2014. And for those in high-skill occupations, the chances of becoming involuntarily part-time rose from 0.8 percent to 1.8 percent and are now back to about 1 percent (see chart 3).
Ready for some good news?
Those who held middle-skill jobs are more likely to obtain high-skill jobs than before the recession
Currently, of those in middle-skill occupations who remain in a full-time job, about 83 percent are still working in a middle-skill job one year later (see chart 4). What types of jobs are the other 17 percent getting? Mostly high-skill jobs; and that transition rate has been rising. The percent going from a middle-skill job to a high-skill job is close to 13 percent: up about 1 percent relative to before the recession. The percent transitioning into low-skill positions is lower: about 3.4 percent, up about 0.3 percentage point compared to before the recession. This transition to a high-skill occupation tends to translate to an average wage increase of about 27 percent (compared to those who stayed in middle-skill jobs). In contrast, those who transition into lower-skill occupations earned an average of around 24 percent less.
In summary, the number of middle-skill jobs declined substantially during the last recession, and that decline has been persistent—especially for full-time workers. Many of the workers leaving full-time, middle-skill jobs became unemployed, and some of that decline is the result of an increase in part-time employment. But others gained full-time work in other types of occupations. In particular, they are more likely than in the past to transition to higher-skill occupations. Further, the transition rate to high-skill occupations has gradually risen and doesn't appear directly tied to the last recession.
Authors' note: The middle-skill category of jobs consists of office and administrative occupations; sales; operators, fabricators, and laborers; and production, craft, and repair personnel. The other two broad categories of occupations are labeled high-skill and low-skill. High-skill occupations consist of managers, technicians, and professionals. Low-skill occupations are defined as those involving food preparation, building and grounds cleaning, personal care and personal services, and protective services.
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August 12, 2014
Are We There Yet?
Editor’s note: This macroblog post was published yesterday with some content inadvertently omitted. Below is the complete post. We apologize for the error.
Anyone who has undertaken a long road trip with children will be familiar with the frequent “are we there yet?” chorus from the back seat. So, too, it might seem on the long post-2007 monetary policy road trip. When will the economy finally look like it is satisfying the Federal Open Market Committee’s (FOMC) dual mandate of price stability and full employment? The answer varies somewhat across the FOMC participants. The difference in perspectives on the distance still to travel is implicit in the range of implied liftoff dates for the FOMC’s short-term interest-rate tool in the Summary of Economic Projections (SEP).
So how might we go about assessing how close the economy truly is to meeting the FOMC’s objectives of price stability and full employment? In a speech on July 17, President James Bullard of the St. Louis Fed laid out a straightforward approach, as outlined in a press release accompanying the speech:
To measure the distance of the economy from the FOMC’s goals, Bullard used a simple function that depends on the distance of inflation from the FOMC’s long-run target and on the distance of the unemployment rate from its long-run average. This version puts equal weight on inflation and unemployment and is sometimes used to evaluate various policy options, Bullard explained.
We think that President Bullard’s quadratic-loss-function approach is a reasonable one. Chart 1 shows what you get using this approach, assuming a goal of year-over-year personal consumption expenditure inflation at 2 percent, and the headline U-3 measure of the unemployment rate at 5.4 percent. (As the U.S. Bureau of Labor Statistics defines unemployment, U-3 measures the total unemployed as a percent of the labor force.) This rate is about the midpoint of the central tendency of the FOMC’s longer-run estimate for unemployment from the June SEP.
Notice that the policy objective gap increased dramatically during the recession, but is currently at a low value that’s close to precrisis levels. On this basis, the economy has been on a long, uncomfortable trip but is getting pretty close to home. But other drivers of the monetary policy minivan may be assessing how far there is still to travel using an alternate road map to chart 1. For example, Atlanta Fed President Dennis Lockhart has highlighted the role of involuntary part-time work as a signal of slack that is not captured in the U-3 unemployment rate measure. Indeed, the last FOMC statement noted that
Labor market conditions improved, with the unemployment rate declining further. However, a range of labor market indicators suggests that there remains significant underutilization of labor resources.
So, although acknowledging the decline in U-3, the Committee is also suggesting that other labor market indicators may suggest somewhat greater residual slack in the labor market. For example, suppose we used the broader U-6 measure to compute the distance left to travel based on President Bullard’s formula. The U-6 unemployment measure counts individuals who are marginally attached to the labor force as unemployed and, importantly, also counts involuntarily part-time workers as unemployed. One simple way to incorporate the U-6 gap is to compute the average difference between U-6 and U-3 prior to 2007 (excluding the 2001 recession), which was 3.9 percent, and add that to the U-3 longer-run estimate of 5.4 percent, to give an estimate of the longer-run U-6 rate of 9.3 percent. Chart 2 shows what you get if you run the numbers through President Bullard’s formula using this U-6 adjustment (scaling the U-6 gap by the ratio of the U-3 and U-6 steady-state estimates to put it on a U-3 basis).
What the chart says is that, up until about four years ago, it didn’t really matter at all what your preferred measure of labor market slack was; they told a similar story because they tracked each other pretty closely. But currently, your view of how close monetary policy is to its goals depends quite a bit on whether you are a fan of U-3 or of U-6—or of something in between. I think you can put the Atlanta Fed’s current position as being in that “in-between” camp, or at least not yet willing to tell the kids that home is just around the corner.
In an interview last week with the Wall Street Journal, President Lockhart effectively put some distance between his own view and those who see the economy as being close to full employment. The Journal’s Real Time Economics blog quoted Lockhart:
“I’m not ruling out” the idea the Fed may need to raise short-term interest rates earlier than many now expect, Mr. Lockhart said in an interview with The Wall Street Journal. But, at the same time, “I’m a little bit cautious” about the policy outlook, and still expect that when the first interest rate hike comes, it will likely happen somewhere in the second half of next year.
“I remain one who is looking for further validation that we are on a track that is going to make the path to our mandate objectives pretty irreversible,” Mr. Lockhart said. “It’s premature, even with the good numbers that have come in ... to draw the conclusion that we are clearly on that positive path,” he said.
Mr. Lockhart said the current unemployment rate of 6.2% will likely continue to decline and tick under 6% by the end of the year. But, he said, there remains evidence of underlying softness in the job sector, and, he also said, while inflation shows signs of firming, it remains under the Fed’s official 2% target.
Our view is that the current monetary policy journey has made considerable progress toward its objectives. But the trip is not yet complete, and the road ahead remains potentially bumpy. In the meantime, I recommend these road-trip sing-along selections.
By John Robertson, a vice president and senior economist in the Atlanta Fed’s research department
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July 18, 2014
Part-Time for Economic Reasons: A Cross-Industry Comparison
With employment trends having turned solidly positive in recent months, attention has focused on the quality of the jobs created. See, for example, the different perspectives of Mortimer Zuckerman in the Wall Street Journal and Derek Thompson in the Atlantic. Zuckerman highlights the persistently elevated level of part-time employment—a legacy of the cutbacks firms made during the recession—whereas Thompson points out that most employment growth on net since the end of the recession has come in the form of full-time jobs.
In measuring labor market slack, the part-time issue boils down to how much of the elevated level of part-time employment represents underutilized labor resources. The U-6 measure of unemployment, produced by the U.S. Bureau of Labor Statistics, counts as unemployed people who say they want to and are able to work a full-time schedule but are working part-time because of slack work or business conditions, or because they could find only part-time work. These individuals are usually referred to as working part-time for economic reasons (PTER). Other part-time workers are classified as working part-time for non-economic reasons (PTNER). Policymakers have been talking a lot about U-6 recently. See for example, here and here.
The "lollipop" chart below sheds some light on the diversity of the share of employment that is PTER and PTNER across industries. The "lolly" end of the lollipop denotes the average mix of employment that is PTER and PTNER in 2013 within each industry, and the size of the lolly represents the size of the industry. The bottom of the "stem" of each lollipop is the average PTER/PTNER mix in 2007. The red square lollipop is the percent of all employment that is PTER and PTNER for the United States as a whole. (Note that the industry classification is based on the worker's main job. Part-time is defined as less than 35 hours a week.)
The primary takeaways from the chart are:
- The percent of the workforce that is part time varies greatly across industries (compare for example, durable goods manufacturing with restaurants).
- All industries have a greater share of PTNER workers than PTER workers (for example, the restaurant industry in 2013 had 32 percent of workers who said they were PTNER and about 13 percent who declared themselves as PTER).
- All industries had a greater share of PTER workers in 2013 than in 2007 (all the lollipops point upwards).
- Most industries have a lower share of PTNER workers than in the past (most of the lollipops lean to the left).
- Most industries have a greater share of part-time workers (PTER + PTNER) than in the past (the increase in PTER exceeds the decline in PTNER for most industries).
Another fact that is a bit harder to see from this chart is that in 2007, industries with the largest part-time workforces did not necessarily have the largest PTER workforces. In 2013, it was more common for a large part-time workforce to be associated with a large PTER workforce. In other words, the growth in part-time worker utilization in industries such as restaurants and some segments of retail has bought with it more people who are working part-time involuntarily.
So the increase in PTER since 2007 is widespread. But is that a secular trend? If it is, then the increase in the PTER share would be evident since the recession as well. The next lollipop chart presents evidence by comparing 2013 with 2012:
This chart shows a recent general improvement. In fact, 25 of the 36 industries pictured in the chart above have experienced a decline in the share of PTER, and 21 of the 36 have a smaller portion working part-time in total. Exceptions are concentrated in retail, an industry that represents a large share of employment. In total, 20 percent of people are employed in industries that experienced an increase in PTER from 2012 to 2013. So while overall there has been a fairly widespread (but modest) recent improvement in the situation, the percent of the workforce working part-time for economic reasons remains elevated compared with 2007 for all industries. Further, many people are employed in industries that are still experiencing gains in the share that is PTER.
Why has the PTER share continued to increase for some industries? Are people who normally work full-time jobs still grasping those part-time retail jobs until something else becomes available, has there been a shift in the use of part-time workers in those industries, or is there a greater demand for full-time jobs than before the recession? We'll keep digging.
By John Robertson, a vice president and senior economist, and
Ellyn Terry, a senior economic analyst, both of the Atlanta Fed's research department
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June 20, 2014
The Wrong Question?
Just before Wednesday's confirmation from Fed Chairwoman Janet Yellen that the Federal Open Market Committee (FOMC) does indeed still see slack in the labor market, Jon Hilsenrath and Victoria McGrane posted a Wall Street Journal article calling notice to the state of debate:
Nearly four-fifths of those who became long-term unemployed during the worst period of the downturn have since migrated to the fringes of the job market, a recent study shows, rarely seeking work, taking part-time posts or bouncing between unsteady jobs. Only one in five, according to the study, has returned to lasting full-time work since 2008.
Deliberations over the nature of the long-term unemployed are particularly lively within the Federal Reserve.... Fed officials face a conundrum: Should they keep trying to spur economic growth and hiring by holding short-term interest rates near zero, or will those low rates eventually spark inflation without helping those long out of work?
The article goes on to provide a nice summary of the ongoing back-and-forth among economists on whether the key determinant of slack in the labor market is the long-term unemployed or the short-term unemployed. Included in that summary, checking in on the side of "both," is research by Chris Smith at the Federal Reserve Board of Governors.
We are fans of Smith's work, but think that the Wall Street Journal summary buries its own lede by focusing on the long-term/short-term unemployment distinction rather than on what we think is the more important part of the story: In Hilsenrath and McGrane's words, those "taking part-time posts."
We are specifically talking about the group officially designated as part-time for economic reasons (PTER). This is the group of people in the U.S. Bureau of Labor Statistics' Household Survey who report they worked less than 35 hours in the reference week due to an economic reason such as slack work or business conditions.
We have previously noted that the long-term unemployed have been disproportionately landing in PTER jobs. We have also previously argued that PTER emerges as a key negative influence on earnings over the course of the recovery, and remains so (at least as of the end of 2013). For reference, here is a chart describing the decomposition from our previous post (which corrects a small error in the data definitions):
Our conclusion, clearly identified in the chart, was that short-term unemployment and PTER have been statistically responsible for the tepid growth in wages over the course of the recovery. What's more, as short-term unemployment has effectively returned to prerecession levels, PTER has increasingly become the dominant negative influence.
Our analysis was methodologically similar to Smith's—his work and the work represented in our previous post were both based on annual state-level microdata from the Current Population Survey, for example. They were not exactly comparable, however, because of different wage variables—Smith used the median wage while we use a composition-adjusted weighted average—and different regression controls.
Here is what we get when we impose the coefficient estimates from Smith's work into our attempt to replicate his wage definition:
Some results change. The unemployment variables, short-term or long-term, no longer show up as a drag in wage growth. The group of workers designated as "discouraged" do appear to be pulling down wage growth and in ways that are distinct from the larger group of marginally attached. (That is in contrast to arguments some of us have previously made in macroblog that looked at the propensity of the marginally attached to find employment.)
It is not unusual to see results flip around a bit in statistical work as this or that variable is changed, or as the structure of the empirical specifications is tweaked. It is a robustness issue that should always be acknowledged. But what does appear to emerge as a consistent negative influence on wage growth? PTER.
None of this means that the short-term/long-term unemployment debate is unimportant. The statistics are not strong enough for us to be ruling things out categorically. Furthermore, that debate has raised some really interesting questions, such as Glenn Rudebusch and John Williams's recent suggestion that the definition of economic slack relevant for the FOMC's employment mandate may be different from the definition appropriate to the FOMC's price stability mandate.
Our message is pretty simple and modest, but we think important. Whatever your definition of slack, it really ought to include PTER. If not, you are probably asking the wrong question.
By Dave Altig, executive vice president and research director, and
Pat Higgins, a senior economist, both of the Atlanta Fed's research department
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June 09, 2014
Looking Beyond the Job-Finding Rate: The Difficulty of Finding Full-Time Work
Despite Friday´s report of a further solid increase in payroll employment, the utilization picture for the official labor force remains mixed. The rate of short-term and long-term unemployment as well as the share of the labor force working part time who want to work full time (a cohort also referred to as working part time for economic reasons, or PTER) rose during the recession.
The short-term unemployment rate has since returned to levels experienced before the recession. In contrast, longer-term unemployment and involuntary part-time work have declined, but both remain well above prerecession levels (see the chart).
Some of the postrecession decline in the short-term unemployment rate has not resulted from the short-term unemployed finding a job, but rather the opposite—they failed to get a job and became longer-term unemployed. Before the recession, the number of unemployed workers who said they had been looking for a job for more than half a year accounted for about 18 percent of unemployed workers. Currently, that share is close to 36 percent.
Moreover, job finding by unemployed workers might not completely reflect a decline in the amount of slack labor resources if some want full-time work but only find part-time work (that is, are working PTER). In this post, we investigate the ability of the unemployed to become fully employed relative to their experience before the Great Recession.
The job-finding rate of unemployed workers (the share of unemployed who are employed the following month) generally decreases toward zero with the length of the unemployment spell. Job-finding rates fell for all durations of unemployment in the recession.
Since the end of the recession, job-finding rates have improved, especially for shorter-term unemployed, but remain well below prerecession levels. The overall job-finding rate stood at close to 28 percent in 2007 and was about 20 percent for the first four months of 2014. The chart below shows the job-finding rates for select years by unemployment duration:
What about the jobs that the unemployed find? Most unemployed workers want to work full-time hours (at least 35 hours a week). In 2007, around 75 percent of job finders wanted full-time work and either got full-time work or worked PTER (the remainder worked part time for noneconomic reasons). For the first four months of 2014, the share wanting full-time work was also about 75 percent. But the portion of job finders wanting full-time work and only finding part-time work increased from about 22 percent in 2007 to almost 30 percent in 2014, and this job-finding underutilization share has become especially high for the longer-term unemployed.
The chart below displays the job-finding underutilization share for select years by unemployment duration. (You can also read further analysis of PTER dynamics by our colleagues at the Federal Reserve Board of Governors.)
Finding a job is one thing, but finding a satisfactory job is another. Since the end of the recession, the number of unemployed has declined, thanks in part to a gradually improving rate of job finding. But the job-finding rate is still relatively low, and the ability of an unemployed job seeker who wants to work full-time to actually find full-time work remains a significant challenge.
John Robertson, a vice president and senior economist and
Ellyn Terry, a senior economic analyst, both of the Atlanta Fed's research department
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June 02, 2014
How Discouraged Are the Marginally Attached?
Of the many statistical barometers of the U.S. economy that we monitor here at the Atlanta Fed, there are few that we await more eagerly than the monthly report on employment conditions. The May 2014 edition arrives this week and, like many others, we will be more interested in the underlying details than in the headline job growth or unemployment numbers.
One of those underlying details—the state of the pool of “discouraged” workers (or, maybe more precisely, potential workers)—garnered special attention lately in the wake of the relatively dramatic decline in the ranks of the official labor force, a decline depicted in the April employment survey from the U.S. Bureau of Labor Statistics. That attention included some notable commentary from Federal Reserve officials.
Federal Reserve Bank of New York President William Dudley, for example, recently suggested that a sizeable part of the decline in labor force participation since 2007 can be tied to discouraged workers exiting the workforce. This suggestion follows related comments from Federal Reserve Chair Janet Yellen in her press conference following the March meeting of the Federal Open Market Committee:
So I have talked in the past about indicators I like to watch or I think that are relevant in assessing the labor market. In addition to the standard unemployment rate, I certainly look at broader measures of unemployment… Of course, I watch discouraged and marginally attached workers… it may be that as the economy begins to strengthen, we could see labor force participation flatten out for a time as discouraged workers start moving back into the labor market. And so that's something I'm watching closely.
What may not be fully appreciated by those not steeped in the details of the employment statistics is that discouraged workers are actually a subset of “marginally attached” workers. Among the marginally attached—individuals who have actively sought employment within the most recent 12-month period but not during the most recent month—are indeed those who report that they are out of the labor force because they are discouraged. But the marginally attached also include those who have not recently sought work because of family responsibilities, school attendance, poor health, or other reasons.
In fact, most of the marginally attached are not classified (via self-reporting) as discouraged (see the chart):
At the St. Louis Fed, B. Ravikumar and Lin Shao recently published a report containing some detailed analysis of discouraged workers and their relationship to the labor force and the unemployment rate. As Ravikumar and Shao note,
Since discouraged workers are not actively searching for a job, they are considered nonparticipants in the labor market—that is, they are neither counted as unemployed nor included in the labor force.
More importantly, the authors point out that they tend to reenter the labor force at relatively high rates:
Since December 2007, on average, roughly 40 percent of discouraged workers reenter the labor force every month.
Therefore, it seems appropriate to count some fraction of the jobless population designated as discouraged (and out of the labor force) as among the officially unemployed.
We believe this logic should be extended to the entire group of marginally attached. As we've pointed out in the past, the marginally attached group as a whole also has a roughly 40 percent transition rate into the labor force. Even though more of the marginally attached are discouraged today than before the recession, the changing distribution has not affected the overall transition rate of the marginally attached into the labor force.
In fact, in terms of the propensity to flow into employment or officially measured unemployment, there is little to distinguish the discouraged from those who are marginally attached but who have other reasons for not recently seeking a job (see the chart):
What we take from these data is that, as a first pass, when we are talking about discouraged workers' attachment to the labor market, we are talking more generally about the marginally attached. And vice versa. Any differences in the demographic characteristics between discouraged and nondiscouraged marginally attached workers do not seem to materially affect their relative labor market attachment and ability to find work.
Sometimes labels matter. But in the case of discouraged marginally attached workers versus the nondiscouraged marginally attached workers—not so much.
By Dave Altig, executive vice president and research director,
John Robertson, a vice president and senior economist, and
Ellyn Terry, a senior economic analyst, all of the Atlanta Fed's research department
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May 09, 2014
How Has Disability Affected Labor Force Participation?
Editor's note: Since this post was written, we have developed new tools for examining labor market trends. For a more detailed examination of factors affecting labor force participation rates, please visit our Labor Force Participation Dynamics web page, where you can create your own charts and download data.
You might be unaware that May is Disability Insurance Awareness Month. We weren’t aware of it until recently, but the issue of disability—as a reason for nonparticipation in the labor market—has been very much on our minds as of late. As we noted in a previous macroblog post, from the fourth quarter of 2007 through the end of 2013, the number of people claiming to be out of the labor force for reasons of illness or disability increased almost 3 million (or 23 percent). The previous post also noted that the incidence of reported nonparticipation as a result of disability/illness is concentrated (unsurprisingly) in the age group from about 51 to 60.
In the past, we have examined the effects of the aging U.S. population on the labor force participation rate (LFPR). However, we have not yet specifically considered how much the aging of the population alone is responsible for the aforementioned increase in disability as a reason for dropping out of the labor force.
The following chart depicts over time the percent (by age group) reporting disability or illness as a reason for not participating in the labor force. Each line represents a different year, with the darkest line being 2013. The chart reveals a long-term trend of rising disability or illness as a reason for labor force nonparticipation for almost every age group.
The chart also shows that disability or illness is cited most often among people 51 to 65 years old—the current age of a large segment of the baby boomer cohort. In fact, the proportion of people in this age group increased from 20 percent in 2003 to 25 percent in 2013.
How much can the change in demographics during the past decade explain the rise in disability or illness as a reason for not participating in the labor market? The answer seems to be: Not a lot.
Following an approach you may have seen in this post, we break down into three components the change in the portion of people not participating in the labor force due to disability or illness. One component measures the change resulting from shifts within age groups (the within effect). Another component measures changes due to population shifts across age groups (the between effect). A third component allows for correlation across the two effects (a covariance term). Here’s what you get:
To recap, only about one fifth of the decline in labor force participation as a result of reported illness or disability can be attributed to the population aging per se. A full three quarters appears to be associated with some sort of behavioral change.
What is the source of this behavioral change? Our experiment can’t say. But given that those who drop out of the labor force for reasons of disability/illness tend not to return, it would be worth finding out. Here is one perspective on the issue.
You can find even more on this topic via the Human Capital Compendium.
By Dave Altig, research director and executive vice president at the Atlanta Fed, and
Ellyn Terry, a senior economic analyst in the Atlanta Fed's research department
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April 17, 2014
Using State-Level Data to Estimate How Labor Market Slack Affects Wages
At a recent speech in Miami, Atlanta Fed President Dennis Lockhart had this to say:
Wage growth by most measures has been very low. I take this as a signal of labor market weakness, and in turn a signal of a lack of significant upward unit cost pressure on inflation.
This macroblog post examines whether the data support this assertion (answer: yes) and whether wage inflation is more sensitive to some measures of labor underutilization than other measures (answer: apparently, yes). San Francisco Fed President John Williams touched on the latter topic in a recent speech (emphasis mine):
We generally look at the overall unemployment rate as a good yardstick of labor market slack and inflation pressures. However, its usefulness may be compromised today by the extraordinary number of long-term unemployed—defined as those out of the workforce for six months or longer... Standard models of inflation typically do not distinguish between the short- and long-term unemployed, because they're assumed to affect wage and price inflation in the same way. However, recent research suggests that the level of long-term unemployment may not influence inflation pressures to the same degree as short-term unemployment.
And Fed Chair Janet Yellen said this at her March 19 press conference:
With respect to the issue of short-term unemployment and its being more relevant for inflation and a better measure of the labor market, I've seen research along those lines. I think it would be tremendously premature to adopt any notion that says that that is an accurate read on either how inflation is determined or what constitutes slack in the labor market.
The research to which President Williams refers are papers by economists Robert Gordon and Mark Watson, respectively. (For further evidence, see this draft by Princeton economists Alan Krueger, Judd Cramer and David Cho.)
The analysis here builds on this research by broadening the measures of labor underutilization beyond the short-term and long-term unemployment rates that add up to the standard unemployment rate called U-3. The U-5 underutilization measure includes both conventional unemployment and "marginally attached workers" who are not in the labor force but who want a job and have actively looked in the past year. The difference between U-5 and U-3 is a very close proxy for the number of marginally attached relative to the size of the labor force.
U-6 encompasses U-5 as well as those who work less than 35 hours for an economic reason. The difference between U-6 and U-5 is a very close proxy for the share of "part-time for economic reason" workers in the labor force. These nonoverlapping measures of labor underutilization rates are all shown in the chart below.
The series are highly correlated, making it difficult to isolate the impact of any particular labor underutilization rate on wage inflation (e.g., "How much will wage inflation change if the short-term unemployment rate rises 1.0 percentage point, holding all of the underutilization measures in the above figure constant?").
We follow the approach of Staiger, Stock, and Watson (2001) by using state-level data to relate wage inflation to unemployment in a so-called "wage-Phillips curve." Because the 2007–09 recession hit some states harder than others, we can use the cross-sectional variation in outcomes across states to arrive at more precise estimates of the separate impacts of the labor underutilization measures on wage inflation (see the chart).
Five-year state-level wage inflation rates for 2008–13, using monthly Current Population Survey(CPS) microdata, are shown on the vertical axis. The CPS microdata are also used to construct all of the labor underutilization measures. Each circle represents an individual state (red for long-term unemployment and blue for short-term unemployment), and each circle's area is proportional to the state's population share. Two noteworthy states are pointed out for illustration. North Dakota has had lower unemployment and (much) higher wage inflation than the other states (presumably because of its energy boom). And California has had higher unemployment and (somewhat) lower wage inflation than average. Even after excluding North Dakota, we see a clear negative relationship between wage inflation and underutilization measured with either short-term or long-term unemployment.
Because short-term and long-term unemployment are highly correlated (also apparent in the above plot), one can't tell visually if one underutilization measure is more important for wage inflation than the other. To make this assessment, we need to estimate a regression. The regression—which also includes both U-5 minus U-3 and U-6 minus U-5—adjusts wages for changes in the composition of the workforce. This composition adjustment, also made by Staiger, Stock and Watson (2001), controls for the fact that lower-skilled workers tend to be laid off at a disproportionately higher rate during recessions, thereby putting upward pressure on wages. The regression also weights observations by population shares.
The regression estimates imply that short-term unemployment is the most important determinant of wage inflation while U-6 minus U-5—the proxy for "part-time for economic reason" workers—also has a statistically significant impact. The other two labor underutilization measures do not affect wage inflation statistically different from zero. Rather than provide regression coefficients, we decompose observed U.S. wage inflation for 1995–2013 into contributions from the labor underutilization measures, workforce composition changes, and everything else (see the chart).
Both short-term unemployment and workers who are part-time for economic reasons have pushed down wage inflation. But the "part-time for economic reason" impact has become relatively more important recently because of the stubbornly slow decline in undesired part-time employment.
By Pat Higgins, a senior economist in the Atlanta Fed's research department
Editor’s note: Upon request, the programming code used in this macroblog post is available from the author.
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