Wednesday, June 26, 2013

No country for young men

WSJ ran a nice analytical piece about the jobless recovery yesterday.  Even though GDP continues to recover, the job market lags far behind.  The 7.6% unemployment understates the true degree of joblessness because it ignores the drop in labor force participation.  In the 1990s and 2000s, two-thirds of working age adults were in the labor force, meaning they were either working or looking for work.  Last month only 63.4% were in the labor force, a three point drop since the recession started.  Further, the labor force participation rate has kept dropping even as the unemployment rate improved. 

Labor force participation is dropping off for two reasons: (1) the first wave of baby boomers has hit retirement age and (2) a sharp drop in participation among workers under 25.  Part of the latter drop reflects increased school attendance, but a big chunk is due to lousy job market opportunities. 

A few more interesting details:
  • The layoff rate has returned to normal levels but the new hire rate is still well below what we have seen in earlier recoveries
  • We still have over 4m workers who have been unemployed 6 months or more and those workers have only a 10% chance of getting work in any given month
  • There are still 2.4m fewer jobs now than at the start of the Great Recession

Monday, June 24, 2013

Food prices and obesity

Fascinating study by three economists affiliated with NBER concerning how food prices are linked to obesity.  They looked at a national sample of 12 to 18-year-olds and examined how clinical measures of body mass index and percentage body fat related to food prices in their county.  The key findings were that
  1. Youths who lived in counties with expensive calories were less obese than those who lived in counties with inexpensive calories.  This applied to both calories associated with foods purchased to be consumed at home and calories purchased at fast-food restaurants (McDonald's, Pizza Hut and KFC, to be precise). 
  2. Obesity was lower in counties with inexpensive prices of fruits and vegetables than in those where fruits and vegetables were more expensive.
Over the last 30 years, food prices -- both overall and for fast-food in particular -- have been falling, making them a prime suspect as a cause of rising obesity.  Prices of fruits and vegetables have been rising, so this re-enforces the overall trend.  

Over the centuries, falling food prices have proven to be a blessing, freeing much of the world's population from the most fundamental concerns about subsistence.  This may no longer be true as our society adopts more sedentary lifestyles.  Expect to see more discussion of calorie taxes in the future, along with exercise credits. 

Saturday, June 22, 2013

Retirement savings incentives in Australia

The problems facing Social Security in the US are well known.  Australia has developed a retirement savings system that seems to be much more secure and it offers lessons for how we can get our system back on a solid footing.  Australia runs two systems, according to a recent BW article.  One is a means-tested system funded by taxpayers that provides benefits to 75% of those over 65.  The other is a mandatory retirement savings plan that requires 9 percent contributions to self-managed funds.  Workers have the option of saving more; some companies provide matches.  The result is that the aged have a safety net, while individuals create their own nest eggs. 

Wednesday, June 19, 2013

Has Daft Punk gotten lucky?

Alan Krueger, President Obama's chief economic advisor, generated some controversy last week when he gave a speech about economics at the Rock and Roll Hall of Fame.  Krueger, one of the few economists to have taken a careful look at the economics of rock and roll, shared some data that showed the richest rock stars are getting richer relative to their less fortunate competitors.  This is happening for a number of reasons, including technology, scale and globalization (see the speech transcript for details).

Krueger raised some eyebrows, however, when he brought up the subject of luck.
I said “best artists,” but I also could have added luckiest artists. Luck plays a major role in the rock ‘n roll industry. Success is hard to judge ahead of time, and definitely not guaranteed, even for the best performers. Tastes are fickle, and herd behavior often takes over.
Out of context, this sounds an awful lot like his boss's "You didn't build that" line from last summer, and way off the mark.  Groups like the Stones and U2 can generate huge box office yields whenever they tour; most economists would argue this has more to do with having a solid customer base than luck. 

The role of luck becomes more critical when one asks why some groups or songs are more successful in obtaining a customer following.  Reviews from rock critics are one way of measuring quality, but their perspective is not the same as the general public.  Critics have a lousy history of predicting commercial success and artists who get poor reviews often go on to become quite well known (e.g., Katy Perry, Justin Bieber). 

In our world of big data, research should now be possible to get better insights into how some acts can break into the big time (e.g., Taylor Swift, Kanye West) whereas others stay in the shadows (Deerhunter gets rave reviews, but you will not see them in any stadiums any time soon). 

Disclaimer: I have known Alan for almost 30 years and consider him one of the best labor economists around, although we do not see eye to eye on politics all the time. 

Tuesday, June 18, 2013

Panic in Detroit

The end game is nearing for Detroit's bondholders and retirees.  The city skipped a debt payment last Friday.   Retirees will face either sharply reduced benefits or whatever judgment they get from a bankruptcy court (for details, see these accounts in today's NYT and last week's WSJ), depending on how negotiations play out over the next 30 days.  

Look for the final outcome to result in a reassessment of the safety of municipal bonds overall, as well as the risk premium associated with different types of bonds.  Much of the debt is insured, good news for debtholders but not so good news for cities that will have to pay higher insurance premiums in the future.  As for the retirees, those 65 and over will have Medicare and the remainder will have Obamacare; both groups will have higher medical expenses and, in all likelihood, smaller pension checks. 

It took decades for Detroit to get into this mess and it will take a long time for it to work through any solution.  The city's population and tax base have shriveled; crime rates remain high and large swaths of the city have been abandoned.  Public employee unions focused on the present and ignored the inevitable future.  The state of Michigan has provided some assistance but it is politically naive to expect that to continue forever; as Detroit has shrunk, so too has its political clout.

This is what happens when governments allow public services to deteriorate and rely on excessive borrowing over prolonged periods.  Do not expect Detroit to be the last chapter in this story; other cities and some states will experience the same thing. 

Sunday, June 16, 2013

More college graduates entering labor market

Most stories about higher education in the media focus on rising cost and spiraling debt.  Here's a new twist -- recent data show that more young Americans are completing college than ever before, according to NYT.  To economists this is not surprising for two reasons.  First, despite the attention given to tuition and fees, the biggest cost of college for most young people is lost earnings.  Time allocated to school is time that could have been allocated to a job.  In a down economy, the lower odds of getting full time employment reduce the lost earnings cost of school attendance. 

Second, the economic gap between those with college degrees and everyone else remains massive.  The best paying jobs continue to require college degrees.  Recently, many customer-facing jobs that do not require college skills for the actual tasks involved (think hotel desk clerk) nonetheless require college degrees because employers believe that college graduates have better communication and organizational skills.  Growing use of information technology and statistical quality control also is driving the trend. 

A continued increase in college attendance and completion rates would result in an increase in GDP and productivity, as well as a reduction in income inequality as the supply of low skill labor shrinks relative to that of highly skilled labor.  In other words, a win-win for the economy!

Saturday, June 15, 2013

WP's Samuelson on farm subsidies

WP columnist Robert Samuelson bemoans the looming passage of another massive, wasteful farm bill.  Despite the federal budget crunch, expect taxpayers to continue to pay $15-20b each year.  Samuelson points out why this policy no longer makes any sense.  Almost all of the subsidies go to mega-farms; the days of the small family farm are over.

Sure, farming is risky, but not exceptionally so.  Resort properties depend on good weather to make money and no serious person would suggest that we need a federal program to protect them from extreme weather.  Further, farmers can use options to hedge their risk.

Money quote:
The survival of farm subsidies is emblematic of a larger problem: Government is biased toward the past. Old programs, tax breaks and regulatory practices develop strong constituencies and mindsets that frustrate change, even when earlier justifications for their existence have been overtaken by events.

Wednesday, June 5, 2013

Entrepreneurship on the wane?

Yesterday's WSJ ran a front page piece citing economic evidence that risk-taking and entrepreneurship are on the wane in the U.S.  The article cites four trends: (1) companies are very slow to add new positions, (2) investors have not been putting as much money into new ventures,  (3) fewer businesses are starting up, and (4) workers are less likely to quit their job or relocate. 

Putting all this together, the implication is that the supply side of the economy now reacts to new opportunities much more sluggishly.  This could help explain why the recovery has been so slow. 

Saturday, June 1, 2013

Tom Friedman's take on "How to Get a Job"

Great NYT column this week on the changing job market.  Employers continue to be swamped with applications but have difficulty finding people who are ready to add value.  Colleges are not preparing students with many of the skills they will need to be successful in the workplace.  Demands for Excel expertise have ramped up a lot (better know how to "Pivot Tables"), as have the more traditional issues associated with writing and speaking.  Employers are developing their own tests to determine if applicants have the skills they really need AND know how to apply those skills. 

Friedman's advice:

People get rejected for jobs for two main reasons, said Sharef. One, “you’re not showing the employer how you will help them add value,” and, two, “you don’t know what you want, and it comes through because you have not learned the skills that are needed.” The most successful job candidates, she added, are “inventors and solution-finders,” who are relentlessly “entrepreneurial” because they understand that many employers today don’t care about your résumé, degree or how you got your knowledge, but only what you can do and what you can continuously reinvent yourself to do.