Still lots of prime age men without jobs

Last week's WSJ has a long front page story on a trend that needs to be getting more attention: the steady decline in the percentage of 25 to 54 year old men who are jobless.  Here are the facts: in the early 1970s only 6% were jobless, a percentage that increased to 13% in 2007 just before the Great Recession.  The jobless rate peaked at 20% in 2009 and now sits at 17%.

There are a few partial explanations: more students attending graduate school, a higher incarceration rate and a larger percentage on disability (although the direction of causality on the latter is far from clear; are more people getting sick or injured or have disability claims have risen because of poor job prospects?).  Another possible culprit is declining inflation-adjusted wages.  Prime age men do not usually qualify for income maintenance programs other than disability.

So what to these idle men do all day?

Surveys find that most of the jobless spend their days in the same way working men spend their weekends -- watching TV, working out, sleeping.  

The story then goes in depth into the situations of four different men.  In each case there is a common thread: initially in a job that is a good fit with their training and experience, each experienced a layoff over the last few years and was unable to get any traction in the job market afterwards.

Do private equity buyouts destroy more jobs than they create?

Fascinating new NBER working paper by a team of economists that includes Chicago Booth's Steve Davis and Harvard's Josh Lerner.  They put together a data set of 3200 firms and 150,000 operating establishments that were targets and match them to comparable establishments (to serve as a control group).  In the establishments that were taken over, employment fell by 6 percent more over five years after the buyout compared to the control group.  Job losses were concentrated in retail and service sectors.

Sounds like the answer is yes.  But wait.  The authors then ask about the creation of new establishments and find that buyout targets were more likely to open new ventures than the controls.  Once this is taken into account, the net job loss becomes less than 1 percent.

The study also looks at the process of job creation and destruction in the target and control firms and finds that the overall churn level is 13% higher in the target firms.  This is consistent with the "creative destruction" theory of Austrian economist Joseph Schumpeter, who in essence argued that you have to break some eggs to make an omelet.

Lazear on the job market blues

Former Harvard classmate and chief Bush 43 economic advisor Ed Lazear has a WSJ op-ed this week that takes a more careful look at the job market.  Most news reports focus on the change in employment from month to month, which is mistakenly interpreted as the number of new jobs (if employment has increased) or the number of jobs eliminated (if employment has decreased).  Actually millions of jobs are created and destroyed each month.  Lazear notes that employers hired four million workers in February 2009, a time when the labor market was thought to be in the deep freeze.  Guess how many workers were hired in March 2011?  Four million!  Employment grew by 200,000 two months ago because there were 3.8 million job separations (layoffs or quits).  Employment plummeted by 700,000 in February 2009 because there were 4.7 million separations.

For the job market to get healthy, Lazear estimates we need to have hiring return to the pace of 2006 and 2007 of 5.5 million jobs per month.  With 13.7 million unemployed workers, it will be hard to bring unemployment down without a sharp uptick in hiring.

Reich on the jobs picture

And it is not pretty. The former Secretary of Labor and current professor of public policy at Cal-Berkeley wrote a stimulating (as usual) WSJ op-ed piece yesterday which made the following key points: (1) the March jobs report was not all that great because it was skewed upward by Census jobs; (2) it is hard to see where future jobs growth is coming from given households' heavy debt burdens, declining home values and tight credit conditions; (3) the Great Recession has accelerated outsourcing and substituting computer capital for labor; and (4) many job seekers will have to settle for much lower wages than they were expecting.

Long term impact of Great Recession

Stimulating read in this month's Atlantic by Don Peck regarding the impact the Great Recession is likely to have on labor markets and society. Points that I find hard to argue: (1) there will be a permanent loss of jobs in finance and construction; (2) there are big concerns about the environment for innovation; (3) young adults face a permanent reduction in lifetime earnings; (4) men are likely to become more marginalized; and (5) some communities that were in good shape as late as 2007 will be in very bad shape soon. All of these points are backed by interviews with researchers who know their stuff. However, Peck ends the article by making an emotional plea for more government spending (and higher taxes if necessary) to create more jobs; no interviews with experts to be seen.

Two reports on how labor markets are changing

From an employee perspective, not for the better. Although there is evidence that output grew in the third quarter, firms are in no hurry to start hiring again. There are a number of factors behind this: some firms will raise hours per person to economize on training costs and employee benefits; others will emphasize increased efficiency; many have concerns about the duration and strength of the upturn; and no small number are worried about the potential outcomes in Congress with respect to health insurance regulation (can we stop using the word reform here?) and cap-and-trade. A recent WSJ article reports on how various firms are responding; the good news locally is that Cree is adding 275 positions. The article also has some interesting ideas about service innovation at the Sheraton Maui.

Obama's chief economics advisor Larry Summers developed a theory of long term unemployment called hysteresis back in the days when he was a Harvard economics professor. In a nutshell, this theory says that the longer a person stays out of work, the lower the odds become that he/she will ever work again as skills become outdated and the work ethic deteriorates. Summers used this theory to explain the persistently high unemployment rates observed in most European countries in the 1990s. Could the US be looking at the same situation in the 2010s?

Another recent WSJ article reports on how the recession might have permanent effects on the relationships between employers and workers. We all know about firms (including state government) that have cut health benefits, reduced contributions to retirement plans, and eliminated other benefits such as employee education. Some companies and governments have reduced pay. In economic terms, employers appear to be taking steps to make labor more of a variable cost than a quasi-fixed cost. Hiring caution, benefit cuts, more contingent pay and lower salaries -- as one Unisys engineer was quoted "You've got to take care of yourself."

My take: the answer depends on the overall state of the labor market. If there is a robust recovery, then labor shortages will develop and employers will have to adjust. Remember -- employers instituted health, retirement and education benefits for two reasons: to attract and retain talent and to provide some tax-free compensation. But if the labor market gets a bad case of hysteresis, to paraphrase Bette Davis in All About Eve: "Fasten your seat belts, it's going to be a bumpy ride."

Beyond the classroom basics on tariffs

Today my students in MBA 505 will be handing in an assignment where one of the problems asks them to explain the effects of a hypothetical tariff on textiles. Now they are getting the opportunity to witness the economic and political impact of a real tariff -- the one imposed by the Obama administration over the weekend on Chinese tire imports. In my previous post I emphasized the impact on consumers, which reflects our in-class discussion. That analysis assumes the US passes a tariff and nothing else happens.

Today's NYT reports that China has responded with its own tariffs on American tires and chicken. This creates an additional cost with the impact being felt primarily by American producers. With world trade talks coming up plus the usual tensions over Iran and North Korea plus the fact that China buys a lot of Treasury debt, one has to wonder about more than the simple economics.

Economic research has shown that trade tensions were a major contributing factor to the duration and severity of the Great Depression. After a financial market meltdown (admittedly one much worse than the one we have been experiencing), the economy took a further hit as the US and its trading partners used tariffs to "protect" jobs. With the recent fall in the dollar, exports are poised to be a big contributor to economic recovery. Don't expect auto and chicken sales to China to lead the way.

Need tires soon? Buy now before tariff kicks in!

Today's NYT reports that the US has imposed a tariff of 35 percent on Chinese tire imports. It goes into effect September 26. The article gloats about how this is a great victory for the United Steelworkers Union. Absolutely no mention on the impact on consumers or tire retailers (who opposed the tariff). And will it really save any jobs? Unlikely for two reasons: (1) China is not the only country that exports tires to the US and (2) US tire manufacturers will continue to outsource jobs to other countries.

Today's jobs report

I am back in the office after a couple of weeks off. There is some relatively good news in today's jobs report: the unemployment rate in July dropped from 9.5 to 9.4 percent. Although employment declined by 247,000 in July, this is well below expectations and far below the 443,000 number for June. (Aside: the press always labels the employment decline as "jobs lost." This is incorrect. Every month new jobs are created and existing positions vanish. The number reported is the net change in employment.)

Today's report provides further evidence that the economy is beginning to recover. Historically, employment growth lags behind output growth. So even if GDP grows by 2 or 3 percent for the rest of the year, we probably should not expect anything dramatic for employment until 2010. Uncertainty about possible healthcare mandates is likely to provide an additional drag on labor market recovery. Companies that do not currently provide health insurance are well aware that the price of labor may increase by 10 percent in the next few months. Demand curves slope down.