Tag Archives: AEI

Many working-age males aren’t working: What should be done?

The steady disappearance of prime-age males (age 25-54) from the labor force has been occurring for decades and has recently become popular in policy circles. The prime-age male labor force participation rate began falling in the 1950s, and since January 1980 the percent of prime-age males not in the labor force has increased from 5.5% to 12.3%. In fact, since the economy started recovering from our latest recession in June 2009 the rate has increased by 1.3 percentage points.

The 12.3% of prime-age males not in the labor force nationwide masks substantial variation at the state level. The figure below shows the percentage of prime-age males not in the labor force—neither working nor looking for a job—by state in 2016 according to data from the Current Population Survey.

25-54 males NILF by state 2016

The lowest percentage was in Wyoming, where only 6.3% of prime males were out of the labor force. On the other end of the spectrum, over 20% of prime males were out of the labor force in West Virginia and Mississippi, a shocking number. Remember, prime-age males are generally not of school age and too young to retire, so the fact that one out of every five is not working or even looking for a job in some states is hard to fathom.

Several researchers have investigated the absence of these men from the labor force and there is some agreement on the cause. First, demand side factors play a role. The decline of manufacturing, traditionally a male dominated industry, reduced the demand for their labor. In a state like West Virginia, the decline of coal mining—another male dominated industry—has contributed as well.

Some of the most recent decline is due to less educated men dropping out as the demand for their skills continues to fall. Geographic mobility has also declined, so even when an adjacent state has a stronger labor market according to the figure above—for example West Virginia and Maryland—people aren’t moving to take advantage of it.

Of course, people lose jobs all the time yet most find another one. Moreover, if someone isn’t working, how do they support themselves? The long-term increase in female labor force participation has allowed some men to rely on their spouse for income. Other family members and friends may also help. There is also evidence that men are increasingly relying on government aid, such as disability insurance, to support themselves.

These last two reasons, relying on a family member’s income or government aid, are supply-side reasons, since they affect a person’s willingness to accept a job rather than the demand for a person’s labor. A report by Obama’s Council of Economic Advisors argued that supply-side reasons were only a small part of the decline in the prime-age male labor force participation rate and that the lack of demand was the real culprit:

“Reductions in labor supply—in other words, prime-age men choosing not to work for a given set of labor market conditions—explain relatively little of the long-run trend…In contrast, reductions in the demand for labor, especially for lower-skilled men, appear to be an important component of the decline in prime-age male labor force participation.”

Other researchers, however, are less convinced. For example, AEI’s Nicholas Eberstadt thinks that supply-side factors play a larger role than the CEA acknowledges and he discusses these in his book Men Without Work. One piece of evidence he notes is the different not-in-labor-force (NILF) rates of native born and foreign born prime-age males: Since one would think that structural demand shocks would affect both native and foreign-born alike, the difference indicates that some other factor may be at work.

In the figure below, I subtract the foreign born not-in-labor-force rate from the native born rate by state. A positive number means that native prime-age males are less likely to be in the labor force than foreign-born prime age males. (Note: Foreign born only means a person was born in a country other than the U.S.: It does not mean that the person is not a citizen at the time the data was collected.)

25-54 native, foreign NILF diff

As shown in the figure, natives are less likely to be in the labor force (positive bar) in 34 of the 51 areas (DC included). For example, in Texas the percent of native prime-age men not in the labor force is 12.9% and the percentage of foreign-born not in the labor force is 5.9%, a 7 percentage point gap, which is what’s displayed in the figure above.

The difference in the NILF rate between the two groups is also striking when broken down by education, as shown in the next figure.

25-54 native, foreign males NILF by educ

In 2016, natives with less than a high school degree were four times more likely to be out of the labor force than foreign born, while natives with a high school degree were twice as likely to be out of the labor force. The NILF rates for some college or a bachelor’s or more are similar.

Mr. Eberstadt attributes some of this difference to the increase in incarceration rates since the 1970s. The U.S. imprisons a higher percentage of its population than almost any other country and it is very difficult to find a job with an arrest record or a conviction.

There aren’t much data combining employment and criminal history so it is hard to know exactly how much of a role crime plays in the difference between the NILF rates by education. Mr. Eberstadt provides some evidence in his book that shows that men with an arrest or conviction are much more likely to be out of the labor force than similar men without, but it is not perfectly comparable to the usual BLS data. That being said, it is reasonable to think that the mass incarceration of native prime-age males, primarily those with little formal education, has created a large group of unemployable, and thus unemployed, men.

Is incarceration a supply or demand side issue? On one hand, people with a criminal record are not really in demand, so in that sense it’s a demand issue. On the other hand, crime is a choice in many instances—people may choose a life of crime over other, non-criminal professions because it pays a higher wage than other available options or it somehow provides them with a more fulfilling life (e.g. Tony Soprano). In this sense crime and any subsequent incarceration is the result of a supply-side choice. Drug use that results in incarceration could also be thought of this way. I will let the reader decide which is more relevant to the NILF rates of prime-age males.

Criminal justice reform in the sense of fewer arrests and incarcerations would likely improve the prime-age male LFP rate, but the results would take years to show up in the data since such reforms don’t help the many men who have already served their time and want to work but are unable to find a job. Reforms that make it easier for convicted felons to find work would offer more immediate help, and there has been some efforts in this area. How successful they will be remains to be seen.

Other state reforms such as less occupational licensing would make it easier for people— including those with criminal convictions—to enter certain professions. There are also several ideas floating around that would make it easier for people to move to areas with better labor markets, such as making it easier to transfer unemployment benefits across state lines.

More economic growth would alleviate much of the demand side issues, and tax reform and reducing regulation would help on this front.

But has something fundamentally changed the way some men view work? Would some, especially the younger ones, rather just live with their parents and play video games, as economist Erik Hurst argues? For those wanting to learn more about this issue, Mr. Eberstadt’s book is a good place to start.

Come learn about whether tax and expenditure limits work

A few years ago I did a study on state Tax and Expenditure Limits (TELs). These are state rules—written into statutes or constitutions—which are designed to arrest the growth of state spending. New Jersey was the first state to adopt a TEL in 1976, and now about 30 states have some variety of TEL.

As I explained in a Wall Street Journal OpEd at the time, though fiscal conservatives have spent decades championing TELs, “these laws may actually be doing more harm than good.” The problem is that the most common variety of TEL—one that limits spending to some share of residents’ income—actually leads to more spending in high-income states. Not all TELs have this feature and my research suggests that the details matter. I found that TELs that limit spending growth to the sum of inflation and population growth, for example, seem to arrest spending in both high and low income states.

Now, Bemjamin Zycher of the American Enterprise Institute has revisited the question with an interesting and provocative new paper that reaches an even more pessimistic conclusion that I did.

Come to AEI tomorrow at noon where I and others will be discussing Zycher’s paper. Other discussants include Nicholas Johnson of the Center on Budget and Policy Priorities and Michael New of the University of Michigan-Dearborn. The event will be moderated by Mark Perry of AEI and the University of Michigan-Flint.

It promises to be a fun and lively discussion. Details here.

Michael Greve on American federalism and pensions

In a recent series of blog posts (h/t Arnold Kling), Michael Greve of AEI discusses the parallels between current American federalism and the trajectory that Argentina followed last century. Essentially, decades of “cooperative federalism” and trillions in transfer payments from the federal government to the states has put us on the course of ruin. This long-running arrangement has set the stage for the $4.5 trillion in unfunded pension liabilities owed to public workers, Obamacare, and ultimately an Argentinian future.

States rely on federal spending to implement the federal government’s policy agenda – most notably in the Medicaid program. Greve makes a provocative comparison: Medicaid is a “fiscal pact” similar to the arrangements between Argentina’s federal and state governments.

Federal transfers come with fiscal illusion. There is the incentive to overspend on the state level. And indeed we have seen the greatest growth in government on the state and local level since the post World War II period.

When states end up in trouble they can reasonably expect a bailout from the feds (ARRA is not the first bailout, nor is it likely to be the last). But what happens when both parties are broke?  Might pension liabilities accruing in the states be filled in with a soft bailout (e.g. an education spending package which can be applied to pay for benefits).  Alternatively, we might see an Argentinian-inspired solution: roll the pension obligations of troubled states into a federal corporation. In Argentina’s experience the federal pension corporation found itself with obligations several times larger than projected leading to a devaluation of the payout to retirees.

This is just one potential scenario. But, Greve’s main point is well taken. For reformers (of all ideological persuasions) who insist block grants will restore federalism‘s balance of power and fiscal discipline, think again. “Devolution” was much talked about in the 1990s as a means of restoring federalism but as implemented, it did nothing of the sort. The transfers keep coming just in different forms. Greve’s (Buchanan-based analysis) concludes it is not that cooperative federalism is broken, it has never been tried. 

Hearing tomorrow on state and municipal debt

The House Committee on Oversight and Government Reform will hold a hearing tomorrow on state and muncipal debt. Witnesses include Governor Scott Walker of Wisconsin, Robert Novy-Marx of the University of Rochester, Andrew Biggs of AEI, Mark Mix of the Right to Work Legal Defense Foundation, and Desmond Lachman of AEI. The hearing is sceduled for 9:30 AM and will be broadcast on C-SPAN.

Hearing on Public Sector Compensation

Andrew Biggs of AEI presented testimony on his recent research with Jason Richwine on public sector compensation. They estimate federal workers receive a 14 percent salary premium and a 23 percent benefits premium compared with workers in the private sector, for an overall premium of 39 percent, or $60 billion annually. Their analysis controls for skills and experience by comparing federal workers with their counterparts in the private sector. As they authors state, federal compensation is neither “obscenely generous nor does it leave federal workers substantially underpaid.” By paying federal workers the same as their private sector counterparts, there are are some savings to be found. But as Andrew notes, finding the premium is easier than fixing it. Market flexibility would permit adjustments – raising salaries when demand for the position is low, and lowering salaries when the demand for the job is high.

 

 

The Failed State of Illinois

The Wall Street Journal has an interesting graph showing the divergent yield paths of debt issued by the states of Illinois and Pennsylvania (I’d reproduce it here but for fear of IP infringement).

The entire $2.8 trillion municipal bond market has been in decline for the last month and a half. As investors have grown increasingly skeptical of governments’ abilities to pay back their debts, they have been demanding higher yields (or, to think of it another way, they are only willing to buy bonds if they are priced at lower levels).

But as the Journal reports, investors seem to be increasingly differentiating between those states that are in bad fiscal shape and those that are in really bad fiscal shape.

Consider, for example, Pennsylvania. Thought to be in middling fiscal condition, that state pays 0.2 percentage points above what the broader market pays when it borrows. But compare this with Illinois. That famously fiscally-irresponsible state must now pay 1.9 percentage points more than what the broader market pays (a year ago, they paid less than 1 percentage point above the market). Of course, this is exactly the sort of dynamic that has done-in so many other governments: irresponsible spending makes lenders charge higher yields, adding to the cost of borrowing and further bloating the budget.

According to Northwestern University Professor Josh Rauh, Illinois’s pension system will be among one of the first to run dry.

This helps explain why, last June, Illinois’s debt surpassed that of California to become the most expensive in the nation to insure. It is now more expensive to insure Illinois’s debt than it is to insure Iraq’s debt!

At an event last week, AEI’s Michael Greve quipped:

Illinois is not a failing state. Iraq is a failing state; Illinois is a failed state.

The Economist on the U.S. Pension Crisis

This week’s Economist features a report on the crisis in U.S. state pensions, with special reference to New Jersey and the recent study authored by Andrew Biggs of AEI and myself. The piece begins with a view of the municipalities, in this case, San Jose, California which has seen its pension costs triple in the last ten years. San Jose offers workers its own muncipal plan and according to Robert Novy Marx and Joshua Rauh, their unfunded liability is about $4 billion, or 321% of the city’s 2006 revenues.

Underestimating the Pension Bomb’s Impact

Today’s Wall Street Journal discusses why both corporations and governments are sticking to “unrealistic return assumptions” in forecasting their pension liabilities. The majority of pension plans expect an 8 percent return and have clung to this expectation, “through thick and thin.” These estimates the WSJ notes are partly due to the high returns witnessed in the 1990s bull market years. Indeed over a 25 year period pension plans had an annualized median return of 9.3%. Over a 10 year period that fell to 3.9%.However, it’s not the number they’re selecting that matters, it’s the rationale.

Part of the difficulty of lowering the discount rate lies in what happens as a result. Reducing the discount rate increases the size of the  liability and the contribution needed to ensure adequate funds. That is one reason states are moving slowly. New York, New Jersey, and Colorado have all reduced their discount rates from the 8 percent to the 7 percent range.Virginia cut its investment return from 7.5% to 7 percent to avoid an even worse strategy – investing the funds in more risky assets to make up for losses.

The discount rate issue will continue to be a big challenge for government pension systems in part due to GASB’s guidance.

We will be discussing this and other issues facing state pension systems this Friday at Mercatus.  Speakers include myself, Dr. Andrew Biggs of AEI, Scott Pattison, Executive Director of the National Association of State Budget Officers, and Utah State Senator Dan Liljenquist. You can register for the event, or view it online.