Tag Archives: LFP

Manufacturing employment and the prime-age male LFP rate: What’s the relationship?

Recently I wrote about the decline in the U.S. prime-age male labor force participation (LFP) rate and discussed some of the factors that may have caused it. One of the demand-side factors that many people think played a role is the decline in manufacturing employment in the United States.

Manufacturing has typically been a male-dominated industry, especially for males with less formal education, but increases in automation and productivity have resulted in fewer manufacturing jobs in the United States over time. As manufacturing jobs disappeared, the story goes, so did a lot of economic opportunities for working-age men. The result has been men leaving the labor force.

However, the same decline in manufacturing employment occurred in other countries as well, yet many of them experienced much smaller declines in their prime-age male LFP rates. The table below shows the percent of employment in manufacturing in 1990 and 2012 for 10 OECD countries, as well as their 25 to 54 male LFP rates in 1990 and 2012. The manufacturing data come from the FRED website and the LFP data are from the OECD data site. The ten countries included here were chosen based on data availability and I think they provide a sample that can be reasonably compared to the United States.

country 25-54 LFP rate, manuf table

As shown in the table, all of the countries experienced a decline in manufacturing employment and labor force participation over this time period. Thus America was not unique in this regard.

But when changes in both variables are plotted on the same graph, the story that the decline in manufacturing employment caused the drop in male LFP rate doesn’t really hold up.

country 25-54 LFP rate, manuf scatter plot

The percentage point change in manufacturing employment is across the top on the x-axis and the percentage point change in the prime-age male LFP rate is on the y-axis. As shown in the graph the relationship between the two is negative in this sample, and the change in manufacturing employment explains almost 36% of the variation in LFP rate declines (the coefficient on the decline in manufacturing employment is -0.322 and the p-value is 0.08).

In other words, the countries that experienced the biggest drops in manufacturing employment experienced the smallest drops in their LFP rate, which is the opposite of what we would expect if the decline in manufacturing employment played a big role in the decline of the LFP rate across countries.

Of course, correlation does not mean causation and I find it hard to believe that declines in manufacturing employment actually improved LFP rates, all else equal. But I also think the less manufacturing, less labor force participation story is too simple, and this data supports that view.

America and Italy experienced similar declines in their male LFP rates but neither experienced the largest declines in manufacturing employment over this time period. What else is going on in America that caused its LFP decline to more closely resemble Italy’s than that of Canada, Australia and the UK, which are more similar to America along many dimensions?

Whatever the exact reasons are, it appears that American working-age males responded differently to the decline in manufacturing employment over the last 20 + years than similar males in similar countries. This could be due to our higher incarceration rate, the way our social safety net is constructed, differences between education systems, the strength of the economy overall or a number of other factors. But attributing the bulk of the blame to the decline of manufacturing employment doesn’t seem appropriate.

More labor market freedom means more labor force participation

The U.S. labor force participation (LFP) rate has yet to bounce back to its pre-recession level. Some of the decline is due to retiring baby-boomers but even the prime-age LFP rate, which only counts people age 25 – 54 and thus less affected by retirement, has not recovered.

Economists and government officials are concerned about the weak recovery in labor force participation. A high LFP rate is usually a sign of a strong economy—people are either working or optimistic about their chances of finding a job. A low LFP rate is often a sign of little economic opportunity or disappointment with the employment options available.

The U.S. is a large, diverse country so the national LFP rate obscures substantial state variation in LFP rates. The figure below shows the age 16 and up LFP rates for the 50 states and the U.S. as a whole (black bar) in 2014. (data)

2014-state-lfp-rates

The rates range from a high of 72.6% in North Dakota to a low of 53.1% in West Virginia. The U.S. rate was 62.9%. Several of the states with relatively low rates are in the south, including Mississippi, Alabama and Arkansas. Florida and Arizona also had relatively low labor force participation, which is not surprising considering their reputations as retirement destinations.

There are several reasons why some states have more labor force participation than others. Demographics is one: states with a higher percentage of people over age 65 and between 16 and 22 will have lower rates on average since people in these age groups are often retired or in school full time. States also have different economies made up of different industries and at any given time some industries are thriving while others are struggling.

Federal and state regulation also play a role. Federal regulation disparately impacts different states because of the different industrial compositions of state economies. For example, states with large energy industries tend to be more affected by federal regulation than other states.

States also tax and regulate their labor markets differently. States have different occupational licensing standards, different minimum wages and different levels of payroll and income taxes among other things. Each of these things alters the incentive for businesses to hire or for people to join the labor market and thus affects states’ LFP rates.

We can see the relationship between labor market freedom and labor force participation in the figure below. The figure shows the relationship between the Economic Freedom of North America’s 2013 labor market freedom score (x-axis) and the 2014 labor force participation rate for each state (y-axis).

lab-mkt-freed-and-lfp-rate

As shown in the figure there is a positive relationship—more labor market freedom is associated with a higher LFP rate on average. States with lower freedom scores such as Mississippi, Kentucky and Alabama also had low LFP rates while states with higher freedom scores such as North Dakota, South Dakota and Virginia had higher LFP rates.

This is not an all-else-equal analysis and other variables—such as demographics and industry composition which I mentioned earlier—also play a role. That being said, state officials concerned about their state’s labor market should think about what they can do to increase labor market freedom—and economic freedom more broadly—in their state.

Women are driving recent increase in age 25-54 labor force participation

Josh Zumbrun from the WSJ posted some interesting labor market charts that use data from today’s September jobs report. The one that jumped out at me was the one below, which shows the prime-age (age 25-54) employment and labor force participation (LFP) rate.

wsj-prime-age-sept-16-prime-age-lfp

In a related tweet he notes that the 25 – 54 LFP rate is up nearly 1 percentage point in the last year. The exact number is 0.9 from Sept. 2015 to Sept. 2016, and in the figure above you can clearly see an increase in the blue line at the end. So does this mean we are finally seeing a recovery in the prime age LFP rate? Yes and no.

I dug a little deeper and females appear to be driving most of the trend. The figure below shows the prime age male and female LFP rates from Jan. 2006 to the Sept. 2016. (Female data series LNS11300062 and male series LNS11300061)

oct-female-male-lfp-rate-1-06-9-16

As shown in the figure, the female LFP rate (orange line) appears to be steadily increasing since September of last year while the male LFP rate (blue line) is flatter. To get a better look, the following figure zooms in on the period January 2015 to September 2016 and adds a linear trend line.

oct-male-female-lfp-rate-1-15-9-16

The female LFP rate does appear to be trending up since the beginning of last year, but the male line is essentially flat.

Much has been made about the short-term and long-term decline of the prime-age male LFP rate. President Obama’s Council of Economic Advisors wrote an entire report about it, and economists such as Larry Summers have recently said that figuring out why males are dropping out of the labor force and what to do about it is “vital to our future”.

The recent uptick in the overall prime-age LFP rate is a good sign, but it appears to be largely driven by women. I think it’s still too early to say that the LFP rate of prime-age men has started to improve, and what this means for the future is still unknown.

Baltimore’s misguided move to raise its minimum wage will harm its most vulnerable

Baltimore’s city council, like others around the country, is considering raising the city’s minimum wage to $15 per hour. This is an ill-advised move that will make it harder for young people and the least skilled to find employment, which is already a difficult task in Baltimore.

The figure below shows the age 16 – 19 labor force participation (LFP) rate, employment rate, and unemployment rate in Baltimore City from 2009 to 2014 (most recent data available). The data are from the American Community Survey table S2301.

baltimore 16-19 emp stats

As shown in the figure, the LFP rate declined along with the employment rate, which has caused the unemployment rate to hold steady at approximately 40% (red line). So 40% of Baltimore’s unemployed teens were searching for a job but couldn’t find one and only 20% of all teens were actually employed, a decline of 4 percentage points (blue line). How is increasing the minimum wage to $15 per hour going to help the 40% who are looking for a job find one?

The minimum wage increase may help some people who are able to keep their job at the higher wage, but for the 40% who can’t find a job at the current minimum wage of $8.25, an increase to $15 is only going to make the task harder, if not impossible. Who is standing up for these people?

The data are just as gloomy when looking at workers with less than a high school degree, which is another group that is severely impacted by a higher minimum wage. As the figure below shows, the employment rate is falling while the unemployment rate is rising.

baltimore lt hs emp stats

In 2009 over 42% of people in this skill group were employed (blue line). In 2014 only 37% were, a decline of five percentage points. Meanwhile, the unemployment rate increased from about 19% to over 25% (red line). And all of this occurred while the economy was supposedly improving.

Again we should ask; how is a higher minimum wage going to help the 25% of high school dropouts in Baltimore who are unemployed find a job? It won’t. Unemployed workers do not become more attractive as employees simply because the city council mandates a higher wage.

What’s going to happen is that more people in this skill group will become discouraged and leave the labor market entirely. Then they will earn $0 per hour indefinitely and be forced to rely entirely on family, friends, and public assistance to live. A $15 minimum wage destroys their chances of finding meaningful employment and unduly deprives them of opportunities to better their lives.

This is the unseen effect of minimum wage hikes that $15 supporters rarely acknowledge. When faced with the higher cost, firms will hire workers who can justify a $15 wage and those who cannot will be unable to find employment. Additionally, firms will start using more technology and automation instead of workers. This happens because consumers want low prices and high quality, and as the minimum wage increases technology and capital become the best way to give consumers what they want. Over time workers in states with lower minimum wages may be forced out of the labor market as well as new technologies spread from high minimum wage areas to low minimum wage areas.

Another common argument put forth by minimum wage supporters is that taxpayers subsidize firms that pay low wages. But this is not true. Firms like Wal-Mart, McDonalds, and the countless other large and small business that employ low-skill workers are doing their part by giving people an opportunity. Firm owners did not unilaterally decide that all Americans should have a minimum standard of living and they should not be required to provide it on their own. Ultimately, advocates of a higher minimum wage who worry that they are subsidizing firms will likely be forced to contribute even more tax dollars to social programs since the wage for unemployed workers is $0.

Furthermore, why $15 and not $20? The argument is that $15/ hour is the minimum necessary to maintain a basic standard of living for working Americans but that argument is subjective. In fact, it can be extended to other areas. For example, should new hires be paid more than an entry-level salary so they can pay off college debt and maintain the standard of living of their parents?

To the extent that Americans deserve a particular lifestyle, providing it is a collective burden that should be shared by everyone. Politicians, clergy, union heads and other minimum wage supporters who want to push the entire burden onto firms are abandoning the moral obligation they claim we all share.

While minimum wage supporters mean well they appear to be blind to those who are harmed by wage controls. And those who are harmed are some of the most vulnerable members of the workforce – high school drop-outs, recent immigrants and urban youth. The minimum wage is a misguided policy that consigns these vulnerable members of the labor force to the basement of the economy and prevents any escape.

Puerto Rico’s labor market woes

Puerto Rico – a U.S. territory – has $72 billion dollars in outstanding debt, which is dangerously high in a country with a Gross Domestic Product (GDP) of only $103.1 billion. The Puerto Rican government failed to pay creditors in August and this was viewed as a default by the credit rating agency Moody’s, which had already downgraded Puerto Rico’s bonds to junk status earlier this year. The Obama administration has proposed allowing Puerto Rico to declare bankruptcy, which would allow it to negotiate with creditors and eliminate some of its debt. Currently only municipalities – not states or territories – are allowed to declare bankruptcy under U.S. law. Several former Obama administration officials have come out in favor of the plan, including former Budget Director Peter Orszag and former Director of the National Economic Council Larry Summers. Others are warning that bankruptcy is not a cure-all and that more structural reforms need to take place. Many of these pundits have pointed out that Puerto Rico’s labor market is a mess and that people are leaving the country in droves. Since 2010 over 200,000 people have migrated from Puerto Rico, decreasing its population to just over 3.5 million. This steady loss of the tax base has increased the debt burden on those remaining and has made it harder for Puerto Rico to get out of debt.

To get a sense of Puerto Rico’s situation, the figure below shows the poverty rate of Puerto Rico along with that of three US states that will be used throughout this post as a means of comparison: California (wealthy state), Ohio (medium-wealth state), and Mississippi (low-wealth state). All the data are 1-year ACS data from American FactFinder.

puerto rico poverty

The poverty rate in Puerto Rico is very high compared to these states. Mississippi’s poverty rate is high by US standards and was approximately 22% in 2014, but Puerto Rico’s dwarfed it at over 45%. Assisting Puerto Rico with their immediate debt problem will do little to fix this issue.

A government requires taxes in order to provide services, and taxes are primarily collected from people who work in the regular economy via income taxes. A small labor force with relatively few employed workers makes it difficult for a county to raises taxes to provide services and pay off debt. Puerto Rico has a very low labor force participation (LFP) rate relative to mainland US states and a very low employment rate. The graphs below plot Puerto Rico’s LFP rate and employment rate along with the rates of California, Mississippi, and Ohio.

puerto rico labor force

puerto rico employ rate

As shown in the figures, Puerto Rico’s employment rate and LFP rate are far below the rates of the US states including one of the poorest states, Mississippi. In 2014 less than 45% of Puerto Rico’s 16 and over population was in the labor force and only about 35% of the 16 and over population was employed. In Mississippi the LFP rate was 58% while the employment rate was 52%. Additionally, the employment rate fell in Puerto Rico from 2010-14 while it rose in each of the other three states. So at a time when the labor market was improving on the mainland things were getting worse in Puerto Rico.

An educated labor force is an important input in the production process and it is especially important for generating innovation and entrepreneurship. The figure below shows the percent of people 25 and over in each area that have a bachelor’s degree or higher.

puerto rico gt 24 education attain

Puerto Rico has a relatively educated labor force compared to Mississippi, though it trails Ohio and California. The percentage also increased over this time period, though it appears to have stabilized after 2012 while continuing to grow in the other states.

Puerto Rico has nice beaches and weather, so a high percentage of educated people over the age of 25 may simply be due to a high percentage of educated retirees residing in Puerto Rico to take advantage of its geographic amenities. The next figure shows the percentage of 25 to 44 year olds with a bachelor’s degree or higher. I examined this age group to see if the somewhat surprising percentage of people with a bachelor’s degree or higher in Puerto Rico is being driven by educated older workers and retirees who are less likely to help reinvigorate the Puerto Rican economy going forward.

puerto rico 25to44 educ attain

As shown in the graph, Puerto Rico actually fares better when looking at the 25 – 44 age group, especially from 2010-12. In 2012 Puerto Rico had a higher percentage of educated people in this age group than Ohio.

Since then, however, Puerto Rico’s percentage declined slightly while Ohio’s rose, along with Mississippi’s and California’s. The decline in Puerto Rico was driven by a decline in the percentage of people 35 to 44 with a bachelor’s or higher as shown in the next figure below.

puerto rico 35to44 educ attain

The percentage of 35 to 44 year olds with a bachelor’s or advanced degree fell from 32% in 2012 to 29.4% in 2014 while it rose in the other three states. This is evidence that educated people in their prime earning years left the territory during this period, most likely to work in the US where there are more opportunities and wages are higher. This “bright flight” is a bad sign for Puerto Rico’s economy.

One of the reforms that many believe will help Puerto Rico is an exemption from compliance with federal minimum wage laws. Workers in Puerto Rico are far less productive than in the US, and thus a $7.25 minimum wage has a large effect on employment. Businesses cannot afford to pay low-skill workers in Puerto Rico such a high wage because the workers simply do not produce enough value to justify it. The graph below shows the median individual yearly income in each area divided by the full time federal minimum wage income of $15,080.

puerto rico min wage ratio

As shown in the graph, Puerto Rico’s ratio was the highest by a substantial amount. The yearly income from earning the minimum wage was about 80% of the yearly median income in Puerto Rico over this period, while it was only about 40% in Mississippi and less in Ohio and California. By this measure, California’s minimum wage would need to be $23.82 – which is equal to $49,546 per year – to equal the ratio in Puerto Rico. California’s actual minimum wage is $9 and it’s scheduled to increase to $10 in 2016. I don’t think there’s a single economist who would argue that more than doubling the minimum wage in California would have no effect on employment.

The preceding figures do not paint a rosy picture of Puerto Rico: Its poverty rate is high and trending up, less than half of the people over 16 are in the labor force and only about a third are actually employed, educated people appear to be leaving the country, and the minimum wage is a severe hindrance on hiring. Any effort by the federal government to help Puerto Rico needs to take these problems into account. Ultimately the Puerto Rican government needs to be enabled and encouraged to institute reforms that will help grow Puerto Rico’s economy. Without fundamental reforms that increase economic opportunity in Puerto Rico people will continue to leave, further weakening the commonwealth’s economy and making additional defaults more likely.

 

 

Teenage unemployment in cities

New research that examines New York’s Summer Youth Employment Program (SYEP) finds that participation in the program positively impacts student academic outcomes. As the authors state in the introduction, youth employment has many benefits:

“Prior research suggests that adolescent employment improves net worth and financial well-being as an adult. An emerging body of research indicates that summer employment programs also lead to decreases in violence and crime. Work experience may also benefit youth, and high school students specifically, by fostering various non-cognitive skills, such as positive work habits, time management, perseverance, and self-confidence.” (My bold)

This is hardly surprising news to anyone who had a summer job when they were young. An additional benefit from youth employment not mentioned by the authors is that the low-skill, low-paying jobs held by young people also provide them with information about what they don’t want to do when they grow up. Working in a fast food restaurant or at the counter of a store in the local mall helps a young person appreciate how hard it is to earn a dollar and provides a tangible reason to gain more skills in order to increase one’s productivity and earn a higher wage.

Unfortunately, many young people today are not obtaining these benefits. The chart below depicts the national teenage unemployment rate and labor force participation rate (LFP) from 2005 to 2015 using year-over-year August data from the BLS.

national teen unemp, LFP

During the Great Recession teenage employment fell drastically, as indicated by the simultaneous increase in the unemployment rate and decline in the LFP rate from 2007 to 2009. From its peak in 2010, the unemployment rate for 16 to 19 year olds declined slowly until 2012. This decline in the unemployment rate coincided with a decline in the LFP rate and thus the latter was partly responsible for the former’s decline. More recently, the labor force participation rate has flattened out while the unemployment rate has continued to decline, which means that more teenagers are finding jobs. But the teenagers who are employed are part of a much smaller labor pool than 10 years ago – nationally, only 33.7% of 16 to 19 year olds were in the labor force in August 2015, a sharp decline from 44% in 2005.

Full-time teenage employment is unique in that it has a relatively high opportunity cost – attending school full time. Out of the teenagers who work at least some portion of the year, most only work during the summer when school is not in session. Some teenagers also work during the school year, but this subset of teenage workers is smaller than the set who are employed during the summer months. Thus a decline in the LFP rate for teenagers may be a good thing if the teenagers who are exiting the labor force are doing so to concentrate on developing their human capital.

Unfortunately this does not seem to be the case. From 2005 to 2013 the enrollment rate of 16 and 17 year olds actually declined slightly from 95.1% to 93.7%.  The enrollment rate for 18 and 19 year olds stayed relatively constant – 67.6% in 2005 and 67.1% in 2013, with some mild fluctuations in between. These enrollment numbers coupled with the large decline in the teenage LFP rate do not support the story that a large number of working teenagers are exiting the labor force in order to attend school full time. Of course, they do not undermine the story that an increasing amount of teenagers who are both in the labor force and attending school at the same time are choosing to exit the labor force in order to focus on school. But if that is the primary reason, why is it happening now?

Examining national data is useful for identifying broad trends in teenage unemployment, but it conceals substantial intra-national differences. For this reason I examined teenage employment in 10 large U.S. cities (political cities, not MSAs) using employment status data from the 5-year American Community Survey (ACS Table S2301. 2012 was the latest data available for all ten cities).

The first figure below depicts the age 16 – 19 LFP rate for the period 2010 – 2012. As shown in the diagram there are substantial differences across cities.

City teenage LFP

For example, in New York (dark blue) only 23% of the 16 – 19 population was in the labor force in 2012 – down from 25% in 2010 – while in Denver 43.5% of the 16 – 19 population was in the labor force. Nearly every city experienced a decline over this time period, with only Atlanta (red line) experiencing a slight increase. Five cities were below the August 2012 national rate of 34% – Chicago, Philadelphia, Atlanta, San Francisco, and New York.

Also, in contrast to the improving unemployment rate at the national level from 2010 – 12 shown in figure 1, the unemployment rate in each of these cities increased during that period. Figure 3 below depicts the unemployment rate for each of the 10 cities.

City teenage unemp rate

In August 2012 the national unemployment rate for 16 – 19 year olds was 24.3%, a rate that was exceeded by all 10 cities analyzed here. Atlanta had the highest unemployment rate in 2012 at 48%. Atlanta’s high unemployment rate and relatively low LFP rate reveals how few Atlanta teens were employed during this period and how difficult it was for those who wanted a job to find one.

The unemployment rate may increase because employment declines or more unemployed people enter the labor force, which would increase the labor force participation rate. Figures 2 and 3 together indicate that the unemployment rate increased in each of these cities due to a decline in employment, not increased labor force participation.

The preceding figures are evidence that the teenage employment situation in these major cities is getting worse both over time and relative to other areas in the country. To the extent that teenage employment benefits young people, fewer and fewer of them are receiving these benefits. From the linked article:

“The substantial drop in teen employment prospects has had a devastating effect on the nation’s youngest teens (16-17), males, blacks, low income youth, and inner city, minority males,” wrote Andrew Sum in a report on teen summer employment for the Center for Labor Market Studies at Northeastern University. “Those youth who need work experience the most get it the least, another example of the upside down world of labor markets in the past decade.”

Unfortunately, in many cities the response to this situation will only exacerbate the problem. Seattle and Los Angeles have already approved local $15 minimum wages, and a similar law in the state of New York that applies only to fast food franchises was recently approved by the state’s wage board. While many people still question the effect of a minimum wage on overall employment, there is substantial empirical evidence that a relatively high minimum wage has a negative effect on employment for the least skilled workers, which includes inner-city teenagers who often attend mediocre schools. Thus it is hard to believe that any of the seemingly well-intentioned increases in the minimum wage that are occurring around the country will have a positive effect on the urban teenage employment situation presented here. A better response would be to eliminate the minimum wage so that in the short run low-skilled workers are able to offer their labor at a price that is commensurate to its value. In the long run worker productivity must be increased which involves K-12 school reform.