Articles by: Philippa Dunne

Current Quit Rate Consistent with 7.7% unemployment

March 6, 2014

Lately we’ve been seeing the argument made that the labor market is tighter than it looks. The argument goes like this: while the decline in the unemployment rate may have been boosted by labor force withdrawal, many of the dropouts will never work again, so it’s wrong to adjust the official jobless rate, either statistically or mentally, to compensate for depressed participation rates. So January’s 6.6% unemployment rate, 0.1 point above the Fed’s long-standing trigger, is getting close to “full employment,” and it would be prudent to start thinking about raising the fed funds rate sooner than most market participants expect. Is there anything to this?

We think not. For one, a 6.6% rate is about two-thirds of a standard deviation above the 1948–2007 average of 5.6%, which is not trivial. It’s even further above, in absolute terms, its 2002–2007 average of 5.3%, an expansion that was far from robust. It may be close to the Congressional Budget Office’s estimate of the “natural” rate of 6.0%, but as we showed last month, there’s nothing very scientific about these estimates; just six years ago, the CBO projected that the natural rate would be 4.8% right now.

A more subtle version of the argument looks at sectoral unemployment rates and finds some getting awfully close to full employment. We have a hard time seeing that. Graphed at right are unemployment rates by major sector compared to their 2000–2007 averages. In only one sector—manufacturing—is the January 2014 unemployment rate close to its average, though it’s 0.1 point above. Next closest is finance, 0.8 point above. The others are 1–2 percentage points above their average. A nice theory, but it just doesn't hold water.

Relatedly, some analysts are detecting wage pressures under a placid overall average—a 1.9% gain for the year ending in January. One argued that weakness in financial sector pay is dragging down the average. But if you do a weighted average of hourly wage growth excluding that sector, you still get 1.9%. Most major sectors, accounting for 72% of total private employment, exhibit wage growth below their 2007 average. In fact, wage growth is slower than it was a year ago—and that’s true of sectors accounting for 68% of private employment. It’s hard to see any tightness here either.

quit rates

Another place to look for signs of labor market tightness is in the quit rate. If workers perceive jobs as easy to get, they’re more likely to quit on their own. And, short of that, they’re more likely to demand raises from employers eager to keep them. But currently the quit rate is low by historical standards.

The BLS started publishing the quit rate in 2000. Since the quit rate tracks the number of those unemployed 5 weeks or less very closely, we used that series to estimate the quit rate going back to 1967. (Where the two series overlap, the fit is very tight—an r2 of 0.93.) December’s 1.7% rate is well below the full series’ 2.1% average. It’s also well below levels seen close to previous business cycle peaks, like 1979, 1989, 1999, and 2007.

The quit rate moves generally in line with the unemployment rate. You can “predict” the unemployment rate with decent accuracy with the quit rate, in fact. But as the graph on the bottom of this page shows, the unemployment rate associated with the December 2013 quit rate is a full point above its actual level. Or, putting it more bluntly, workers are acting as if December’s unemployment rate were 7.7%, not the 6.7% it actually was. If the job market were tighter than it looks, we’d expect a much higher quit rate.

 

How is the non-farm payroll tracking the most complete data?

The BLS released Quarterly Census of Employment and Wages (QCEW) data for the second quarter of 2013 this morning. Since it's based on the unemployment insurance system's records, it offers near-universal coverage of the job market (as opposed to the monthly payroll survey, which is just a sample, though a very large one). It shows that total employment grew 1.6% in the year ending in June, compared with 1.7% reported by the monthly payroll numbers. This is a reversal of the last release, which had the QCEW growing 0.1 point more than the payroll survey. But an 0.1 point difference in either direction is trivial, and confirms that the payroll survey is doing a good job at tracking this weird recovery/expansion.

Earnings figures in the QCEW are difficult to compare with the monthly payroll numbers, since the definitions and coverage are different, and the series is not seasonally adjusted. They showed a 6.9% decline in wages from the first quarter to the second, following a 1.1% decline from 2012Q4 to 2013Q1. Quarterly declines are normal in the first and second quarters in the QCEW earnings series, but the second quarter decline is larger than normal (the first quarter was quite close to average).

Finally, the number of employing establishments rose 0.7% for the year ending in the second quarter, a decline from the 2.0% gain in the first. The trend, however, is working its way slowly higher after the sharp (and unprecedented since the series began in 1976) decline in establishments during the Great Recession. The pace of startups is well below the 2-3% average of the 1980s and 1990s, and even the 1.7-1.8% average of the mid-2000s. Establishment formation is extremely important to employment growth, since young firms are the primary creators of new jobs. So this is good news for continued employment gains, but offers little hope for an acceleration in the pace of job growth over the next year or two.

The start-up bust: it’s credit and the housing collapse in the short term; education, health insurance and immigration in the long

Young firms, not small firms, make an outsized contribution to job growth here in the U.S., and the ongoing decline in start-up activity has taken a lot of the fizz out of the U.S. job market. We've gathered some research that considers why creative destruction in the business world has lost its creative half, a serious and ongoing issue for our workforce

In a presentation at a November 2012 IMF research conference, Teresa Fort, John Haltiwanger, Ron Jarmin and Javier Miranda note that between 2006 and 2009 employment growth in firms less than 5 years old with fewer than 20 employees fell from 26.6% to 8%, while employment in businesses more than 5 years old with more than 500 employees fell from 2.8% to -3.9%, narrowing the differential from 23.7% to 12.5%. They note that many of the hypotheses concerning why small firms are more sensitive to credit conditions apply more accurately to young firms and start-ups because they don’t have access to commercial paper and corporate bonds, and instead rely on their own finances to get started including, you guessed it, home mortgages. Specifically, they found that the housing price shock in California explains 2/3s of narrowing of the growth rate differential noted above, found like patterns in other states with severe housing price declines, and did not find them in states that did not experience such declines.

In a related paper, the same team, sans Ms. Fort, found that the largest declines in the share of employment accounted for by young firms (declines ranging from 11.8 to 14.3%) occurred to California, Nevada, Utah, Arizona and Idaho, while the second tier (declines of 7.1 to 11.8%) were wider spread, but included Florida, Oregon, Wyoming, and Michigan. So, all front-line housing bust states are all in the top tiers.

 …and housing bust

 The authors note the work of Atif Mian and Amir Sufi on aggregate demand at the state level, and note that the decline in housing prices cuts both into self-financing, and into local demand. A San Francisco Fed paper released yesterday authored by Mian and Sufi using state-level National Federation of Independent Businesses data finds a strong correlation between the decline in the employment-population ratio between 2007 and 2009 and the 20pp increase in businesses citing poor sales as their biggest problem. (The percentage citing credit conditions barely moved, which struck the authors, and us, as odd.) 

They looked at household-leverage and found that the percentage of businesses citing weak sales rose more in states with higher household leverage, where largest declines in spending and employment catering to local customers took place as well. And although the percentage of small business owners reporting regulation and red tape as their biggest problem rose between 2008 and 2011, the increase was inconsistent across states—Rhode Island reported a rise of over 30pp while that measure fell by 10pp in New Jersey—and the states where the complaints about regulation and taxes rose the most also experienced the strongest employment growth, although the correlation was not statistically significant.

The weakness in start-up activity since the Great Recession is no mystery. 

longer-term issues

 But what about the long if less dramatic decline since the 1980s? Of course there are many factors, including concentration of power in major corporations, barriers to entry, and outsourcing, especially of manufacturing activity, and we have identified a few other trends that have gotten less attention.

 First there is a well-documented relationship between education and entrepreneurship: as of 2007, 28% of the overall US population had attained a bachelor’s degree or higher, but 48% of business owners with paid employees had bachelor’s degrees or higher. Between 1980 and 2010 both overall job growth and educational attainment have slowed from their 1950–1980 rates. Metro areas with smaller education gaps (the difference between the years of education required by the average posted job openings and the ears of education attained by the average worker in that area) have significantly lower unemployment rates for well and poorly educated workers alike. The decline in job growth/ed attainment coincides with the decline in start-up activity. 

 Second, in a paper in the January 2011 issue of The Journal of Health Economics, Robert W. Fairlie, Kanika Kapur, and Susan Gates used CPS panel data to expand on limited research on “entrepreneurship lock,” and found that self-employed business owners are “much less likely” than wage & salary workers, part-time workers and even unemployed workers to have health insurance, and that new business owners have lower rates than those in older businesses. Business creation rates are lower for workers with employer-based heath insurance, and higher for those who have no health insurance, or have insurance through their spouses. They estimate that, for men, this lowers the probability of starting one’s own business by 1% “relative to an annual base business creation rate of 3%.” They conclude that eligibility for Medicare has a lot to do with it: business ownership rates for men increase from 24.6% for those just under 65 to 28% just over 65, but there is no change between the ages of 55 and 75, meaning it’s not just because they reach retirement age. In closing they note that the relatively low rates of business ownership in the US may be related to differences in our health insurance coverage with coverage in other wealthy countries. 

 Third, a disproportionate number of start-ups are founded by skilled immigrants. A Kauffman Foundation study found that a quarter of the science and technology firms founded in the US between 1995 and 2005 were headed up by a foreign-born CEO or lead technician, and that in Silicon Valley the percentage rose to 52%, with Indian immigrants founding one fourth of the start-ups, and immigrants from Britain, China, Taiwan and Japan founding the other fourth. Weakness in our economy has caused a decline in immigration, and although there have been some legislative proposals to award VISAs to those who might want to start a new company here, it doesn’t really work that way. Generally firms are started by entrepreneurs who come here to go to school, work, or for family reasons, about not until they have been in the US for about  10 years. So this is likely to be a persistent problem as well. 

 There is much speculation about tax rates but, although increased tax rates on capital gains may discourage angel investors, David Friend, who has founded six companies in three decades, notes that the marginal tax rate “doesn’t make any difference” to entrepreneurs: they are unlikely to make much in their first few years, and are focused on “hitting it big” in the future, as were Bill Gates and Steve Jobs who braved top income tax rates of 70% when founding their companies.

 

 

 

Public Service Announcement on the Non-farm Payroll

The large upward revisions to August payrolls released by the Bureau of Labor Statistics this morning (with jobs data for September) set the conspiracy theorists' world on fire. And they were strong, about three times the usual revision. But, as we pointed out in a report we sent to our clients earlier this week, this is a long-standing pattern. It almost always happens, whether there's an election coming up or not. Here's the relevant text from this morning's note:

August's gain was revised upward by 46,000, and July's by 40,000. Almost all the revisions, however, came from an upward revision of 101,000 to local government education in August before seasonal adjustment – a recurrent anomaly at this time of year that we wrote about in Wednesday's report. The concurrent seasonal adjustment technique distributes large changes like that backwards, so the gain was split between July and August in the adjusted numbers. Some excitable types are attributing the upward revision to political machinations, but this pattern has been around a long time. It's likely something is amiss in the BLS's collection process, and they are working on it. There shouldn't be a recurrent pattern of error like this. (Excitable types should also note that the birth/death model subtracted 9,000 jobs in September.)

by Philippa Dunne· · 0 comments · Uncategorized

Student Debt: Onerous, and a Drag

We have heard from a number of sources that researchers at the New York Federal Reserve Bank are worried that without some form of mortgage debt relief we may face a crisis in a couple of years that eclipses the one that took place in 2008. In line with such worries, the New York Fed has started collecting previously unavailable data on student debt, a form of indebtedness that’s a major burden on the young, and also more of a macroeconomic drag than many analysts realize. Here are some details on all that.

Runaway Inflation

The rise in college tuition has been relentless, far outpacing the famous rise in the cost of health care (see graph, below). Since 1980, the overall CPI is up 194%. Its medical care component is up 436%, more than twice as much. But its college tuition component is up 829%, more than four times as much.

CPI

It’s hard to put a finger on just what drives educational inflation. No particular category of spending is rising out of line with the averages, though contacts at a number of institutions point to a great fondness for building fancy new buildings, many of them financed with bonds secured by supposedly ever-rising student tuition and fees. This is how NYU, with its relatively small endowment, is financing its grand expansion plans in lower Manhattan. Faculties of both the business school and economics department have filed objections, citing a fearsome growth in leverage. Similar things are going on in public systems, like the University of California’s, despite continued reduction in state financing.

Instructional budgets have remained at a stable 33% of spending for the last decade, even as student/teacher ratios have fallen. The reason that those ratios could fall while the instructional share of budgets has been stable is that universities have squeezed on labor costs. To start with, the composition of faculties has changed markedly—from nearly 80% full-time in 1970 to about 50% today. Over the last decade, student enrollment is up 38%; full-time faculty is up 23%, and part-time is up 63%. But the full-time faculty haven’t been raking it in. Tuition and fees have risen 82% faster than the salaries of full-time faculty since the early 1990s at private institutions, and 149% faster at public ones.

Burdens Shifting to Individuals

At the same time costs have been rising, state governments have cut back their support of public universities and colleges. Some major state universities now get less than 10% of their income from state budgets. As the graph below shows, the personal share of higher ed spending surpassed the state and local share about ten years ago, and the two lines continue to get farther apart. (This data, drawn from the national income accounts, stops in 2010. Given budget cutbacks since then, the gap has undoubtedly gotten wider.) The feds have kicked up their share, but nowhere near enough to offset the decline in the state and local share.

Who-pays

Of course, because of aid, not everyone pays the full published prices. According to the College Board, net costs of public institutions in 2008 were around 44% of household income for the poorest quartile of the population, 26% for the next-poorest, 19% for the second-richest, and 10% for the best off. That’s a lot of money. And more of the aid, at least until very recently, has been coming in the form of loans rather than grants. In the 1970s, loans were 21% of aid; lately, the share has been 47%. Pell Grants, the major federal program, covered 45% of the average public university tuition bill in 1990; in 2011, it covered 32%.

The Great Recession had a major effect on college choice and financing. According to a Sallie Mae/Ipsos survey, college costs—actually paid, not sticker prices—came down in the 2010–2011 school year, especially for higher-income families. (It rose for the poorest quartile, though.) Students traded down, looking for cheaper options (many—at all income levels—shifted from four-year public to two-year public institutions), and grants and scholarships increased (led by increases in Pell Grants from the federal government). More middle-income families applied for financial aid—the product, no doubt, of the recession’s lingering hit to income and balance sheets. Middle- and high-income families increased their use of grants and scholarships, with both dollar levels and shares of costs paid rising over the last couple of years. More middle-income families are applying for aid, and they’re still plenty worried about rising costs.

But a lot of college funds have to be borrowed. According to Sallie Mae/Ipsos, poor families paid 25% of expenses with borrowed funds in the 2010–2011 year. The share declines as you go up the ladder, but not as much as you might think: 22% for the middle ranks, and 17% for the best off. And the trend is towards increasing reliance on loans. In 1992, 32% of undergrads borrowed; in 2007, 53% did.

Heavy Debt Loads

The result has been a relentless increase in education debt. (See graph, below, for a yearly flow picture.) We don’t know exactly how much it’s risen, since there are no official sources of the stock of loans outstanding. A private researcher, Mark Kantrowitz, proprietor of a website called finaid.org, estimates that total student debt has risen from about $200 billion in 2000 to $1 trillion today, but he’s stingy about disclosing his sources and techniques. While the trajectory is probably more or less right, we don’t know for sure.

Loans

More recently, the New York Fed, using data gathered from the credit rating agency Equifax, has been publishing estimates of student debt, which are the closest to definitive we now have. The numbers are staggering. They estimate that as of the third quarter of 2011, total student debt was about $870 billion—more than credit card balances ($693 billion) and auto loans ($730 billion).

Just over 15% of adults have student debt balances. The mean balance is $23,300—but that is pulled up, as most debt aggregates are, but a minority who are deep in debt. The median is only about half the mean: $12,800. A quarter owe more than $28,000, and 10% owe more than 54%.

Although almost all age groups owe student debt, the profile skews young: 40% of people in their 20s are on the hook, compared with just 7% of those over 40. But the numbers don’t go to 0 with age: 5% of over-60s owe student debt.

And since the young have relatively low incomes—on which more in a moment—there’s a lot of distress among the indebted. On the surface, about 10% of those with student debts are in arrears, roughly in line with credit card debt. But since many borrowers are still in school or just out, they’re not yet expected to begin servicing their debts. Adjusting for that, the New York Fed estimates that more than a quarter—27%—of borrowers have past-due balances.

That level of distress, combined with a still-lousy job market, means that today’s young are having a hard time getting on their feet. A just-released survey of recent grads by the Heldrich Center for Workforce Development at Rutgers shows unrelated to their fields of study, and having a hard time making ends meet. Median student debt of recent grads is $20,000—higher than the New York Fed’s figure, no doubt because of the increasing prominence of debt finance. And it’s pinching their spending sharply: 40% have delayed the purchase of a house or car, 28% have put off additional education, 27% have moved back in with their parents, and 14% have delayed marriage. And they have generally gloomy views of their future—personally and especially for their generation as a whole.

A Nonflattering Profile

One of the more established facts in economics is that people’s incomes tend to rise with age to a peak around their early 50s, then decline into retirement and beyond. As with many established facts, recent economic history is challenging this pattern.

Graphed below is average household income in constant dollars by age of household head. In 2010, households headed by someone aged 15–24 had an income of $28,322, 15% less than their counterparts in 1970. All other age groups were better off than their predecessors 40 years earlier, though in general, the younger the cohort, the lesser the advantage. The 65+ set, though, was almost 80% better off than their 1970s counterparts. Today’s young are about 20% worse off than those of 2000. Most other groups are 10–15% worse off than their counterparts at the century’s turn.

Income-age-profiles

That’s not to say that older households are doing swimmingly. In fact, the 35–44s and 45–54s are also worse off than their 1990s ancestors. And economic progress over time is looking to have stalled for the middle ranks. While the 25–34 set in 2010 had incomes 42% above the 15–24 group ten years earlier (presumably, that is, mostly the same people), the 45–54 group was 8% worse off than that cohort was when they were 35–44, and the 55–64 group was worse off.

Only the elderly have been exempt from this stagnation/downward mobility. They’re the only group whose incomes have risen consistently. But before one concludes that they’re rolling in it, the average income of this cohort was $31,408 in 2010, 36% below the national average.

Amid shifting trends and uncertainty, one thing doesn’t change: our young adults are our country’s future. It’s a good thing the NY Fed is paying attention to the burdens are best hopes are carrying.