Archive for June, 2016

Cinching the Propensity to Depart

In a new piece of the wage and job-churn puzzle, the Treasury Department recently published a report on the widespread use of non-competition agreements around the country.

Non-competition agreements, which surely our readers are familiar with (!), are intended to encourage businesses to invest in their workers by reducing the likelihood that the worker will move elsewhere, and to encourage inovation by protecting trade secrets, a trickier argument to make since such secrets are often protected by other law.

The Treasury Department, however, is looking into detrimental effects on worker mobility, and hence wage growth, innovation, and new business formation. Although media headlines glommed onto doggie day care workers laboring under such agreements (which is either laughable or outrageous, take your pick), the Treasury lists fast-food employees, warehouse workers, and camp counselors as other signers, and wonders where the social value lies in asking an entry-level low-wage burger flipper to sign a two-year non-compete. There is a lot of important stuff in the Treasury and other reports tied to free markets, innovation and “perfect information,” all crucial aspects of a vibrant economy but perhaps currently straitened by onerous legalities.

It’s a complicated subject: not all states enforce such agreements, some are overly broad and hence get thrown out of court, in some states employers can revise agreements after the fact to make them enforceable, in others they can’t. One study found that, as of 2015, non-competes were enforceable in about half of the states even in cases where the employee was fired without cause. Some researchers speculate these agreements allow companies to hire, preferentially, workers with a lower propensity to depart, especially since such workers could not convincingly make that case on their own, except by a willingness to accept such a restriction, which would be less of a burden to them. On and on.

Understanding has a big role in this as well. Many workers—and we’ve heard this from some high-level strategists in the financial sector—don’t fully understand what they are signing, and the preferential hiring argument rests on just such an understanding, probably a weak link. For example, California has among the highest percentages, 22%, of such contracts, but noncompetes are generally not enforced at the state level there, so employers are relying on workers’ lack of knowledge about the legal system.

On to a barrage of percentages: Nationally, 19% of our workers are currently restricted by such agreements, and close to 40% have signed them in their working lives.

Although there are questions about the overall benefits even for math and computer specialists, such limitations make the most sense in such fields and, indeed, about one-third of high-tech and math workers have signed non-competes. On the other end of the spectrum, about 14% of workers who are either making less than $40,000 a year, and/or do not have college educations are also clenched by such agreements.

Ten percent of workers reported bargaining on their non-competes, and 38% of the non-bargainers did not know they could do such a thing. In many cases such agreements are proffered after the employee has accepted the position, as in turned down all other offers. Treasury estimates that the lower bound on this after-the-acceptance practice—a new use for a tired term—is 37%. In one study 70% of highly skilled electrical workers were asked to sign such agreements after they had accepted offers, half of the time after the first day of work, another affront to perfect knowledge. The Treasury report points out that this kind of tactic need not be used if the agreements truly were beneficial to both parties.

Only 24% of all workers report having trade secrets in their possession, and these workers, as well as those who interact with clients, are understandably more likely to have signed non-competes. But less than half of all workers who have signed noncompetes meet these standards, which “suggests” to the Treasury that protecting trade-secrets “does not explain the majority of these contracts.”

And related litigation is on the rise: A 2013 study commissioned by the Wall Street Journal showed either a rise in the prevalence of non-competes, or perhaps a “significant” increase in their enforcement, and law firm Beck Reed Ridden  ferreted out a 61% increase in the number of employees getting sued under these agreements between 2003 and 2013.

On the legislative side, recently Oregon limited such agreements to 18 months, and Hawaii prohibited them for all tech workers, which Missouri legislators proposed but were unable to pass. Maryland and New Jersey are working to make non-competes unenforceable if a worker is eligible for unemployment insurance benefits, with Massachusetts, Michigan and Washington proposing to make them generally unenforceable. Proposals in Minnesota and Connecticut would bar such agreements for workers making less than $15.00 an hour, while Georgia recently amended its constitution, no less, to allow for greater enforcement.

How goes it around the world?

Law protecting free trade generally makes such agreements unenforceable in India. In the UK an employer must demonstrate what is being protected; “competition”itself doesn’t make the grade. Many countries impose more limited tenure on such agreements, and many require those sidelined to be paid a portion of their former salary, a quarter in Romania, a third in France, and half in Germany and Belgian, for example.

Why does this matter?

Wages: Non-competes erode bargaining power, and have an adverse effect on wage growth. We grabbed the graph below from the Treasury piece comparing wages, reweighted by occupation, in states with heavy and no enforcement.

Age-wage profile

Of course, it’s not a slam-dunk: Median household incomes in California rank third in the nation, and are about 150% of 33rd ranked Georgia’s median household incomes. Clearly there is more at play there than California’s lack of enforcement and Georgia’s more aggressive stance.

Innovation and productivity: We know that high-tech firms often cluster in regions with competitive suppliers, large numbers of qualified workers, and “information spillovers” among firms. Of course, such spillovers are not always beneficial to firms whose ideas are on the move, although they will rotate into the taking position again. But spillover is one of the drivers of innovation, job churn and productivity and so is beneficial to regional economies on the whole.

Some studies referenced within the Treasury piece note that workers tend to migrate to states were enforcement is weakest, hence contributing to brain drain of specific regions.

In their paper “Do strict trade secret and non-competition laws obstruct innovation?” (not free online) two specialists, Charles T. Graves and James A. DiBoise argue that, whatever we have come to believe about protecting intellectual property, the real innovators are the creative job-hopping employees themselves, and anything that restricts their mobility impedes the advancement of valuable “destructive” technologies. They suggest reform would be a good thing, and they have something to lose in suggesting this: they both represent employees in noncompete litigation.

Harvard law professor William W. Fisher working with Felix Oberholzer-Ghee of the Business School in their paper on developing an integrated approach to managing intellectual property make the point that although intellectual property rights represent a “significant fraction” of enterprise value, recent surveys show that less than half of current business leaders understand how important such rights are, or are actively involved in strategic planning. They note that IP management is handed off to legal departments who are little involved in strategic planning, and strategic managers don’t work together.

This double-silo approach leads to short-sighted solutions, most lamentably legally driven attempts to leverage their IP possibilities in a way that derail important network effects, and “worse yet, enable competitors to capitalize on network effects.”

We often argue that R&D spending is below where it should be. Efforts to control employee movement read as a dinosaur in the vibrant high-tech world, and such squabbling suggests too much attention to the fencing, and not enough to the care of the herd.

We’ll end with this wise advice from the irascible HR Examiner:: “Your Trade Secrets are Secret For About 27 Days. Or 27 minutes. Really, the secret way of doing almost anything is over… Why are you focused on the rear-view mirror and trying to protect something that will be obsolete long before the lawsuit is over?”

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St. Louis Fed’s James Bullard: Enter the Regime

To paraphrase a wise friend, there are three things we can know about the economy: what people say it is, what we each believe it could be, and what it is. The world is too much with us on the first two, while St. Louis Fed President James Bullard et al. are reframing the third in their recent paper, “The St. Louis Fed’s new characterization of the outlook for the economy.” As was picked up by the media, the new frame suggests interest rates far lower than the conventional models.

This clear nine-page paper invited, and received, a lot of criticism. Some labeled it pessimistic, and used its publication to call for higher interest rates, while others quibbled with the veracity of the inflation scales, and used its publication to call for higher rates. The paper is clear that there are risks to the outlook, which takes the steam out of the biggest criticism, that things could change. Indeed.

But Bullard and the SL Fed are outlining a new framework for our economy and how we understand it. After a performance review, they abandoned the idea that the economy will return to a recognizable steady state and their models built on such a state, which they believe have outlived their usefulness. They now see a series of regimes that are persistent and cannot be forecast. In abandoning the single steady state, they are more in line with current cosmological thought, probably a good thing, and in replacing that state with regimes that cannot be forecast, they are moving closer to what we see all around us. In limiting the horizon to two years they are echoing CBO’s Larry Ozanne’s belief that in many cases forecasting out more than two years is a waste of taxpayers’ money.

They are making this switch now because they believe real output, unemployment, and inflation are close to the “mean outcome of the current regime.” Since they cannot predict when the track will switch, they are “forecasting” that the current regime will persist and policy will be set as is appropriate to that.

In the current regime weak productivity produces weak output, as is surely the case, and real rates remain low, as do returns on short-term government debt. Here the authors make an important distinction. Noting that the real return to capital has not “declined meaningfully,” they attribute low rates on government debt to an “abnormally large” liquidity premium, their fundamental factor, not to low real returns throughout the economy. Full disclosureperhaps we think that’s important because it’s close to what we’ve been calling a missed opportunity recently: capital investment is weak, even though it currently carries a higher return than financial assets, and that weakness flows through the economy. We’ve long argued that if we want higher rates we need more capital investment, job training, and the like.

Shifting the Fed’s dependency to regimes instead of data suggests a more coherent communication. Recently some of the secondary data streams have become more important to the FOMC’s thinking than the primary, and that needs to be evaluated in a bigger context, in this case a regime. Of course, we’re going to have to wait to find out what it all means.

In this context, the authors peg the “appropriate regime-dependent policy rate path” (get used to writing that) at 63 basis points, and the Dallas Fed’s trimmed mean inflation, their preferred measure, at 2% over their horizon. Solving a one-year Fisher equation (0.63 less 2.0%), pegs the real rate on short-term government debt at -137 basis points. That’s now r† (r dagger) to distinguish the government rate from r*. Their main difference between the prior and current outlooks: in the old all components “trended” toward values in line with the assumed steady-state outcome. Specifically, the policy rate would be 350 bps above today’s level. He notes that if the FOMC adds 25bps a year, it would take 14 years to get there.

Taking the steady-state economy off the table makes sense to us as well. That steady state was supported by such old-fashioned things as long-term capital investment, job churn, new business formation, and productivity growth, the facets of a vibrant economy. If you take the legs off a chair, you can’t expect it to stand.

It’s a relief to have the uncertainty of our world accepted, and to hear those three little words, “We don’t know,” coming through. As Janet Yellen put it recently, “I am describing the outlook that I see as most likely, but based on many years of economic projections, I can assure you that any specific projection I write down will turn out to be wrong, perhaps markedly so.”

You could argue that it’s scary to hear those with such power express such uncertainty, but it sure beats hearing full confidence from those who were deeply wrong about what was to come, as we did in the years leading up to the crisis.

We have long expected Bullard to come up with some original thinking and, whether you like what the SL Fed is saying or not, we have that in spades. We’ve joked that we have a soft spot for him because we believe he was the first to use “Halloweenish” in an official Fed communiqué. Sometimes you don’t know what you want until it falls into your lap.

Honk if you now know you’ve always wanted to see such a word in Fed print.

Philippa Dunne & Doug Henwood




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What are transportation fuels telling us?

We follow transportation fuel sales volumes because they have a tight relationship with overall and manufacturing employment. The data are released with a lag, but they still provide a lead on the health of employment, especially manufacturing employment.

There’s been quite a bit of price action in the sector. Since bottoming out at $26.19 per barrel (bbl) on February 11th, the WTI price of crude has recovered to near $50; since mid-February the average price of regular gasoline has risen from $1.64 to $2.24 per gallon and the average price of diesel has increased from $1.98 to $2.36 per gallon.

Since the end of April, the nation’s crude oil inventory has decreased by almost 3 million bbls, or 0.1%. Domestic production has decreased by 11.5% since peaking during March 2015, shale oil production has decreased by 8.4% its March 2015 peak.

During December 2015 (most current data), diesel fuel sales increased by 82.5 million gallons (2.3%) nationwide over the year. During the prior 3-, 6-, and 12-months, increases were 2.5%, 3.1%, and 2.5%. This brought the 1-month diffusion index below 50 for the first time since May 2015, or from 52.9 to 47.1, as shown in this graph:


This next chart shows that the strongest diesel sales growth occurred in the Southeast, Great Lakes and Rocky Mountain regions during the past three months, while sales fell in the Southwest, Plains and Mideast regions.

Diesel yy

The 3-month-average growth rate for diesel sales bounced back from November’s 1.81% to 2.49% in December. During April, the relevant month, total employment growth rate decreased from 1.99% to 1.88%. The growth rate for manufacturing employment moved up from -0.20% to -0.16%, and remains near the lowest level since September 2010. Although other indicators imply some positive signs for growth in the manufacturing sector, diesel fuel sells imply growth in this sector will remain subdued through much of the remainder of 2016:

Employ diesel

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