Dull Party to blame for low labor force participation
Jared Bernstein is saying that the unemployment rate is actually higher than 6.7%…
“Based on numbers I’ve written about in greater detail, I think a more representative rate would be about 9 percent.”
His reasoning is based on the fall in labor force participation. But I do not agree with his logic. 6.7% is a realistic unemployment rate. The people who have dropped out of the labor force are gone. The economy is not as good as it used to be. And they have found alternatives. Mr. Bernstein is living in a delusion of the past grandeur of a better economy. Just like his view that unemployment will fall back to 4.0%.
Here is a story of the Dull Party to explain the low labor force participation rate.
You give a fun party every week. You send out invitations to 55 people. So you only provide enough food, beverages and party favors for 55 people. That is your budget. Every week the 55 people show up and enjoy the party. Yet every week, about 7 other people come hoping to get into the party. Every week you have to tell them “sorry, there is no more room.”
However, you would like the extra people to have a chance to enjoy your party. So you drop some people from your invitation list that don’t seem to be enjoying the party and add some names of the people who waited outside. So next week, the faces in the party will change, but there will still be 55 guests at the part. The people dropped from the invitation list now wait outside hoping to get back in.
So week to week there is a balance where 55 people enjoy the party, and 7 people wait outside. (Stable unemployment)
But then the party starts to get dull. The food, beverages and party favors just aren’t as good as before. So, you begin to notice that every week some people get bored and disappointed by the party. So they decide to do something else, maybe go to school and study. Maybe stay home and play video games. You think this is good, because now there is room for some of those who wait outside to come into the party. They seem eager and motivated to enjoy the party. You don’t have to have as many party favors to please the new-comers.
But then you begin to notice that just 4 people wait outside the party each week hoping to get in. There used to be 7 every week. What happened to the other 3 people. Well, I hate to tell you, but your party is dull. Word is getting around that it is just not as fun as before, and the food, beverages and party favors just aren’t as good as before. There are simply less people who are willing to wait outside. And let me tell you something else. Many of the people who come to the party, are not enjoying themselves. More and more of them would love to do somethings else, but they come by obligation to their family or have no good alternative.
So every week, more and more people decide not to come back and wait outside for a space in the party. They are relieved and go do something else. They have found an alternative. Maybe they make an “informal” party amongst themselves. (Informal economy is growing. source 1, source 2, source 3, source 4, source 5, source 6… enough sources?)
The point of this story is that the low labor force participation is due to a dull economy with poor benefits. Just because 7 people used to wait outside, but now only 4 do, you cannot count the missing 3 people as still there somehow. They are gone. They have found other alternatives. The new balance has been established according to the “Fun level” of your party.
Until you realize the party is dull and start offering more food, beverages and party favors, please do not expect that 7 people should be waiting outside. You are living in a delusion of past grandeur, when the party used to be more fun.
Message to anyone who thinks the unemployment rate is much higher than 6.7%… Please wake up and realize that only 4 people are now waiting outside. The others are doing something else. You have to blame the “Dull” party. Even though the economy is making room for a few more people, the party is still not getting any better. People are still not enjoying the party. The unemployment rate of 6.7% is a realistic rate.
UPDATE: Will discouraged workers come back if the economy picks up? Yes, some will, but some won’t. I do know 2 ladies who have a house-cleaning business in the “shadow” informal economy. They both earn over $50,000 per year. And they pay their workers over $12 per hour. There is no way the economy will entice these people back. Regular house-cleaning businesses pay $10 or less to their workers.
You are committing the cardinal sin of taking your model for reality. I’m just an econ undergrad, but off the top of my head, I can think of three canonical models of employment that tell completely different stories.
Let’s continue with the party analogy. It isn’t like every week the 7 people waiting outside got an invitation to next weeks party. Some people had been waiting outside for months (possibly the unattractive people?) They haven’t necessarily decided that they have better things to do than go to the admittedly duller party. They HAVE however decided that they have better things to to than wait around outside. So if the line got shorter they might well get back into it. OTOH having a long line outside helps to convince the people INSIDE that putting up with bad food and poor music must be worth it.
Larry,
Then I commit a common cardinal sin. Even the Euler equation part of DSGE models was taken as reality.
Your comment reminds me of an old Chinese saying…
“There are three truths… one is what you think is the truth. two is what I think is the truth, three is what the truth really is.”
Jim,
The people waiting outside do not receive invitations because they were not offered a job.
They hope that by going to the party, maybe somebody didn’t show up and there will be room for them. Kind of like stand-by for an airplane.
You make a good point about a long line outside and how it affects the people inside.
Flight attendant parties must be pretty wild :
http://www.usatoday.com/story/todayinthesky/2013/12/30/flight-attendants-hiring-southwest/4248543/
“Southwest Airlines recently put out the call for 750 flight attendants. More than 10,000 people submitted résumés in about two hours, according to Bloomberg….”
At some level, I think that the better analogy is a club(Like Studio 54), with people entering and leaving rather than a party with invitations. I think that models people entering and leaving the labor market continuously better than discrete parties, with separate invitations. So the Bouncers are determining the “proper” amount of people inside. And the line at the door making people inside more satisfied with watered drinks and poor music is equivalent to large numbers of job seekers suppressing wages. The long term unemployed correspond the the “hicks from the sticks” or “bridge and tunnel” crowd who are allowed in only in limited numbers when the club is relatively empty. And my earlier point stands, I believe that people are leaving the labor force not so much because the party sucks, but because waiting in line forever with little chance of getting in does. But the people in line outside ARE one of the things that allows the party to suck. Why NOT water the drinks when there is a line of people outside willing to put up with watered drinks and the customers inside KNOW that.
Jim,
It will be very interesting what happens in 2014. The economy picked up steam in the 2nd half of 2013. Will it last? Will capacity utilization continue to increase? Or was it a big effort to get a good holiday sales season?
2014 will tell us if the party will get better and more people will be willing to wait outside.
We may find that as people get hired, discouraged workers will take their place in the line outside so that the 6.5% or so unemployment rate stays steady.
Marko,
I read within the last week that JC Penney and Macy’s? just closed many stores and each left at least 2000 people unemployed. The first quarter 2014 data will be very interesting.
Do you think that airlines need more attendants because people are leaving the US? : )
If your 7 people (before things got dull) are changing all the time (case 1) then you a have a very different situation than if they are the same 7 people (case 2). If 3 of the seven case 2 people finally give up, it tells you nothing about what is going on inside even if you have evidence that those 3 are at some other party.
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Open thread Jan 17, 2014
Dan Crawford | January 17, 2014 8:05 am
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Comments (3)
Coberly
January 17, 2014 11:03 am
you could be right about the dull party. certainly I have found something better to do.
but the danger of a “good story” is that people will accept it for “the” truth.
i bet if you looked hard enough you’d find that some of those people no longer reporting themselves as “looking for work” have just run out of unemployment benefits, or gone on welfare, or slowly winding out their lives living on their “savings…” or selling dope. or baby-sitting my daughter’s dogs for sub sub sub minimum wage while she takes her ph.d. and works as an unpaid assistant to her boyfriend who can’t afford to hire anyone because he isn’t making enough money in his business which has been reduced to survival level by the masters of economic theory who think that’s the way it’s supposed to work.
Coberly
January 17, 2014 11:10 am
i suppose i might be one of those no longer unemployed because
because i am one of those whose life expectancy has gone up, you see, so they raised the retirement age, see, because “it’s obvious,” see, that if “we” are going to live longer we can all work longer, see
except that there aren’t enough jobs, and aren’t going to be, according to the people who predict such things… and that’s why we need to cut SS benefits, see, because there won’t be enough workers to pay the tax to pay for Social Security, see…
and the tragic thing about this reasoning is that for some people, many people, it “makes sense.”
Coberly
January 17, 2014 11:18 am
IF we are going to spend more of our careers unemployed… and this is the reason CBO gives for the Newer Bigger Projected Shortfall in Social Security, cutting benefits would be exactly the wrong thing to do.
Much smarter would be to raise the payroll tax. Sure, you’d be spending (a tiny bit) more, as a percent of your wages on SS. But You can live a lot better on that tiny bit less while you are working than you will be able to live on those smaller benefits when you are old and can’t work… or can’t find a job.
But don’t try to explain this to people.
It is due to the Boomers and it is going lower. another awful post by this guy.
please learn demo. LFPR was dead flat between 1945-1965…….why? Cause the Boomers. Hence, the fact LFPR hasn’t fallen since the recession is a sign of the expansion. Mercy people THINK!!!
Arne,
There is a balance established between employed, unemployed and those who don’t want to wait outside. We are seeing a new balance get established. The people outside the party do rotate with the people inside the party. They are not always the same people.
John C,
LFPR is not going lower because of the Boomers. You see the drop across all age groups.
And you are missing the fact that women started moving into the labor force in the late 60’s and 70’s. That is a major part why the LFPR grew. And now we see drops in Black’s and men’s participation.
It is not a Boomer thing. Just look at how much the informal economy has grown. There is a real change taking place.
Ed,
Add this to your list of sources:
http://www.cbsnews.com/news/gang-wars-at-the-root-of-chicagos-high-murder-rate/
100,000 of 200,000 (the latter my guesstimate) gang age Chicago males are in street gangs — trying to earn a living? One-third of African American adult males have a felony conviction. I would put the job outsourcing at home mostly down to the “Great Wage Depression.”
PS. If one extra trillion our of our $16 (17?) billion economy now exists wouldn’t that employ something like 1/17 of our 140 million workforce? ??? Especially on the poor side of town? See: Off the Books: The Underground Economy of the Urban Poor by Sudhir Alladi Venkatesh.
http://www.amazon.com/Off-Books-Underground-Economy-Urban/dp/0674030710/ref=la_B001HML50Y_sp-atf_title_1_3?s=books&ie=UTF8&qid=1389989078&sr=1-3
Ed,
How I was squeezed out of the New York and Chicago labor markets — even at the height of the dot.com boom:
The “Pakistanization” (“Nigerization”, “Russianization”, etc.) of my job: Between 1991 and 1997 the city of Chicago allowed one 30 cent increase in the taxi meter mileage charge …
… at which 1990 midpoint the city began building subways to both airports, allowing unlimited llimos, and (the coup de gras) putting on free trolleys between all the hotspots downtown (the Aquarium had been our second hottest pick up after O’Hare) …
… and adding 40% more taxis.
In New York the taximeter had reached $2.25 a mile in 2004 dollars (60 cents nominally) after the last successful taxi strike in 1974 — after which the lease system destroyed the union. By early 2004 the meter was down to $1.50 a mile. Under the lease system the loss all came out of the driver. Drivers were going back to India for a better life.
By early 2007 I was driving a cab in San Francisco — having given up free rent, free cable and free use of my brother’s Lincoln Towncar in Chicago to live in what my brother called the “derilict hotel” to make a decent living. Most of the San Francisco drivers were still American born and the job was still good enough that you had to start out on undesirable shifts and work your way up.
What is the point of this post? There are obviously something like 10-15 million people per the U-6 who would come back into the labor force and take jobs if they were available. The employment-to-population ratio dropped by five percentage points over a period of less than three years. That’s about 12.5 million people. It’s 16 million lower than it might have been compared to the last time jobs were plentiful, in 2000. Culture — finding something else to do rather than a job with actual income — does not change fast enough to explain employment changes that dramatic. There is also the matter of an additional five million people who are part-time not of their own volition.
Seems to me the thousands of seekers who show up for advertised openings is a flat-out refutation of the thesis. Not all of them — probably not even a majority — are in the official labor force.
It’s foolish to believe anyone can micromanage a large, diversified, and dynamic economy. There are hundreds of major economic forces, in hundreds of dimensions, pushing and pulling a large macroeconomy, simultaneously, which no one has the capacity to understand.
However, mathematical models explain how economic variables interrelate and empirical models explain how those variables interact. A large macroeconomy can be directed, in a crude way, towards optimization.
For example, I’ve shown, related to other econ variables, in much detail, and with no contradictions, raising the minimum wage (a relatively small component) will have a net positive effect on the U.S. economy.
Without going into extensive economics, the positive income and multiplier effects may be stronger than the negative employment effect up to $15 an hour.
A further explanation is raising the minimum wage will also reduce (other) production costs and raise productivity. Moreover, it’ll correct a “market failure” and reduce income inequality. Furthermore, the textbook model, of the minimum wage, is incomplete, because wages don’t equal prices. Wages are not only the price of labor, they’re also an input and income. The labor economics literature reveals a rise in the minimum wage has little or no effect on employment.
I stated before:
A rise in the minimum wage can increase real economic growth.
The higher wage attracts better workers, with higher reservation wages, to increase productivity.
Minimum wage workers have high marginal propensities to consume. So, a higher minimum wage increases consumption.
Only a portion of the higher minimum wage may be passed along in higher prices, because portions will be absorbed by “excess” wages of other workers (or overpaid workers) and “excess” profits (capital as a share of GDP is at an all-time high, while real wages declined).
Weak or poorly managed firms will lose business or fail. However, stronger or better managed firms will gain their business, and also gain from the increased demand.
Real wages of low income workers will rise more than real real wages of high income workers will fall, through prices. So, income inequality will be reduced.
If the economy was able to absorb a $10 real minimum wage, in 1968 (which coincided with a 3.5% national unemployment rate and a much higher teen labor force participation rate), why can’t it absorb a higher real minimum wage with low-wage productivity 25% higher, and the real minimum wage 25% lower, particularly, since per capita real income doubled, profits are much higher as a percent of GDP, and the proportion of real income of the top 20% became much more concentrated, while real median income was stagnant, and then declined since 2000.
Here’s a real example (relatively few new workers were hired after raising the wage – existing workers rose to the higher standard):
There was a fast growing firm that was also very disorganized, because it was so busy. One of the recommendations was raising the starting wage from $11 to $13 an hour for all factory workers. However, management decided that was a bad idea. One reason was there were always plenty of applicants for $11 an hour, over the prior five year period, and of course, there was concern profits would fall, substantially.
However, roughly six months later, management raised the starting wage to $13 an hour and something miraculous happened.
Turnover rates dropped like a rock, overtime was almost completely eliminated, including six day weeks, injuries fell dramatically, hardly anyone called in sick, damage to equipment and products almost disappeared, including steep declines in reject rates, quality rocketed, morale was lifted, management no longer had to spend enormous time interviewing workers, with related paperwork and training, supervisors no longer had to cover for sick workers, to do their jobs, and had time to actually do their work, and profits soared.
Experienced workers who rejected the job when they learned it was $1 or $2 less than they were willing to work for took the jobs at the higher rate. Management had much more time to manage and supervisors had much more time to supervise. So, operations became much more organized and efficient.
Why raising the minimum wage is a good idea:
1. Stimulate economic growth.
2. Correct a market failure.
3. Lower production costs.
4. Raise productivity.
5. Raise teen labor force participation rate.
6. Expand better managed businesses.
7. Create less income inequality.
8. Correct the saving glut.
9. Correct weak demand.
10. Build morale and make work pay.
11. Reduce government support for low wage workers.
12. Reduce parental support for low wage workers.
Hey, Peak Trader,
Are you trying to steal my thunder? I just wrote this. 🙂
Nobody who thinks about doubling the minimum wage ever seems to consider whether raising the wages of 45% of the workforce could actually raise demand (sounds sensible somehow) – for the very goods and services they produce. But, before the 45% of the workforce — who would get a wage hike to $15 an hour — raise demand for their own products, that money has to come from somebody else, first – the 55%.
The 45% can actually get more money to spend if demand for their products drop — because they will get a bigger cut of the price tag. It will be sort of like a leveraged buyout or buying stocks on margin. Or (the comparison I like) as if there were “shadow” price/demand curves hidden on what I call the “classic minimum wage 101 chart” wherein what I call “financial demand” for labor is much more inelastic than the visible curve (which is probably not very elastic as we will consider).
The 45% will likely spend more than average of their expanded new cash on the kind of products they produce – wheels within wheels of multiplier effect. Let’s look at the real world.
Products produced by low-wage labor tend to be staples whose demand is inelastic. Demand for food is inelastic – probably even fast food. If your family visit to McDonald’s goes from $24-$30, are you really going to eat at home on Saturday (the kiddies haven’t forgotten the fundamental theorem of economics: money grows on trees :-]). And fast food is by far the most worrisome example: lowest wages; even so, highest labor costs, 25%.
Wal-Mart is the lowest price raising example (surprise) with 7% labor costs. Jump Wal-Mart pay 50% and prices go up 3.5%.
If labor costs average 15% and wages increase an average of 50%, that amounts to an average 7.5% increase in prices. Even if demand drops just enough for the increase in prices to result in the same gross receipts, then, labor income comes out far ahead.
http://www.nytimes.com/2014/01/12/business/the-vicious-circle-of-income-inequality.html?src=me&_r=0
“… higher incomes of top earners have been shifting consumer demand in favor of goods whose value stems from the talents of other top earners. … as the rich get richer, the talented people they patronize get richer, too. Their spending, in turn, increases the incomes of other elite practitioners, and so on.” (My emphasis.)
The multiplier effect – works at both ends of the spectrum and probably in the middle. A minimum wage raise to $15 an hour is not going to send most low-wage earners in pursuit of better model autos, an extra bedroom or gold seal medical plans. Wal-Mart and Mickey D’s OTH should do spectacularly – which in turn could keep Wal-Mart and Mickey D’s doing even more spectacularly.
I just got this off a David Brooks column:
“But raising the minimum wage may not be an effective way to help those least well-off. Joseph J. Sabia of San Diego State University and Richard V. Burkhauser of Cornell looked at the effects of increases in the minimum wage between 2003 and 2007. Consistent with some other studies, they find no evidence that such raises had any effect on the poverty rates.”
I wonder if that LACK of effect could have anything to do with this:
According to big (biggest?) minimum wage critic David Neumark, $55 billion is transferred to poor working families every year by the E.I.T.C. — and that ironically says it all. That much money represents a third of one-percent of our $16 trillion economy.
That much equates to a federal minimum wage raise from $8 to $9 an hour (if it were $8 already) which would shift about $40 billion to the bottom 20% of workers — who take home all of 2% of American income. That would represent one-quarter of one percent of our $16 trillion economy — talk about trickling down the trickle down.
To add to my explanation why a so-called “moderate” minimum wage increase in the studies Brook cites did not even dent the poverty line — because that shifts only about a quarter of a percent of GDP per dollar hike: the poverty line they are talking about — the official federal poverty line — is off by about half.
The federal line is based on three times the price of an emergency diet (dried beans only please; no expensive canned): $20,000 for a family of three. A realistic minimum needs costs for a family of three can be discovered on p. 44 of the MS. Foundation book “Raise the Floor”: more like $45,000 if they have to pay for their own health care.
So a so-called “moderate” hike in the minimum wage cannot even dent a very mistakenly very low poverty line. Just noticed that.
I suspect, states that raised the minimum wage (a pro-growth policy, because the national minimum wage is too low) were also more likely to create more regulations and raise taxes, fees, fares, fines, tolls, etc. (which are anti-growth policies when there’s too much regulation and taxes are too high or when the country is in depression).
Also, David Neumark was unable to disprove the Card-Krueger study
“It is not uncommon to hear the Card and Krueger results dismissed by opponents of the minimum wage as having been disproved by the Neumark and Wascher study. However, an objective review of all the material from both sets of authors leads to the conclusion that the New Jersey minimum wage increase had no measurable impact on employment in fast-food restaurants. As discussed on the following pages, a number of factors support the Card and Krueger findings and call into question the results of the Neumark and Wascher study: 1) the questionable data collection methods used by Neumark and Wascher; 2) a reexamination of the Card and Krueger study using unbiased government records; and 3) the carefully worded conclusions in the final version of the Neumark and Wascher paper.
Based solely on their own research—using highly questionable data—Neumark and Wascher concluded that the minimum wage had a negative impact on employment. They did, however, acknowledge that many of their results are not statistically significant. Even more telling, after reviewing the results of the second Card and Krueger study that used government data and combining that with their own findings, Neumark and Wascher hedge by saying that they can only decisively conclude that “New Jersey’s minimum wage increase did not raise fast-food employment in that state” (Neumark and Wascher 2000, p. 1,391). “
“The best data for looking at the impact of the minimum wage on restaurant employment are ES-202 data, which are routinely collected by state governments for the unemployment compensation program. These data are likely more accurate than the phone survey originally performed by Card and Krueger and would not be subject to the same biases as the EmPI/Neumark and Wascher data. For confidentiality reasons, ES-202 data is generally not available to the public except in the form of broad aggregate data. Card and Krueger, however, received access to establishment-level data, which allowed them to reevaluate their original study using an accurate and unbiased source.
The results of this study were published in the American Economic Review alongside the results of Neumark and Wascher (Card and Krueger 2000). The updated conclusion of Card and Krueger was identical to their first study: that the “increase in New Jersey’s minimum wage probably had no effect on total employment in New Jersey’s fast-food industry and possibly had a small positive effect” (Card and Krueger 2000, p. 1,419).”
I think, there are two opposing forces on employment.
One is raising the minimum wage increases productivity and lowers production costs. So, instead of 100 workers, for example, to produce a level of output, 95 workers, for example, are needed to produce the same level of output.
The higher wage creates incentives for workers to keep their jobs (e.g. working harder for the higher wage), attract more productive idle workers (e.g. with more education), and lowers production costs, e.g. a lower turnover rate.
The other force is when 100 workers get a $1 raise, one worker may lose his job and go on unemployment. So, 99 workers benefit and one worker doesn’t. 99 workers have $1 an hour more to spend or save. However, they’ll likely spend it, because they have high marginal propensities to consume
The freed-up labor, along with a rising labor force participation rate, can expand the economy at a faster rate.
It should be noted, the teen labor force participation rate collapsed after 1980 when the real minimum wage fell below $8 an hour.
Since the minimum wage was established, per capita real GDP has grown at a much faster rate.
Annual per capita real GDP growth:
1863-1937 (75 years): 1.33%
1938-2012 (75 years): 2.44%
Source: Census data and the BEA.
Moreover, raising the minimum wage will cause a shift from the labor input to the capital input (e.g. capital equipment).
However, workers have to create, build, ship, install, improve, maintain, operate, and manage those machines.
Currently, in the U.S., there’s an overabundance of capital and an education boom.
Do we want to continue keeping trillions of dollars of capital in unproductive assets, in the saving glut, while overeducated Americans work at low-skilled jobs?
Ed,
Can’t speak for everybody, only myself, but as a skilled tech worker w/almost forty years exp who is now a discouraged unemployed person (due to there being no suitable work in this area anymore), I would go back to work in a heartbeat if an interesting position paying a living wage were to be available to me. Please do not stereotype us, I am only a discouraged ex-job seeker as there are no suitable jobs here for me.