Tag: full employment

At Barron’s: What’s At Stake in the Labor Market?

(I am now writing a monthly opinion piece for Barron’s. This one was published there in August.)

The labor market is exceptionally tight, at least by the standards of recent history. That matters for monetary policy, but its importance goes beyond inflation, or even material living standards. We are used to a world where workers compete for jobs. A world where businesses compete for workers would look very different.

Today’s 3.5% unemployment rate is lower than any time between 1970 and 2019. While the prime-age employment-population ratio is still shy of its prepandemic level, other measures imply a labor market even hotter than at the height of the late-90s boom. Both the historically high rate of workers quitting their jobs and the nearly two job openings for each unemployed worker suggest that this could be the best time to be looking for a job in most Americans’ working lives.

How long this will continue depends in large part on the Federal Reserve, where the question often comes down to whether inflation expectations are anchored. If businesses and households come to believe that prices will rise rapidly, the argument goes, they will behave in ways that cause prices to rise, validating those beliefs and making it harder to bring inflation back down.

Curiously, there is little discussion of all the other expectations that can also be anchored in different ways, which suggest a very different set of trade-offs.

Businesses that expect growth to be weak, for example, are unlikely to invest in raising capacity—which makes strong growth much harder to achieve. Workers who feel it’s impossible to find a job may stop looking for one, making expectations of weak employment growth self-confirming. Both these expectational shifts played a role in the “lost decade” after the 2007 crash.

Today’s tight labor markets are reshaping expectations in a different direction, which could lead to lasting changes in employment dynamics. As economist Julia Coronado observes, one lesson businesses seem to have learned is that staffing up may be slower and more difficult than in the past. This in turn makes businesses more hesitant to lay off workers, even when demand slackens.

Fewer layoffs, of course, contribute to tighter labor markets—another example of self-confirming expectations. But those new expectations also mean a different kind of employment relationship. A business that expects labor to be cheap and abundant has little reason to invest in recruiting, retaining and training its employees. Conversely, a business that can’t count on quickly hiring workers with whatever skills are needed has to focus more on developing and holding on to the workers it has. These qualitative changes in the organization of work aren’t captured in the aggregate numbers on employment and wages.

To be clear, there is not a labor shortage in any absolute terms. One thing we have clearly learned over the past year is that total employment isn’t just a matter of how many people are willing to work. Back in spring 2021, some economists argued that generous pandemic unemployment assistance was holding back job growth. When some states ended unemployment assistance early, that offered the perfect controlled test of this theory. It was decisively refuted. As the labor economist Arin Dube has shown, employment growth was no faster in the states that ended pandemic unemployment relief earlier than in those that kept it longer.

What is true, though, is that the kinds of jobs people will take may depend on their other options. For the economy as a whole, today’s high rate of movement between jobs is a clear positive. A big reason people can get raises by changing jobs is, presumably, that their new work is more valuable than what they were doing before. But from the point of view of employers, this is a process with winners and losers. Some businesses will adapt, offering higher wages—as many food service and retail giants are already doing—and nonpecuniary benefits such as predictable schedules and pathways for advancement. Tight labor markets will also favor higher-productivity businesses, which can afford to pay higher wages. Those that are wedded to a model that treats labor as cheap and disposable, on the other hand, may struggle or fail.

It isn’t only employers that need to adjust to tight labor markets, of course. There is little doubt that the upsurge of union organizing we’ve seen in recent years owes a great deal to labor market conditions. When jobs are plentiful, the fear of losing yours is less of a deterrent to standing up to the boss. And people who are reasonably confident of at least getting a paycheck may begin to wonder if that is all their employer owes them.

Historically, periods of rapid union growth have followed sustained growth, not depressions and crises. During the 1972 strike at GM’s Lordstown plant—one of the high points of 1970s labor militancy—one union leader explained why the younger workers were so ready to walk off their jobs:

“None of these guys came over from the old country poor and starving, grateful for any job they could get. None of them have been through a depression …They’re just not going to swallow the same kind of treatment their fathers did. That’s a lot of what the strike was about. They want more than just a job for 30 years.”

Strikes like Lordstown are rooted not just in conditions at the particular workplace, but also in the ways a prolonged high-pressure economy shifts what workers expect from a job. Significantly, the Lordstown strikers’ demands included a say in the design and organization of the plant, as well as better pay and benefits.

Not everyone would welcome a revived U.S. labor movement, of course, or a move toward German-style co-determination. While some people see unions as a pillar of democracy and counterweight to corporations’ political power, others see them as an illegitimate intrusion on the rights of business owners. Either way, whether organized labor can reverse its decline is a question with consequences that go far beyond next month’s inflation numbers. And it depends a great deal on how long today’s tight labor market lasts.

It might seem utopian to imagine a transformation of the workplace when the headlines are dominated by inflation and recession fears. But the real fantasy is to imagine we could reap the benefits of a high-pressure economy—faster productivity growth, a more equal distribution of income, more resources to solve our most pressing problems—without making any changes to how firms and labor markets are organized.

In his most recent press conference, Federal Reserve Chair Jerome Powell said, “we all want to get back to the kind of labor market we had before the pandemic.” Do we really all want that, or could we aim higher? But in any case simply turning back the clock isn’t an option. An economy adapted to slow growth and cheap, abundant workers can’t adjust to tight labor markets without changing in profound ways.

Some may welcome an economy where chronically scarce labor means that businesses are under constant pressure to raise productivity and attract and retain employees. Others may hope for a deep recession to reset expectations about the relative scarcity of workers and jobs. One way or the other, those are the stakes.

 

At Barron’s: What We Don’t Talk About When We Talk About Inflation

(I am now writing a monthly opinion piece for Barron’s. This one was published there in July.)

To listen to economic policy debates today, you would think the U.S. economy has just one problem: inflation. When Federal Reserve Chairman Jerome Powell was asked at his last press conference if there was a danger in going too far in the fight against inflation, his answer was unequivocal: “The worst mistake we could make is to fail—it’s not an option. We have to restore price stability…because [it’s] everything, it’s the bedrock of the economy. If you don’t have price stability, the economy’s really not going to work.”

Few would dispute that rising prices are a serious problem. But are they everything?

The exclusive focus on inflation acts like a lens on our view of the economy—sharpening our attention on some parts of the picture, but blurring, distorting, and hiding from view many others.

In the wake of the Great Recession, there was a broadening of macroeconomic debates. Economists and policy makers shifted away from textbook truisms toward a more nuanced and realistic view of the economy. Today, this wide-ranging conversation has given way to panic over rising prices. But the realities that prompted those debates have not gone away.

In the clamor over inflation, we’re losing sight of at least four big macroeconomic questions.

First, does the familiar distinction between supply and demand really make sense at the level of the economy as a whole? In the textbooks, supply means the maximum level of production in the economy, labeled “full employment” or “potential output,” while demand means total spending. The two are supposed to be independent—changes in spending don’t affect how much the economy can produce, and vice versa. This is why we are used to thinking of business cycles and growth as two separate problems.

But in the real world, supply often responds to demand—more spending calls forth more investment and draws people into the labor force. This phenomenon, known by the unlovely name “hysteresis,” was clearly visible in the slowdown of labor force and productivity growth after the Great Recession, and their recovery when demand picked up in the years before the pandemic. The key lesson of this experience—in danger of being forgotten in today’s inflation panic—was that downturns are even more costly than we thought, since they not only imply lost output today but reduced capacity in the future.

Hysteresis is usually discussed at the level of the economy as a whole, but it also exists in individual markets and industries. For example, one reason airfares are high today is that airlines, anticipating a more sustained fall in demand for air travel, offered early retirement to thousands of senior pilots in the early stages of the pandemic. Recruiting and training new pilots is a slow process, one airlines will avoid unless it’s clear that strong demand is here to stay. So while conventional wisdom says that rising prices mean that we have too much spending and have to reduce it, in a world with hysteresis a better solution may be to maintain strong demand, so that supply can rise to meet it. In the textbook, we can restore price stability via lower demand with no long-run costs to growth. But are we sure things work so nicely in the real world?

The second big question is about the labor market. Here the textbook view is that there is a unique level of unemployment that allows wages to grow in line with productivity. When unemployment is lower than this “natural rate,” faster wage growth will be passed on to rising prices, until policy makers take action to force unemployment back up. But in the years before the pandemic, it was becoming clear that this picture is too simplistic. Rising wages don’t have to be passed on to higher prices—they may also come at the expense of profits, or spur faster productivity growth. And not all wages are equally responsive to unemployment. Younger, less-educated, and lower-wage workers are more dependent on tight labor markets to find work and get raises, while the incomes of workers with experience and credentials rise more steadily regardless of macroeconomic conditions. This means that—as Powell has acknowledged—macroeconomic policy has unavoidable distributional consequences.

In his classic essay “Political Aspects of Full Employment,” the great Polish economist Michal Kalecki argued that even if it were economically feasible to eliminate unemployment, this would be unsustainable, since employers’ authority in the workplace depends on “the threat of the sack.” Similar arguments have been made by central bank chiefs such as Alan Greenspan, who suggested that low unemployment was sustainable in the 1990s only because workers had been traumatized by the deep recession of the decade before.

Some would argue that it’s unnecessarily wasteful and cruel to maintain labor discipline and price stability by denying millions of people the chance to do useful work—especially given that, prior to the pandemic, unemployment had fallen well below earlier estimates of the “natural rate” with no sign of accelerating inflation. But if we wish to have a permanent full-employment economy, we need to answer a difficult question: How should we manage distributional conflicts between workers and owners (and among workers), and motivate people to work when they have little to fear from losing their job?

A third set of questions concerns globalization. There are widespread fears that renewed Covid lockdowns in China may limit exports to the U.S. and elsewhere. Seen through the inflation lens, this looks like a source of rising prices and a further argument for monetary tightening. But if we take a step back, we might ask whether it is wise to organize the global economy in such a way that lockdowns in China, a war in Ukraine, or even a factory fire in Japan leave people all over the world unable to meet their basic needs. The deepening of trade and financial links across borders is sometimes presented as a fact of nature. But in reality it reflects policy choices that allowed global production of all kinds of goods—from semiconductors to Christmas decorations and latex gloves—to be concentrated in a handful of locations. In some cases, this concentration is motivated by genuine technical advantages of larger-scale production, in others by the pursuit of low wages. But either way, it reflects a prioritization of cost minimization over flexibility and resiliency. Whatever happens with inflation, this is a trade-off that will have to be revisited in coming years, as climate change makes further disruptions in global supply chains all but inevitable.

Then there is climate change. Here, the inflation lens doesn’t just recolor the picture but practically reverses it. Until recently, the conventional wisdom was that a carbon tax was the key policy tool for addressing climate. An Obama-era economist once quipped that the big question on climate was whether a carbon tax was 80% of the solution, or 100%. A carbon tax would increase the prices of energy, which still mainly comes from fossil fuels, and of travel by private car. As it happens, this is exactly what we have seen: Autos and energy have increased much faster than other prices, to the point that these two categories account for a majority of the excess inflation over the past year. In effect, we’ve seen something like a global carbon tax. But far from welcoming the disproportionate rise in the prices of carbon-intensive goods as a silver lining of inflation, both policy makers and the public see it as an urgent problem to be solved.

To be clear, people are not wrong to be unhappy at the rising cost of cars and energy. In the absence of practical alternatives, these high prices inflict real hardship without necessarily doing much to speed the transition from carbon. One reasonable lesson, then, is that a carbon tax high enough to substantially reduce emissions will be politically intolerable. And indeed, before the pandemic, many economists were already shifting away from a carbon-price-focused approach to climate policy toward an investment-centered approach.

Whether via carbon prices or investment, the only way to reduce carbon emissions is to leave fossil fuels in the ground. Yet an increasing swath of the policy conversation is focused on how to encourage more drilling by oil-and-gas companies, not just today but into the indefinite future. As a response to today’s rising energy prices, this is understandable, given the genuine limitations of renewable energy. But how can measures to boost the supply of fossil fuels be consistent with a longer-term program of decarbonization?

None of these questions have easy answers. But the danger of focusing too single-mindedly on inflation is that we may not even try to answer them.

At Roosevelt: Reimagining Full Employment

Mike Konczal, Lauren Melodia and I have a new report out from the Roosevelt Institute, on what true full employment might look like in the United States.

This is part of a larger project of imagining what an economic boom would look like. As Mike and I argued in our recent New York Times op-ed, there’s a real possibility that the coming years could see a historic boom, thanks to the exceptionally strong stimulus measures of the past year and, hopefully, the further expansions of public spending on the way. (Interestingly, the term “boom” is now making it into Biden’s speeches on the economy.) If the administration, Congress and the Fed don’t lose their nerve and stay on the path they’re currently on, we could soon be seeing economic growth and rising wages in a way that we haven’t since at least the late 1990s.

This is going to call for a new way of thinking about economic policy. Over the past decade or more, the macroeconomic policy debate has been dominated by a consensus that is more concerned with the supposed dangers of public debt than stagnation, and sees any uptick in growth or wages as worryingly inflationary. Meanwhile, the left knows how to criticize austerity and bailouts for business, and to make the case for specific forms of public spending, but has a harder time articulating the benefits of sustained growth and tight labor markets.

What we’re trying to do is move away from the old, defensive fights about public debt and austerity and make the positive case for a bigger more active public sector. There’s no reason the Right should have a monopoly on promises faster growth and improvements in peoples material living standards. Post-covid, we’re looking at a new “morning in America” moment, and progressives should be prepared to take credit.

One of the great appeals of the Green New Deal framing on climate change is that it turns decarbonization from a question of austerity and sacrifice into a promise to improve people’s material well being, not decades from now but right now, and in ways that go well beyond climate itself. I think this promise is not just politically useful but factually well-founded, and could just as well be made for other expansions of the public sector.

This is an argument that I and others have been making for years. Of course, any promise of faster growth and higher living standards has to confront the argument, enshrined in macroeconomics textbooks, that the economy is already operating close to potential, at least most of the time — that the Federal Reserve has taken care of the demand problem. In that case, the Keynesian promise that more spending can call forth more production would no longer apply.

We’ve tended to respond to this argument negatively — that there is no evidence that the US now was facing any kind of absolute supply constraint or labor shortage before the pandemic, let alone now. This is fine as far as it goes, and I think our side of the debate has won some major victories — Jay Powell and Janet Yellen both now seem to agree that as of 2019 the US was still well short of full employement. Still, I think it’s legitimate for people to ask, “If this isn’t full employment, then what would be?” We need a positive answer of our own, and not just a negative criticism of the textbook view.

This new paper is an attempt to do just that — to construct an estimate of full employment that doesn’t build in the assumption that recent labor market performance was close to it. One way to do this is to compare the US to other advanced countries, many of which have higher employment-population ratios than the US, even after adjusting for age differences. We chose to take a different approach, one that instead looks at differences in employment rates within the US population.

From the executive summary:

This issue brief argues that potential employment in the US is much higher than we have seen in recent years. In addition to those officially counted in the labor force, there is a large latent labor force, consisting of people who are not currently seeking work but who could reasonably be expected to do so given sustained strong labor demand. This implies much more labor market slack than conventional measures of unemployment suggest.

An important but less familiar sign of labor market slack is the difference in employment rates between groups with more- and less-privileged positions in the labor market. Because less-favored groups—Black workers, women, those with less formal education, those just entering the labor market—are generally last hired and first fired, the gaps between more- and less-favored groups vary systematically over the business cycle. When labor markets are weak and employers can pick and choose among potential employees, the gap between employment rates for more- and less-favored groups widens. When labor markets are tight, and workers have more bargaining power, the gap shrinks.

We use this systematic relationship between overall labor market conditions and employment rates across race, gender, education, and age to construct a new measure of potential employment. In effect, since more-favored workers will be hired before less-favored ones, the difference in outcomes between these groups is a measure of how close hiring has gotten to the true back of the line.

We construct our measure in stages. We start with the fact that changes in employment rates within a given age group cannot reflect the effect of population aging. Simply basing potential employment by age groups on employment rates that have been observed historically implies potential employment 1.7 points higher than the CBO estimates.

Next, we close the employment gaps by race and gender, on the assumption that women and Black Americans are no less able or willing to work than white men of a similar age. (When adjusting for gender, we make an allowance for lower employment rates among parents of young children). This raises potential employment by another 6.2 points.

Finally, reducing the employment gap between more- and less-educated workers in line with the lower gaps that have been observed historically adds another 1.8 points to the potential employment rate.

In total, these adjustments yield a potential employment-population ratio 10 points higher than the CBO estimates, equivalent to the addition of about 28 million more jobs over the next decade.

Adding these 28 million additional jobs over the next decade would require an average annual growth in employment of 2.1 percent. The employment growth that would fully mobilize the latent labor force, as estimated here, is in line with the rate of GDP growth required to repair the damage from the Great Recession of 2007–2009 and return GDP to its pre–2007 trend.

You can read the rest here.