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Monitoring the Dual Mandate: What Ails the Labor Force?

Pia Orrenius

Federal Reserve Bank of Dallas

Dallas Fed Economic SummitJune 27, 2016

Disclaimer: The views expressed here are those of the presenter and do not reflect those of the Federal Reserve Bank of Dallas or Federal Reserve System.

A SLOW RECOVERY

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Judging by real GDP growth, the current expansion has been unusually weak

100

105

110

115

120

125

130

135

1 2 3 4 5 6 7

1982

2009

1975 1991

2001

Index, business cycle trough = 100

Years into recovery

SOURCES: Bureau of Economic Analysis; National Bureau of Economic Research; authors’ calculations.

But divide GDP by the size of the labor force, and this expansion looks ordinary

100

105

110

115

120

125

1 2 3 4 5 6 7

1982

2009

1975

1991

2001

Years into recovery

Index, business cycle trough = 100

SOURCES: Bureau of Economic Analysis; National Bureau of Economic Research; authors’ calculations.

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The explanation for sluggish recovery: Labor-force growth has been exceptionally slow

99

103

107

111

115

1 2 3 4 5 6 7Years into recovery

Index, business cycle trough = 100

1982

2009

1975

1991

2001

SOURCES: Bureau of Labor Statistics; National Bureau of Economic Research; authors’ calculations.

What ails the labor force?

Wages Stagnation

Rising wage inequality, labor market polarization

Other trends with implications Aging

Diversity

Immigration

Policy responses Beware of unintended consequences

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Stagnating wages…

NOTES: Calculations are for full-time workers ages 25-65 who worked 50-52 weeks in the calendar year. Education groups are defined by a recoded education variable and is comparable across all years. Incomes are deflated using the CPI-U.SOURCE: March Current Population Survey , 1964 - 2015.

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013

Total wage and salary income by education (2014 dollars)

Less than high school

High school graduates

Associate's degree or some college

Bachelor's degree or higher

0

20

40

60

80

100

120

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Services

Goods

Millions of jobs

Rising service sector employment

SOURCE: Bureau of Labor Statistics.

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0

10

20

30

40

50

60

70

80

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Ratio of manufacturing to service sector jobs

Percent

Falling manufacturing employment

SOURCE: Bureau of Labor Statistics.

Job polarization: The shrinking middle class

-10

-5

0

5

10

15

Lowest WageQuartile

Lower-Middle WageQuartile

Upper-Middle WageQuartile

Highest WageQuartile

Texas U.S. Minus Texas

Percent change from 1979-2014

NOTES: Calculations include workers over age 15 with positive wages and exclude the self-employed. Quartiles based on the Texas and US wage distributions from the 1980 decennial census, which refers to 1979 wages. SOURCES: 1980 Census; 2014 ACS.

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Routine Non‐routine

Blue collar(manual)

ProductionCrafts

Operative Repair

Food servicePersonal care

Protective service

White collar(cognitive)

ClericalAdministrative

Sales

ProfessionalTechnicalManagerial

low‐skill  middle‐skill high‐skill

Technology replaces routine tasks, which most affects middle skill jobs

Rising income inequality…

0

50

100

150

200

250

1967 1972 1977 1982 1987 1992 1997 2002 2007 2012

Income in thousands (2014 dollars)

90th

50th (median)

5th

$206,568

$157,479

$53,657

$12,276

NOTE: The 2013 data reflect the implementation of the redesigned income questions.SOURCE: U.S. Census Bureau, Current Population Survey, 1968 to 2015 Annual Social and Economic Supplements.

95th

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Who/what gets blamed?Technological change

Routine tasks are automated

Globalization: Offshoring, trade, immigration

Production moves overseas

Trade increases access to foreign suppliers

Immigration

Slowing educational attainment

Changing labor market institutions

Decline of unions; falling real minimum wage

Exports and imports as a percent of GDP

0

5

10

15

20

25

30

35

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Percent of GDP

SOURCE: Bureau of Economic Analysis.

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SOURCE: Goldin and Katz “The Race Between Education and Technology” (2008).

The slowdown in educational attainment

0

10

20

30

40

50

60

70

80

Kor

ea

Can

ada

Rus

sia

Fed

erat

ion*

Irel

and

Nor

way

Uni

ted

Kin

gdom

Aus

tral

ia

Isra

el

Uni

ted

Sta

tes

Sw

eden

Sw

itzer

land

Fra

nce*

Net

herla

nds

Pol

and

Den

mar

k

Spa

in

OE

CD

ave

rage

New

Zea

land

Fin

land

Gre

ece

Tex

as

Ger

man

y

Chi

le

Mex

ico

Italy

25- to 34-year-olds 55- to 64-year-olds

Percent

*Year of reference: 2013. NOTE: Texas is based on 45- to 64-year-olds.SOURCES: Organization for Economic Cooperation and Development Table A1.4a (www.oecd.org/edu/eag2015); Texas data: American Community Survey, 2014 one-year estimate.

Population with a Bachelor's Degree or higher: Small gap means education gains dissipating

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Foreign-born population 42.4 million in 2014

0

5

10

15

20

25

30

35

40

45

1850 1870 1890 1910 1930 1950 1970 '00 '10 '14

Millions

Share of Population

Number

SOURCE: U.S. Census Bureau.

Due to sharp rise in immigration, the foreign-born share near historic peak

0

2

4

6

8

10

12

14

16

0

5

10

15

20

25

30

35

40

45

1850 1870 1890 1910 1930 1950 1970 '00 '10 '14

Millions Percent

Share of Population

Number

SOURCE: U.S. Census Bureau.

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Immigrant workers overrepresented at extremes of the education distribution

0

10

20

30

40

50

60

Less than highschool

graduate

High schoolgraduate,

some college

Bachelor'sdegree

Master'sdegree

Professionaldegree

Doctoraldegree

Percent

Foreign born share of labor force

NOTE: Percent of foreign workers age 25 and over in the U.S. labor force by education.SOURCE: 2014 American Community Survey

A CHANGING LABOR FORCE

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A changing native labor force

Aging

Diversity

Immigration

Aging underway: seniors will be 20% of U.S. population by 2030

0

5

10

15

20

25

1950 1970 1990 2015 2040 2060

Percent

SOURCE: U.S. Census, various years; U.S. Census Bureau 2014 population projections 2015- 2060.

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Changes in population by age group

-5

0

5

10

15

20

25

1994-04 2004-14 2014-24

16 to 24 25 to 54 55 and older

Change (millions)

SOURCE: “Labor Force Projections to 2024: The Labor Force is Growing, but Slowly,” Monthly Labor Review, December 2015, Bureau of Labor Statistics.

U.S. labor force participationrate in decline since 2000

SOURCE: Bureau of Labor Statistics.

56

58

60

62

64

66

68Percent

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69.1

56.7

0

10

20

30

40

50

60

70

80

90

100

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Men

Women

Percent, SA

NOTE: Ages 16 and over.SOURCE: Bureau of Labor Statistics.

Labor force participation by gender

Diversity risingPopulation projections by race: 2015 to 2060

-16.4

14.220.9

14.4

62.3

95.4

-40

-20

0

20

40

60

80

100

120

NH White NH Black NH Asian NH Other Hispanic (anyrace)

Total

Change in population, millions

SOURCE: U.S. Census Bureau, Population Division, Table 10. Projections of the Population by Sex, Hispanic Origin, and Race for the United States: 2015 to 2060.

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Rising diversity

61.712.4

5.3

3.017.7

2015

White

Black

Asian

Other

Hispanic

43.7

13.09.15.7

28.6

2060

White

Black

Asian

Other

Hispanic

SOURCE: U.S. Census Bureau, Population Division, Table 11. Percent of the Projected Population by Hispanic Origin and Race for the United States: 2015 to 2060.

POLICY RESPONSES

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0

5

10

15

20

25

30

35

1820 1840 1860 1880 1900 1920 1940 1960 1980 2000

GDP per capita (1990 $)

Global inequality high, but falling

U.S.

Germany

MexicoChina

India

GhanaHaiti

UK

SOURCE: The Maddison-Project, http://www.ggdc.net/maddison/maddison-project/home.htm, 2013 version.

World poverty declining ($1.90/day)

0

5

10

15

20

25

30

35

40

45

50

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

SOURCE: World Bank.

% of population

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World poverty declines by region

0

10

20

30

40

50

60

70

80

90

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

NOTE: Sub-Saharan Africa, Latin America & Caribbean, East Asia & Pacific, and MENA are measured as developing only.SOURCE: World Bank.

% of population living on $1.90 per day or less

Sub-Saharan Africa

East Asia & Pacific

South Asia

Latin America & Caribbean

MENA

What can we hope to fix with policy?

Technological progress is what the US excels in

Curbing trade bad for efficiency, productivity and consumers

Immigration brings needed skills, labor

Labor market interventions raise the cost of labor to producers

Answer: Investing in education

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52

54

56

58

60

62

64

66

68

70

2002 2004 2006 2008 2010 2012 2014 2016

Total Benefits

Total Compensation

Wages & Salaries

SOURCE: Bureau of Labor Statistics, Employment Cost Index.

Adjusted Index

Wages & Benefits – reindex & deflated

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90

100

110

120

130

140

150

160

170

2002 2004 2006 2008 2010 2012 2014 2016

Total Benefits

Total Compensation

Wages & Salaries

SOURCE: Bureau of Labor Statistics, Employment Cost Index.

Index

Wages & Benefits – reindex