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America: A workforce on the wane

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Reposted from the Financial Times


America: A workforce on the wane

Robin Harding  |  April 18, 2012  |  Financial Times

As unemployment returns from high recessionary levels, it is becoming clear that millions in the US have left the jobs market
A job seeker arrives for JobProsper career fair

A lot depends on what people such as Fred Knopsnyder, Sandy Brady and Leanne Wilson do next: the course of the world’s biggest economy, their own futures and – in strange and unexpected ways – the outcome of a presidential election.

Mr Knopsnyder spent 33 years making pop-up camping trailers in Somerset, a town in the Laurel Highlands of Pennsylvania, population 78,000. He relates with engaging surprise the vicissitudes of what was to happen. “I learnt from watching the news. Real nice and warm in the house, and I’m drowsing and going to sleep, and my wife goes, ‘Honey, I don’t think you have a job any more’. I looked up,and she backed up the TV and played it again, and it just said, ‘Doors are closing’.”

Ms Brady worked at the Fleetwood caravan plant too, for 40 years – 148 staff remained in the final days before operations ceased in January 2011. Ms Wilson was in management at Gilmour, a Somerset maker of garden hoses and sprinklers that closed its doors in 2009 with the loss of 330 jobs.

It is nothing new when an out-of-town owner closes down a small slice of Americana. Gilmour is part of Robert Bosch, the German industrial group; Fleetwood was owned by Blackstreet Capital, a Maryland private equity firm that townsfolk say behaved disgracefully, giving no notice of the closure. Blackstreet did not immediately respond to a request for comment.1“

But as a small and relatively isolated labour market that suffered a painful shock during the recession that followed the financial crisis, Somerset may help to answer a crucial question about the US economy: why have people dropped out of the labour force and are they returning?

There are about 5m more unemployed Americans today than at the start of 2008. They count as part of a workforce in which the unemployment rate stands at 8.2 per cent. But in that time labour force participation has also declined by two percentage points of the civilian adult population, equivalent to another 5m Americans who are not working, and not looking for work, but are doing something else. “Had the labour force participation rate not declined from around 66 per cent in mid-2008 to under 64 per cent in February, the unemployment rate would still be over 10 per cent,” William Dudley, president of the Federal Reserve Bank of New York, said in a recent speech.

Economists at the Fed and elsewhere tell three different stories about why this happened. The first is a sad one – that the recession left workers damaged and discouraged, sitting at home watching The Young and the Restless because their skills do not match today’s economy.

The second is more cheerful. It says that those 5m workers want jobs, and are busily retraining, but they are not bothering to look actively at the moment because the economy is still too weak. When it heals, they will come back into the labour force.

Story three says the decline was written in the stars because 2008 was 62 years after 1946 and hence the first year that the baby boom generation could retire on Social Security, the federal retirement benefit. Rather than the recession, it was because of ageing – and thus the only people in today’s economy who need jobs are those defined as unemployed.

All this matters because labour participation is the hidden force behind the unemployment rate. If people return to the labour market it will keep the unemployment rate up and wage inflation down. That makes story two best for the US economy in the long run, because it implies the largest future labour force along with low inflation that lets the Fed keep interest rates down. Story three is worst because it suggests the opposite. Explanation one implies less economic capacity in the short term, and much heartache for the workers affected, but means that participation could recover over time.

Up in western Pennsylvania, the best evidence of hard-to-heal labour dislocation is at the Somerset County Workshop, a vocational facility for workers with disabilities that got much of its work from Gilmour and Fleetwood. “It was devastating, because those were the two contracts that we had,” says Cathie Beal, the workshop supervisor.

Ms Beal and her colleague Jackie O’Connor, the workshop director, have started a catering business, tried making blankets and school scarves, and won some orders from the toy company Poof-Slinky, but it is hard to find enough to keep their worker-customers busy. “If they don’t come here and make a pay cheque of any kind, they miss work, and what happens? Their disability cheques go up,” says Ms O’Connor.

But the aggregate figures in Somerset belie the idea that most workers have given up, even though the average age of workers at Fleetwood was 53 and at Gilmour in the mid-40s,suggesting instead a more fluid picture of people moving into and out of jobs and training. That fits with a host of economic studies that have struggled to find much “mismatch” in the US labour market.

Of the 275 staff from Gilmour attached to a petition for trade adjustment assistance, 96 went into training, of whom 21 are still in school. A further 105 are working, 25 have retired, a couple are on disability benefits and three left the area. Cathy Lilly, the redoubtable local employment chief, estimates that many of those unaccounted for are younger and likely to be in work, although others are doubtless unemployed. The figures are broadly similar at Fleetwood although with more retirements.

“I’m taking [diploma] classes and I’m hoping to pass them so I can get on with my life,” says Ms Brady. “I don’t have a husband … I’d like to be back in the working world, I’d love to go to the bank every Friday and get my cheque.”

For her part, Ms Wilson had begun studies to be a registered nurse before Gilmour closed. She will graduate soon. For Ms Brady and Mr Knopsnyder, who is finishing up a welding course, matters are trickier because they are dependent on the local economy to create enough jobs. Some workers from the two plants went into the local coal industry, which enjoyed a mini-boom but is now struggling against cheap shale gas. Others found work with Lockheed Martin in nearby Johnstown. But the overall unemployment rate in Somerset county is a higher-than-average 9.2 per cent and the area would benefit from a further economic stimulus.

In recent months, though, the third story about demographic change has gained ground. The only way to address it is with a model that compares the decline in labour participation against some kind of trend. Dean Maki of Barclays Capital is one economist who has done so. “Our analysis indicates that the single biggest factor dragging the labour force participation rate down has been the retirements of the baby-boomers,” he says.

Of a 2.8 percentage point fall in labour force participation since 2002, Mr Maki estimates that 1.6 points are due to demographics and only 0.9 points to the economic cycle. As the demographic decline will continue at 0.3-0.4 points a year, his calculations suggest all of the “cyclical” decline could be gone within a couple of years if only modest numbers return to work.

Data that make the Fed ponder

Before the latest recession, labour economics was a rather unfashionable branch of the profession – taken up with arguments about minimum wages and the merits of tax credits in encouraging people to work.

With the return of mass unemployment, however, the speciality has taken centre stage. One of its leading lights – Alan Krueger of Princeton University – is a senior adviser to President Barack Obama and labour economists are in demand across the Federal Reserve, the US central bank.

A particular question at the Fed is “Okun’s law”, which has recently been behaving less like a law and more like the rule of thumb that it is. Okun’s law says that for a 1 percentage point fall in unemployment, the economy must grow by 2 percentage points above its long-run average. Over the last year, however, unemployment is down by a percentage point while measured growth in the economy has barely matched its trend rate.

Labour force participation goes to the heart of the internal Fed debate about what is going on. “A story centred on potential workers dropping out of the labour force might seem in line with the low level of the labour force participation rate,” Ben Bernanke, Fed chairman, said recently. “But other data cast doubt on that idea.” The number of workers who want a job but are not looking for one is also falling, he pointed out.

That millions more Americans are willing and able to work provided the economy creates demand for their labour remains the dominant view within the Fed. But a few officials are starting to wonder whether the decline in unemployment, combined with low participation rates, may mean that the potential labour force is smaller than they previously thought.

That is another reason for caution about the likelihood of more monetary stimulus such as a third round of quantitative easing – the much mooted QE3.

“To the extent this trend is not fully recognised by the Fed, it does raise the risk of greater wage and price inflation sooner than the Fed expects,” says Mr Maki. “The other implication for policy makers is that potential growth in GDP is a lot weaker – we’d put it no higher than 2 per cent – and so budget forecasts are for too rosy a picture.”

Others who have done similar work do not find such large declines. A recent Chicago Fed paper puts the demographic element at a quarter of the total drop and the Congressional Budget Office also projects a slower pace of demographic decline. Much depends on assumptions about whether more of the elderly will choose to work. But Mr Maki points to a sharp rise in workers receiving Social Security and to the numbers aged 55-plus who are not in the labour force and say they do not want a job.

David Greenlaw of Morgan Stanley adds another element: he estimates that 0.3 percentage points of the decline in participation is because unemployed workers have moved on to disability benefits. It is hard to become certified as disabled and, once on the benefit, few workers go back. “There has been a large increase in the number of long-term unemployed and many of these people will have a difficult time reattaching to the labour market,” says Mr Greenlaw. “It seems that many of them are shifting from unemployment benefits to disability insurance benefits.”

Difficult though the balance is to judge, a chunk of the lack of participation is likely to be demographic and a chunk due to lack of demand. Either way, it will affect the election.

Ten months ago, Rick Santorum stood on the steps that lead up to Somerset’s grand, century-old courthouse and launched his campaign to be president. Mr Santorum’s bid for the Republican nomination ended last week, partly because his pledge to revive US manufacturing was inaudible above the abortion, contraception and gay marriage debates for which he is better known.

That leaves Mitt Romney to take on Mr Obama in an election about the economy. Participation in the labour force will decide the unemployment rate on election day, assuming a moderate growth in jobs. But as Matt McDonald at Hamilton Place Strategies, a Washington policy consultancy, and a veteran of John McCain’s 2008 presidential campaign points out, the actual rate matters less than which of the three stories is true. “People don’t make voting decisions based on the statistics; the statistics are our insight into the reality that people are voting on,” he says.

With story one, of labour discouragement, participation stays low and unemployment falls but the economy still feels miserable. “If the unemployment rate goes down because the economy is doing badly and labour force participation falls, then does it matter?” asks Mr McDonald. “The economy is still doing badly.”

Story two, although best for the long-term health of the US economy, could be even worse for Mr Obama. Participation recovers as people such as Mr Knopsnyder and Ms Brady return to the workforce, but that stops the unemployment rate going down or even pushes it back up again, making it hard for the incumbent to argue that things are getting better.

Perversely, the worst news for the US in the long run could help Mr Obama the most. If story three is correct, and demographics dominate, participation will stay low and the unemployment rate will decline. A smaller workforce will mean a smaller economy. But in the short term it means fewer people to find jobs for before the labour market tightens, pushing up wages and making people feel better.

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