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The job market is improving faster for the least skilled

Some pessimists worry that we are merely creating “McJobs” for the least skilled. Others worry that most of the new jobs require lots of skills, leaving the unskilled without good prospects.  Most pessimists worry about both problems, even if it isn’t internally consistent.  Just as pessimists worry that machines will take the place of workers in Japan, and that there won’t be enough young people to take care of the elderly.

I’m an optimist; so let me take a stab at this Matt O’Brien comment that Tyler Cowen linked to:

Of course, “us” is a relative term. Unemployment fell from 3.3 to 3.2 percent for people with a bachelor’s degree or more, and from 5.7 to 5.5 percent for those with some college. But it actually rose from 6.3 to 6.5 percent for people with only a high school diploma, and from 8.9 to 9.1 percent for those without one.

In other words, our polarized labor market isn’t getting any less so. The Cleveland Fed points out that routine jobs disappeared during the Great Recession, and haven’t come back during the not-so-great-recovery — which partly explains why our economic upswing, such as it is, has been much less dramatic for the least educated.

I certainly agree with Matt that the labor market is kind of lousy, despite the recent record set in employment.  But I also think one month is too short of time to draw any conclusions.  Let’s look at how the job market has improved for each of these groups, compared to the worst of the recession.  In each case, I look at unemployment rates for people above age 25 (because that’s all I could find, and because it seems more consistent):

Less that high school:   17.9% —> 8.5%

High school grad:   11.9% —>  6.1%

Overall:   9.2% —>  4.9%

Some college:    8.8% —>  5.5%

College grad:   5.3% —> 3.0%

The reduction in the unemployment rate has been much bigger for the less skilled workers.  You’d expect that given that they started at a much higher rate. Unemployment cannot go below zero.  But it’s also true that even the relative change has been considerably bigger for the less skilled.  The least skilled workers saw their unemployment rates fall by more than in half.  The high school grads by nearly half. The two college groups saw unemployment fall by even less.

Obviously in an absolute sense the less skilled are doing far worse.  But their abysmal job situation actually seems to be improving faster than for the more skilled groups.  It’s an easy mistake to make.  When I was young I often heard people say, “the rich get richer and the poor get poorer.”  Confusing levels with changes.  Actually, in 1969 the poor and working class had been gaining on the rich for 40 years.

Mark Sadowski nails it again

The GDP data just came in, and Mark Sadowski continues to demolish the experts:

Actual RGDP growth:  minus 1.0%

Mark Sadowski’s initial forecast:  minus 1.4%

Initial Consensus:  PLUS 1.0% to 1.5% (depending on source)

NGDP came in at 0.3%, slightly below Mark’s 0.5%.  I don’t have the consensus, but it must be around 3.0%

In the 4th quarter of 2013 the consensus RGDP growth rate was around 3.8% or 3.9%.  Mark forecast 2.5% and the actual was 2.6%.  Mark forecast 4.2% NGDP growth, and the actual was 4.2% NGDP growth.

I can only find one other Sadowski GDP forecast, for the second quarter of 2013.  The consensus called for 1.0% RGDP growth, Mark forecast 2.0%, and the actual was 2.5%.

If he’s not snapped up by an investment bank in the next 30 days I am going to have to revise my views on the EMH.  Don’t make me do that.  Mark understands government data better than anyone I’ve ever met.

PS.  I notice that the fall in NGDI was entirely due to a collapse of corporate profits, which fell 10% in the first quarter (from the previous quarter.)  That’s an annual rate of decline of 34.4%!!  Does anyone know the explanation for that? Was it measurement error?  Does it comport with the numbers being reported on Wall Street?

Let’s all be Germans

Over at Econlog I have a post discussing the German jobs miracle.  One counterargument is that all countries can’t be like Germany, because their success comes from a large current account surplus. And if there is one thing that all economists agree on, it’s that all countries cannot simultaneously run CA surpluses.

Those who have not studied economics might be surprised to discover that standard economic theory suggests CA surpluses have no impact on job creation.  Many people draw the wrong implication from an accounting identity:

GDP = C + I + G + (X – M),     Where (X – M) is the CA surplus.

It looks like a bigger CA surplus would boost GDP.  That ignores the ceteris paribus problem. Here’s another accounting identity:

I  = Sp + (T-G) + (M-X)   [money for investment comes from private, government, and foreign saving]

If one ignores the ceteris paribus problem, then it looks like a CA surplus reduces investment dollar for dollar.  So accounting identities get us nowhere.  There is a slightly more sophisticated argument that CA surpluses can have a negative impact on foreign AD when the entire world is at the zero bound.  The argument is that CA surpluses created by thrifty Germans will increase global saving and depress global AD for old Keynesian reasons.  The monetary authority is assumed not to offset the effect.

I’m skeptical of that argument, but even if true it’s a cyclical argument not a secular argument.  If other countries reduce their W/NGDP ratios, then in the long run the number of hours worked should rise.  Remember that macro is not a zero sum game; all countries can simultaneously increase employment and output.  And even if central banks are letting inflation run a bit below target, surely there are limits as to how low they’ll allow inflation to go.  Cut wages by more than that and you create jobs.

By the way, I’m not suggesting everyone should work super hard; German hours per year are fairly low. Their jobs miracle comes from creating more jobs, having fewer people who are completely unemployed.  Nor am I suggesting lower living standards.  The share of income going to labor in Germany has been rising.  If total income also rises (as it should with more employment), then Germans are better off.  (Unless you don’t think unemployment is a problem.)

It’s ironic that back in the golden 1990s the Clinton Democrats favored many of these policies. They advocated thrift (budget surpluses).  They advocated moving people from welfare to work with welfare reforms and low wage subsidies.  Finally a major country adopts the Clinton Democrat plan and achieves great success in job creation relative to other developed economies.  And how do Democrats react?  All they seem to do today is trash the German model:  ”Run deficits”, “put more people on welfare and food stamps”, “raise the minimum wage”, “low wage subsides just help fat cat corporations pay workers less.”  Very sad.

Take a look at one of the very first articles at the new website “The Upshot”

Sometimes all I have to do is read a post title.

Paul Krugman on monetary policy options

Saturos sent me some interesting PowerPoint slides by Paul Krugman:

Screen Shot 2014-04-11 at 9.37.21 AMKrugman overlooks a third option, targeting an alternative variable that is not subject to the zero lower bound.  Or perhaps he regards that as a regime change.  I can’t be sure.  But it need not involve the Fed changing its inflation/unemployment targets, so it depends how one defines ‘regime.’  I believe he regards “regime shift” as something like an increase in the inflation target to 4%.

In any case, alternative targets include foreign exchange rates, the price of actively traded commodities such as gold, and CPI/NGDP futures prices. Fisher’s Compensated Dollar plan was an adjustable gold price peg, aimed at stabilizing the price level.

In the past I’ve argued that Krugman had a sort of blind spot in this area.  For instance, he was too pessimistic about the ability of the Swiss National Bank to peg the franc at a lower level vs. the euro.  In any case, it’s interesting to compare these schemes to forward guidance. Krugman correctly points out that there is a theoretical possibility of an “expectations trap” with forward guidance.  Markets might not believe central bank promises to fully carry through with monetary stimulus, as the initial effect on expectations is all the central bank really wants and needs.

You can think of the alternatives to interest rate targeting (assets that lack a zero bound) as a way of overcoming the expectations trap. When you target a variable with no zero bound (forex, gold, NGDP futures, etc) you are forced by the market to do “enough” to make the promise credible. Hence no expectations trap. In this post Krugman correctly pointed out that the risk of an expectations trap is replaced with the risk of a central bank balance sheet that is bloated to undesirable levels. In practice, I think that’s unlikely to be a problem for any “reasonable” nominal aggregate policy goal.  And if it does become a problem the market is telling you that perhaps your inflation/NGDP target path is too low.

And we should not overlook the bright side of a bloated balance sheet.  Suppose Japan was still at the zero rate bound after pegging CPI futures at a 2% premium over the spot CPI.  That might imply a bloated BOJ balance sheet.  But that would prove beyond any doubt that the Japanese government had just spent the past 20 walking down a sidewalk covered with $100 bills (or 10,000 yen bills) without once stopping to pick one up.  Not smart, and it’s about time they raised their inflation rate target if they can do so without raising the nominal cost of funding the Japanese debt by one iota.  A free bento box.

Krugman also makes this comment:

Screen Shot 2014-04-11 at 9.51.35 AMOnce again, this is correct but slightly misleading. The distinction between the direct effect of a policy shift and the effect of a shift in the future expected path of policy is almost equally important when not at the zero bound.  Any monetarist thought experiment involving a higher money supply ALWAYS involves the implicit assumption that the increase is permanent, or at least semi-permanent.  Alternatively, when markets react very strongly to changes in the fed funs target (Jan. 2001, Sept. 2007, Dec. 2007) the market reaction almost certainly reflects changes in the expected future path of the fed funds rate, not the current setting.

I was also amused by this; from one of his PP slides:

Screen Shot 2014-04-11 at 9.56.01 AMI wondered what had been deleted from this passage, as there seemed to be missing material at the end of each line.  Here’s where Google is a miracle of the modern world—I was able to find the Wikipedia source:

On September 13, 2012, the Federal Reserve announced a third round of quantitative easing (QE3).[7] This new round of quantitative easing provided for an open-ended commitment to purchase $40 billion agency mortgage-backed securities per month until the labor market improves “substantially”. Some economists believe that Scott Sumner‘s blog[8] on nominal income targeting played a role in popularizing the “wonky, once-eccentric policy” of “unlimited QE”.[9]

Ah, that’s much better!



Reply to Frances Coppola

Here is Frances Coppola:

Scott Sumner argues thatwhen the monetary base is fixed, low interest rates are deflationary. I’ve emphasised the fixed monetary base because it is an important condition. If the monetary base is NOT fixed then the relationship between low interest rates and deflation is much less clear.

Logically, this makes sense. If the supply of base money is fixed, then falling interest rates indicate* rising demand for base money, increasing its value and therefore causing prices to fall. Aficionados of a classical gold standard will recognise this as “benign” deflation. Falling interest rates when the monetary base is fixed are an indicator of healthy growth.

I would argue the opposite.  Low interest rates are usually indicative of weak growth, as both real and nominal interest rates are procyclical.  Barsky and Summers showed that under the gold standard, when the economy slowed interest rates tended to fall.  This increased the demand for gold (the medium of account) and was deflationary.

The “good deflation” was a secular phenomenon.  It was associated with a rise in the demand for money from positive trend real GDP growth, not lower interest rates.

It’s misleading to say falling interest rates are only deflationary under a constant monetary base. They have a deflationary impact regardless of the base, it’s just that when the base is changing the deflationary impact from falling interest rates is often offset by the inflationary impact of a rising monetary base.

The Fed was not holding the monetary base fixed and allowing the interest rate to fall, which is what Sumner implies. It was actively supporting the Fed Funds rate.

The Fed Funds rate is not simply a market interest rate. At the time, it was the primary monetary policy tool, though these days – because of the presence of excess reserves in the system – it has been superseded by the interest on reserves (IOR) rate.

Interest rates fell becasue of a weakening economy, not because the Fed cut interest rates.  When the Fed announcement in December 2007 was less expansionary then expected, 3 month T-bill yields (which are market interest rates) fell on the news. Markets understand market monetarism. A few weeks later the Fed had a panicky emergency meeting and cut it’s fed funds target in an attempt to keep up with changing economic conditions.  The reduced demand for loanable funds was pushing rates lower, and because the Fed did not respond by increasing the base this led to a further slowdown in NGDP.

Sumner seems to think that the Fed should not have supported the rate by draining reserves. On he contrary, he explicitly blames the Fed’s failure to expand the monetary base at this time for the subsequent collapse of NGDP:

Between August 2007 and May 2008 there was no change in the monetary base, and yet interest rates fell sharply.  Not surprisingly NGDP growth slowed and we tipped into recession.

But the problem was inflation:

Expansionary monetary policy when inflation was already so far above target would have seemed like madness. Even since the crisis, it takes a brave central bank to hold its nerve and its expansionary policy when inflation is a long way above target, as the Bank of England has discovered.

Yes, at the time the market monetarist message would have seemed like madness—focus on NGDP growth and ignore inflation.  But we now know it is inflation targeting that is madness.  Even Bernanke now admits that actual policy was too tight during the crisis.

Nor would NGDP targeting necessarily have made much difference to Fed policy. We now know, with the benefit of hindsight, that NGDP was going to fall off a cliff in 2008. But at the time, NGDP didn’t show much sign of such a dramatic collapse:

It would have made a huge difference, because with NGDPLT monetary policy works with “long and variable leads.”  The expectation that the Fed would return to the 5% trend line in the long run would have stabilized asset markets in the short run, and Lehman might not have even failed.

Those in favour of a strict rule-based approach to monetary policy based on something like an NGDP target will no doubt be disappointed: but as I said above, an NGDP target would not necessarily have resulted in a markedly different policy stance in the crucial early part of the financial crisis.

Maybe not all that different, but then the initial part of the recession was exceedingly mild.  Most importantly NGDPLT would have created expectations of a very different policy in the latter half of 2008, which would have made the recession far milder.

PS.  The Coppola post refers to a money supply graph that I wasn’t able to find. Was it included? Another graph has a garbled horizontal axis, and another refers to potential NGDP which is a nonexistent concept.  “Potential” only has meaning for real variables.

Update:  I mistakenly linked to the wrong version of the post.  The correct version does have a money supply graph.

HT:  Travis V.