The latest employment figures: implications for policy

Stronger employment growth in February than I and many others had been expecting.





Data source: St. Louis Fed
employment_fig.gif >



BLS reported Friday that seasonally adjusted nonfarm payrolls grew by 243,000 workers in February, much better than the average growth of 180,000 jobs per month seen over the last two years, though below the 255,000 per month average of 1994-1999.

I take this as another indication that the economy is recovering nicely from the bump in the road we encountered last quarter. Coupled with the increase in bond market expectations of inflation that seems to have developed over the last two months, this has to raise the probability of more hikes in the fed funds rate from the Federal Reserve.

And what does the new data tell us about fiscal policy? Outside the Beltway notes the following analysis from Representative Bill Thomas (R-CA), Chair of the House Ways and Means Committee:

The creation of 243,000 new jobs offers further evidence that our work in Congress to lower the tax burden on workers and on business capital has produced an environment in which the American economy can thrive. Our policies have helped create 2.0 million jobs in the last year and almost 5.0 million jobs since May 2003, and have made the American economy the most dynamic in the industrialized world.

Thomas is joined in this enthusiasm by Representative Jack Kingston (R-GA):

For those who say tax cuts do not help stimulate the economy, today’s news emphasizes the fact that President Bush’s tax cuts have now done for the economy what Kennedy’s cuts did in the 60s and Reagan’s cuts did in the 80s.

The DOL’s Bureau of Labor Statistics (BLS) employment report showed that 243,000 jobs were created in February, for a total of nearly five million new jobs since May 2003 and more than two million in the last year alone. The new job growth continued a significant trend that now stands at 30 consecutive months of uninterrupted job growth.

Most economists would certainly agree that tax cuts can help stimulate the economy. Where we may differ is on the mechanism whereby this stimulus occurs.

Source: Macroblog
participation.gif width="480" height="360"td>

One possibility is that lower income taxes increase the rewards to working and may thereby lead to an increase in the number of people willing to work. However, the fraction of people who are either employed or looking for jobs has dropped significantly over the last several years. I am not among those who see this as necessarily a bad thing, for reasons I explained here. But it is certainly clear that such an effect has not been a mechanism whereby the recent tax cuts could have led to faster growth.

A second possibility is that cutting tax rates on capital income may increase personal saving, and thereby help promote investment over the long run. The rather spectacular drop in the U.S. personal saving rate belies this interpretation as well– people are spending their tax cuts, not saving them. Admittedly, this drop in saving should be viewed as a continuation of a long-run trend. Even so, it is abundantly clear that this cannot be a mechanism by which the tax cuts might be claimed to be exerting a beneficial effect.



Data source: BEA Table 5.1.
pers_saving.gif >


We are then left then with the third argument, which is that the budget deficits may be serving to stimulate aggregate demand. Such a claim would in my opinion be accurate. However, the question is whether stimulating consumption spending is a desirable policy goal at this point in the business cycle. I believe that our big concerns at the moment should be reducing the trade deficit and increasing national saving, both of which goals are undermined by a big federal deficit. And it surely makes no sense for Congress to be doing its best to stimulate aggregate demand while the Federal Reserve is determined to reduce aggregate demand.

So yes, I agree that the latest employment figures are good news. But I do not believe that they could be used as a justification for doing nothing about the budget deficit.


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32 thoughts on “The latest employment figures: implications for policy

  1. Stormy

    The composition of those jobs is not exactly something to write home about.
    Not sure what we have to trade, other than debt.

  2. outsider

    To digress from pure intellectual exersize to the more pragmatic…the head of the BLS is Elaine Chao, the wife of the Senate conservative whip, Senator Mitch McOnnell, noted for a conservaive stance with a penchant for special interests (superficial source, Wikopedia}. one of her appointees, Philip Rones, is distinguished for a paper pointing out the excessive payments to workers injured on the job.
    Given the calibre of appointees (Heck of a job Brownie!} of this administration, and the controversy of ‘How many people are unemployed and stopped looking, or classified themselves as something like “personal trainer” to sound better, and the outright misinformation (Dubai would control 6 ports or so, instead of something like 50 terminals on the eastern seaboard: how can we trust the numbers?

  3. Rich Berger

    What’s the matter with that Labor Force Participation graph? Why are the y-axis values duplicated? The original is the same way.

  4. JDH

    Rich, the “.5″ labels were missing on the original. I’ve fixed this. Thanks for noticing.

  5. Rich Berger

    Professor-
    It does make the variance less dramatic. From a low of about 64% 25 years ago to a high of slightly over 67% to 66% now is not so earth-shaking. Only a wealthy society can support 1/3 of its population not working.

  6. Stormy

    Well, all the auto workers can become health care workers…hmmmm tending each other’s hurts.
    Or maybe they can take Economics 101 so that they understand the glories of globalization as they watch GM and Ford hustle over to China for the cheap labor, low taxes, and lax environmental standards. Was that what Manikew meant for Michigan?

  7. Grzegorz

    “The composition of those jobs is not exactly something to write home about.”
    Stormy, help me understand your assertion. As I understand the issue, I see that after years of modest wage increases the last three months have seen average hourly rates rise at an annualized rate of 4.8%.
    The last I’ve read, there are 150k new jobs created a month just to keep pace with population growth. Maybe better metrics are needed to break out the skill set of these new workers.
    “A second possibility is that cutting tax rates on capital income may increase personal saving, and thereby help promote investment over the long run.”
    The key phrase being may increase personal savings. There is no guarantee that workers, while being paid more along the labor market rainbow, will increase their personal savings rate.
    Education and clear planning for the future is a better guarantee of personal savings than dollars happen to be.

  8. spencer

    Dae Schuler — very good points in your comments.
    It is an interesting question that is getting way too little attention. The economic rational for higher income inequality is that it leads to higher savings and investment that makes everyone better off. But we have had a quarter century of rising inequality with plunging savings and investments falling as a share of nominal gdp.
    But no one seems to want to discuss why our economic theory is not working.
    On the other hand at least the Rebublicans can claim that the Keynesian part of their tax cuts worked.

  9. Movie Guy

    outsider — the head of the BLS is Elaine Chao
    A small clarification:
    Commissioner, BLS, is Kathleen P. Utgoff.
    Philip L. Rones, as the Deputy Commissioner, works for Kathleen.
    Secretary Elaine Chao, as SecLabor, has over 20 operations in DOL, and BLS is just one of them.

  10. Stormy

    Grzgorez
    Ok. Take a look at the way the employment miracle shakes out over the past five years:
    http://economistsview.typepad.com/economistsview/2006/03/change_in_servi.html
    For a clear-headed look at the rise in wages, consider the following from BLS:
    Hourly compensation increased 1.8 percent during the fourth quarter in total manufacturing and in both subsectors. When the increase in consumer prices was taken into account, real hourly compensation fell 1.4 percent in the fourth quarter for workers in total, durable, and nondurable manufacturing.
    http://www.bls.gov/news.release/prod2.toc.htm
    Italics mine.
    Offshoring is real and growing. The auto clubGM, Ford, and companyare busy moving to China. See
    Thanks to Detroit, China is Poised to Lead
    http://www.bls.gov/news.release/prod2.toc.htm
    This is not news to any one who has been following gold rush to China. The trouble is: We are the market, the consumer, not the Chinese peasantry. The question is: Who leaves first: the debt-ridden American consumer or the central banks?
    By the way, personal bankruptcies are up 10% from 2004.
    As far as education is concerned, I remember Manikew saying something in Michigan about how smart it would be for unemployed workers to take Economics 101 to understand globalization. I suggest that these workers already know more about the reality of globalization than Manikew ever could. Manikew then continued that they could simply move somewhere else. Maybe he had China in mind.
    Education is the great myth that the average American has been repeatedly fed. Check the job losses in IT and tell me how education counts. Maybe we should all become financiers and stockbrokers.

  11. Hal

    As far as predictions of future Fed policy, allow me to mention again this Los Angeles Times poll from a few days ago, which asked respondents what they thought the Fed would do with interest rates this year:
    http://www.latimes.com/media/acrobat/2006-03/22315063.pdf
    48% thought they would keep raising interest rates throughout the year, compared to 30% who thought they would soon stop raising them and keep them level (and 9% who thought they would start cutting). I tend to give a lot of credibility to people on this issue because changes in interest rates are important to the financial lives of ordinary people.
    My impression is that professional economists have been predicting that increases will soon level off. It will be interesting to see how the general public does on this question, vs the experts.

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  13. Joe Rotger

    Wasn’t the winter unusually benevolent, allowing for an unexpected and unusual increase in construction and retail sales for this period?
    If this is the case, of course, employment increased.

  14. JohnDewey

    Stormy,
    Could you elaborate a bit on the IT job losses you mentioned? Are you referring to the IT industry or to IT jobs?
    The Nov-2004 BLS data on computer-related occupations showed they were at the same level as the all-time peak in 2001. Certainly there were reductions in 2002. But the BLS data I saw indicates a full recovery of jobs since then.
    It is true that in the Information Services sector jobs have been lost. But most computer professionals do not work in that sector anyway.
    You wrote “The composition of those jobs is not exactly something to write home about.”
    What do you mean by that? Is there anything in the recent report to indicate what type jobs were added? I thought the report listed the jobs by sector rather than by occupation. Is there any way to know how many of the new jobs in the various service sectors were computer programmers or accountants or lawyers?

  15. calmo

    Thanks Joe for hitting the nail on the head. And the Katrina effects may last for another couple of months, no?
    I think Stormy might be looking at the manufacturing jobs John, but you raise an interesting question about whether lawyers would ever allow themselves to be counted as ‘labor’ as that means supervised help.

  16. Daniel Ogden

    Why does “doing something about the deficit” always mean raising taxes instead of cutting spending?

  17. supersaurus

    it would be nice to see that plot of non-farm payroll as net gain…once you subtract the 150,000+ necessary to break even with increase in the workforce due to population growth that “…2.0 million jobs in the last year…” doesn’t sound so impressive. you can see that in the labor market participation numbers, but the administration doesn’t talk about that.

  18. dilbert dogbert

    Daniel,
    The party of small government is in power currently and shows no interest in cutting spending. However, they are interested in cutting taxes.
    We live in interesting times.

  19. Stormy

    JohnDewey,
    This will be a bit complicated; hope it will all make sense. Most people think simply of call centers as to what is being offshored. Not so. Tip of the iceberg. And, usually, the service is awful.
    Let me see if I can cover some of the bases that lead me to my opinion:
    1. Offshoring IT manufacturing has occurred in spades: Dell, Intel, etc. Look at the shift in trade. To see what I mean, find something in a Dell laptop that is not made overseas.
    2. Actual IT support for major American firms: Think Verizon which has tried to offshore as much IT support as it can. The support is not call centers, but actual support for everything from the desktop to networking.
    3. The Mark Thoma graph to which I referred and other reports too numerous to mention.
    4. Anecdotal and personal knowledge:
    a. Software support and developers whose jobs have been offshored.
    b. New hardware offshored for testing and completed development in terms of firmware.
    c. Abundance of IT professionals looking for work.
    Regarding the last: My entire immediate family and offspring are involved in computers, covering almost every area of IT, from the development of advanced switches to networking support and in-house proprietary software development.
    Now, advanced software development, in some large corporations, continues to remain in-houseor at least seems to be staying there. Outsourcing proprietary in-house software development does need, in my opinion, people who have an intimate understanding of a firms operation, something hard to get with simple outsourcing. See:
    http://www.dba-oracle.com/oracle_tips_offshoring_database_failed.htm
    To continue, everything cannot be offshored: Feet are needed on the ground to do some things: physically changing a server, a switch, cabling, etc. But more and more, troubleshooting can be done from afar, as you most probably know. I can, for example, troubleshoot a server half way around the world. No problem.
    I would add that India may well becoming a software innovator, with lots of seed money coming from FDI.
    I do expect the pace of offshoring to continue, moving into actual software development. Furthermore, as more and more companies setup shop offshorethink Delphi, GM, etc.proprietary in-house software will be done at those sites. In fact, there is no reason at that time for them not to become centers for a particular firms softwares needs. Cheaper.

  20. save_the_rustbelt

    The quality of jobs has shifted, more lower quality service jobs.
    I can’t remember in my lifetime a period when workers were more afraid of job losses and benefit cuts.

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  22. JohnDewey

    Stormy,
    What I’ve observed, and others have confirmed, is this: many corporations decided in the 90′s and a couple years beyond that computer programmer wages were too high for them. Rather than screw up salary structures in their organization, they hired contract programmers from information services firms at higher wage rates. After Y2K and after the 2001 recession, programmer salaries returned to lower levels, or at least lower relative to other professions. At that point, it became easier for corporations to hire programmers into permanent positions.
    So what does that do to BLS statistics? For the occupational survey data, it does not much at all. November, 2004, data show that the number of programmers in the U.S. is just about the same as in 2001. But the sector data shows shifts. I suspect thousands of formerly contract programmers now hold permanent positions in non-IT companies, but I can’t find data to support or refute this assertion.
    I’m not denying that growth in IT has moved offshore. I think that was inevitable because the pool of U.S. citizens with programming talent is finite.

  23. Anonymous

    “I can’t remember in my lifetime a period when workers were more afraid of job losses and benefit cuts.”
    Not sure if your life or mine is longer, but I remember lots of fear about job losses in 1982.
    As for benefit cuts, I’m probably in agreement with you. What many corporations ahve done is outrageous: promise a level of benefits to loyal workers and then break that promise to workers who are retired or too old to easily find other work. I don’t have a solution to offer. I do not believe in changing the rules after the game. If the benefits are not guaranteed by laws that have existed, then I think we have to live by those laws. Today’s young workers would be foolish to accept a job based on promised future benefits.

  24. Stormy

    JohnDewey,
    My own anecdotal evidenceinside one MNC, which I will not mentionedgoes as follows:
    Specialty programmers were indeed hired, at wages higher than in-house programmers, usually paid on a per diem basis. Attempts to expand beyond niche programmers were not really successful. (I am speaking here through 2005.) To write good proprietary softwarenot commercial softwarerequires extensive knowledge of the company, knowledge that often cannot be articulated by contract. (Having owned a software company that did commercial softwareand that tried to farm out some of the workI know that the clarity of the contractual issues are difficult, creating more expense and trouble than it is sometimes worth.)
    However, a company can work around this problem if it establishes a fully staffed offshore programming center dedicated to handling just its needs. Commercial software companies can more easily set up shop overseas.
    (I would have to concede that the rise of programming firms to handle in-house needs has increased. I have not been especially impressed with them.)
    Shifting the discussion slightly to the BLS data, I would suggest that the fact that the number of programmers has remained constant is not a good sign. The number should have increased, even if we consider just population growth, more especially if we consider the growing importance of software in todays world.
    Any talent pool is finite. To say that does not say much.
    I would suggest, however, that the potential U.S. talent pool is much larger than you think. Your suggestion that we have tapped the available talent pool strikes me as self-defeatist and a bit odd. Good education is the key. I simply do not buy that argument. I see it as a PR cover for labor arbitrage.
    When leading edge hardware is developed here in the states, it is often off-shored for further testing and development. Very little stays. And, because labor costs are cheaper in the India and elsewhere, the flight is hastened. So too is the effort to find cheap talent abroad.
    In short, labor arbitrage works in IT the same way it works in the auto industry. It is not the limited talent pool that is the issue; it is the cost of labor. And, in this case, we have to add educational costs. But we know what that is in the states. In short, the U.S. is burnt toast. Going to take a while, but it will be toast.

  25. JohnDewey

    stormy,
    Please note that the number of U.S. programmers stayed the same from 2001 to 2004. I don’t think the 2005 data is yet available. I suspect that 1999 to 2001 strong growth was due to overhiring, which I did observe here in Dallas. I’m not surprised it took a couple of years to recover from the 2001 recession.
    I agree that more money would lead to more U.S. talent. If computer programming could command the same career income as M.D.’s or lawyers or Finance MBA’s, some of those professionals may have taken a different turn.
    I don’t think the U.S. talent pool will be as deep as the Indian or Chinese pool will be. But that doesn’t mean we’ll be “toast”, at least not to me.

  26. Stormy

    JohnDewey,
    “Toast”: I am overstating the case for effect, although I think the hollowing out of America is real and will continue.
    You would, I think, have to agree that labor arbitrage is playing a key role.

  27. JohnDewey

    “You would, I think, have to agree that labor arbitrage is playing a key role.”
    Oh, certainly. Were I a shareholder of IBM or Oracle, I would expect them to use whatever legal means possible to reduce costs. I wish that walking away from benefits promises were not legal, but apparently it is.

  28. JohnDewey

    Manpower released their quarterly hiring outlook today.
    http://tinyurl.com/p49oq
    Manpower’s survey asks the same question every quarter of 47,000 public and private employers:
    “How do you anticipate total employement at your location to change in the three months to the end of (June 2006) as compared to the current quarter?”
    Although “No Change” was the dominant answer, the “Increase” responses beat out the “Decrease” responses 4 to 1 or 5 to 1 in every sector. That includes both durable goods manufacturing and non-durable goods manufacturing.
    Manpower’s seasonally adjusted net employment outlook appears to be as high as any time in the past two decades, except for the overheated year 2000. It’s dificult for me to conclude that our economy is in trouble.

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