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Sunday, July 7, 2013

Full Employment: The Big Missing Piece

While some important parts of the current economy are showing strength — housing, energy extraction, corporate profitability — demand for labor, or “job creation” if you prefer, remains weak.  That’s a huge problem because most of us depend on our paychecks, not our stock portfolios, so the fact that there’s still about 12 million unemployed (including four million who’ve been jobless for over half a year) in addition to about eight million involuntary part-timers (who want more hours, and can’t find them) should give one pause before declaring all clear on the economic front.
Today’s Economist
Perspectives from expert contributors.

Weak labor demand plays an integral role in these outcomes, but too much of the rhetoric I’ve been hearing lately ignores that reality.  In the immigration debate — and I’m a longtime active supporter of comprehensive reform — advocates in both parties argue that there are lots of job slots waiting to be filled, if only we had greater labor supply.  This claim is most commonly made regarding high-skilled workers, like programmers, but one advocate recently wrote a commentary arguing that we also face a shortage of low-wage workers.  Anyone with even cursory knowledge of employment or especially wage trends among such workers knows that this is not a credible claim.
It’s even worse over in the poverty debate, where contentions about the safety net, a topic I wrote about last week, suggest that the jobs are there for the taking if only SNAP (food stamps) and other benefits weren’t removing the incentives for low-income people to look for work.  (The Southerland amendment to the farm bill, a key reason the bill failed in the House, was very much written in this spirit.)
The extent to which such claims are misguided came back to me as I was working with some new data on the importance of strong labor demand, particularly to low- and middle-income workers.  The data are simply the annual hours of work by income group over the last few decades, with households split into fifths by income, from the poorest to the wealthiest 20 percent, or quintile (e.g., “Q1” in the figure below represents the lowest-income quintile).
The trends reveal the disproportionate impact of strong labor demand on low relative to high income workers.  Basically, using the economic model introduced in “Field of Dreams,” it’s an “if the jobs are there, they will come” story, which is decidedly different than “if they come, the jobs will be there” (economists will recognize the latter as Say’s Law).
A simple statistical model of the relationship between annual hours and unemployment shows that since the mid-1970s, for every point the unemployment rate falls, annual hours of work go up by 3.7 percent for low-income workers from the bottom fifth of the income scale, 1.7 percent (about half as much) for middle-income workers, and 0.8 percent (half as much again) for high-income workers.
But these are broad historical averages.  During the late 1990s, the last time the United States economy was at full employment, low-income workers were remarkably responsive to strong labor demand.  Between 1996 and 2000, for each point the unemployment rate fell, their hours of work rose more than 10 percent.
The figure below provides some historical context.  The first three bars for each income group shows the percentage change in annual hours worked over the last four years of the last three recoveries — if the recovery is going to reach full employment, that’s when it will do so.  The fourth bar in each set shows the most recent years of data, tracking the hours impact of the Great Recession.

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