In Praise of Older Women

By all accounts, the U.S. employment picture looks bad. But what do we mean by "bad?" The most common way to demonstrate how bad it is, is via a diagram like this (source):

 

See also here. These displays take the level of employment at its cyclical peak and normalize it to zero. This is done for several earlier episodes, and then the evolution of employment is tracked from the onset of each recession. And, well, the current episode looks bad.

Diagrams like the one above are interesting. But I think they need to be read with some caution. You may not even know it, but the diagram has planted an idea in your head. The idea is that the data are stationary, and that reversion to the mean is desirable. It is sometimes useful to look at the broader picture; and this is what I propose to do here.

Here is a plot of the U.S. employment ratio (employment divided by population) over a longer horizon than is normally considered (1948-2010):

The first thing that should strike you is that the employment ratio does not appear to be stationary, at least, over this sample period. It seems to be roughly stationary in the first half of the sample, but then it grows steadily, reaching a peak in the late 1990s. Since that time, it has (arguably) been on a downward trend. It is possible that the recent cyclical decline is exacerbated by this downward trend (and may have contributed to the recent jobless recovery phenomena).

If the trend is indeed heading downward, in what sense should policymakers desire a return of employment to its earlier cyclical peak?  Do we know what the "natural" rate of employment is?

Perhaps the recent downward trend is not the only thing that needs explaining. We might also puzzle over the employment boom that seems to have begun in the mid 1970s. The following figure is revealing.

What we see here is that the employment ratio for men was in secular decline until the early 1980s. The employment ratio for women, in contrast, has been increasing steadily up until 2000. So the large increase in total employment is accounted for by female employment decisions. But since 2000, the employment ratio seems to be on a slow downward trend for both sexes, until falling sharply (again, for both sexes) in the recent recession.

Let me now slice the data up into finer categories. Here is the employment ratio for men by age:

What this suggests is that the secular decline in male employment early on in the sample was attributable largely to the employment choices of older men. The trend seems to have reversed itself some time in the early 1990s. Offsetting this rise is a decline in the employment of young men. The recent recession seems to have hit young men particularly hard; the employment ratio for older men hardly budged at all.

Here is what the employment ratio looks like for women across age groups:

What this suggests is that the recent secular decline in female employment is attributable largely to the behavior of young women (are all going to college?). But what I find very interesting here are the labor supply choices of older women.  In particular, their employment continued to expand even throughout the recent recession!

I am not sure what is driving this behavior. I do find it interesting, however, that a large negative aggregate demand shock seems not to have had much of an impact on the demand for goods and services produced in "old age" sector of the economy.

Despite Economy, Americans Don't Want Farm Work

The article is here: Despite Economy, Americans Don't Want Farm Work.

There is, evidently, plenty of agricultural work available in the state of California these days. It's hard work--the type of work most of humanity throughout history had little choice but to perform. And by modern standards, the pay is not that great ($10.25/hr); though our distant ancestors might have considered it astronomically high. Indeed, it is high enough even today to attract a large body of foreign workers (largely from Mexico).

What is it that makes a foreign worker willing to go through all the risk and expense of taking such jobs, when an unemployed domestic worker will not?

A labor economist might answer this question by appealing to differences in reservation wages (an individual's reservation wage is defined to be the lowest wage he or she is willing to work for). Evidently, Mexican migrants have low reservation wages relative to their American counterparts. Another way of saying this is that the former group are relatively "desperate." Yet another way of saying this is that American workers can better afford spells of unemployment--they are generally wealthier, and many can draw on UI to make their job search less painful (and presumably, more productive too).

What interests me about the anecdotal evidence reported in this article is what it implies about theories that explain the current high rate of U.S. unemployment as the consequence of a "lack of aggregate demand" leading to a lack of available jobs. I am not sure how well this hypothesis squares up against the sort of evidence reported in this article. On the surface, at least, it appears that jobs are clearly available; Americans just don't want them--they are searching, or waiting, for better opportunities to arise. To me, the rise in unemployment smacks more of mismatch following a structural realignment of sectoral demands, as opposed to an overall decline in aggregate demand (the latter might explain the decline in employment, but not necessarily the increase in job search activity).

Update 1

When I posted this, I was unaware of Paul Krugman's article this morning: Structure of Excuses. Steve Williamson comments on Krugman here: It's the Housing, Stupid. This is certainly shaping up to be an interesting debate. I would love to see Kocherlakota and Krugman square off against each other in a public debate, but that's not likely to happen any time soon. Too bad.

Update 2

I have work to do, really I do. But I can't quite lay this to rest just yet. Krugman does not put much currency in the "structural" unemployment view. He says:

After all, what should we be seeing if statements like those of Mr. Kocherlakota or Mr. Clinton were true? The answer is, there should be significant labor shortages somewhere in America — major industries that are trying to expand but are having trouble hiring, major classes of workers who find their skills in great demand, major parts of the country with low unemployment even as the rest of the nation suffers. None of these things exist.

Well, I'm not sure if none of these things exist as he claims. Consider, for example, this WSJ article: Some Firms Struggle to Hire Despite High Unemployment. Here is an excerpt:

In Bloomington, Ill., machine shop Mechanical Devices can't find the workers it needs to handle a sharp jump in business. Job fairs run by airline Emirates attract fewer applicants in the U.S. than in other countries. Truck-stop operator Pilot Flying J says job postings don't elicit many more applicants than they did when the unemployment rate was below 5%.

I read this and I ask myself why Krugman would think you or I an idiot for giving any credence to what Narayana is talking about? Or how about this:

Matching people with available jobs is always difficult after a recession as the economy remakes itself. But Labor Department data suggest the disconnect is particularly acute this time around. Since the economy bottomed out in mid-2009, the number of job openings has risen more than twice as fast as actual hires, a gap that didn't appear until much later in the last recovery. The disparity is most notable in manufacturing, which has had among the biggest increases in openings. But it is also appearing in other areas, such as business services, education and health care.

Hmm....that "Stuck in the Middle" figure sure looks like a negative aggregate demand shock alright. Or how about the next figure? How can it be that firms (not the government, you will notice) are having trouble filling their openings? Where does this show up in Krugman's IS-LM model, I wonder? Just asking.

Here is some more stuff: America's Strongest Job Markets. But of course, it should not be possible to rank domestic job markets in this manner...it's aggregate demand, stupid.

What am I missing here? Is there a legitimate debate to be had, or not? Krugman appears to think not. He is acting more like someone who wants to stifle debate, rather than promote it.

Caveat emptor, I guess.