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Thursday, September 8, 2016

The non-mystery of declining employment rates for prime-age workers [feedly]

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The non-mystery of declining employment rates for prime-age workers
// Jared Bernstein | On the Economy

Allow me to pile on alongside Dean Baker on this alleged mystery-of-the-missing-men, the theme of an NPR story that Dean critiques. There's little mystery here: the driving factor is the loss of employment opportunities, or what economists call weak labor demand, particularly for non-college-educated, prime-age (25-54) workers. It's not the only factor, but it's the main one. There are various ways to show this, but the one I find most intuitive, as it's kinda staring us in the face, is the cyclical pattern of the employment rates of prime-aged men, which I'll get to below.

A caveat: this being economics, I want to be careful not to over-claim. There are, of course, other factors in play and no one has smoking-gun evidence that demand explains everything. But nothing ever explains everything in economics, and you should be suspicious of those who claim otherwise.

That said, I recently wrote something on this issue, out soon, critiquing new work by Nick Eberstadt, who's cited in the NPR piece and has a book on this coming out soon (summarized here). Nick was kind enough to include a response by yours truly in the book. His evidence of the long-term decline in men's employment rates, by the way, is far-reaching and well-constructed. But we disagree on the diagnosis.

This is a problem, because when you downplay the straightforward demand-side story, you end up emphasizing supply-side stories about disability insurance, the safety net, and other less important explanations which lead you to prescriptions that are ineffective at best and harmful at worst.

For those of us who've tracked this phenomenon for a while, the recent report by the Council of Economic Advisors is among the most thorough analyses out there. The CEA finds that "reductions in labor supply—in other words, prime-age men choosing not to work for a given set of labor market conditions—explain relatively little of the long-run trend…In contrast, reductions in the demand for labor, especially for lower-skilled men, appear to be an important component of the decline in prime-age male labor force participation." (My bold.)

It is common, for example, to cite the generosity of the Disability Insurance program as a large contributor to the long-term decline in men's work. But CEA shows that the magnitude of the increase of prime-age men on DI is too small to explain the lion's share of the decline in work. Over a period where their participation rates fell 7.5 points (1967-2014), CEA finds disability rates go up from 1 to 3 percentage points. Of course, it would be extreme to conclude that none of that increase was warranted by actual disabilities (or conversely, that all of it was warranted). CEA's analysis assigns less than half a percentage point (out of the 7.5 points just noted) to DI, suggesting it accounts for less than 10 percent of the decline in work.

Citing other safety net programs gets you no further, because they've become more, not less, conditioned on work.

But to me, just eyeballing the data returns a solid bit of demand-side evidence ("EPOP" in the chart's title means employment-to-population ratio, or the employment rate). The figure below shows male employment rates with shaded recession bars and a trend line running through the series. The negative trend is obvious and suggests the depth of the problem. But the cyclicality around the trend is equally clear. Simply put, prime-age guys get whacked by recessions (and the less educated they are, the harder they get hit); then, as demand strengthens, they slowly start to climb back.

Source: BLS, linear trend

Most recently, these guys have climbed 2/3's of the way back from their losses in the Great Recession. In recent downturns, they've made in most of the way back: in 1979, their EPOP was 91 percent; in 1989, 90 percent; in 2007, 88 percent. None of this denies the negative trend which is real and serious. But this series is a ratchet, not a straight line.

The reason that's important is because it suggests they're not lost to the labor market: these guys still respond to demand shocks in both directions. In other work, I've shown that less educated prime-age men are more responsive to stronger demand—their employment rates are more cyclical—than those with higher levels of education (see table 3 here). The coefficient on the demand variable for prime-age men with terminal high school degrees in this work was 1.12 (t-stat: 22.28). For those with advanced college degrees, the coefficient was 0.23 (t-stat: 5.37).

Here's another figure that might surprise you. To estimate the extent of cyclicality in the employment rate series you see above, I regressed that series on a flexible trend and, to capture cyclical variation, the unemployment gap, or u – u*, where u is the unemployment rate and u* is CBO's estimate of the natural rate. When u – u* is positive, there's slack in the job market; when it's negative, the job market is tight. Thus, we expect a negative coefficient (tighter job market, higher EPOP), which is what we get.

Source: see text

But if you start the regression with data from the late 1940s to the 1960s, add one observation at a time and rerun it (a rolling regression), you get the plot you see below. The fact that the coefficient falls as more observations are added (and also becomes more statistically significant) suggests an increasing cyclical response.

Here again, I don't want to overplay the point—the coefficient on the unemployment gap grows by about 25 percent over the series. But if you read much of the commentary on "missing men," you'd be quickly convinced that these guys are increasingly cut off from the job market, disconnected from work, and immune to stronger labor demand.

Final point: I fear some guys are. That is, shut out and disconnected. These are the guys with criminal records, who face, as Eberstadt discusses, extremely steep barriers getting back into the job market, and there are millions of them. They need targeted help finding their way back to work, alongside criminal justice reform that stops excessively punishing them for non-violent crimes.

Bottom line, no mystery, just the need for a lot more labor demand. And given the persistence of this trend and the extent to which the economy leaves these guys behind, I'm not at all sure we can count on the market to do this for us. At least for some of these guys, and as Dean says, some women too, we may well need to think in terms of direct job creation.

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