Tuesday, March 28, 2017

Variations on the Phillips curve: labor force participation and wage growth


 - by New Deal democrat

Over the last month or so, in a few posts I have looked at the relationship between labor force participation, wages, and unemployment.  Last week I looked at several variations on the Phillips Curve -- the proposed relationship between inflation and the unemployment rate. While over a single business expansion the relationship seems to work, i.e., lower unemployment rates correlate with higher inflation, that hasn't been true over a longer term secular basis, and it specifically reverses during and after severe recessions, where higher (but declining) unemployment rates have been correlated with higher (and declining) inflation. 

But a much tighter relationship appears to exist between the labor force participation rate (the total employed plus unemployed as a share of population) and wage growth:



We have two secular regimes where higher participation is correlated with higher wage growth separated by a brief transition where higher participation was correlated with a sharp decline in wage growth.

Let's break it down.  First, here are the inflationary 1960s and 1970s, where there was also a great deal of labor bargaining power due to strong unions:



Here is the low inflation late 1980s to the present, where there has been very little labor bargaining power:



In both of these cases, for a total of almost 45 of the last 50+ years, higher wage growth has been correlated with higher labor force participation.

Here is the brief transition period during the 1980s Reagan Administration, where both inflation and labor bargaining power sharply declined:



The bottom line is that, once we take into account labor bargaining power, there appears to be a very good and durable relationship between changes in prime age labor force participation and 
growth in wages. 

But of course, correlation is not causation, and I have suggested in prior posts that if anything, wage growth may lag labor force participation, with some complex mutual causation. I will wrap this thought process up in one final post later this week.


Sunday, March 26, 2017

My Weekly Columns Are Up At XE.com

US Equity and Economic Week in Review

US Bond Market Week in Review

International Week in Review

A thought for Sunday: Thank You, Freedom Caucus!!! Plus, Democats should offer a plan to "Reform and Improve" Obamacare


 - by New Deal democrat

First of all, thank the Great Flying Spaghetti Monster for the GOP's Freedom Caucus!!! They have been the best friends Progressives like myself could have hoped for.
Every time the mainline GOP or corporatist Democrats wanted to move the country back to 1929, the Freedom Caucus has insisted that nothing short of 1859 will do.  By refusing to take "yes" for an answer, they have again and again -- in the Debt Ceiling Debacle of 2011, in the "Fiscal Cliff" of 2012, and again with TrumpRyancare this past week -- single-handedly kept the US in the late 20th Century.
Secondly, I hope the Democratic Party does not slip back into passivity on Obamacare simply because they have won this battle.  I strongly suspect that the main reason Trump is implacably  against "Obamacare" is because Obama humiliated him at the White House Correspondents' Dinner once upon a time, and he is nothing if not vengeful. He wants to obliterate Obama's legacy.
So Democrats need to make a big stink any time the Trump Administration undercuts Obamacare provisions to try to make it fail (as they have already done in several respects, e.g., state waivers). 
Beyond that,  Obamacare does have some significant problems.  The individual mandate is hated, and the penalty isn't big enough. More young people need to buy in. Further, some of the Exchanges and health care provider networks are too narrow, and in a few states they are in big trouble. Complacency is not a winning strategy.
If Democrats truly care about making this country better for the vast majority of its population, now that most people are finally of the opinion that health care ought to be reasonably available to everybody, not just if their employer offers it, Democrats should respond to the GOP's deplorable "repeal and replace" efforts with a promise to "reform and improve" Obamacare should they gain a Congressional majority.
How would a plan to "reform and improve" Obamacare work?  There is renewed talk of "Medicare for All" and if the public can be sold on that, I certainly have no problem.  But I suspect the public is not interested in "Medicare for All."  So what is a viable Plan B?
The goals ought to be:
1. universal coverage. Obamacare still leaves about 10% of the population uncovered.
2. better plans.  Too many of the Bronze and Silver plans have sky-high deductibles and copays, making them little more than "junk insurance."
3. administrative efficiency. There are too many potential side-by-side bureaucracies: Medicare, Medicaid, SCHIP, private exchange providers, employer-provided insurance, auto and homeowner medical coverage, and potentially a "public option" provider. The less redundancy among providers, the more the cost savings which can be plowed into cheaper premiums and better coverage.

Two elements of a viable Plan B are well-known: the "public option" and age 55+ (or at least age 62+) Medicare buy-in.  These will ensure wider choices, more competition, and to the extent older workers choose to retire early with the Medicare buy-in, lower premiums and a healthier risk pool in the Exchanges.

Additionally, Plan B ought to include a reform to abolish the individual mandate and penalty and replace them with automatic enrollment in a basic health care plan.
Here's how I envision it would work. Just like SS, Medicare, unemployment and disability deductions to paychecks, establish a Health Care automatic deductible. If your employer offers healthcare, the deductible is reduced by the amount of the premium, all the way to zero if applicable.

If your employer doesn't offer healthcare, if you are under age 40, you are automatically enrolled in the least expensive Bronze plan in your state. If you are 40 or older, you are automatically enrolled in the least expensive Silver plan in your state. 
The deductible would also include a small contribution towards Medicaid. Then, if you are unemployed, you are automatically enrolled in Medicaid, but can continue with the silver or bronze plan as above if you choose.
The  Kaiser Foundation estimated that in 2015, the average worker paid about $1200 per year for their employer provided health care, and the employer picked up another $4800 for a total of $6000 per year.  This out of an average annual salary of about $30,000.  This boils down to roughly a 4% deduction from worker wages, with the employer kicking in 16% more.
So, just for example, let's make the automatic deduction the following:
2% for a 20 year old + another 0.1% for the unemployment medical coverage.
3% plus 0.15% for a 30 year old
4% plus 0.2% for a 40 year old
5% plus 0.25% for a 50 year old
6% plus 0.3% for a 60 year old
Employers would pick up the rest up to a total of $6000. The self-employed pick up both the employer and employee share, with subsidies as per existing Obamacare.
Remember that if the employer is already providing coverage, that is counted against the payroll deduction.  and the deduction ought to kick in gradually, e.g., 1% a year, so that employees do not sustain any acutal nominal losses.

Now you have a social insurance program that provides universal coverage.  And we know that social insurance programs like Social Security, etc., are very popular.
Dems could turmpet such a plan to "Reform and Improve" Obamacare, and campaign on pushing for it if they get a Congressional majority. Heck,call it Trumpcare and President Caligula might even sign on!

Saturday, March 25, 2017

Weekly Indicators for March 20 - 24 at XE.com


 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

Among the entire array of indicators, only 3 were negatives this week.

Friday, March 24, 2017

Leading housing data continues to be positive


 - by New Deal democrat

We now have all of the February housing sales data.  With the exception of the least important series, the trend in each continues to move in the positive direction.

This post is up at XE.com.

Thursday, March 23, 2017

Variations on the Phillips Curve: unemployment and underemployment


 - by New Deal democrat

This is part of a longer post I wanted to write, and if FRED didn't play so poorly with iPad I would put it all up.  But, having finished with my cursing, let me put up a truncated version now and follow up with another one sometime in the next week.

This picks up on my post from several days ago in which I noted that a fuller explanation of the cycle of wage gains should take into account the labor force participation rate for prime age workers.  So I thought I would show the differences in how the Phillips Curve (the tradeoff between wages and unemployment) looks depending on how completely we look at it.

Let's start with the unemployment rate (bottom scale) vs. YoY nonsupervisory wage growth (left scale) since the series started in the 1960s:



It's pretty clear that there are two regimes, higher vs. lower wage growth (top vs. bottom).  And if you were looking for a clean relationship in which lower unemployment equals higher wage growth, it ain't there.

But let's cull out the two big recessions and recoveries 1981-89 and 2007-17.  Here's the 1980s:



and here's the last 10 years:


In each case, once unemployment gets low enough, increased wage growth does kick in.  But before that, we see wage growth falling as unemployment increases during the recession -- and continuing to decrease in the earlier part of the recovery thereafter while unemployment remains relatively high (over 7% or so).

Here's the same scatterplot for the U6 underemployment rate:

The traditional Phillips Curve gained prominence during the post-WW2 era when unemployment remained relatively low for nearly 30 years.  Now we can see that it is only part of the story.  It only holds true when the unemployment and underemployment rates are low enough. At higher un(-der)employment  rates, whether going into or coming out of recessions, wage growth decelerates even if unemployment or underemployment are decreasing.