Tuesday, January 27, 2015

The Surprising Stability of the US Federal Budget

Federal budget issues are often debated at high volume. It seems like either the all-powerful liberals have been raising taxes and spending to unprecedented and unbearably high levels, or the all powerful conservatives have been slashing spending and taxes to unprecedented and unbearably low levels. Thus, I always smile a bit in looking at actual budget numbers over the last half-century or so, which reveal a remarkably level of consistency over time. For some recent specifics, turn to
The Budget and Economic Outlook: 2015 to 2025, just published by the Congressional Budget Office. 

For simplicity and clarity, focus on federal spending and taxes expressed as a share of GDP in each year. Then, here's a figure showing the pattern over time. The blue line shows outlays, which average 20.1% of GDP over the period from 1965-2014. The green line shows average federal revenues, which average 17.4% of GDP over that same half-century. In 2014, federal spending was 20.3% of GDP and federal spending was 17.5% of GDP, almost bang-on their historical averages. 

Now, it's true that expressing the totals as a share of GDP can be a little misleading. After all, the GDP for 2015 will be about $18 trillion, so while a movement of 1 percentage point on the vertical axis might look small, it represents $180 billion in spending or taxes--certainly enough to be worth a lively political dispute. 

On the other hand, the figure put many of the major budget movements of the last few decades into a long-run perspective. For example, you can see the early 1980s combination of tax cuts and higher defense spending under President Reagan, You can see in the 1990s how a combination of a buoyant "new economy," along with tax increases on those with high incomes, lower defense spending, and less need for government services led to a few years of budget surpluses. You can see the Bush tax cuts in the early 2000s. You can see the extraordinary drop in tax revenues during the Great Recession from 2007-2009, and the extraordinary increase in federal spending in an attempt to stimulate the U.S. economy. And even after all those changes, as the U.S. economy has staggered back toward recovery in the last few years, federal spending and taxes by 2014 returned to their historical averages. 

Of course, this descrption of long-run averages offers no reason to assume that the long-run levels of spending and taxes are optimal, or that the composition of spending on one side or taxes on the other side should not be adjusted. But it does suggest that the political forces pushing on federal taxes and spending have tended to balance each other out over the last five decades. 

Monday, January 26, 2015

Productivity of High-Income Countries in the Long-Run

Over time, the rise in productivity as measured by output per hour is what makes the standard of living rise. For some people, I've found that the power that statement is stronger if it's put in reverse: unless productivity as measured by output per hour rises, the average standard of living can't rise. Morever, if output per hour isn't rising and the size of the economic pie (per person) isn't rising, then we move closer to zero-sum society in which all social and policy tradeoffs--helping the environment, or the poor, or the schools--become tougher to address.

Thus, my eye was caught by a figure showing long-run rates of labor productivity over time that apperared in a short article called "Productivity’s wave goodbye?" in the recent issue of OECD Observer, (2014 Q3). The red line is the U.S. economy; the blue line is the euro area; the green line is Japan; and the gray line is the United Kingdom. No matter how you slice it, productivity growth is low all around.

The figure appears in a paper called "Productivity trends from 1890 to 2012 in advanced countries," by  Antonin Bergeaud, Gilbert Cette et Rémy Lecat, published as a February 2014 by the Bank of France. The authors summarize the long-run patterns in this way (citations omitted):

We can mainly distinguish four periods from 1890 to 2012 ...
1. From 1890 to WWI, productivity was growing moderately and was characterized by a UK leadership and a catch-up by the other countries.
2. After the WWI slump, the Interwar and WWII years were characterized by a heightening of the US leadership, as it experienced an impressive big wave of productivity acceleration in the 1930s and 1940s, while other countries struggled with the Great Depression legacy and WWII.
3. After WWII, European countries and Japan benefited from the big wave experienced earlier in the United States.
4. Since 1995, the post-war convergence process has come to an end as US productivity growth overtook Japan and other countries’, although it is not up to its 1930s or 1940s pace. Shorter and smaller than the first one, a second big wave appeared in the US and, in a less explicit way, in the other areas.
Hence, all countries experienced that one big wave of productivity acceleration, but in a staggered manner: first the United States in the 1930s and 1940s, next the European countries and Japan after WWII. This wave was the strongest in the Euro Area and Japan, but starting from a much lower starting level than the United States. ... After several leaps forward of the US relative productivity level during each World War and its own big wave, this gave rise to a convergence process after WWII which appeared completed in the 1990s for the Euro Area - but not yet for Japan or the United Kingdom- when this process came to an end.

The data in the graph above is smoothed out (that's what "Hodrick-Prescott filtering" means in the title of the figure.) Here's a figure showing post-World War II quarterly data on U.S. output per hour worked (one standard measure of productivity), generated by the ever-useful FRED website run by the Federal Reserve Bank of St. Louis.

The quarterly data on rate of productivity growth is volatile, since it reflects both changes in output (the numerator) and in hourss worked (the denominator) in a given quarter. But if you squint a bit, some patterns are visible. For example, productivity growth usually falls during recessions (the gray areas) because at that time output growth falls faster in recessions than the decline in hours worked. Conversely, productivity growth usually rises right after a recession, because at that time output growth rises faster than the rise in hours worked.

Over the longer run, you can see that productivity levels are consistently higher in the 1950s and 1960s than they are in the 1970s and into the 1980s. You can see the take-off of productivity growth durign the "new economy" of the 1990s and how that lasted into the early 2000s. And you can see that despite an short-term upward blip in productivity growth right after the Great Recession, U.S. productivity growth was disappointingly low before the recession, and has stayed low since then.

Alan Blinder, the prominent macroeconomist, summed up the recent U.S. experience in an op-ed he wrote for the Wall Street Journal last November:

In sum, here’s what we know—and do not know—about productivity growth. First, it’s been dismal for the past four years. Second, economists cannot predict swings in productivity growth. Each sharp swing shown in the chart took us by surprise. Third, while the Fed is now forecasting something near 2% productivity growth over the next several years, it really has little basis for choosing that number. That’s not a criticism; no one else has a better basis for a different number. We are all in the dark.
So maybe some of the copious attention now being devoted to assessing labor-market slack should be redeployed to studying productivity growth. It might be more productive.

Saturday, January 24, 2015

The EU Economy as Quantative Easing Arrives

The European Central Bank launched a new wave of quantitative easing last week: that is, a policy in which central bank buys debt directly, in an attempt to stimulate additional spending and demand in the economy. As the head of the ECB Mario Draghi announced on Thursday: "Under this expanded programme, the combined monthly purchases of public and private sector securities will amount to €60 billion. They are intended to be carried out until end-September 2016 and will in any case be conducted until we see a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates below, but close to, 2% over the medium term."

To see why the European Central Bank thought that committing to debt purchases of  €60 billion per month until late next year was a useful step, take a quick look at the unemployment, inflation, and economic growth statistics for the European Union.  Here are unemployment statistics released earlier in January from Eurostat. The lighter line shows the unemployment rate for the 18 countries that use the euro; the darker line shows the unemployment rate for all 28 countries of the European Union. The good news is that unemployment rates did drop in 2014. The really bad news is unemployment rates in the EU is are higher now than they were at the worst of the Great Recession back in 2009. 

In the U.S., many of us worry that the drop of the US unemployment rate from 10% in October 2009 to 5.8% in December 2014 has happened so slowly, and that the decline may overstate the real improvement in US labor markets because of those who are no longer looking for work and are thus "out of the labor force." American readers, try to imagine the political, economic, and social conversation we would be having in the United States if the unemployment rate at the end of 2014 was higher than late in 2009!

Here's a table showing the spread of unemployment rates across countries. As noted under the table; "The EU28 includes Belgium (BE), Bulgaria (BG), the Czech Republic (CZ), Denmark (DK), Germany (DE), Estonia (EE), Ireland (IE), Greece (EL), Spain (ES), France (FR), Croatia (HR), Italy (IT), Cyprus (CY), Latvia (LV), Lithuania (LT), Luxembourg (LU), Hungary (HU), Malta (MT), the Netherlands (NL), Austria (AT), Poland (PL), Portugal (PT), Romania (RO), Slovenia (SI), Slovakia (SK), Finland (FI), Sweden (SE) and the United Kingdom (UK)."The unemployment rate for those under age 25 is 21.9% across the 28 EU countries. 
The high unemployment rates, not unexpectedly, have been accompanied by slow economic growth. Here are the  Eurostat estimates of GDP growth published in early December. The data is for growth from the previous quarter, seasonally adjusted. The thin line shows the US economy. The dark line shows the euro area countries, and the dashed line shows all 29 countries of the EU. Quarterly changes bounce up and down a bit for idiosyncratic reasons, but still, the pattern is fairly clear. Both the U.S. and the EU had steep recessions around 2008-2009. Both seeemed to have entered a slow period of recovery from late 2009 up through 2010. But since about 2011, the U.S. economy has continued its slow but real recovery, while the EU actually went back into recession for much of 2011 and 2012, and barely edged back into positive growth in 2013. 

Here's the country-by-country data for quarterly rates of GDP growth in the third quarter of 2014. 

The U.S. Federal Reserve legally has what is called a "dual mandate": that is, it is legally required to worry both about inflation and also about growth and unemployment. When the European Central Bank was created, it was given a single target: keeping the inflation rate at 2%. At that time, the main focus was on holding the inflation rate to no higher than 2%. But in recent years, it has often been pointed out that the euro inflation rate is substantially less than 2%, and thus the ECB is not fulfilling its legal mandate. In the Draghi quotation noted above, for example, he says that the program of quantitative easing is justified until the euro inflation rate is back to 2% in the medium term. 

Here are inflation statistics released by Eurostat in mid-January, with euro-area inflation shown by the solid yellow line and inflation for the EU as a whole shown by the blue dashed line. As many commenters have noted, the inflation rate in the EU peaked back around summer 2011, and has been in steady decline since then. It has now been below the 2% target--and getting farther from the 2% target--for more than two years. As of December 2014, the inflation rate tipped negative. My suspicion is that this shift into deflation made the ECB decision to announce a large program of quantitative easing look relatively easy. 
While I think the ECB is making the correct decision, I do worry about how the decision is viewed. 
I'm of course a complete outsider to the EU policy process. But it seems to me that there is a tendency for political leaders and public discourse to often talk as if the European Central Bank has the power to fix Europe's unemployment and growth problems. The ECB can be part of a solution, and its actions may be necessary for a solution, but it isn't close to sufficient. In Draghi's press conference announcing the quantitative easing, he made this point a couple of times. For example, in his prepared remarks Draghi said:
Monetary policy is focused on maintaining price stability over the medium term and its accommodative stance contributes to supporting economic activity. However, in order to increase investment activity, boost job creation and raise productivity growth, other policy areas need to contribute decisively. In particular, the determined implementation of product and labour market reforms as well as actions to improve the business environment for firms needs to gain momentum in several countries. It is crucial that structural reforms be implemented swiftly, credibly and effectively as this will not only increase the future sustainable growth of the euro area, but will also raise expectations of higher incomes and encourage firms to increase investment today and bring forward the economic recovery. Fiscal policies should support the economic recovery, while ensuring debt sustainability in compliance with the Stability and Growth Pact, which remains the anchor for confidence. All countries should use the available scope for a more growth-friendly composition of fiscal policies.

In answer to a question later in the press conference, Draghi repeated:

Finally, let me add something here, because it’s actually quite important. What monetary policy can do, I’ve said this many times, but I think it is worthwhile repeating it. What monetary policy can do is to create the basis for growth, but for growth to pick up, you need investment. For investment you need confidence, and for confidence you need structural reforms. The ECB has taken a further, very expansionary measure today, but it’s now up to the governments to implement these structural reforms, and the more they do, the more effective will be our monetary policy. That’s absolutely essential, as well as the fiscal consolidation side. So structural reforms is one thing, budget and fiscal consolidation is a different issue. It’s very important to have in place a so-called growth-friendly fiscal consolidation for confidence strengthening. This combined with a monetary policy which is very expansionary, which has been and is even more so after our decisions today, is actually the optimal combination. But for this now, we need the actions by the governments ...  Speed is of the essence.
Maybe I'm just cynical, but I'm not expecting the European governments to follow up with a wave of structural reforms and "growth-friendly fiscal consolidation." I'd love to be proven wrong.

Friday, January 23, 2015

Where Has Welfare Reform Taken Us?

Back in the 1980s and early 1990s, there was much talk of "welfare reform," which referred specifically to a program called Aid to Families with Dependent Children (AFDC). The concern was that the cash assistance given to low-income families through this program was helping to create a culture of dependency. For a sense of the tone of this discussion, consider these comments from Democratic President Bill Clinton to a National Governors' Association Conference on July 16, 1996:
I have been committed to ending welfare as we know it. ... Today, after long years of effort, I believe we are poised for a real breakthrough in welfare reform. Real welfare reform requires work, imposes time limits, cracks down on deadbeat parents by enforcing child support, provides child care. ...  We've cut through red tape and worked with you to set up 67 welfare reform experiments in 40 states, with more to come. We've granted more than twice as many waivers as the previous two administrations combined, and now, 75 percent of all welfare recipients are already under new rules. The New York Times called this a quiet revolution in welfare. Well, I'm proud that there are 1.3 million fewer people on welfare now than the day I took office, and that child support collections are up 40 percent.
But there's more to do. As you know, the state of Wisconsin has submitted a bold plan to reform welfare. We're working closely with Governor Thompson's staff, and I am committed, as I've said before, to getting this done. I'd just like to emphasize the things about this Wisconsin plan which are compelling to me: The idea that people should be required immediately to be ready to go to work, but that in return, they would have health care and child care guaranteed; and that the welfare money could be used to pay income supplements or wage supplements to private employers to put these people to work; and that if there is no private employment, these folks will be given community service jobs. That's what we ought to be doing everywhere. If we can create these jobs, we ought to require people to take them.
Clinton signed the Personal Responsibility and Work Opportunity Reconciliation Act into law soon after, on August 22, 1996. The main thrust of the bill was to put limits on how long one could receive welfare, along with adding programs intended to push recipients toward work and self-sufficiency. These programs vary across states, but can include support for training, job search, child care subsidies, programs to reduce out-of-wedlock pregnancies, and more. The program was renamed as Temporary Assistance for Needy Families (TANF). For a sense of what has happened since then, and what may happen next, a useful starting point is the January 2015 report from the Congressional Budget Office: "Temporary Assistance for Needy Families: Spending and Policy Options."

Here's a figure showing total national spending on TANF, and on AFDC before it, since 1994. The program includes both federal and matching state-level spending. The total amount spent has not change much, after adjusting for inflation. However, the composition of that spending has shifted substantially. Back in 1994 almost all of the spending was cash assistance, while the spending now comes primarily in the form of work support and other services.

One big change in the aftermath of welfare reform was that when work requirements and time limits were added, the number of recipients fell sharply. Some of this change may be due to the strong economy and low unemployment rates in the second half of the 1990s, but even in the recessions of 2001 and 2007-9, the number of recipients barely budged. The dark line shows the number of recipients of TANF and AFDC; the green line shows the average cash benefits per household, adjusted for inflation. In other words, the similar spending on TANF/AFDC over time, combined with a lower level of recipients, means that the remaining recipients could get roughly the same level of cash benefits, but also receive a number of other work support and other services.
AFDC was controversial back in the day in part because it was a cash payment: that is, it wasn't provision of health care to the poor through Medicaid, nor was it provision of food stamps. The value of AFDC was not especially large compared to other means-tested programs for assisting the poor, and with the passage of time since welfare reform, it has become relatively even smaller.

Here's a figure showing federal spending on means-tested programs and tax credits. (Thus, the state-level spending contributions to TANF spending are not included here, but they are less than half the total and would not substantially alter the shape of the figure.)

Cash spending through TANF is the very thin grey area at the bottom of the figure. TANF noncash assistance is shown by the very thin area above that. the next two areas show Supplemental Security Income, which goes to the low-income elderly as well as to low-income people of all ages with disabilities; and the effect of refundable tax credits like the earned income tax credit and the child credit. (The credits are called "refundable" because they not only can reduce the tax liability of those eligible to zero, but they can also generate a payment to the household.) Above this are the main noncash assistance programs, including food stamps and Medicaid.

In short, AFDC was a small share of means-tested assistance to the poor back in 1994--but it was a primary form of cash assistance to a number of recipients. Since welfare reform, the US has continued along this path: a focus on providing health care and food through targetted noncash programs to those with low incomes, while trying to tie cash assistance for the able-bodied to work effort, either through the earned income tax credit or through the work supports in TANF.  

Thursday, January 22, 2015

Where Will the Future Global Jobs Come From?

Economies all around the world need to create jobs. In part, this is to continue the process of recovery from the Great Recession. In part, it is to address expanding workforces in the countries that are still experiencing population growth. And and all around the world, jobs need to be created so that those who have unsatisfactory or insecure jobs have the prospect of something better. The International Labor Organization offers some background on these issues in the January 2015 issue of World Employment and Social Outlook: Trends 2015..

As a starting point: here is an overview of how the ILO sees the need for creating 280 million jobs worldwide in the next five years:
"[T]he global employment outlook will deteriorate in the coming five years. Over 201 million were unemployed in 2014 around the world, over 31 million more than before the start of the global crisis. And, global unemployment is expected to increase by 3 million in 2015 and by a further 8 million in the following four years. The global employment gap, which measures the number of jobs lost since the start of the crisis, currently stands at 61 million. If new labour market entrants over the next five years are taken into account, an additional 280 million jobs need to be created by 2019 to close the global employment gap caused by the crisis."
This estimate of a need for 280 million new jobs covers the unemployed and population growth, but from a global view, it seems a lowball estimate to me. The reason is that the ILO counts many people around the world as holding jobs in what it calls the "vulnerable employment" sector, which is defined as "own-account work and contributing family employment." Thus, a low-income subsistence farmer is counted as counted as holding a job.  The ILO writes: "[A]lmost half of the world’s employed population are still working in vulnerable conditions, pre-dominantly women, and are thus prevented from accessing basic necessities and decent work. ... In particular, nearly eight out of ten employed persons in Sub-Saharan Africa were in vulnerable forms of employment. Accordingly, the vulnerable employment rate – the share of own account workers and unpaid family workers in total employment – was estimated at 76.6 per cent in 2014, significantly higher than the global average of 45.3 per cent, and followed closely by South Asia at 75.6 per cent."

Here's a figure for "vulnerable employment" as a share of total employment in regions around the world. In many parts of the world, robust job creation is needed to help large proportions of the population shift from "vulnerable employment" to jobs with better wages and prospects.

It is of course impossible to specify in advance where hundreds of millions of new jobs going to come from. But it is possible to identify where they are most likely to come from--and to note some challenges posed by this answer.

The hundreds of millions of new jobs are not likely to be generated by agriculture. Indeed, the more common pattern in economic development is that as agricultural productivity rises, the share and absolute number of workers should diminish. The hundreds of millions of new jobs are not likely to come predominantly from the public sector. Although many countries around the world certainly could benefit from an expansion of government spending in areas like health care, education, and infrastructure, many governments around the world are also struggling with deficit spending and accumulated debts. Even with some additional public support, increased jobs in these areas will involve a substantial private sector presence.

Within the private sector, it seems highly unlikely that hundreds of millions of new jobs are going to be generated in the manufacturing sector. The reason lies in what the report calls the theory of "premature industrialization." In past episodes of economic development around the world, a common progression has been for workers to move from agricultural jobs to low-skilled manufacturing jobs, and then on to higher-skilled manufacturing jobs and service jobs. However, in a world of high-technology, many countries without especially high income levels seem to have already seen a peak in their manufacuturing  jobs--and the peak level of manufacturing jobs seems to be happening at lower levels of the workforce.

Here's a figure from the ILO report, where the point for each country shows the year on the horizontal axis in which the share of manufacturing workers in its economy was at its peak, while the vertical axis shows what that peak level was. For example, in the upper left of the figure manufacturing jobs in Argentina peaked at about 24% of the workforce in 1992. As the figure shows, it's common for manufacturing jobs to peak at around 15% of the workforce, and that level seems to be on average declining over time (as shown by the yellow line).

So what is left? Service jobs. The ILO writes:
"The bulk of new jobs are being created in private sector services, which will employ more than a third of the global workforce over the next five years ... Public services in health care, education and administration will also see smaller increases, still reaching more than 12 per cent of total employment. In contrast, industrial employment is expected to stabilize globally at slightly below 22 per cent of total employment, mainly driven by a continuous rise in employment in construction whereas manufacturing industries continue to lose jobs. The advanced economies still account for the largest share of manufacturing jobs across the globe, but current trends will bring their employment share to below 12 per cent by the end of 2019. Some emerging countries
have also seen a fall in their share of manufacturing employment, despite the fact that their manufacturing industries have not yet reached levels similar to those in advanced economies. In general, industrial employment is not likely to contribute strongly to employment recovery, despite its important role in structural transformation particularly in the emerging economies. Rather, service sector employment will remain the most dynamic area of job creation over the next five years."
The jobs question all around the world is the extent to which service-sector jobs can provide a broad base of careers for a wide range of skill levels. As the ILO notes in discussing the idea of premature deindustrialization, "the extent to which services can take over the role of manufacturing and facilitate the convergence of developing to developed countries is still under scrutiny ..." In high-income countries, there are concerns that service industry jobs can tend to be polarized, with options for low-skill workers who do service jobs where a physical presence is needed, and high-skill workers who make heavy use of information and communications technology, but a hollowing out of options for the middle class.

The question of how new technologies might be combined with workers of all skill levels to create middle-class career paths for the future will manifest itself in very different ways in countries all around the world. But in every country, it's one of the fundamental challenges for the global economy in the next few decades.

Wednesday, January 21, 2015

Rising Fears About Losing and Replacing Jobs

The General Social Survey is a nationally representative survey carried bout by the National Opinion Research Center at the University of Chicago and financially supported by grants from the National Science Foundation. Starting in 1977 and 1978, and intermittently over the years since then, it has included these two questions:
Thinking about the next 12 months, how likely do you think it is that you will lose your job or be laid off—very likely, fairly likely, not too likely, or not at all likely?
About how easy would it be for you to find a job with another employer with approximately the same income and fringe benefits you have now? Would you say it would be very easy, somewhat easy, or not easy at all?
Back in 1980, Charles Weaver wrote an article about the patterns of the answers in the first wave of this data. He updates the results and looks for patterns over time in "Worker’s expectations about losing and replacing their jobs: 35 years of change," in the January 2015 issue of the Monthly Labor Review, published by the US Bureau of Labor Statistics.

Before looking at the results, it's useful to ponder what one might expect to find. At times when unemployment is relatively high or the economy has gone through a substantial disruption, for example, one would expect fears over losing or replacing jobs to be higher.  But it's worth remembering that the 1977 and 1978 were a time of considerable economic uncertainty. The economy was gradually recovering from a recession that had lasted 16 months from November 1973 to March 1975. There were fears related to the global economy, including the rise of OPEC and higher energy prices, the growth strength of competition from Japan, and the end of the Bretton Woods agrreement for stabilizing global exchange rates. Inflation was viewed as such a severe problem that President Nixon had imposed national wage and price controls in 1971 and 1972.  Thus, comparing job fears in 1977 and with fears in 2010 and 2012 has some plausibility.

Both simple comparisons and more sophisticated analyses suggests that fear about losing and replacing jobs has been rising over time. Here's the simple comparison from Weaver: "Compared with workers in 1977 and 1978, workers in 2010 and 2012 expressed significantly less job security. They were more afraid of losing their jobs (11.2 percent versus the earlier 7.7 percent) and were less likely to think that they could find comparable work without much difficulty (48.3 percent versus the earlier 59.2 percent)."

The more detailed breakdown of the data shows which groups have seen their labor market fears increase the most. On the question how likely you are to lose your current job, the answer for the population as a whole rose 3.5 percentage points from 1977-78 to 2010-12. But for blue-collar craft workers the increase was 11.1 percentage points, and for blue collar operatives the rise was 9.7 percentage points. Also, from the early to the most recent survey, those in the age 50-59 age bracket were 8.2 percentage points more likely to think that they were likely to lose their job.

On the issue of whether workers expected to be able to find a comparable job, the answer for the population as a whole dropped 10.9 percentage points from 1977-78 to 2010-12. For those with "some college," but not a college degree, the expectation fell by 23.1 percentage points, and for white collar workers in clerical jobs it fell by 23.9 percentage points. Interestingly, for workers 60 and over the confidence in being able to fine a comparable job was actually 1.7 percentage point greater in the 2010-12 results than in the 1977-78 results.

An obvious question is whether the greater fears about losing jobs and replacing jobs are a relatively recent development--in particular, whether they happened only in the aftermath of the Great Recession--or whether this has been a steady trend over time. Stewart runs through a number of different statistical exercises to consider this point: for example, one can look at whether there was a trend toward greater fears of losing and replacing jobs in earlier time periods (and there was). Or one can look at whether the statistical relationship between the unemployment rate  and the fears about losing and replacing jobs has gotten higher over time (actually, this relationship has stayed about the same over time).

Stewart writes: "In 2010 and 2012, more workers feared losing their jobs, and far fewer workers said that it would be easy to find a comparable job, than in 1977 and 1978. Comparing the slopes suggests that job security diminished more than 3 times as much for ease of finding comparable jobs than for the fear of losing jobs. ... Some may infer that the lower job security felt by Americans in 2010 and 2012 was an aberration, based upon the unusual conditions presented by the recent recession. But the reality is that the downward trend in feelings of job security has been going on for the last 35 years, apart from the “extra push” it has received from the “\`Great Recession,' ..."

As I mentioned in yesterday's blog post, I think the most powerful fear in the current labor market is not about mass unemployment, but instead is a concern that the available alternative jobs may be of lower quality in terms of wages, benefits, work conditions, job security, and the prospect for a future career path.

Tuesday, January 20, 2015

Global Economic Growth: All Productivity, All the Time

The growth of an economy can be divided into two parts: growth of population, and growth of output per person, which is commonly known as "productivity."  The McKinsey Global Institute looks at these patterns over the last 50 years in its January 2015 report "Global growth: Can productivity save the day in an aging world?" The report calculates that over the last 50 years, the global economy has grown at about 3.6% per year, with roughly  half of that coming from more workers and half coming from higher productivity per worker. But in the next 50 years, the rate of workforce growth is going to decline substantially, as population grows more slowly and ages more rapidly. We are headed toward a global economy where growth is determined almost entirely by the rise in productivity.

I'm fond of figures that offer an image of the global economy. To set the stage, here's a figure from the report showing growth of the world economy during the half-century from 1964 to 2014. The horizontal axis shows the the world population, divided up by country. The vertical axis shows the per capita GDP for different countries, ranked from highest per capita GDP on left to lowest on the right. For example, you can see the wide bars showing the populations of China and India, the most populous countries in the world, and their per capita GDP shown by the height of the bars. The gray bars show the results of doing this exercise in 1964; the blue bars show the results for 2014. The size of the world economy is captured by the shaded area; that is, population multiplied by per capita GDP. Thus, the gray area represents the size of the world economy in 1964, while the blue area (which should be understood to overlap with the gray area and include it) shows the size of the world economy in 2014.

But looking ahead, many countries and indeed the world as a whole are headed for "peak employment." The nubmer of employees has already peaked in Germany, Japan, Italy, and Russia. Global employment is projected to peak around 2050. Encouraging greater labor force participation can influence these dates by a bit--for example, making it easier for older people to retire later--but the overall demographic trends are inexorable.

Thus, the growth of the global economy in the future is becoming less affected by population growth, and more heavily reliant on productivity growth. This raises some hard questions where the answers will only become apparent with the passage of time.

1) Can global productivity growth in the future be sustained and increased?

From a global perspective, there are two main contributors to economic growth: catch-up growth taht builds on already existing knowledge, and cutting-edge growth based on new discoveries and products. The McKinsey report suggests an number of opportunities for catch-up growth.

For low and middle-income countries: "Overall, it is striking that the absolute gap between productivity in emerging and developed economies has not narrowed. Productivity in developed economies today remains almost five times that of emerging economies. Narrowing this gap is one of the biggest opportunities for—and challenges to—long-term global growth."

For high-income countries: "In developed economies, more than half—55 percent—of the productivity gains that MGI’s analysis finds are feasible could come from closing the gap between low-productivity companies and plants and those that have high productivity. There are opportunities to continue to incorporate leaner supply-chain operations throughout retail, and to improve the allocation of the time spent by nurses and doctors in hospitals and health-care centers, for example. Across countries, large differences in average productivity within the same industry indicate industry-wide opportunities for improvement. For instance, low productivity in retail and other service sectors in Japan and South Korea reflects a large share of traditional small-scale retailers. High costs in the US health-care system partly reflect the excessive use of clinically ineffective procedures. Even agriculture, automotive manufacturing, and other sectors that have historically made strong contributions to productivity growth have ample room to continue to diffuse innovations and become more efficient."

One of the great strengths of the McKinsey Global Institute is its studies looking at productivity levels with specific sectors and industries, where they see all sorts of opportunities for cutting-edge growth:
Online retail productivity, even in developed economies, can be more than 80 percent higher than modern brick-and-mortar retailers. ...
Typically, only one-third of a nurse’s time is spent directly caring for patients: non-core activities account for roughly 66 percent of nurses’ scheduled time ... Shifting health care to more cost-effective settings can reap large savings. ...  The biggest savings can be achieved from shifting inpatient care to outpatient care, shifting from outpatient care in hospitals to primary-care and other settings outside hospitals, empowering patients to treat themselves to a greater degree, and integrating care settings in which different providers that a patient might see are in the same organization. ClickMedix uses mobile phones and digital cameras to capture images, transmit patient information, and deliver remote consultations, resulting in a 25 percent reduction in administrative costs and a four- to tenfold increase in the number of patients seen by doctors and specialists. ...
Some opportunities require simply continuing existing industry research programs, such
as agricultural research into tailoring and improving seeds and agronomical practices to
raise crop yields in new geographies, and automotive industry initiatives to power cars using more efficient fuel technology. Others rely on technological innovations that could potentially transform many different industries. For example, highly efficient and intelligent robots— or bots—are already boosting efficiency in retail warehouses where they are deployed, mobile technology is increasingly being used to deliver health care in remote regions, and automobile manufacturers are installing a broader range of digital features in cars. Advanced materials such as nanolaminates—edible lipids or polysaccharide compounds—can be sprayed on food to provide protection from air or moisture and reduce food spoilage, while carbon-fiber composites can make cars and airplanes both more resilient and lighter. The Internet of Things can cut time spent in production processes by detecting potential failures early, increase crop yields by measuring the moisture of fields, and cut the cost of monitoring health dramatically. Such innovations are not confined to developed economies but are happening in emerging economies, too. For instance, Aravind Eye Care of India, which has become the largest eye-care facility in the world, performs cataract surgeries at one-sixth of the cost and with fewer infections than the National Health Service in the United Kingdom achieves.
More broadly, future productivity growth depends on a confluence of many well-known factors: a workforce with high and growing levels of education and skills; investment in research and development; paying attention to the multiple infrastructures involved with transportation, communication, and shipping; and a regulatory and legal environment that is supportive of innovation and competition.

2) Will the benefits of future productivity growth lead to good jobs at good wages?

There is a long-standing concern that technology growth can eliminate jobs. As the McKinsey report notes, the term “technological unemployment” was coined by John Maynard Keynes in an essay in 1930. I've pointed out on this blog that concerns over technology and automation eliminating jobs were strong enough in the early 1960s to lead to a presidential commission and report. In the last few decades, the concern has been less about the risk of mass unemployment: after all, the U.S. unemployment rate was 6.1% or lower from May 1994 to September 2008, except for a couple of months in 2003 when it rose as high as 6.3%. As of September 2014, it's below 6% again. This pattern does not look like a trend to mass unemployment. As the McKinsey report notes: "Countries that have flexible labor markets have tended to experience rapid changes in the kind of jobs that the economy creates. Take the United States as an example. About one-third of the new jobs created in the United States over the past 25 years were types that did not exist, or barely existed, 25 years ago."

It seems to me the real issue is not the prospect of mass unemployment, but instead the issue of what kinds of jobs people have. Can people who want them find career-type jobs--that is, jobs where you build skills, receive pay raises over time, have a degree of autonomy in your work, take on additional responsibilities over time, and can identify alternative jobs options if you want or need them?  Or are people in job that help pay the bills, but lack these future prospects? If such a change is occurring, is it baked into the pie of technological change and thus something that is difficult to affect with public policy, or might it be that with a different set of policy choices, future technological change has a different effect on labor markets?

Over the very long run, technological change and productivity growth have been extremely disruptive to economies, but have led over time and after many adjustments to a higher average standard of living.  I see articles and receive emails arguing that "this time is different," and the technological changes of the future will be far more disruptive than those of the past. Of course, it's impossible to disprove that the future will be different!

3) Is there an interaction between slower population growth and future productivity growth?

Does the peak workforce affect the prospects for future productivity growth? Or are these separate issues? One can argue that slower growth in the population and the workforce shouldn't really matter, as long as average or per capita growth continues. But when the idea of an economy experiencing "secular stagnation" was first argued by Alvin Hansen back in 1938, one concern was that slower population growth would mean slower economic growth, and the connection has been made in more recent arguments over secular stagnation, too.

The potential connections between population growth and productivity growth are not well-established. But there is some plausibility in the argument that a growing population represents larger future markets, and young consumer who may be especially open to new products, in a way that improves the incentives of firms and entrepreneurs to invest in new ideas and technology. Similarly, there is some plausibility in the argument that a growing workforce has a higher proportion of new workers, who may be more flexible about new practices and innovations, while a peak workforce has a larger share of older workers, who have not traditionally been the main source of innovations. I do not know whether these kinds of factors are large enough to make a substantial difference in productivity growth. But as we head toward a global economy where growth is all about productivity, all the time, more knowledge about these interactions will begin to emerge.