Lecture 4 The Economic Structure of the Bay Area Economy Looking at Structure through Labor

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1 Lecture 4 The Economic Structure of the Bay Area Economy Looking at Structure through Labor Page

2 Defining the Issues Economic Fluctuations Long Run Economic Growth Structural Change Page

3 We Turn too the Labor Market and Jobs Structural issues impacted by macroeconomic performance Demographics and trends in labor force participation rates Hysteresis and impacts on long-term supply of labor and future growth of the standard of living Structural issues that affect differential growth rates by industry and regions of the country Implications for future growth of the Bay Area Page

4 Key Concept in Labor Market Unemployment Severe unemployment has significant social and political effects The economic system isn t fair and it s less fair in terms of who experiences unemployment either frequently or for long periods Unemployment spells of long duration is the challenge to the classic laissez-faire model of economy It isn t a coincidence that the Keynesian model evolved from the ashes of the Great Depression Page

5 Household Survey ( CPS ) Data Two completely different monthly surveys provide much key information for economists Household Survey : Current Population Survey The Current Population Survey (CPS), sponsored jointly by the U.S. Census Bureau and the U.S. Bureau of Labor Statistics (BLS) The primary source of labor force statistics for the population of the United States. About 60,000 Households sampled each month Source of Employment, Labor Force and Unemployment Page

6 Establishment Survey Data The Establishment Survey :The Current Employment Statistics Program A Federal-State cooperative program. The CES survey is based on approximately 141,000 businesses and government agencies representing approximately 486,000 worksites throughout the United States. Generates estimate of jobs, wages and salaries Markets react to the announced number relative to the expected number Page

7 Confusion in Terminology Typically when the Bureau of Labor Statistics reports employment it is referring to the Establishment Survey even though the CPS also reports civilian employment. Frequently jobs and unemployment for various areas are reported at the same time, despite totally different surveys and meanings when you get to smaller geographies (e.g. counties) Household Survey is based on where people live Establishment Survey is based on where people work Note: where people live vs. where they work leads to daily commutes Page

8 Sonoma County - October 2017 Unemployment rate = 3.3% Establishment non-farm jobs = 205,800 Civilian employment = 254,000 Explanation: About 17% of Sonoma s employed residents work outside of Sonoma About 8% of jobs in Sonoma are held by non-sonoma residents Page

9 Marin County - November 2017 Unemployment rate = 2.6% Establishment non-farm jobs = 118,600 Civilian employment = 140,300 Explanation: About 34% of Marin s employed residents work outside of Marin About 36% of jobs in Marin are held by non-marin residents Page

10 Measuring Employment: Establishment vs. Household Surveys Civilian Employment vs. Payrolls Employ (Mill) Civ Emp = Household Survey: Are you employed? NFPayroll=Establishment Survey: How many employees do you have? Page

11 Emp (MM) Measuring Employment: Establishment vs. Household Surveys Civilian Employment vs. Payrolls The surveys are different and give similar but different results Page

12 Establishment vs. Household Surveys for Sonoma County Thousands Page

13 Establishment vs. Household Surveys for Marin and Sonoma Employment in 000 Page

14 Population and Labor Market Definitions: Dec 2016 Employed 152 Million Civilian Labor Force 160 Million Unemployed 8 Million Not in Labor Force 95 Million Civilian Non-institutional Population (16+) 255 Million Children, Military, Inst. Pop 69 Million Total Population: 324 Million Page

How to Count the Labor Force Matters U (%) This difference creates great confusion U-6 is total unemployed, plus all persons marginally attached to the labor

15 How to Count the Labor Force Matters U (%) This difference creates great confusion U-6 is total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force Page

16 Trends in Unemployment by Cohort By Race U % This is one the reasons there is macroeconomics: Page 16 While there are differences in unemployment rate levels, the increases/decreases are highly correlated 20-16

17 Trends in Unemployment by Cohort By Gender U % 60,000 households provides a rich source to understand how unemployment varies over time and by cohort. As is well known, the statistics confirm the differential impacts of unemployment by race. Experience by gender has converged. Page

18 Trends by States U % Page

19 Trends in Marin and Sonoma U % Note the correlation within the Bay Area in the movement of the unemployment rate. How much can local politicians affect unemployment rates in their districts? Page

20 Unemployment Rates since 1970 U % Page 20 USA AUS CAN FRA GER ITA JAP SWE UK This illustrates: 1) Only modest amount of correlation among countries in terms of short-run economic performance 2) Some unpleasant economic trends in Japan and Europe 20-20

21 Unemployment Classifications Three types sources of unemployment: Frictional unemployment Cyclical Structural unemployment Page

22 Frictional Unemployment Frictional Unemployment is related to job search Some level of frictional unemployment is considered to socially beneficial Some frictional unemployment makes the economy better off and is thus desirable because the job search process can increase efficiency and sustain a better-performing economy. This is why it is not socially optimal to have a zero unemployment rate. Page

23 Cyclical Unemployment Cyclical unemployment is related to recessions Job losers are those thrown out of work due to the recession with some expectation of being rehired when conditions improve. Large manufacturing employers frequently hire back the workers laid off during recessions In unionized manufacturing jobs, the unions build additional private insurance coverage Page

24 Structural Unemployment Structural unemployment is defined by people without marketable job skills Sometimes this is due to a mismatch with available jobs Sometimes this is because an individual has few skills Duration of unemployment is longer than average Frequency of unemployment is higher than average Frequency of transition in/out of the labor force with economic conditions is higher than average. Examples: Ghettos West Virginia coal mining country Northern California redwood logging workers Page

25 NAIRU Again NAIRU : Non-Accelerating Inflation Rate of Unemployment In practice it is equivalent to the level of unemployment consistent with a stable inflation rate Actual Unemployment Rate = NAIRU + cyclical unemployment rate = Frictional unemployment rate + structural unemployment rate + cyclical unemployment rate Page

26 Aggregate Demand and Aggregate Supply Aggregate Demand Conservatives believe in this Aggregate Supply p Inflation Liberals believe in this GDP Potential GDP Page

27 Labor Force Participation Rate Labor Force Participation Rate (LFPR) = Labor Force Population Page

28 LFPR Trends Labor Force Participation Rates Data capture long-term trends in our culture such as marital status, participation in the labor force by age, sex, and race Many of these are trended in well defined cohorts and reflect long term changes in our culture What changes most over time is the weights due to demographics Population by cohort is anything but stable The projection of these long-term trends affect how economists think about: Social Security financing Medicare funding Whether US faces a debt crisis Growth rate of potential GDP Page

29 LFPRs and Long-term Economic Growth Recall from an earlier lecture the following: Q = L * Q/L %D Q = % D L + % D Q/L The Growth of Real GDP Growth Rate of Labor + Growth Rate of Labor Productivity Page

30 Labor Force Participation Rates: Trends LFPRs % Two biggest changes are: The increase in women in the labor force The decrease in men 55+ seeking early retirement Page

31 Labor Force Participation Rates: Trends by State LFPR (%) Women Entering the Labor Force Older Men Leaving the Labor Force Page

32 Labor Force Participation Rates: Trends by State What it Looks Like when we Remove the Wiggles LFPR (%) Women Entering the Labor Force Older Men Leaving the Labor Force Page

33 Labor Force Participation Rates: Bay Area LFPR (%) Page

34 The Slow Recovery and Long Run Economic Growth Hysteresis, NAIRU, and Labor Force Participation Rates Hysteresis refers to the possibility that periods of high unemployment tend to increase the rate of unemployment below which inflation begins to accelerate, commonly referred to as the natural rate of unemployment or non-accelerating inflation rate of unemployment (NAIRU). In addition, Hysteresis may impact individual choices about participating in the labor force, impacting the growth rate of the labor force and Potential GDP Page

35 Recent Changes in Projected Potential Labor Hours Index of Labor Hours Page

36 Hysteresis and Potential GDP Estimates Directly Impacts the Growth of the Bay Area Economy Page 36 Welcome to the Supply Side Economics and Long Term Supply Effects of Mismanaging Aggregate Demand 20-36

37 Long Term Trends Having Less to do With Macroeconomic and More to Do with Technological and Demographic Change Page

Population and Age Distribution 1980 & 2010 US 1980 2010 25 20 15 10 5

38 Population and Age Distribution 1980 & 2010 US in millions Page

Population and Age Distribution 2010 & 2025 US 2010

39 Population and Age Distribution 2010 & 2025 US in millions Page

40 US Median Age Age (Yrs) Page

41 Median Age in Bay Area Counties Age (Yrs) Page 41 US Ala CC Mar Napa SF SMat SCla Sol Son 20-41

42 Growth Rates by Age Cohort US Cohort Millions of People %D Under Total Macroeconomic Effects & Structural impacts Page

43 What about the Structure of Employment over Time? Employment in Millions Data on US Employment Growth of employment has been dominated by the services sector, which is largely providing non-tradeable services Manufacturing is in the goods-producing sector Page

44 Manufacturing Jobs as % of Total % of Total Employ As percent of total economy, manufacturing jobs have been declining while service industry jobs have been increasing over the entire post war period Page

45 Manufacturing Jobs in Midwest vs. US Millions of Jobs in OH, MI, WI, & WV Millions of Jobs in US Page

46 Mining in West Virginia % of Total Employ Page

47 Service vs. Goods Producing by State Services /Goods Producing Jobs Page

48 Outliers Services /Goods Producing Jobs Also District of Columbia is way off (above) the chart. Page

Regional Economies : A First Look 1990-2016 % D Population Differences in the growth rate

49 Regional Economies : A First Look % D Population Differences in the growth rate of state populations over time is largely correlated with employment growth Page

50 CA vs. US Employment since 1945 Employment Index 1945=100 California has been growing faster than the rest of the economy Page

% D in Total Employment: 1990-2016 Page 51 <10%

51 % D in Total Employment: Page 51 <10% 10%-20% 20%-30% 30%-40% 40%-50% 50%-60% >60% 20-51

52 Census Regions Page 52 Relevant for Next Slide 20-52

D Employment 1990-2016 Jobs in Millions NE

53 D Employment Jobs in Millions NE NY-NJ MW NPlain SE DeepS TxArk Mtn Pac Page

54 D Employment leads to Different Income Growth Rates by State Real Per Capita Income Index 1950 = 1.0 When thinking about regional growth rates, while all boats rise with the tide (on average), the tide doesn t flow in at the same rate by state. Page

55 CA vs. US Employment Employment Index 1990=100 Shows a High Degree of Macroeconomic Influence on Short-term Economic Performance in CA Page

56 Michigan vs. US Employment Employment Index 1990=100 Page 56 Shows a High Degree of Macroeconomic Influence on Shortterm Economic Performance in Michigan with specific impacts on the auto industry in the Great Recession 20-56

57 Michigan vs. US Employment since 1956 Employment Index 1956=100 Page 57 Michigan total employment has been relatively flat for a very long time, as jobs in the manufacturing sector have declined

58 CA vs. Bay Area Employment since 1990 High Tech Bubble Employment Index 1990=100 We ve been growing much faster than the state Page

Regional Economic Model 1990-2015 %D Pop Avg The key factor explaining

59 Regional Economic Model %D Pop Avg The key factor explaining differential population growth among the states is differential employment growth Page

60 Regional Economic Model By Decade %D Pop Employment Growth Population Growth Page

61 Regional Economic Model Page 61 Slower than Avg Faster Jobs, Slower Pop Slower Jobs, Faster Pop Faster than Avg

62 Regional Employment Model Two fundamental types of jobs Basic jobs Basic or tradeable jobs Non-basic or population serving or non-tradeable jobs Employers have choices among regions where to locate these jobs and choose one region over another because of a specific region s characteristics Associated with industries that are producing goods and services that are traded outside of an economic region Agriculture Automobile assembly Mining Logging Page

63 Regional Employment Model Non-Basic jobs Jobs associated with serving populations Gas stations Barbers Health services Construction Household services Page

64 Regional Employment Model % D Total Jobs - Avg Implication #1 Growth rate of tradeable jobs is a key determinant in the growth of total jobs Page

Regional Employment Model 1990-2016, Groups of 10 States %D in Total Employment In 4 out 5

65 Regional Employment Model , Groups of 10 States %D in Total Employment In 4 out 5 groups, tradeable employment has been declining but total employment has been increasing. Page

66 Why Do Some Regions Grow Faster than Others? Look to the growth rate of jobs that are those that don t serve local populations and are associated with employers that have choices among different regions These jobs determine the differential growth rates of populations Differential growth rates in population determine the differential growth rates of population serving ( service sector ) employment And one other factor not discussed: Tradeable job diversity within an economic region. This is what makes the California and Bay Area economies different. Page

Unemployment. Three criteria have to be met to be considered unemployed.

Unemployment. Three criteria have to be met to be considered unemployed. Unemployment Unemployment Three criteria have to be met to be considered unemployed. Working age: 16 years or older Not working Looking for work Note: The UE rate is calculated for non-institutionalize