Saturday, April 1, 2017

Weekly Indicators for March 27 - 31 at

 - by New Deal democrat

The vast majority of all indicators remain very positive.  This post is up at

Friday, March 31, 2017

Positive Q4 2016 profits help long term outlook

 - by New Deal democrat

Corporate profits are a long leading indicator, but they are reported with a long lag. So Q4 2016 profits were finally reported yesterday.  This post is up at

Thursday, March 30, 2017

Does productivity growth lead to wage growth? "Not really, no."

 - by New Deal democrat

I've seen a few articles recently claiming that low wage growth is because productivity by workers has been stalling. A convenient way to absolve the oligarchy.

Except, if the theory were true, we should see bigger wage gains in the sectors of the economy with the most productivity growth.

Well, some British researchers studied that, and here is what they found:

Does productivity growth help predict wage growth at an industry level? Not really, no. The distribution of productivity growth across industries is positively correlated with subsequent wage growth – industries with higher productivity growth now will tend to have higher wage growth in subsequent quarters. However, productivity growth has little additional value in predicting wage growth over and above univariate models....
The real conclusion is buried in the prior discussion:
These correlations may also tell us something about how an increase in productivity in a particular industry feeds through into real wages. Rather than bidding up relative nominal wages (and therefore, the relative RCW in that industry), an increase in productivity leads to lower relative prices for the output of that industry, increasing RPW for given nominal wage. This boosts the real consumption wages of workers in all industries.
So, productivity gains lead to a deceleration in consumer inflation, *not* better nominal wage growth.
Ultimately, wage growth isn't about productivity.  It's about bargaining power. And bargaining power is the biggest blind spot of most macroeconomic theory.

Wednesday, March 29, 2017

Wage growth and labor force participation: a Big Picture summation

 - by New Deal democrat

The jobs and wages of average Americans is a major focus of my blogging, since they are a major component of Americans' well-being.

Recently I've written quite a bit about the labor force participation rate, especially about prime age individuals.  In addition to the big secular influx of women into the workplace between roughly the mid-1960s into the early 1990s, there has been an almost remarkably steady slow decline averaging about -0.3% a year in prime age male participation, going all the way back to the 1950s!

A major element of the participation rate is comparison with other alternatives to being in the labor force. 

Two alternatives to labor participation appear to have had a significant effect on the rate.

First, the cost of child care, which has soared over the last 15 years, compared with subdued (or paltry) wage growth has caused many women and some men as well in the prime age demographic to leave the labor force completely and instead raise their children as homemakers.  

A second alternative, which appears to be a major determinant of the decline in male participation at least over the last 60 years is the expansion of disability insurance. This increase in disability has been mainly due to neck and back conditions, and together with improved longevity, has increased the incidence of long-term disability dramatically.  

It has also been suggested that the huge increase in the incarceration rate from roughly 1980 through 2000 has also played an important role in depressing participation.

In several posts over the last week, I've suggested that the traditional Phillips curve which posited a relationship between lower unemployment and higher wage growth and inflation, is best seen as a special variant of a broader relationship between the labor force participation rate (i.e., the total of those both employed and unemployed). For 46 of the last 52 years it has been true under first a high inflation regime and secondly a low inflation regime that an increase in labor force participation has been correlated with more wage growth.

But on a secular basis, the correlation does not reflect direct causation.  Rather, increased labor force participation (blue in the graphs below) appears to lead an improvement in wage growth (red) by about one year.  Here's the high-inflation, high labor bargaining power 1960s and 1970s:

and there is the low inflation, low bargaining power era since 1988:

In both of these eras, generally participation led wage growth by about one year.

For completeness purposes, here is the transitional Reagan Administration:

In this transition period, labor bargaining power was curtailed sharply as was inflation.  Even so, the leading/lagging relationship appears intact, as lower participation led lower wage growth by about a year.

A more nuanced cyclical feedback mechanism appears to be that too rapid an increase in participation will lead either to higher inflation (the 1960s and 1970s) or lower short term wage growth (the 1980s to present. To show that, below is a variation on the misery index. The "misery index" came out of the 1970s and added the inflation rate to the unemployment rate. In the graph below, I have double-weighted inflation. the only major departures between this "misery index" and labor force participation are the Oil shocks of 1974, 1979, 1990, and 2008:

Let me wrap up this compendium on labor force participation by applying this to our present situation. In the last 1 1/2 years, there has been one of the two biggest surges in participation in the last 30 years, meaning that wage growth has stalled out:

If this increase in the labor force is successfully absorbed into the economy, improved wage growth ought to resume as early as later this year.

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

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!