To Divest or Not to Divest Electricity Generation

Posted April 9, 2014 by Brian Gottlob
Categories: Electricity, Electricity Generation, Energy

Tags: , , ,

Whether or not New Hampshire’s largest electric utility should divest its generating facilities is a hot topic again. The NH Public Utilities Commission issued a preliminary report last week which concluded that it is in the economic interests of PSNH’s retail customers for the company to divest its generating assets. The report was less sanguine about the economic impacts on customers not purchasing electricity from PSNH, but that depends on how the stranded costs are allocated in any divestiture.

“Staff continues to believe that over the long term, PSNH’s default service rate will be substantially higher than market prices resulting in continued upward pressure on default service rates. Based on La Capra’s forecast of wholesale prices in New Hampshire and adjusted for retail, Staff’s rate analysis indicates that PSNH’s default service customers would be better off under a divestiture of the PSNH assets if the stranded costs were recovered from all customers. Customers who do not receive default service from PSNH, however, would see rate increases through the imposition of a stranded cost charge. While we recognize the volatility in today’s energy markets, the value of PSNH’s “hedge” will likely diminish over the long term and will continue to be at risk due to potential environmental legislation.”

There are also smart and well-meaning people in New Hampshire who argue that that PSNH’s generating assets provide a valuable ‘hedge” given the volatility of fuel (primarily natural gas) prices and the impending retirement of several regional electricity generating facilities. But the value of that hedge depends, in part, on the price paid for it. This winter’s cold snap and concomitant spike in natural gas prices are times when the PSNH hedge did provide some benefits. But even in those instances, the net electricity generated by PSNH was below what it was in the early and mid-2000s (the latest available data is for January of 2014 so this may change with February and March data). The figure below shows the capacity utilization of PSNH’s coal-fired generating units on a monthly basis during three separate time periods. Capacity factors are the ratio of net electricity actually generated to the total potential electricity that could be generated by a facility (for this analysis I used the average of winter and summer coal-fired capacity for each facility -Merrimack and Schiller stations – rather than the nameplate capacity).

Monthy capacity
The chart shows that from 2004 to 2009, PSNH’s coal-fired generating units were primarily ‘baseload” generators, operating at 60% of capacity or higher. I have previously written about how electricity gets sold into the regional market and which generators will provide that electricity (which determines their capacity utilization) so I won’t cover that again here. Baseload generating units typically operate 24 hours per day year-round baring maintenance outages. At the other end of the spectrum are peaking generators, which mainly operate when hourly electricity load demand is at its highest (think the hottest summer and coldest winter days). Intermediate (or cycling generating units) operate between base load and peaking generators, varying their output to adapt as demand for electricity changes over the course of the day and year. After 2009 the decline in natural gas prices along with higher generating costs, including environmental, associated with PSNH’s coal facilities have resulted in the price at which it can supply electricity to the regional grid being higher than many other generators. As long as their generating cost remain higher, except for times of peak demand, limited capacity by other generators, or when events like the spike in natural gas prices occur, PSNH’s coal-fired units will produce little electricity for sale to the regional grid. During 2013 alone, there were six months when the coal units operated at less than 10% of capacity. PSNH’s coal-fired units have gone from baseload, to intermediate generators and as the chart below shows, when averaged over 12 months, they are looking a lot more like peaking units. Whether this pattern will continue is the heart of the debate over whether PSNH should be required to divest its generating assets.
Annualized generation
It becomes a lot harder to amortize the costs of generating units as their capacity utilization is lowered. There may be times when the hedge provided by PSNH’s generating assets provides a benefit and that would be truer if the units were baseload generators. But even with the extremes of this winter’s cold, price spike in natural gas, and high demand for electricity, the chart above shows, over the course of a year, the facilities have moved from baseload generators, to intermediate, and are trending toward peaking units. The NH Public Utilities Commission, its consultants, and a lot of other knowledgeable people think that, despite current market conditions and the uncertainties surrounding regional generating capacity and natural gas supply and price, these trends will continue.

Maximizing Costs and Benefits of the Minimum Wage

Posted April 1, 2014 by Brian Gottlob
Categories: Labor, minimum wage, Small Business, wages

Tags: , ,

Note: Links updated and some errors corrected at 6:23 pm

Lawmakers want to do the right thing on the minimum wage issue and even if some don’t, the issue is a highly symbolic indicator of one’s position on a number of important policy issues. That’s too bad because it reduces the probability that the issue will be decided entirely on its merits (benefits versus costs). With so much hyperbole on both sides of the debate it is difficult to know what the “right thing” is and raising wages for those at the bottom of the wage scale has a lot of appeal as an easier and faster way to augment income than is increasing the productivity and educational attainment of individuals.
This month the U.S. Bureau of Labor Statistics (BLS) issued a brief report on minimum wage workers. Anyone interested in the policy debates about minimum wage should at least peruse “Characteristics of Minimum Wage Workers, 2013.”  According to the BLS, about 59 percent of workers in this country are paid on an hourly basis and the percentage of that group that is working at or below the minimum wage declined to 4.3 percent last year. Thus about 2.6 percent of all workers (those paid hourly and those on salary) are paid at or below the minimum wage. Most of those workers are employed in a few industries, led by the food service industry which employs nearly one-half of all workers making at or below the minimum wage.
min wage industries

New Hampshire is immersed in its own debate over raising the state’s minimum wage. In what was largely a symbolic measure, the prior legislature repealed the minimum wage and the current legislature looks to reinstate and raise the minimum wage in the state. My analysis of data from the U.S. Census and BLS’s “Current Population Survey” (CPS) indicates that about 10,000 workers in NH earn at or below the national minimum wage of $7.25 (this number is slightly below the 11,000 estimate in the BLS report, but that report rounds the NH estimate so the discrepancy is probably less and well within the CPS’s sampling error).

number of min wage workersAnother 16,200 earn between $7.25 and the proposed new state minimum of $8.25. Thus about 26,000 hourly workers, about two-thirds of whom are mostly in the food services and retail industries, would be affected by a $8.25 minimum wage. A second proposed increase to $9.00 would affect another 13,600 workers. So all told, about 40,000 workers or about six percent of all workers in the state could be affected. I did not analyze the age composition of NH’s minimum wage workers but a 2007 study by the Federal Reserve Bank of Boston did and they conclude that younger workers comprise a larger portion of minimum wage workers in NH than in the U.S. as a whole. Almost one-half of workers at the minimum in NH are teenagers age 16-19 (chart below).

age of min wage workersWhatever the result of NH’s minimum wage debate, a lot of people earning far more than minimum are working to influence the outcome. I have no personal or professional stake in the minimum wage debate but I like the issue because it is a documentary on highly-charged policy fights, combining real and perceived forces of good and darkness: economics, emotion, populism, ideology, compassion, greed, idealism, labor versus management, as well as wealth versus want. The minimum wage debate also provides some of the clearest examples of the tradeoffs involved in public policy choices. In this case, the tradeoff is raising wages for some while reducing the employment opportunities (hours or jobs) for others. Despite what the media say, and the President’s statement that “there’s no solid evidence that a higher minimum wage costs jobs,” most economists do agree that minimum wage increases result in some economic damages (reducing employment). They don’t agree on everything about the impacts of the minimum wage, however, and a good number of reasonable economists believe that the negative employment impacts from minimum wages are offset or even outweighed by the benefits. The negative employment impacts are substantial but do not appear, to me at least, to be dramatic, which of course is a fairly insensitive view that could only be held by someone not negatively impacted by an increase in the minimum wage (who are likely to be the least skilled and with the fewest economic opportunities among us).

In any case, having some negative impacts is not, in itself, enough to reject a policy. Most people, me included, accept the fact that the tradeoff for a compassionate policy that provides a minimal cushion against the ravages of unemployment (unemployment compensation) is some increase in the rate of unemployment. There are just as many or more policies that benefit some businesses or industries but also have some negative competitive impacts or costs to consumers.

I don’t have strong feelings either way about re-establishing and raising the state’s minimum wage. Raising the state’s minimum wage will cost some businesses and/or consumers more and reduce and have some negative impact on employment and hours worked (see the Boston Fed’s study here if you don’t trust me). The chart below demonstrates (too busily) the impacts on a business of an increase in the minimum wage assuming they can’t or don’t raise prices and any increase in the minimum wage comes at the expense of profitability (that is increases is efficiencies can’t offset wage increases). Wages comprise close to 40 percent of business costs for both food service and retail businesses and the high-end of profit margin in those industries is about 5 percent so the chart also incorporates those two assumptions. Depending on what percentage of the businesses’ workforce is currently at or below the minimum wage, the chart shows how business costs increases for both the $8.25 and $9.00 increases (the red lines), as well as how profitability is affected (the blue lines). It may use simplifying assumptions but I think the chart demonstrates why businesses in affected industries are so opposed to a minimum wage increase. While expenses appear to rise modestly, profit margins can quickly erode.

business impactsMy issues with raising the minimum wage tend to be more about the distribution of the impacts than with their magnitude. Freedom from want for working Americans should be a national goal. If augmenting the income of individuals with the least earning power (because of experience, skills, education, etc.) is a national goal, it is it is hard to see why that responsibility should fall only on a few industries that employ these individuals, especially when doing so will only decrease the opportunities for employment.  That seems to be the philosophy behind the Earned Income Tax Credit.  There are other distributional impacts as well.   Those with the least opportunities bear the greatest negative employment impacts even as they also receive some benefits.   Big companies are more able to absorb higher costs and in any case are less likely to pay minimum wage, so smaller, local businesses already at a cost disadvantage can be put at even more of a competitive disadvantage.   This is especially true in rural areas. Small, rural towns have lower costs, especially for real estate, so an increase in the minimum wage gives cities and big companies competitive advantages at the expense of small and rural employers.

As is the case with most policy debates, proponents of a minimum wage increase maximize benefits and minimize costs while opponents minimize the benefits while maximizing the costs.

Energy Prices Won’t Be Our Savior

Posted March 24, 2014 by Brian Gottlob
Categories: Electricity, Energy, New Hampshire, NH Economy

Tags: , ,

For as long as anyone can remember New Hampshire (and most of New England and the Northeast) has had high energy prices compared to most other states.  We may narrow the gap some but as sure as tomorrow will be Tuesday, compared to most other states and regions of the country, our energy prices will be higher. There are a number of reasons for that and they can’t be adequately covered here so for now let’s move on to the real concern of this post.  Many will disagree with me about the prospects for relative energy costs in the state but even if I am wrong, and NH and New England could somehow be truly energy price competitive with the rest of the country, we are likely to be very disappointed in the resulting economic benefits.  I am all for lowering energy prices and doing whatever we can do to accomplish that.  Reducing energy costs will give households more discretionary income, ease the burden high energy prices place on many households, and benefit the cash flow of many businesses.  These are real economic benefits but based on op-eds and comments about how high electricity and energy prices are killing business, including by people and groups I like and respect, you might think that reducing the price of electricity will bring a new industrial revolution to the state.  The problem is, a new industrial revolution has been occurring and it is one that relies less on energy and is, in part,  a result of those high energy prices.

Energy BTUs per GS

Energy prices are becoming less important to the success of the New Hampshire economy all the time.  As the chart above shows, the energy content of what the state produces has been declining for decades.  More of what we produce relies less on energy content and the lower energy intensity of the NH economy indicates a lower price or cost of converting energy into GDP.  Reducing the price of an input that is becoming less important each year to the output of the NH economy is not a prescription for revitalizing the NH  or any state’s economy.

To cite just one example, high energy prices have hurt but certainly didn’t kill the pulp and paper industry in New Hampshire.  Industrial electricity rates in Georgia are almost exactly one-half (5.97 cents/kwh) what they are in New Hampshire (11.97 cents/kwh avg. as of Dec. 2013) but Georgia lost 10,000 pulp and paper jobs (40% of the industry in that state) over the last 11 years.  Industrial electricity rates are 40% lower in Wisconsin and Pennsylvania than they are in New Hampshire and those states lost 11,000 and 10,000 jobs respectively in paper-making industries.  California lost more than 13,000 jobs in the paper industry, Illinois 12,000, Ohio 10,000 etc., etc. etc., to the tune of about 200,000 jobs lost across the country and in states with both high and low energy prices.  So if you thought that lower electricity prices would reverse that  industry you would be wrong.

I hope NH does lower electricity prices and if we do, congratulations, we will have won a battle for the 1970’s and 1980’s.  Maybe then we can turn our attention to the battle for the future.   If you want an example of a NH paper company that is fighting (and winning) today’s and tomorrow’s battles consider Monadnock Paper, you can read an excellent online Forbes article about them here.

The future is as much or more about reducing energy intensity as it is about lowering energy prices.  In fact, while lowering energy prices would have been great for NH circa 1980, it might also have delayed the long-term economic adjustments and reductions in energy intensity needed for our state and region to thrive. An industry that can’t thrive in NH because of energy prices is an industry that probably could not thrive in a global economy for a number of other cost-related reasons.   Maine’s industrial electricity prices are about one-third lower than they are in the rest of New England and I don’t think it is a coincidence that Maine is the only state in the region with an economy as energy intensive as the rest of the nation (chart below). Maine’s reliance on more energy intensive natural resource industries hasn’t served that state’s economy well in recent decades.

state by state energy intensity

Our state’s (and our region’s) comparative advantage will never be natural resources or lower costs such as electricity.  For the most part, state economies have been adjusting to account for that fact in what has been at times a painful but necessary adjustment.  As the chart below shows, states with high electricity prices also generally use less electricity per dollar of gross state product.

Eelectricty prices and energy intensity

Although it can, becoming a less energy and electricity intensive economy does not just mean ‘de-industrializing” or becoming a more services-oriented economy.  The dollar value of what New Hampshire’s manufacturers produce continues to climb in real dollars, they just do so just using less electricity every year.  As the chart below shows, the electricity content per dollar of manufacturing output in the state continues to decline and it is not a coincidence that our manufacturing sector has been evolving from traditional to more advanced manufacturing.

electricity content of manuf

Although much of this trend in manufacturing  has to do with the loss of more energy-intensive industries and the emergence of newer, less energy intensive industries, as Monadnock Paper demonstrates, some is also about traditionally energy-intensive industries adapting to the state’s less competitive energy climate.   In either case, the NH economy and individual businesses are way ahead of energy policies in the state.  The question is whether energy policies can catch-up enough to help facilitate the energy and economic transitions and adaptations that are occurring in the state’s economy

Can “Paycheck Equity” be Mandated?

Posted January 28, 2014 by Brian Gottlob
Categories: Gender, Labor, Labor Force

Tags: ,

For decades, one of the most salient features of women’s status in the labor market was their tendency to work in a fairly small number of relatively low-paying, predominantly female jobs. That has changed and as it has differences in aggregate average wages between men and women (the most often cited data on the “wage gap”) have narrowed. Still, the aggregate average wages of women are  almost 20 percent lower than the aggregate average for men.  But that data say almost nothing about whether employers compensate men and women in similar positions differently.  Only a thin veneer of empiricism covers what seems to me to be fundamentally ideological arguments in the public debate on what, if anything, government should do to address the gender wage gap issue.  Proponents of “paycheck equity” measures don’t often acknowledge that research shows that differences in labor force participation, occupation, experience, etc. account for the majority of the difference between the average wages of men and women. While those who believe markets (including labor markets) operate perfectly, and who reject almost all government interjections into markets, fail to note that even accounting for differences in occupations etc., there is still a significant portion of the pay differences between men and women that is unaccounted for or “unexplained.”  The unexplained portion of the wage gap is probably 8 percent or less and whether this difference in wages is the result of biases or discrimination that can be remedied by legislation is the fundamental public policy at issue.

Living with four, smart, talented, women with strong opinions makes me approach this subject with trepidation.  It is possible that one or more of them may talk to me even less than they do now  (I am comforted knowing that it gets incrementally more difficult for this to occur as the amount approaches zero) if my interpretation of the issue is in error in their eyes.  Still, as the father of daughters, I want to know if there are any biases in the labor market that may constrain their earnings and limit their ability to care for me in my dotage.

To truly know whether biases or discrimination (intentional or not) contribute to the wage gap you have to do the impossible, you have to compare the wages of men and women with identical ages, education, qualifications, experience, motivations, work habits etc., in identical jobs, working for identical companies, and you have to do it for the entire male and female workforce (across all occupations).  Nobody can do that so in the absence of a Boston Celtics, Boston Bruins, or UNH hockey game on television this past Saturday evening I undertook a smaller task to gain the kind of first-hand insight into the issue that only analyzing data can provide.

My goal was to compare the wages and salaries of full-time working men and women who are as similar in education, age, experience, occupation and other factors (marriage, children etc.) as possible, to see if wage and salary difference exist when as many key characteristics of individuals are as similar as possible.  The 2009 March Supplement of the U.S. Census Bureau’s “Current Population Survey” contains information on the college majors of those who have earned degrees, in addition to the usual labor force, earnings, and demographic information it provides about survey respondents.  I extracted microdata for over 5,000 survey respondents nationally whose highest educational attainment was a bachelor’s degree in accounting and who were employed full-time as  accountants or auditors.  Focusing on just one occupation and one level of educational attainment limits the ability to generalize my results (that is, results and conclusions may not apply to other occupations or to other levels of educational attainment) but choosing just one occupation that has a relatively equal employment distribution between men and women, and just one education level is likely to provide the cleanest evidence or lack thereof for the wage gap.

Many factors contribute to gender wage differences between men and women in the same occupation.  In the end, like other researches, my analysis showed that under 10 percent of the difference between the wages and salaries of men and women (in accounting) cannot be explained by difference in hours worked, the presence of children etc.  This little exercise cannot say whether those “unexplained” or unaccounted for factors mean discrimination or bias or less pernicious forces that are not captured or measured with available variables.  Regardless, the results were fascinating (to me at least) for a number of economic and sociological reasons.

At all age levels, women in accounting worked (on average) fewer hours weekly than did men (Figure below).  This was true for women with and without children and whether they were married or not.  Regression models show that each additional hour worked per week actually added more to the annual wage and salary of women than to men ($641 to $568).  This suggest to me that women are rewarded equally for additional labor and that some of the wage gap in accounting is simply attributable to the longer (on average) hours worked by men.

hours workedChild birth and care is associated with lower labor force participation among women but on average, women in accounting worked fewer hours than did men whether or not they had children.  This is not an epiphany because child care responsibilities still disproportionately fall on women.  The presence of children, however, does have a much more negative impact on hours worked for women than it does for men. The effect on hours worked diminishes by age for women – presumably because children are more likely to be older and in need of less care.  Interestingly, among younger men, the presence of children reduces hours worked (not as much as it does for women) but among older men, the presence of children is associated with small increases in hours worked.  I hope this implies larger roles in child care among younger men that will contribute to a further narrowing of the wage gap.

Impact of Children on Hours workedWages grow with age and experience (typically for most individuals into their late fifties) but among accountants with bachelor’s degrees, they grow less, on average, annually for women than for men.  The cumulative effects of hours worked, breaks in labor force participation among women for child care, and other factors can account for some of this.  But key factors that can determine how much wages grow over time (getting promotions, asking for raises, motivation etc.) cannot be discerned from the data.  If women aren’t promoted as readily or don’t seek raises as often or as large,  their annual wage growth would be expected to be lower.

The figure below shows some of the wage and salary impacts for men and women of different variables.  Interestingly, marriage seems to have a much more positive impact on the earnings of men  than it does for women,  adding $3,415 to earnings of men but just $920 for women when controlling for other variables (i.e. age and hours worked, children,  etc.).

wage and salary impactsApparently some stereotypes are based in reality and it makes me wonder what aggregate economic and societal implications this may be having as more young men seem to resist or delay marriage or long-term relationships.  The big take away for me was the impact that marriage as well as the “unexplained” difference attributable to gender had on wages and salaries when earnings were not “constrained,” meaning that the data included the earnings from the highest earners, the “outliers” or top 15 percent who earn much higher salaries than typically earned in the occupation.  For most of my analyses I selected data for individuals whose wages and salaries were between the 15th and 85th percentile of all earners among accountants.  But I also ran the same analyses using data that was not constrained at the top of the earnings scale.  This would likely include business owners and individuals in higher level positions.   When data was not constrained based on wages and salaries, the impact of marriage on the wages and salaries of women was significantly negative in contrast to the wage and salary constrained data where it was positive (albeit a much smaller relationship with earnings than for males).  The unexplained difference attributable to gender was also disproportionately large compared to the constrained data set.  What this says to me is that the largest evidence of a gender wage gap occurs at the upper end of wages and salaries and may be more attributable to lower percentages of women in higher positions (a “glass ceiling” effect) than a paycheck fairness effect.  Does this mean that women are at a disadvantage in becoming high earners if they are married, and if so, is it the result of personal choices or does the labor market systemically punish them relative to men?  Does being married necessarily mean that a woman will be less likely to rise to the top of their occupation?   These results do suggest a glass ceiling that contributes to the wage gap and this should trouble all fathers of daughters, brothers,  husbands and even friends.  Unfortunately, it doesn’t say much about what we can do about it.

We do have laws that prevent wage and salary discrimination based on race and gender and yet the wage gap persists (even as it has shrunk).  As more women populate higher levels of occupations and organizations (it will happen as I suggest here and here and in several other posts), it is likely that whatever unexplained gender-based differences in wages and salaries (that are not based on occupation, education, experience etc.) will decline rapidly.  To me, addressing why more women don’t reach higher positions in organizations  is likely to be a much more effective prescription for whatever gender gap continues to exist than are mandates that seek to compensate for factors that we aren’t even sure contribute to wage and salary differentials between genders.

The Locus of Economic Activity in NH is Shifting

Posted January 21, 2014 by Brian Gottlob
Categories: economic development, Educational Attainment, job growth, NH, NH Economy

Tags: , , , , ,

I gave a presentation last month during which I argued that the locus of economic activity in New Hampshire is shifting to the Seacoast.  That is a provocative statement destined to offend the population centers of Manchester and Nashua and quite likely the individuals elected to represent them. Provocation isn’t my intent, it rarely is, but is often the result nevertheless.  This shift will take years to become more apparent but the evidence for its occurrence appears across a range of important economic and demographic metrics.  Over the past decade, private sector job growth in the combined Portsmouth and Dover/Rochester NECTAs** has outpaced growth in either the Manchester of Nashua NECTAs.  The Seacoast is home to only about 15% of private sector employment, but that percentage is growing.  The shift is not really about the job growth numbers because the Seacoast will always have smaller employment numbers than will the population centers of Manchester and Nashua.  It is about how so much more of the innovation and transformation that is occurring among businesses and industries in the state’s economy is occurring in the Seacoast region.

NH Regional job growth

Alone, the increase in private employment in the Seacoast relative to the Manchester and Nashua regions would not be that significant.  Rather, it is the increasing share of innovation and growth in key industries that the Seacoast is capturing that indicates the locus of key economic activity is shifting.  As the chart below shows, the Seacoast region has marginally increased its share of New Hampshire’s private sector employment since 2004, but it has, in relatively short time, substantially increased its share of finance and insurance industry employment, information industry employment, as well as both health care and manufacturing employment.  Annual town-level data stops in 2012 but with the coming addition of technology dependent, international companies like Safran, the manufacturing trend appears to be continuing.   The one key industry where the Seacoast has not gained share is in professional and business services.   This is a large, important, and growing sector of the New Hampshire economy.  In most states, key professional and business services firms often locate in the state’s largest city.  Major NH Law firms, engineering firms, advertising agencies, and many of the other industries that comprise this sector still seem to prefer to be centrally located and have their main offices in the state’s largest city, Manchester.  Having a main office anywhere other than  the largest city seems to signal, to some, that a business is “regional,” that it does not serve the entire state or the larger New England region. The Seacoast is also capturing a smaller share of retail employment, which is surprising given its location along two state borders.  It is not that retail is declining in the region but rather that it has grown faster elsewhere in the state.

Seacoast share of industries

Manchester and Nashua are still home to more companies in key industries than is the Seacoast and that will be true for some time, maybe always.  Still, there was a time when the Greater Nashua and Manchester areas were the technology and manufacturing center of New Hampshire and almost all important developments in manufacturing and technology industries occurred there.  These regions remain the technology leaders by numbers, but more key developments and new companies in technology and manufacturing are  occurring in the Seacoast.  The development of the Pease Tradeport into a premier location for industries of all types, along with the presence of a major research university (UNH), have played important roles in the shift.  But what is really sustaining the trend is the ability of the region to attract the talent (skilled individuals with higher levels of educational attainment) that companies in emerging, growing and higher value-added industries desperately need.   As I say far too often, brains are the most valuable resource in the 21st century.  Skilled, well-educated people have the most economic opportunities and they are the most mobile members of society.  Where they choose to locate, robust economic growth is likely to follow.  Examining Census data indicates that skilled individuals with higher levels of educational attainment have increasingly chosen to live in the Seacoast, and that has provided a key source of competitive advantage to the region.  The chart below shows how the population of individuals with a bachelor’s degree or higher has changed in some NH cities over the past two decades.  The chart shows that on a percentage basis, Portsmouth and Dover, by far, had the greatest increase of individuals over the age of 25 with a bachelor’s degree among their populations.  Somersworth, although beginning with a lower concentration of individuals with a bachelor’s degree, had the next largest percentage increase in subsequent decades.  Among the largest cities in the Seacoast, only Rochester has not seen a substantial increase in its population with a bachelor’s degree or higher.

Changes in Ed Attainment

If the Seacoast continues to increase its concentration of “talent,” then the locus of economic activity in the state will continue to shift toward the region.  Communities in the region continue to attract skilled individuals with higher levels of educational attainment because, to varying degrees, most have been able to provide a mix of services and social, cultural, and civic amenities, at a price more affordable than communities in other states.  But if being the “cheapest” place to live were the key, the Seacoast would not be thriving.  Rather, it is the combination of services and amenities at  relatively more affordable price (providing a good value) that has been attractive.  Many communities and regions are looking to thrive.   Like all regions in New Hampshire the Seacoast has heard, and for the most part heeded, the call for fiscal restraint (although you can never spend too little for some or too much for others), but most of its communities have looked for ways to continue to provide or increase the quality of their services and the amenities (natural, built, civic, social and cultural) they offer.  It is more difficult for urban areas to attract and retain the skilled individuals with higher levels of educational attainment that are increasingly the key to a vibrant economy because urban cities have to find ways to provide and encourage a level of services and amenities to compensate individuals for living in cities that have the problems associated with urban environments.

Most of the focus of economic development strategies is on creating policies to ensure a “good business climate.”  I think that is important and I also think NH has a pretty good business climate.  With so much concern over population and labor force growth and demographic changes in NH, more emphasis needs to be placed on creating a good “talent climate” as well as a good business climate. I don’t know that the Seacoast of NH has sought to do that but the demographic and economic data suggest they have done so regardless.   The result has been a competitive economic advantage. On a smaller and slightly different scale you can say the same thing about the Hanover/Lebanon area which serves as a nice control group to assure the importance of amenities don’t just mean having an ocean nearby.

 

** NECTA = New England City and Town Area, a grouping of towns into a connected labor market area, akin to a metropolitan or micropolitan statistical area.

The Incredible Shrinking Labor Force

Posted January 10, 2014 by Brian Gottlob
Categories: employment, Gender, Labor Force

Tags: , , ,

The employment growth report released today by the U.S. Bureau of Labor Statistics was disappointing for sure (74,000 job growth when 200,000 was the consensus estimate) but December employment numbers are more prone to seasonal adjustment errors because of the large amount of hiring that occurs prior to the holidays and this year presented even more issues because of the shortened time between Thanksgiving and Christmas (Thanksgiving was on the 28th, its latest possible date).  December’s employment growth may still be disappointing but my bet is that December’s numbers will be revised up in future months.  Help wanted ads have been increasing for the past six months and the labor supply/demand ratio has been falling.  Unless there is an even bigger “skills gap” than many think, that implies stronger job growth than was reported in December.

The best thing about the report was that it helps focus more attention on the nation’s incredible shrinking labor force, a problem that significantly lowers the potential economic growth of our nation’s economy.  Too many media reports on the nation’s and NH’s economy focus almost entirely on the unemployment rate.  That is especially true in New Hampshire where, because of our demographics (a lower percentage of harder to employ populations are in our state’s labor force), we always have a lower unemployment rate than the U.S.   No matter how weak job growth is in New Hampshire, many will cite our lower than the U.S. unemployment rate as a sign of economic strength.  Some reporters (hat tip to John Nolan of the Rochester Times) have avoided confusing job growth with the unemployment rate but too many in our state confuse the two.

The problem of smaller or slower growing labor force is an important and vexing one for New Hampshire and the entire U.S. A smaller or slower growing labor force implies slower economic growth because the output of the economy grows when more people are producing, when more capital (equipment and machinery) allows the same number of people to produce more, or when knowledge/technology/skill levels improve and allow greater productivity per worker. So unless productivity is increasing to compensate, a shrinking or slow growth labor force means slower economic growth.

There are several reasons a labor force can shrink or grow more slowly. Some related to economic conditions, some related to demographics, and some (such as the current situation) seem to have an unexplained element. Nationally, population trends have meant slower labor force growth as lower birth rates over the past few decades and as baby boomers reach ages where labor force participation starts to decline. NH benefited from strong population growth in the 70′s and especially 80′s and 90′s. That provided a strong boost to our economy, especially since much of that pop. growth was the result of in-migration from other states by skilled, well-educated individuals (a good characterization of our in-migrants from other states is a two wage earner, married couple family, probably both college educated with children). That migration added tremendous talent to our labor force and made NH an attractive location for many business looking to employ skilled workers.

The labor force grows or shrinks by population growth in the working age population, or by changes in labor force participation (those of working age who choose to be in the labor market or not). NH and the U.S. have seen slower population growth in the working age pop., but more disturbingly, both have seen a decline in the labor force participation rate.  Yes NH still has a relatively higher participation rate but the trend decline is similar to the U.S.  The graph below shows the decline in participation among individuals aged 25-64 (to minimize schooling and retirement decisions as possible causes).

nh us labor force particpation 25-64

If your working age population isn’t growing, having high labor force participation rates is critical for economic growth.   NH has had very high participation rates compared to the U.S. because of our favorable demographics (few people who traditionally have lower levels of participation – minorities, those without a high school diploma etc., and because our population overall has higher levels of educational attainment that is associated with labor force participation).  Women in NH especially tend to have higher participation because of higher levels of education and lower fertility rates (child-bearing lowers labor force participation).  I have written many times on gender and employment (search on gender in this blog) and the “feminization of the workforce” is a theme (non-pejoratively as the father of daughters) I believe is continuing.   As the chart below shows, virtually all of the decline in the labor force participation rate in NH is a result of a reduction in the rate among males.

male female labor force participation

Labor force participation always drops during recessions as workers get discouraged and drop out.  What is especially troubling today is that labor force participation continues to be weaker even as the economy has improved. Some has to do with demographics as more of the working age population ages into groups with lower participation rates although participation among those with higher levels of educational attainment seems to have held-up best. The best explanation of why labor force participation has continued to be lower than in the past is that the skills required by the economy have been changing, making many workers less qualified than before and creating more discouraged workers. I think that is part of the issue but I don’t think the “skills gap” could have so abruptly hit the labor market to cause participation rates to fall so much over the last half-decade. The skills gap has been a more slowly growing phenomenon.  Among older men without a post-secondary degree, participation has been declining for decades.  The skills mismatch between the supply of labor among males and the demand has been ongoing for decades.  Did it peak so suddenly in the past decade to create a permanent decline in the male workforce?  I don’t think so, additional factors are contributing.  I remember in the 70’s when the first real oil crises hit (related to Middle East wars) and a lot of job losses resulted, especially in mill towns like the one I festered in as a youth.  Someone whom I thought was wrong about almost everything said to me at that time “a man should never be ashamed of any job he takes to feed his family.”   I didn’t think much about that back then, but today it seems especially appropriate, even as it appears to be increasingly a relic of an outdated ethic.  Economic conditions today aren’t the result of people not wanting to work and a labor market where many individuals are working at jobs that don’t fully utilize their skills is not desirable.  Changes in and the performance of the economy are  obviously largely responsible for declining labor force participation.   Still, with so many troubling indicators for males  – especially younger males (educational performance and attainment, household formations etc.)  emerging over the past decade or more , I can’t help wonder how much of the decline is the result of a lost ethic among my gender.

“…..No Fury Like the Middle and Upper Classes Scorned”

Posted November 1, 2013 by Brian Gottlob
Categories: college, Debt, Education, higher education

Tags: , , ,

College students rage against  a lot of things (including their parents as I have learned) but tend not to channel that energy into exercising  their right of franchise.   I think that helps explain why, after decades of rapidly rising college costs and levels of student debt, the tipping point on the issue appears to have finally been reached.   As I noted in a recent study on student debt, one of the features today that distinguishes debt to pay for higher education from prior periods when the issue bubbled to the surface is how much more of the debt appears to be being borne by parents as well as students.  Parent debt is not included in the popularly reported student loan debt by college or by state, but as the chart below shows, along with unsubsidized federal loans to students, federal parent “PLUS Loans”   have been the second fastest growing category of student debt.

Growth in Student Loans by Type

PLUS Loans are still a much smaller category of debt for higher education than are loans to students but there is no data available on the non-federal loans parents have accumulated (such things as home equity loans) to pay for their children’s education so overall parent debt has likely increased even more .  It is much easier to avoid the public debate about debt for higher education when it affects just students than it is to avoid when  it affects parents as well ( whom lawmakers are much more likely to respond to as constituents).  Another troubling aspect of the chart above is the increase in federal unsubsidized student debt.  Because the interest on this debt is not paid for by the federal government while a student is in college (unlike subsidized debt), it is more costly, and thus the higher percentage of unsubsidized debt today than a decade ago suggests that student debt levels actually understate the impact on students of the increase in student debt since 2001.

Examining data from the Federal Reserve Board’s “Survey of Consumer Finances” highlights how debt for higher education has increased over 20 years as a percentage of household’s non-mortgage debt, with the biggest increases coming since the mid 2000s.

H Installment Debt by Purpose

The chart above reflects both parent and student debt.  More of household installment debt going to pay for education implies less borrowing (and spending) for other purposes and helps explain (along with generally weaker economic conditions during much of the 2000s) why consumer expenditures on other goods have been relatively weak.  The economic implications of student debt are typically seen as constraining recent graduates spending, household formation, home buying, entrepreneurship, etc., but the reality is that student debt is likely constraining more than just recent graduates.  I think some evidence of this is seen in the changes in installment debt of households by income (chart below) .

Installment debt by income

As the chart  shows, the largest increases in  the percentage of installment debt that goes for education are among middle and higher income groups.  These are income groups with the most disposable income and anything that constrains them from “disposing” of their income (like repaying debt for higher education) on goods and services that boost economic activity will have detrimental impacts on the economy.  Lower income groups have seen significant increases in installment debt for education as well, much of it attributable to increased enrollment rates over the past few decades which have been highest among students from lower-income households.  With more students from families with modest incomes attending college, the share of installment debt for education among these income groups can be expected to rise.  Higher college costs also play a role but increases in financial aid for lower-income students have helped offset some but certainly not all of those cost increases.   In no way do I want to minimize the impact of college costs and debt on lower-income students and households but that has been a fairly consistent problem that does not distinguish the current situation from the past the way changes in debt among higher income groups appears to have changed.

The large increase in the percentage of installment debt that goes to education among middle and higher income groups reflects economic conditions (savings for education dropped the most among these income groups over the past decade) but also financial aid policies and practices of governments and colleges that appear to especially squeeze middle-income households.

The rapidly rising debt for education held by parents and households, not just students, I think explains a lot about the new urgency to address college costs and student debt.  The fact that middle and higher income groups seem more affected by these pressures than in the past may say even more about why the issue has risen on the public agenda.  Beyond the political, when the households that typically have the most disposable income appear to be especially affected by higher education debt, we should not discount the role debt for higher education may be playing in constraining economic activity in the U.S.


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