Archive for the ‘Labor Force’ category

Is NH’s Labor Deficit Turning?

September 19, 2018

Aside from the ups and downs of business cycles, the growth rate of New Hampshire’s (and the nation’s) labor force and labor force participation rate has been on a consistent, downward trend. The rising percentage of NH’s population in age groups with traditionally lower rates of labor force participation along with slower overall population growth are key contributors. The two trends go a long way toward explaining why economic growth has been slower over much of the past two decades than during earlier time periods. As I noted in earlier posts, with NH’s extremely low birth rates, net in-migration to the state is critical for population, labor force, and ultimately employment growth. Net state-to-state in-migration to NH is resuming in age groups with higher labor force participation and one consequence is a recent increase in the working-age population, as well as labor force participation in the state (chart), enabling stronger job growth in NH. It is early but the trend is very encouraging.

Particption and Population

Presidential Campaign Impacts on U.S. Job Growth and Implications for NH

June 9, 2016

The May U.S. jobs report with downward revisions to the March and April job numbers was bad, not bad enough that you should start stocking canned goods and bottled water in your basement but bad nevertheless.  The impact of 35,000 striking Verizon Corp. workers on the May numbers is cited as one explanation for the weak report but there were 25,000 temporary workers hired by the company during the strike so the overall impact was actually fairly small.  Seasonal adjustment factors (the statistical procedure used to smooth regular annual fluctuations in employment data throughout the year– things like Christmas hiring, summer employment of youth etc.) seem to be more problematic in recent years and that may also be a contributor.   Of course it is possible that hiring was just weak, plain and simple.  Hiring will continue to weaken, I just don’t think job growth is really as weak, and the slowdown as rapid, as the May jobs report suggests.

Presidential Campaigns Appear to Impact Job Growth

The first rule of politics is to forget all of the rules of economics and that is more problematic now that the national political climate seems to increasingly influence real economic variables. Think of the impact that debt ceiling debates and government shutdown threats have had on economic activity recently.  With almost no focus in the current presidential election on sound economics and economic policies it is easy to see how politics could  contribute to a weak May jobs report (when the empirical evidence doesn’t provide a clear explanation for economic events it is hard to go wrong blaming politics and politicians).  But there is some evidence that presidential elections can temporarily depress job growth.  The uncertainty of a presidential election, especially in a year without an incumbent, and the people and policies that candidates may employ in their administration can give pause to businesses investment and hiring decisions. The uncertainty surrounding future economic and fiscal policies in a presidential election year should arguably be greater several months prior to the election rather than a month or two when the election outcome and policy directions become clearer.  I compared average private sector job growth (government employment should not be affected) in the U.S. during the months of June-August in presidential election years, to the average job growth from September (of the year prior to the election) to May (of the election year).   Since 2000, in each presidential election year the average private sector job growth from June-August significantly lagged average job growth over the prior nine month (Sept-May) period. The pattern held in 2008 but because the U.S. economy was in free fall for other reasons it is not included here.   In years with no presidential election this generally was not the case (years such as 2002, 2003 and 2007 when the U.S. was entering or exiting a recession are exceptions).

UncertaintyJob growth in NH is going to slow regardless of political uncertainties given existing labor force constraints.  NH is essentially at full employment and the nation is close. The longer a recovery lasts the greater are the chances that job growth will slow.  Still,  there are more uncertainties regarding the presidential candidates and the policies that could affect business and the economy in this election than is typical in a presidential year so it is not unrealistic to think that politics is already affecting hiring and investment decisions.

Will New Hampshire Follow the National Trend?

State level job growth numbers for May will be released June 17th.  In a small state like NH monthly job growth can be especially volatile. Up or down  conclusions about a state’s economy should not be drawn from a single month of employment data.  A three month trend in private sector employment is a better reflection of the direction of a state’s economy and by that metric NH has been on a roll.  The chart below shows that after several years of below national average private sector job growth, the pace of job growth in NH is now at a level equal to the U.S. average.  Moreover, the growth trend for NH has accelerated while the rate of private sector job growth in the U.S. has decelerated.  The rate of private sector job growth NH is going to slow nonetheless,  just as it has in the nation overall.

private sector job growthI don’t think the private sector job growth trend has gotten enough attention in NH.  Many (including me at times) focused on several years of NH’s subpar total non-farm (including government) employment growth.  But as I have noted in prior posts, the percentage drop in government jobs in NH is among the largest of any state in the nation, masking some of the strength of hiring trends in NH’s private sector.  The chart below shows how both private sector and state and local government employment in NH have grown since each sector’s pre-recession peak.  Private sector employment in NH peaked in February of 2008 and after shedding 6% of those jobs during the recession NH has regained that many plus an additional 3%.  State and local government employment in NH did not peak until April of 2010.  It takes a couple of years for property valuations to reflect economic conditions so the largest declines in property valuations – and thus local revenues and employment- occurred as the recession had ended.  State and local government employment in NH is about 8.5% lower than at its peak, with local government shedding about 6,800 jobs and state government about 1,000 jobs.

public vs private sector growth

Labor Market Response in NH May Be Too Late

For too long in NH private sector job growth remained consistent at a subpar rate despite a large increase in help wanted ads in the state.  A combination of slow or no labor force growth and a mismatch between job opportunities and the skills of job seekers were the causes and not a fundamental erosion of NH’s business climate as I argued in this post.

NH US Help Wanted

But now help wanted ads in NH and the nation are slipping (chart above) and while the recovery isn’t over we are getting better more slowly.  Unfortunately, that is occurring just as the labor market conditions –  low unemployment, rising wages, and signs that NH is once again seeing net in-migration from other states, are all resulting in a more rapid expansion of the NH labor force, the key ingredient wages

the state has lacked in recent years to achieve a faster pace of  job growth.

NH Labor force growth

A Bumpy Ride for the Remainder of 2016

I am frequently in error but rarely in doubt and in this post  last fall I was confident NH would again exceed the U.S. rate of employment growth (it is still possible but not likely) and that NH would see a 2.5% increase in total employment in 2016 (that is not going to happen). In fairness, private sector job growth has been on a more than 2% growth pace for the year and I did include two caveats in my forecast last fall: first that labor force growth in NH would have to accelerate (in part due to a resumption in net in-migration to the state) and while the labor force is once again growing in NH,  it is at a pace that may not sustain the 2% plus growth that NH’s private sector is currently on.  Second, the decline in government jobs would have to abate – it hasn’t.  A month ago at a presentation at a local community bank I downgraded my job growth forecast for NH in 2016 from 2.5% to 1.8%.  With more recent national economic data – including the May jobs data and March/April revisions, readings from my PolEcon NH Leading Economic Index, along with the uncertainties produced by the nation’s political climate, I now believe the rate of growth will be just 1.2 to1.4 percent.

A Perfect Labor Force Storm

May 24, 2016

A perfect storm is brewing for the economy and individual businesses in NH and across the country.  Slow labor force growth, the retirement of baby boomers, and weak growth in labor productivity are severely limiting the productive capacity of the nation’s economy.  Between 2010 to 2015 labor productivity in the U.S. increased by just 0.5 percent on average annually, and the labor force by an average of just 0.4 percent.  Since the end of World War II, the combined, labor productivity and labor force growth in the U.S. had never fallen below 1 percent – until 2015 when it was just 0.9 percent. I have written about the the limits labor force growth place on the U.S. and NH economies here and here (and others).  Factors such as the flow of population (state-to-state migration and  international migration), and changes in labor force participation rates will play a large role in determining which states and regions are most affected, but a real possibility exists that the economies of some  states and regions could shrink over time.

Figure 1

A quick assessment of the potential impact of baby boom retirements across the country is illustrated in Figure 1 which shows the ratio of the population in each state that will (or could) be entering the labor force approximately over the next decade – that is individuals currently ages 5-19 –  to those who will (or could) be exiting the labor force – individuals currently ages 50 to 64.   The bars in the graphic that fall below zero indicate states that face more retirements from their labor force than new entrants over the next decade or more.  As the chart shows, the labor force in New England and much of the Northeast will be especially challenged by baby boom retirements as far more individuals will leave than enter the workforce.

In NH, the impact of baby boom retirements will vary greatly by industry.  The Millennial generation will soon be the largest segment of the labor force but their distribution across industries varies greatly.  For this analysis I examined the demographic characteristics of each industry’s workforce in NH.  Figure 2 presents the ratio of early career (age 25-34) to older workers (age 55-64) in major industry groupings in NH.  The graph suggests industries that will be more and less challenged by retirements of the baby boom generation.  Industries that have higher ratios employ more individuals early in their working lives than individuals nearing retirement age.  Several industries stand out for the high percentage of older individuals in their workforce.  Manufacturing is one industry that has had difficulty attracting younger workers and I have written about that issue long ago in this blog, Educational services is another.  Professional, scientific, and technical industries have a surprisingly low percentage of younger workers but an examination of this industry grouping at a more detailed level shows that the legal profession has among the oldest demographics of any industry in the state.

Figure 2

Looking at the age composition of workers in broad occupational groups in NH (Figure 3)  shows how much difference there is across different occupations employed in professional, scientific, and technical industries. The ratio of younger to older workers in the legal profession is just 46 percent, while in computer and mathematical occupations there are many more younger workers and the ratio is 127 percent.

Figure 3

Health care is also a field with a larger percentage of older individuals in the workforce but when the demographics are examined at a more detailed industry level or by specific occupations, it is clear that the industry is bifurcated – with physicians and other health care practitioners having an older demographic while many of the support occupations in the industry that have emerged as health care has become a much larger portion of the economy, have a much younger demographic.

Industry Growth is as Important as Industry Demographics

 The retirement of baby boomers only hints at the industries that could face the most significant labor shortages over the next decade.  Retiring workers may need to be replaced but they may not.  If employment in an industry shrinks or if it grows slowly over the next decade, then labor shortages are likely to be less severe than baby boomer retirements would suggest, even in industries with a higher percentage or older and retiring workers.

 To capture the impact of industry trends on potential labor shortages related to baby boom retirements I combined projected industry growth in NH over the next decade with the ratio of younger to older workers in each industry to produce a supply/demand balance metric.  For illustrative purposes I present the supply/demand calculations for broad industry groupings in Figure 4.  I did the same calculations at a more detailed (50+ industry) level but that level of detail is not amenable to presentation in a single graphic.  It is not possible to know what industries workers entering the labor force over the next decade will work in so these calculations are only rough estimates of potential supply/demand imbalances. As the chart shows,  industries with a relatively older workforce, such as manufacturing, public administration, and utilities, will nevertheless likely confront fewer labor shortages because of slower employment growth in those industries.  Unfortunately, all industries are likely to face shortages in some occupations that are employed and in demand across many industries.

Figure 4

What Can States and Business Do?

The primary shortcoming of Figure 1 is that it is a static representation of the demographics each state’s workforce.  The population and demographic composition of states are not static however.  People move from place-to-place, state-to-state, county-to-county, and country-to- country.  A state or region with substantial labor shortages that is also viewed as an attractive location can see increases in labor supply in response to labor shortages and wages that are rising in response to shortages.   For more than two decades attracting skilled individuals with higher levels of educational attainment has been a key to NH’s economic success, since the mid 2000s however, NH has seen fewer individuals moving into the state from other states.

A popular meme in NH (and in many rural states) is that the state’s labor force challenges are largely the result of young people leaving the state.  But that is a phenomenon that has been occurring for decades in NH as it has in other rural states.   While it plays some role in the state’s labor force challenges, it has not been a key factor contributing to or detracting from NH’s economic performance – either NH’s strong successes of the 1980s and 1990s  or its subpar job growth of recent years. I wrote about who is moving to NH here, the chart below adds who (from an age perspective) left NH during the same recent 5 year time period.

Figure 5

I am not arguing that we ignore the issue of out-migration of youth, but a state budget in surplus along with the “migrating youth” meme is likely to produce proposals for labor supply policies that are likely to be as costly as they are ineffective.  In future posts I will examine the costs and benefits of several labor supply policies directed at increasing the percentage of young people in NH as well as the percentage attending college and remaining in NH after graduation.   NH is not monolithic, some communities and regions have been attracting younger workers and the age structure of their labor forces has not been increasing as rapidly as NH overall.  If policymakers want to attempt to change decades of youth migration trends then these communities are instructive of the types of actions that may or may not help NH capture higher numbers of workers early in their working lives.

Still, migration along with changes in the labor force participation rate among different demographic groups are going to be the primary determinants of the magnitude of NH’s labor force growth in the coming decades. As Figure 6 below shows, net migration from other states (the # moving in versus the # moving out) has been negative in recent years. That is largely the result of a slowdown in people moving to NH rather than a substantial increase in those leaving the state. The chart also shows that net international migration has offset much of the recent loss from state-to-state migration.

Figure 6

International migration of foreign workers into NH has played a critical role in meeting the demand for many occupations in NH.  Overall just under 8 percent of the labor force in NH is foreign born but in some occupations such as computer and mathematical occupations and life and physical sciences occupations, the percentage of foreign born workers in the NH labor force is over 20 percent (Figure 7).

Figure 7

The projections of labor supply/demand imbalances in this post don’t account for  potential increases in domestic or foreign migration but each of these will  play an important role in meeting the demand for labor in the Granite State.  Businesses have little control over net migration to NH so what can businesses do in the face of impeding labor shortages?  Here are some possible strategies to help businesses  meet their labor needs in an era of slow labor force growth:

  • Increase Wages and Pass Costs on to Consumers
  • Expand Automation and Increase Productivity
  • Move to Areas with More Labor
  • Increase Teleworking to Expand Potential Labor Pool
  • Tap the Untapped Labor Pools
  • Provide Incentives to Delay Retirement
  • Rely More on Contingent Workers
  • Recruit (and Train) Discouraged Workers.

These strategies are not available to all businesses or all industries.  Of all, I like providing incentives to delay retirement the best – it is the “revenge of the baby boomers”. More occupations today are less physically demanding and older citizens are healthier than any time in our nation’s history.  Combined, this should allow individuals to work (if they so chose) well beyond traditional retirement years.  For a long while now younger workers have been all the rage.  It is fitting that baby boomers who entered the workforce in numbers large enough to depress wages, and who have seen workplace cultures that increasingly look to appeal to the youngest workers, could see increasing demand for their services at the end of their working lives.

 

Who is Moving to NH and Why Does it Matter?

October 5, 2015

A lot of time and energy is expended fretting over young people and recent college graduates from New Hampshire moving to other states. It would be nice if many young people remained in the state but keeping a larger percentage of a shrinking demographic is, at best, a small part of New Hampshire’s longer-term demographic and economic challenges. New Hampshire, along with the rest of Northern New England has been a net supplier of 18-24 year olds to other states for decades and it that hasn’t changed much in recent years. It isn’t exactly a trade but what NH got in return, that is until the mid-2000s to the mid-2010s, was a lot of 30-44 year olds with high levels of educational attainment. The movement of individuals and families into New Hampshire during their early and mid-career years was what set New Hampshire apart from the rest of New England and the Northeast and it is what provided the fuel for the extraordinary rise in prosperity in the state from the 1980s to the early 2000s.

If NH becomes more attractive to young people that is great, but with the lure of several great and exciting cities so close, I don’t think our appeal to the youngest entrants to the working world is likely to be fundamental strength of our state. Still, I say go for it, it can’t hurt unless it takes our state’s “eye off the ball” of what contributed so greatly to our state’s prosperity. Take whatever actions to make our state a “hipper” place for young people as long as those actions also make NH even more attractive to those we have already proven we can attract and retain. Attempting to address whatever shortcomings NH has in the eyes of young people is a noble goal but no entity thrives for very long if it spends most of its time addressing its failures instead of feeding its successes. In this case, NH’s success is its demonstrated appeal to early and mid-career individuals and young families. After a decade of limited net in-migration from other states (more people moving in than moving out) and even net-out migration, in-migration to NH from other states is once again rising.

I confess to being a huge fan of the middle of the age distribution. Attracting those in the middle won’t give a state the lowest median age but it does help keep a state’s median age relatively stationary in the face of declining birth and mortality rates. More importantly, the benefits that individuals age 30-54 confer on an economy are much more important than are the benefits conferred by the 18-25 crowd. A younger workforce has been in favor since the 1980’s and capturing recent college grads is an obsession in NH and in many states, but in reality the strong economic growth that characterized the US and NH economies during much of the 80s and 90s, was, in part, the result of an increasingly high percentage of workers age 35-54, and a corresponding decline in the % age 20-34. In the aggregate, workers age 35-54 are our most productive. They have more accumulated expertise, knowledge and training than younger workers, at the same time they work more and are in their “peak” earning years. The high % of workers age 35-54 during the 1990s likely played a significant role in boosting our national and state productivity. The 35-54 age group works and earns earn more than older workers, boosting overall income levels and government revenues, at the same time this age group invests and saves more than the 20-34 age group, contributing to lower inflation and interest rates at the national level. As the chart below shows, NH’s period of strongest economic growth (as well as the nation’s) coincides with an increasing % of workers age 35-54.

Age comp of labor force

So, as I hurtle relentlessly toward the dying of the light I say three cheers for middle-age and let’s hope NH keeps attracting skilled, well-educated individuals and families in their peak working and earning years. My analysis of the last five years of NH data from the Census Bureau’s “Current Population Survey” suggests that is what is happening, boosting the prospects for accelerating prosperity in NH along the way. I examined the characteristic of some 22,000 individuals from the survey, over four years, who indicated that they had moved into NH during the prior 12 months period (I also examined the characteristics of those who moved out but that is another post). The age composition of in-migrants age 18 and older is presented in the chart below. It shows that the largest group of in-migrants was ages 25-34, representing 44 percent of the adult age migration to NH during the 2011 to 2014 time period. Another 25 percent were in the larger age 35-54 age group. New Hampshire will do quite well thank you very much if it can attract more of these individuals than it loses to other states each year. Net in-migration to NH resumed in 2013 and anecdotally appears to be accelerating in some parts of the state.

age comp of in migrants

As encouraging and important as the age composition is of in-migrants to NH is, the educational attainment of in-migrants is perhaps even more so. On that front there is even more encouraging news. About 55 percent of in-migrants age 25 and above hold a post secondary degree, with 47 percent holding a bachelor’s degree or higher. This is significantly higher levels of educational attainment than in the current population of NH residents age 25 and above.
ed attain of in migrants

I am waging my own private campaign (with limited success) to keep three of NH’s best and brightest young people in our state. Efforts to attract well-educated, early career and middle-aged residents aren’t nearly as exciting as campaigns to entice the young and the restless to remain or migrate to New Hampshire, but they are likely to pay greater dividends over the long-term for New Hampshire.

Jobs Just Don’t (and Won’t) Grow Like They Used To

June 29, 2015

A late boss of mine used to say “We all know the time when education in this country started to go downhill; it was the day after each of us graduated.” I am trying to not let nostalgia influence my views of the current labor market and prospects for job and economic and growth. In prior posts I have tried to make the case that slower labor force growth (and to a degree a skills gap) is the fundamental factor constraining growth in the NH economy. In my last post I wrote: “Looking ahead, population and demographic projections show that both nationally and in NH, the working age population (defined here as age 18-64) will show almost no growth over the next 25 years.” If that was written in another’s blog I would have dismissed it if it was not empirically supported, especially if it was as fundamental to the analysis as it was in my post. Regardless of whether you agree with or have even read the analysis in that post, the population and labor force trends it references are keys to understanding critical obstacles to future economic and employment growth.  In this post I provide some documentation and my interpretation of those trends.

It is important to make the distinction between growth in the “working age population” (which my prior post referenced) and “growth in the working age labor force,” (which is a more appropriate measure for the main thesis in that post.). While the two measures  move in the same direction, the magnitude of change can differ as the age composition of the population changes and as  trends in labor force participation among different age and demographic groups change over time. Longer-term trends (as opposed to shorter-term or cyclical trends – those affected by business and economic cycles) in labor force participation can mitigate or exacerbate some of the population trends affecting the size of the labor force.

“Prediction is very difficult, especially if it’s about the future”
—Neils Bohr, Nobel Laureate in Physics

First, let’s look at the assertion from my prior post that: “the working-age population …..will show almost no growth over the next 25 years.” That is a remarkably imprecise statement on which to base any analysis and its accuracy depends on your definition of “almost no growth,” as well as how you define the working-age population.  The chart below shows the U.S. Census Bureau’s “middle scenario” for U.S. population growth to the year 2060. In the chart I show four definitions of “working-age population” along with the cumulative growth rate of each. Three of the four definitions begin at age 22 to reflect the adult working age population. The three definitions include: ages 22-64 that recognizes a historical traditional retirement age at 65, as well as two others (ages 22-69 and ages 22-74) that reflect mortality, health, occupational, and retirement trends that have many individuals working beyond traditional retirement ages. To show that adding the younger population has relatively little impact on the trends I include a traditional definition of working-age population that includes individuals ages 16-64.

working age pop growth

The chart shows that the “adult working-age population” is projected to grow by about 10 percent over the next 25 years (between 2015 and 2040) in the first two (more traditional) definitions of working-age and by a much larger 15 percent for the definition that extends “working-age” population to ages 22-74. “Almost no growth” may overstate the decline in the rate of growth but, for me, 10 percent growth over 25 years is pretty close to almost no growth, especially by historical standards. I think the chart highlights the important role that older individuals could play in employment growth in the future. I like to call this the “revenge of the baby boomers” who first entered the labor market in competition with large numbers of other boomers and who experienced resulting demand for their labor that could not always keep up with the big increase in supply. Much later in life boomers who wish to continue working will likely see demand for their labor higher than it has been in the past for older workers.

The Distinction Between Population and Labor Force Growth

How growth in the “working-age” population translates into growth in the labor force is a function of the age composition of the labor force and the labor force participation rates among the different age groups in the population. Participation rates are highest between ages 25 and 54, much lower among teenagers, lower among 22-24 olds and much lower and declining at ages 55 and above. Thus when the population is growing in high participation age groupings (between 25 and 54) labor force growth will grow more similarly to population growth than when more of the growth in population is among younger (under 25) and older (55+ individuals). That is illustrated in the following two charts. The chart below compares cumulative population and labor force growth between 2015 and 2060 in the broadest definition of “working-age population” which here includes ages 16-74. Labor force projections incorporate a forecast of an increase in labor force participation rates for all age groups above age 55 (averaging about a 5% increase in participation rates) consistent with projections of participation made by the U.S. Bureau of Labor Statistics. The increase in labor force participation among individuals aged 65 and above is not simply a result of individuals who are not able to financially retire (although that does play a role), it is also a function of the better health of older individuals and a decrease in the percentage of jobs in the economy that are physically demanding, among other factors. For age groups in the middle age ranges there is a slight decline in participation rates (averaging about 0.4%), and for the youngest age groups a decline averaging 3.6 percent.

Combining the age distribution of the growth in the working-age population with trends in labor force participation shows that actual labor force growth among the population ages 16-74 is going to be much smaller than population growth because so much of the population growth will be among age groups with the lowest labor force participation rates.

16-74

When a the “adult working-age population” is examined (including ages 22-69), little difference between the cumulative population and labor force growth is seen, with time periods where growth rates are identical and some during which cumulative population growth is slightly higher.. This occurs because the combination of growth in the ages 55-64 population and an increase in the labor force participation rate of this age group compensates for the decline in participation among the youngest age groups and slower population growth in the high participation age groups (25-54).
22-69 growth

Population and Labor Force Growth Over the Next Several Decades Will Support Job Growth That is Less Than One-Half of Current Employment Growth Rates

Each of the graphs above show a labor force that is growing nationally (in fact some states will likely see an outright decline in their labor force). Because the charts show labor force growth it is easy to miss the significance of a slower rate of labor force growth on the U.S. economy and future job growth. Over the past three years the average monthly job growth in the United States has averaged about 200,000 jobs. Real labor force growth hasn’t been sufficient to accommodate that level of growth but because of the layoffs in the labor market during the recession there was enough slack (unemployed individuals and individuals temporarily out of the labor market) in the labor market to allow for that level of job growth. Eventually that slack will be taken-up and job growth will be more constrained because of labor force growth and wages will rise in response to tighter supply (that is just beginning to happen). That was the essence of my thesis about the interaction between NH’s business taxes and demographic and labor market trends.

During the non-recessionary years of the 1990’s the average monthly job growth in the U.S. was about 243,000. Those monthly job growth numbers include jobs going to individuals below the age of 22.  While my analysis primarily is concerned with the adult working-age population (ages 22+), including the labor force ages 16-21 into the analysis changes the population and labor force growth trends very little. Even including individuals ages 16-21 into labor force projections labor force growth will not support an increase in 200,000 plus jobs in the coming decades (except following a recession when substantial layoffs and slack in the labor market exist)..

To illustrate that point the chart below translates the annual increase in the nation’s adult labor force into a potential monthly job growth for the nation (if all of the increase in labor force were employed) under four definitions of the labor force. The chart shows that under a traditional (ages 22-64) or a maximum expansion (ages 16-74) definition of the labor force, annual growth will not sustain current or historical rates of monthly employment growth. During years of the highest labor force growth, jobs would grow only at about one-half the current monthly rate of job growth in the U.S.

LF to job growth conversion

Caveats and Conclusions

Long range forecast and projections are always problematic but the scenario of slower labor force growth and greater competition for labor outlined in this and my previous post will play out even if the degree to which it does has some uncertainty. Despite the overall U.S. trends it is important to note that population and labor force growth will vary greatly among states. Unfortunately NH and other Northeastern states currently are confronting trends that are on the negative end of the spectrum for population and labor force trends.

When the percentage of women in the labor force increased dramatically beginning in the 1970s the labor market was fundamentally changed and the growth potential of the economy was given a tremendous lift. There are no equivalent transformative changes on the labor market horizon. More individuals will work later into their lives but it won’t have the same economic effects as did the increase in labor force participation among half the nation’s population. In addition there has been on ongoing trend of declining labor force participation rates among young people that is, in large part I believe, attributable to the increase in post secondary school enrollments over the past few decades and this partially offsets increases in participation among older individuals. Perceptions of the need for and value of a at four-year college degree are increasingly being challenged so it is possible that the trend of lower labor force participation rates among the young may begin to reverse. The scenario presented here is based on the assumption that current international immigration and state-to-state migration trends will continue unchanged into the future. It is possible that if labor shortages are severe enough in the northeast, we would we see increased net migration into the region, and once again into NH.  But the potential pool of labor which NH can attract will be growing more slowly, making attracting “talent” to the state ever more challenging. That is one reason why I stress the importance of making states and communities attractive to individuals (of all ages) as well as attractive to businesses. Net inter-state migration to NH will likely increase from recent low levels, however, only if the state and its communities offer enough of the amenities and enough of a value proposition to justify that net in-migration. Finally, it is also possible that labor shortages will spur action to increase rates of international immigration to the U.S.. Prediction is indeed very difficult – especially when it is about the future. and especially when it involves a long horizon and as many variables as do population and labor force growth. But for now, my money is on the scenario outlined in this and my previous post.

The Business Tax Discussion NH Should Have

June 23, 2015

What to do about New Hampshire’s business taxes is near the top of lawmaker’s agenda in the Granite State. Many policymakers are concerned that the business tax climate is contributing to a fundamental erosion of New Hampshire’s business climate that is reflected in lackluster employment and revenue growth. Reports that NH has recently outperformed  New England and the U.S. in gross state product (GSP) growth highlight the disconnect that can occur between economic metrics of output (GSP) and measures that more directly affect individuals in their daily lives, such as employment and wage growth. Better than regional or national average growth in GSP is good but state-level GSP numbers are relatively imprecise and should not obscure the fact that employment, wages, and state revenue growth have all been disappointing in NH by the standards of the past few decades. Sustained, disappointing employment and revenue growth since the end of the recession have prompted well-meaning lawmakers in NH to consider a number of policies to accelerate growth in the state.

NH and US emp Growth

Business Taxes Seen as Key

Business tax rates impact business decisions but I don’t believe they are the fundamental factor behind NH’s disappointing economic performance. Lawmakers should consider “what to do about business taxes” but that consideration should go well beyond current tax rates and regulations. Lawmakers should also be concerned with the long-term prospects (revenue yield) of business taxes because business taxes are the largest source of general revenue supporting state government.  New Hampshire’s fiscal structure is fundamentally tied to the performance of the state’s business taxes.  As importantly, lawmakers should be concerned with how NH’s business taxes will interact with key economic and demographic trends to influence the state’s future economic performance. The chart below shows combined quarterly business profits and business enterprise tax collections on an annualized basis and illustrates that nearly six years post-recession and more than seven past their high mark, business tax revenues in NH have not fully recovered. Some of the failure of revenues to rebound following the recession is a result of changes in the state’s business tax rules and some is the result of total private sector wages and salaries (the largest portion of the BET tax base) that declined in  2009 and 2010. Whatever the reason it highlights concerns about the viability of business taxes as the primary source of support for state government. I don’t believe that either raising or lowering rates is likely to improve the performance of business tax revenue enough to alleviate those concerns or even result in revenue gains that match those seen in the first half of the 2000s.

NH Business Tax Revenue

The Business Tax Burden in NH

Using tax rates to measure burdens over time is not a true measure of the impact that business taxes have on companies. Comparing state business tax climates using rates is problematic because of the various provisions of each state’s tax code that affect nominal rates. Here I assess business tax “burdens” using an economic measure – business tax collections as a percentage of private sector gross state product (GSP). This metric documents the state’s business tax burden placed on the total value of private sector goods and services produced in a state. Even using this measure of “burden” is problematic because it does not include all of the taxes, fees, and charges that may apply to a business in each state. Nevertheless, when it comes to addressing the primary sources of tax burden and the ‘headline taxes” that are identified with a state’s business climate, it is a better measure than looking at just business tax rates.

As the chart below shows, as a percentage of GSP, business tax burdens have nearly doubled in New Hampshire since the early 1990’s. Much of that is the result of the addition of the Business Enterprise Tax in 1993, as well as increases in the BET’s rate from 0.25% to 0.50% in 1999, to 0.75% in 2001. But some is also the result of increases in the rate of the business profits tax (BPT) which began the time period shown at 8.0% (from FY 92 through FY 93), dropped to 7.5% in FY 94 and hit a low of 7.0% (from FY 95 through FY 99) and finally rose to its current rate of 8.5% in FY 02. Importantly, the chart also shows that business tax revenue as a percentage of private sector gross state product has fallen since the recession and is now at a level seen at the beginning of the last decade. Again, changes in rules and a decline in wages and salaries both play a role in that decline. For comparison purposes the chart also shows the percentage of GSP that corporate income taxes take in Massachusetts, however, as noted, a number of other taxes are applied to or affect business in addition to corporate income taxes.

Taxes as a pct of GSP

What’s Ailing the NH Economy?

I don’t believe there has been a substantial, fundamental erosion of the ‘business climate” in NH. Slow labor force growth is by far the largest factor contributing to New Hampshire having gone from a leader to a laggard in job growth. That labor force issue is much broader and more complicated than the simplistic and too often noted “young people moving out-of-state.” The chart below shows that labor force growth has slowed more in NH than nationally in recent decades. Where once NH enjoyed a significant advantage in labor force growth, the state now lags the nation as a whole. Above average labor force growth is what allowed NH to have exceptional job growth in the 1980’s and much of the 1990’s.

lf growth 3 time periods

Labor force growth (largely via in-migration of skilled, educated individuals and families from other states) provided NH with a resource advantage for decades. Slow labor force growth is now capping the amount job growth that is possible in the state. Some believe the state’s labor force would experience stronger growth if more job opportunities existed in NH and that simply reducing business taxes will make that happen. While that is true to a degree, today, businesses rarely locate where there is not clearly a sufficient supply of needed labor. A sharp rise in help-wanted advertising in NH in recent years even as private sector employment growth has remained relatively constant and disappointing (chart below) shows that in the near-term at least, demand for labor does not necessarily increase its supply.  Significantly, the chart also shows that after a rapid rise in help wanted advertisements that was not accompanied by a noticeable increase in the rate of private sector job growth, help wanted ads have begun to decline in what may be a sign that employers, because of labor supply constraints, are increasingly looking  elsewhere for labor.

help wanted june 2015

The demand for labor does generally increase the supply of labor but when the supply is growing slowly everywhere (especially in the Northeast where NH has typically attracted much of its increase in labor force), supply will respond accordingly. Increasingly businesses follow labor rather than the other way around and they do not rely on their demand to increase labor supply.  Looking ahead, population and demographic projections show that both nationally and in NH, the working age population (defined here as age 18-64) will show almost no growth over the next 25 years. Competition for labor among businesses will become more intense and to keep and attract a labor force businesses will have to offer more than just the promise of a paycheck. I would argue that states and communities will also have to offer more (in terms of amenities – natural, social, civic, cultural, and services) to attract and retain the labor force needed for employment and economic growth. Evidence of the importance of amenities to labor supply (and employment growth) can be seen in the differential employment growth between some of NH’s regions such as the Seacoast (which has had higher population, labor force, and employment growth and which has several high amenity communities) and other regions of the state.

New Hampshire can improve its business taxes and business climate but whatever reforms are enacted, alone, are not going to overcome demographic and labor force imposed constraints on employment growth in the state. Lawmakers should, however, seek to assure that business taxes do not worsen key constraints on the NH economy moving forward.

The Longer-Term Problem

NH’s combination of a traditional tax on the profits of business profits (the business profits tax or BPT), along with its “business enterprise tax” or BET (on the combined compensation, interest, and dividends paid by businesses) may well exacerbate some of the disadvantages the state’s economy will face as a result of national and state demographic trends, making it more difficult for NH to overcome key constraints on employment growth in the state.

Reducing business tax rates that many see as too high is a near-term solution to a longer-term problem. The longer-term problem is slow or no labor force growth nationally and in NH in the coming decades that will limit profit growth everywhere but which will also place additional burdens on NH businesses. The labor force problem and NH’s reliance on business taxes will present NH businesses and state government with challenges that are unique to the state.

Wages and salaries are generally lower for comparable positions in NH than they are in Massachusetts. At one time it was easy to justify that wage differential because of large differences in the cost of living between the two states. Today, the cost of living differential between the two states has narrowed and NH is considered a high cost-of-living state. The U.S. Bureau of Economic Analysis (BEA) produces a “regional price parity index” Regional Price Parities (RPPs) measure the differences in the price levels of goods and services across states for a given year. RPPs are expressed as a percentage of the overall national price level (100). As the chart below shows (apologies for the poor quality – I lifted it directly from a BEA publication), NH (seen in red) has become a high cost state (largely because of housing costs), nearly as costly as Massachusetts.

price parityIn a state (NH) with living costs that are increasingly comparable to Massachusetts, workers in NH can be expected to seek wages nearly comparable to wages available in Massachusetts. For the most part, however, NH employees do not receive wages comparable to wages in Massachusetts and that contributes to some of NH businesses inability to hire needed workers and to NH’s modest job growth, despite increased job openings in the Granite State.   It may also be a contributing factor to NH’s significant drop in its unemployment rate with only modest job growth (the unemployment rate is a residency-based measure that considers only whether or not a resident of NH has a job or not, regardless of where that job is located).  Little or no growth in the labor force in the coming decades will increase competition for workers and will put more pressure on NH businesses to narrow wage and salary differentials with other, higher-cost states, if higher-skill jobs located in NH are going to grow. The catch 22 is that higher wages increase the BET liability of businesses at the same time they can reduce profitability (if productivity isn’t rising along with wages). A growing disconnect between the profitability of businesses in NH and the tax burden placed on them is not likely to be an incentive for businesses to compete for labor in a era when it is ever more scarce.

Higher wages would not be a problem as long as productivity increases justify wage growth. When workers produce more they should see higher wages. Productivity growth has been modest over the past decade and shows little sign of accelerating. Thus increasing wages will likely mean slower profit growth for businesses in NH and elsewhere. I think we have seen the high mark nationally for corporate profitability for some time. But in NH, the higher wages needed to attract labor will also increase the business enterprise tax (BET) liability of companies. If profitability is indeed more modest because of faster wage growth and modest productivity growth, the BET liability of NH businesses relative to their business profits tax (BPT) liability will increase. An ad valorem tax on a resource (labor) in short supply with a rising price and that is paid regardless of the profitability of a business may increase (or cushion from decline) state revenue for a time but it also seems like a disincentive for businesses to pay the wages necessary to compete for labor and to hire in New Hampshire over the longer term.

New Hampshire’s tax structure has never really been a boon or an advantage for business but it has been attractive to large numbers of individuals and families over the years and it contributed to growth in the state’s labor force via inter-state migration into NH. Growth in key demographic groups within the labor force – skilled individuals with higher levels of educational attainment  and regardless of their age ( two wage-earner, college educated, married couple families with children characterized the typical inter-state migrant to NH) made New Hampshire a much more attractive place for businesses to operate. The in-migration of “talent” fueled the state’s transition to a more sophisticated, technology dependent economy. But there is less state-to-state migration everywhere today and national and regional population, demographic, and labor force growth make it much less likely that NH will continue to realize those benefits from its fiscal structure. In the coming decades as competition for labor increases because of limited growth in the labor force, stronger wage growth will be needed to attract a limited pool of labor. Taxing compensation (as NH’s BET does) will increase tax liabilities for many NH businesses even as higher wages limit their profitability.

It is time for a discussion of NH’s business taxes, but that discussion needs to involve a lot more than just tax rates, credits, and how the rules apply to publicly traded companies.

Can “Paycheck Equity” be Mandated?

January 28, 2014

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.


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