Tight Labor Markets for Me, but Not for Thee

by Reihan Salam

One of the more intriguing, and dismaying, developments in the U.S. labor market has been the apparent tightening of the labor market for employed workers even as the level of underemployment and long-term unemployment remains high. That is, it appears that employed workers feel more confident about quitting their jobs and switching to other, better jobs, a sign of a tight labor market, even though there remains a large number of workers who’ve been sitting on the sidelines for a long period of time. The most obvious explanation is that we have a segmented labor market, as Evan Soltas has suggested. (It is not at all obvious that an increase in the minimum wage will alleviate this problem of persistent exclusion from the mainstream labor market, a subject we’ll revisit.)

John Cochrane addressed a related issue in a recent comment on the work of Torsten Slok of Deutsche Bank Research:

Lately, there has been a pretty remarkable consensus among macroeconomists that the labor market really is not doing well, despite lower unemployment rate. About 10 million people lost their jobs in the great recession,  and new employment has just about matched new people since then. The employment-population ratio — red line — hasn’t budged. The 10 million aren’t actively looking for work, so they don’t count as “unemployed.” Whether “discouraged” by persistent “lack of demand” or discouraged by high marginal taxes and social program disincentives, or bad match of skills and opportunities, take your pick, the consensus view on all sides has been pretty dim on the labor market.  I’ve seen about the same slide deck from Ed Lazear (Bush CEA chair) and Larry Summers (Obama adviser). Usually, employment and unemployment mirror each other, so it doesn’t matter which measure you use.

In Torsten’s view, there is nothing the Fed can do about this. I agree. The Fed seems to secretly agree too. They talk about the employment-population ratio, but if they thought there were effectively 10 million unemployed and they could do something about it, they would not be even talking about tapering, they’d be talking about buying another $2 trillion of bonds and promising zero rates into the 7th year of the Hilary Clinton administration.

I’m not convinced that there is nothing the Fed can do about low employment levels, and I tend to think the Fed should do more. But whether or not that’s true, the point Cochrane goes on to make is an important one. According to Torsten Slok, large numbers of 55-65 year-olds have exited the workforce because they’ve accumulated substantial wealth and they are choosing to retire early, a finding with dovetails with recent work from Sylvester Scheiber and Andrew Biggs. Cochrane replies that the average net worth cited by Slok ($650,000) is not as encouraging as Slok thinks, as it is an average (most early retirees have accumulated less, if not far less), it reflects accumulated housing wealth, and it won’t be enough to last 30-35 years.

The same numbers can be read dreadfully as a generation whose location, skills, health insurance arrangements, marginal tax rates (social security disability, etc.) and now long-term unemployment history leave them behind, facing a long painful old age, and the economy without their contributions.

In 2012, Andrew Biggs proposed an attractive solution for part of this cohort — the partial or full elimination of Social Security payroll taxes for workers over the age of 62 — and one hopes that this will become part of a broader Social Security reform agenda. The thornier problem is what we ought to do about the younger Americans, many of whom are less-skilled, who find themselves segmented out of work.