No, the unemployment rate is not “meaningless”

In March, the economy created 916,000 new jobs and the unemployment rate edged down to 6%. At the same time, total employment remains roughly 10 million below trend.

This leads some people to assume that the unemployment rate is sort of meaningless, and that the total employment figures show the true state of the labor market.

That’s not quite right.  If you want to know how far we are from a full recovery, then the total employment figures are indeed more relevant at the moment.  But if you want to understand how hard it is to find a job, then the unemployment rate is probably the better indicator.

When these two series diverge sharply, it is because there has a been a drop in the total labor force.  Million of people who were employed in early 2020 are currently not even looking for a job.  As a result, the labor market is tighter than you’d normally expect from a situation where employment is 10 million below trend, and indeed far tighter than in 2009:

A record share of U.S. small-business owners reported unfilled positions in March, and firms are starting to boost wages to attract talent, a report by the National Federation of Independent Business showed Thursday. . . .

[A]n overwhelming number of small businesses are having trouble finding qualified applicants to fill open positions. Over 90% of owners looking to hire reported few or no “qualified” applicants for the jobs they were trying to fill last month.

“Where small businesses do have open positions, labor quality remains a significant problem for owners nationwide,” said Bill Dunkelberg, chief economist at NFIB. “Small-business owners are raising compensation to attract the right employees.”

I’m not sure what explains the recent drop in the supply of labor.  Part of the decline might reflect workers that are skittish about contracting Covid-19.  Some workers may be staying home to care for children, as many schools have closed.  The expanded unemployment program pays some workers more in unemployment compensation than they earned on their previous jobs.  I expect these roadblocks to mostly be eliminated by late in the year, and hence I expect a surge in labor force participation.

But as of the moment, it’s easier to find work than would normally be the case when employment is 10 million below trend.

The punch line here, as in so many of my posts, is to avoid thinking exclusively in supply or demand terms.  When it comes to the labor market, both supply and demand matter.  Never reason from a quantity change.

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Working Out the Differences: Labor Policies for a Fairer Recovery

By John Bluedorn The COVID-19 pandemic’s destruction of jobs was sure and swift. The lasting effects of the crisis on workers could be just as painful and unequal. Youth and lower-skilled workers took some of the hardest hits on average. Women, especially in emerging market and developing economies, also suffered. Many of these workers face […]

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Repealing Political Discrimination

Most skilled American workers are now at least somewhat afraid to criticize fashionable left-wing views.  They feel quite fearful to do so on the job, and fairly fearful to do so on social media.  One tempting way to quell this high anxiety is to pass new laws against political discrimination.  Washington, DC already has such a law:

[T]he District of Columbia Human Rights Act prohibits all employers in the District from refusing to hire, terminating, or otherwise discriminating against any individual with respect to his or her “compensation, terms, conditions, or privileges of employment” on the basis of the individual’s political affiliation.  D.C. Code § 2-1402.11.

Before passing a new law, however, one should always ask, “Can we accomplish the same end by repealing – or liberalizing – an existing law?”  And in this case, the answer is clearly yes.

But first, let’s back up.  Why are high-skilled employers almost uniformly eager to enforce left-wing fashions, such as adopting an official “anti-racist” philosophy?  Sincere commitment is part of the reason, but far from the whole story.  Political philosophy is too variable to explain such uniform workplace policies.  A better story, in my view, is that almost all employers – left, right, and in-between – fear race and gender discrimination lawsuits.  And since their inception, such lawsuits have been sliding down a slippery slope.

The slippery slope looks something like this:

1. The law initially bans conscious decisions by employers to base hiring, promotion, or compensation on race or gender.

2. Discrimination gradually gets reinterpreted to include “unconscious” behavior with similar effects.

3. The next step is to blame employers for saying “the wrong thing,” even if there’s no discernable effect on workers’ objective career outcomes.

4. Then you blame employers for failing to deter their employees from saying “the wrong thing” to each other.  This is when workers go from looking over their shoulder before they say something negative about a specific person, to looking over their shoulder before they say anything that would upset their most hypersensitive colleague.

5. Finally, you blame employers for failing to failing to induce employees to say “the right thing” loudly and often.  In other words, for failing to build a “culture of inclusion.”

Why has the slope been so slippery?  Because if you’re doing less to “fight discrimination” than other firms, you worry that you might be perceived as “soft on discrimination” and get sued.  (And if you do more to “fight discrimination” than other firms, even better). You definitely don’t want to loudly announce, “We’ve gone far enough.”  Such words are financially dangerous.  As I’ve said before:

Imagine what would happen if a firm’s top brass loudly declared that, “Discrimination simply isn’t a problem here” – and routinely fired complainers for contradicting the party line.  Picture a firm blanketed in propaganda telling workers to “Be color-blind,” “Laugh it off,” and “No one likes a tattle-tale.”  A small business in a conservative area might get away with this for a few years, but a Fortune 500 company that stuck to its right-wing guns would go down in flames.

You could argue that employers still overreact to the risk of lawsuits.  I’m sympathetic; contrary to what you’ve heard, even hiring by IQ is fairly safe.  But there’s no need to resolve this debate here, because what I’m going to propose is similarly good at defusing both justified and unjustified fear.

My proposal:

1. Amend discrimination law to explicitly state: “Political speech by employers or employees, on or off the job, shall never be considered a form or indicator of ‘discrimination.’  ‘Political speech’ includes the expression of any allegedly racist or sexist views.”

2. For further teeth, add: “Any employee who lodges any formal complaint – internal or external – about a co-worker or employer’s political speech forfeits any right to sue that employer for discrimination for any reason whatsoever.”  This preserves firms’ right to handle offensive speech internally; they can still fire you for singing Hitler’s praises on the job.  But it also gives firms a free hand to handle these internal complaints as it sees fit, without fear of legal blowback or second-guessing.  In fact, it gives firms an incentive to urge employees to voice their complaints internally to ensure that the firm won’t have to deal with such complaints in court.

Most people, I suspect, will object that these legal changes for going too far.  Since I think discrimination laws do little to reduce genuine discrimination, I obviously disagree.  But I’m unlikely to persuade such people here.

On the other hand, many who share my concerns about freedom of expression will object that my proposed legal changes don’t go far enough.  Under my system, stridently left-wing employers can continue to impose a rigid orthodoxy.  Toning down the fear of lawsuits only changes the behavior of employers who were motivated by fear in the first place.

Fair enough, but I maintain that my proposal strikes a reasonable balance.

Reducing the threat of lawsuits will restore variety by reviving competition.  Strident left-wing workplaces aren’t a big deal as long as we unbelievers can take our labor and go elsewhere at reasonable cost.  And yes, strident left-wing employers have rights, too.  If they want to spend every Friday doing struggle sessions, they should be free to do so.

Other employers, however, shouldn’t lose sleep over lawsuits if they offer their workers a more genteel experience.  While I’m not sure, I definitely predict that my proposed revisions of existing discrimination law would lead to robust competition between employers to create workplaces where no one walks on eggshells.  Since worker preferences vary, we will witness a wide range of options.  But since only a few fanatics savor stifling left-wing dogma, we’ll no longer witness much of that.

I for one have already seen enough stifling left-wing dogma to last a lifetime.

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Alain Bertaud and the Future of Cities

Recently, our parent organization, Liberty Fund, embarked on a series of programs aimed at our local (Indianapolis, Indiana) community. The first topic we endeavored to explore was the future of cities.

One of the programs we hosted was a virtual “town hall,” in which I was privileged to interview former EconTalk guest and urban planner Alain Bertaud.

I asked Bertaud what a city like Indianapolis, whose goal is to attract and retain talented young professionals, ought to focus on, as well as why we might not want our city planners to have a “vision” for the future.

Here’s the video of our conversation:

 

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My Thoughts on Unions

 

Last week, April Glaser, a journalist at NBC News, contacted me for a story on the unionization effort at Amazon in Bessemer, Alabama.

She wrote:

Is this bad for business or workers? Is it good? Would be great to get your perspective, especially considering President Biden’s pro-union comments made Sunday.

I emailed her back the following response:

Dear Ms. Glaser,
Thanks for your note.

I would prefer to answer questions by email. And we can go back and forth with follow-up. That way, there’s less chance of being misinterpreted.

So here are my answers to your first questions.

Unions per se are not bad or good. Unfortunately, unions under the laws of the United States tend to have bad effects. I watched President Biden’s 2-minute speech. I noted that he said that the choice to join a union is up to the workers. True, but here’s the problem. Once a majority votes for the union, the union represents all the workers, even those who didn’t want to be represented. So although President Biden makes it sound as if this is a free choice, the free choice is only on the first vote. Once the vote is taken, if the majority wants the union, everyone is forced to be represented and often everyone, even those who don’t join, is forced to pay union dues.

Moreover, while our political system is imperfect, to put it mildly, we get to vote every 4 years on who the President will be. But once the workers vote to join the union, the union is there forever unless the workers choose to get a decertification vote going. If would be as if people who wanted President Biden to be president would have to get enough signatures to have a decertification election to remove President Trump. Absent that election, in this analogy, Trump would be president forever.

One of the major effects of unions is to ossify the work structure in a plant or business, making it hard for the management to move workers around between various tasks. Unions also tend to compress pay scales so that the relatively less productive will gain somewhat and the most productive will lose. Overall, unions tend to raise the compensation package (wages plus benefits) per worker. That sounds good, but we’ve got to remember the law of demand. When wages rise, employers let attrition reduce the number of people employed and so while it’s good on average for those who keep their jobs, it reduces opportunities for those who would otherwise get jobs.

Please reply if you want to follow up.

Best,

David R. Henderson
Research Fellow
Hoover Institution

This isn’t my ideal strategy. I like socializing with reporters but I didn’t know who she was and I didn’t know whether she would get the nuances or report them. So maybe it was my ideal strategy.

Ms. Glaser didn’t reply but within minutes wrote a piece quoting me. Here’s the piece. Here’s what she wrote in reference to my point:

Not all academics agree that the union will be good for the Amazon workers in Bessemer. David Henderson, a fellow at the conservative think tank the Hoover Institution, says that while unions do tend to lead to a rise in wages for workers, it could amount to fewer jobs in the long run.

“When wages rise, employers let attrition reduce the number of people employed and so while it’s good on average for those who keep their jobs, it reduces opportunities for those who would otherwise get jobs,” Henderson said.

For more on unions, see Morgan O. Reynolds, “Labor Unions,” in David R. Henderson, ed., The Concise Encyclopedia of Economics.

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An Unnecessary “Stimulus”

In two Defining Ideas articles in 2009, “Who’s Afraid of Budget Deficits? I Am” and “Furman, Summers, and Taxes,” I criticized Lawrence Summers and Jason Furman, two prominent economists who worked in the Obama administration, for their dovish views on federal debt and deficits. They had argued that we shouldn’t worry much about high federal budget deficits and growing federal debt. Of course, that was before the record budget deficit of 2020. Now even Summers is worried. In two February op-eds in the Washington Post, Summers argues against the size and composition of the Biden “stimulus” bill.

Summers makes a solid argument, on Keynesian grounds alone, that the proposed $1.9 trillion spending bill is much too large. He also, to his credit, digs into some of the details of the bill, pointing out how absurd they are. Had Summers looked at more details, he could have made an even stronger case against the measure. For instance, one major provision of the bill, the added unemployment benefits through August, will actually slow the recovery. And other provisions of the bill, like the bailout of state and local governments, are bad on other grounds. The fact is that this is not your father’s or your grandmother’s run-of-the-mill recession. It was brought about by two things: (1) people’s individual reactions to the threat of Covid-19 and (2) politicians’ reactions, in the form of lockdowns, to the same threat.

These are the opening two paragraphs of my latest article for Defining Ideas, “An Unnecessary ‘Stimulus’“, Defining Ideas, March 5, 2021.

And the ending:

First, the economy is recovering. In January, the International Monetary Fund predicted that real GDP will grow by 5.1 percent in 2021. Possibly that’s because the IMF understands that this is not a typical recession. The slump we’re in was due initially to people’s fear of the virus, a fear whipped up by Dr. Anthony Fauci and others. But now it’s due mainly to lockdowns. As the percent of the US population that has had COVID-19 rises and the number of people vaccinated rises, we are getting closer to herd immunity. Then people will feel even safer going out and governments will have fewer excuses to keep their economies locked down. We can all become Florida or Florida-Plus. That will all happen without any stimulus bill.

Second, the $1.9 trillion bill represents government taxing us or our children in the future to spend money in places where we the people have chosen not to spend it now. The bill is, in essence, a huge instance of central planning with government officials’ preferences overriding ours. The bill, for example, contains $28 billion for transit agencies, $11 billion in grants to airports and airplane manufacturers, and $2 billion in grants to Amtrak and other transportation. How does the government know that those are the right amounts? What if, as I predict, when the pandemic and lockdowns end we will still have fewer people wanting to ride transit because they and their employers will opt for a hybrid model of some at-home work and some in-office work? The effect of this misallocation of resources won’t necessarily show up in GDP because GDP measures government spending at cost rather than at value. But this spending will make us somewhat worse off. It’s far better to rely on people having the freedom to make their own allocations.

If the government gets out of the way, the economy will recover. Maybe it takes an outsider to see that and to say that. I just did.

Read the whole thing.

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L’Etat, C’est Ro

Louis XIV, pictured above, the king of France from 1643 to 1715, famously said, “L’Etat, C’est Moi.” Thus the title of this post.

Ro Khanna, a Democratic member of the House of Representatives, was recently asked what his plan was for the small businesses that might be hurt by the Democrats’ (and some Republicans’) proposal to raise the minimum wage from its current $7.25 an hour to $15.00 an hour by 2025.

The interviewer asked:

I’m wondering what is your plan for smaller businesses? How does this, in your view, affect mom-and-pop businesses who are just struggling to keep their doors open, keep workers on the payroll right now?

Khanna answered:

Well they shouldn’t be doing it by paying people low wages. We don’t want low-wage businesses.

What does Mr. Khanna mean by “we?” Many small businesses want to pay what he would regard as low wages. Many workers would like to work at those low wages if the alternative is higher wage rates but fewer hours, being worked harder, getting fewer benefits, or, in the limit getting zero hours. Many customers would like to buy goods and services produced by businesses paying wages less than $15 an hour.

But none of these people count, in his view.

His “we” means “he” or, more inclusively, people like him who are willing to ignore the desires of those three groups.

Thus the title of this post.

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The Effect of the Minimum Wage on Employment and Unemployment

In a comment on my blog post about the proposed $15 federal minimum wage, frequent (and careful) commenter KevinDC quotes my statement:

Here’s what they found. The vast majority of studies, 79.3 percent, found that a higher minimum wage led to less employment.

He then comments:

I like the precise wording here by using the term “less employment.” One thing I’ve tried explaining to people is that is possible for increases in the minimum wage to decrease employment without increasing unemployment, because economists are bad at naming things in a way that make intuitive sense to people outside the field. (“Public goods? Obviously that means goods provided by the public sector, right?” “Market failure? That’s whenever I personally don’t like a market outcome, isn’t it?”) So, even in the case where  particular study doesn’t find increased unemployment after a minimum wage hike, that doesn’t actually mean that the increase in the minimum wage didn’t decrease employment.

Well said, Kevin.

I want to add that the CBO study I cited makes this distinction also. Here’s a key paragraph:

Taking those factors into account, CBO projects that, on net, the Raise the Wage Act of 2021 would reduce employment by increasing amounts over the 2021–2025 period. In 2025, when the minimum wage reached $15 per hour, employment would be reduced by 1.4 million workers (or 0.9 percent), according to CBO’s average estimate. In 2021, most workers who would not have a job because of the higher minimum wage would still be looking for work and hence be categorized as unemployed; by 2025, however, half of the 1.4 million people who would be jobless because of the bill would have dropped out of the labor force, CBO estimates. Young, less educated people would account for a disproportionate share of those reductions in employment.

 

 

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Adam Smith in the Workplace

Jonas Grafström and I chat about Adam Smith in the workplace. The chat is based on a paper “Adam Smith and Human Resources” by me, published by the American Enterprise Institute (and in Swedish in Ekonomisk Debatt).

 

How can the thinking of Adam Smith help with challenges in work and employment? What skills should employers look for?

Smith discussed what we may call sympathetic deftness, akin to social intelligence or soft skills. There are two sides to sympathetic deftness: The amiable side is deftness in entering into the situation of another. The respectable side is deftness in enabling others to enter into your situation.

But continuing upward in virtue calls for deftness in both the amiable and the respectable. Work, business, and trade are schools of virtue.

Smith is therapy, self-help. He affords a rich understanding of sentiments, sympathy, and virtues. Here the focus is on the workplace. The video gives some introduction, but the paper says more about using Adam Smith to improve your career, productivity, and sense of meaning –and your love of life, which David Hume mentioned as one of the calm passions.

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The Opportunity-Killing Minimum Wage

Among non-economists and politicians, the minimum wage is one of the most misunderstood issues in economic policy. President Biden and almost all Democrats and some Republicans in the US Congress advocate increasing the federal minimum wage from its current level of $7.25 an hour to $15 an hour over four years. They argue that many of the workers earning between $7.25 and $15 will get a raise in hourly wage. That’s true. But what they don’t tell you, and what many of them probably don’t know, is that many workers in that wage range will suffer a huge drop in wages—from whatever they’re earning down to zero. Other low-wage workers will stay employed but will work fewer hours a week. Many low-wage workers will find that their non-wage benefits will fall and that employers will work them harder. Why all those effects? Because an increase in the minimum wage doesn’t magically make workers more productive. A minimum wage of $15 an hour will exceed the productivity of many low-wage workers.

This is from David R. Henderson, “The Opportunity-Killing Minimum Wage,” Defining Ideas, February 18, 2021.

Another excerpt:

Employers don’t hire workers as a favor. Instead, employers hire workers to make money. They hire people only if the wage and other components of compensation they pay are less than or equal to the value of the worker’s productivity. If an employer pays $10 an hour to someone whose productivity is $15 an hour, that situation won’t last long. A competing employer will offer, say $12 an hour to lure the worker away from his current job. And then another employer will compete by offering $13 an hour. Competition among employers, not government wage-setting, is what protects workers from exploitation.

We all understand that fact when we see discussions on ESPN about why one football player makes $20 million a year and another makes “only” $10 million a year. Everyone recognizes the twin facts of player productivity and competition among NFL teams. The same principles, but with much lower wages, apply to competition among employers for relatively low-skilled employees.

Also, see how I discuss the last 28 years of literature on the minimum wage.

And finally:

The University of Chicago’s Booth School has an Initiative on Global Markets (IGM) that occasionally surveys US economists on policy issues. Possibly because of the surveyors’ understanding that the $15 minimum wage would hurt some states more than others, the IGM recently made the following statement and asked forty-three economists to agree or disagree: “A federal minimum wage of $15 per hour would lower employment for low-wage workers in many states.” Unfortunately, the question did not specify what is meant by “many.” Is it ten, twenty, thirty? Some economists surveyed pointed out that ambiguity. That ambiguity could explain why a number of the economists answered that they were uncertain. But of those who agreed or disagreed, nineteen agreed that it would cause job loss in many states and only six disagreed.

One economist who disagreed, Richard Thaler of the University of Chicago, gave as his explanation this sentence: “The literature suggests minimal effects on employment.” No, it doesn’t. As noted earlier, the federal government has never tried to raise the minimum wage by such a large amount and so there is no scholarly literature on such an increase. Would Thaler say that if putting a cat in the oven at a temperature of 72.5 degrees Fahrenheit doesn’t hurt the cat, then putting a cat in the oven at 150 degrees wouldn’t hurt the cat either?

Read the whole thing.

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