Brookings: Topics - Job Creation

Confronting Suburban Poverty in America - Release Event

Mon, 20 May 2013 09:30:00 -0400

Event Information

May 20, 2013
9:30 AM - 11:30 AM EDT

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue, N.W.
Washington, DC 20036

Click here to visit the Confronting Suburban Poverty in America website.

In 1965, President Lyndon B. Johnson declared a war on poverty. Back then poverty was largely confined to inner-city neighborhoods and isolated rural areas. Today, the overwhelming majority of America’s poor live not in cities—but in the suburbs of its major metropolitan areas. Yet the paradigm of poverty in America, and the infrastructure for addressing the conditions poor families and communities face, has failed to keep pace with the reality of these changes. The problems of the growing suburban poor are now exacerbated by a weak economy and increasingly limited resources for nonprofits, philanthropies and government at all levels.

As with many challenges facing the nation, metro area leaders are leading the way in the search for solutions—learning how to do more with less and adjusting their approaches to address the metropolitan scale of poverty, collaborating across sectors and jurisdictions, using data and technology in innovative ways, and integrating services and service delivery.

In Confronting Suburban Poverty in America (Brookings, 2013), co-authors Elizabeth Kneebone and Alan Berube, take on the new reality of metropolitan poverty and opportunity in America. On May 20, they along with some of the nation’s leading anti-poverty experts, including Luis Ubiñas, president of the Ford Foundation, and Bill Shore, founder and CEO of Share our Strength, and leading local innovators from across the country discussed a new metropolitan opportunity agenda for addressing suburban poverty, how federal and state policymakers can deploy limited resources to address a growing challenge, and why building on local solutions holds great promise.

Click here to visit the Confronting Suburban Poverty in America website.

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Confronting Suburban Poverty in America - Release Event

Should the United States Have 2.2 Million More Jobs?

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 03 May 2013 10:30:00 -0400

Employers added 165,000 jobs in April, according to the Bureau of Labor Statistics, following upwardly revised gains of 332,000 in February and 138,000 in March. The three-month average pace of job gains of 211,000 was slightly above the average pace of 173,000 jobs over the last twelve months. The unemployment rate edged down to 7.5 percent, and the fraction of the population reporting a job edged up. The unemployment rate has now declined 0.6 percentage point since last April, although much of this change can be attributed to declining rates of labor-market participation rather than increases in employment.

These numbers continue a pattern of steady growth in the labor market, but they also confirm that America’s recovery from the Great Recession is still very much a work in progress. The public sector, especially, has been a drag on the economy in recent months. While the private sector has added roughly 2.2 million jobs over the past year, employment in state, local, and federal governments has declined by 89,000, including significant losses to teachers and emergency responders. In this challenging economic climate, there is growing concern about how sequestration—the across-the-board budget cuts to discretionary spending that took effect on March 1—may negatively impact the recovery even more. Indeed, forecasters at the Congressional Budget Office project that the sequestration could reduce overall GDP growth in the United States by 0.6 percentage point and cost the economy 750,000 jobs by the end of 2013.

In this month’s employment analysis, The Hamilton Project examines the trajectory of public-sector employment since the onset of the Great Recession and contrasts this decline to periods of economic recovery after previous recessions. We find that the last several years’ policy choices are starkly different from those following previous recessions. Specifically, there are 2.2 million fewer jobs today, relative to what would have occurred with the policy response typical of the five preceding recessions. We also continue to explore the “jobs gap” and find that the country needs to add about 10.0 million jobs to return to pre-recession employment levels.

Government Employment Since the Recession

The downward trend in public-sector employment, described in a Hamilton Project report last summer, has continued into the opening months of 2013. While the private sector has added jobs to the economy in every month since March 2010, a total increase of approximately 6.8 million jobs, the public sector has contracted. To put this in perspective, federal, state, and local governments added jobs in only twelve of the thirty-eight months since March 2010 and have lost more than 625,000 jobs over this period.

The graph below shows the ratio of government employment to the civilian non-institutional population (every civilian in the United States sixteen and older who is not in prison or a live-in care facility) going back to 1980. For the twenty years prior to the Great Recession, this ratio stayed relatively constant, but since then it has dropped precipitously, except for the temporary uptick in 2010 when government employment rose to accommodate demand for U.S. Census workers.

This figure shows that the percentage of individuals working for federal, state, and local governments is at a decades-long low. In fact, the ratio of government employment to population has not been below 9 percent since the mid-1960s. The result, as detailed in last summer’s Hamilton Project report, is over 200,000 fewer teachers, 50,000 fewer policemen, and 6,000 fewer air-traffic controllers since 2009.

Government Policy: It's Different This Time

By cutting jobs during a period of already high unemployment, budget policies have contributed to the tepid pace of labor-market recovery and stand out as a departure from typical policy responses after recessions. The figure below shows the change in government employment forty-six months after every recession in the United States going back to 1970. (The double-dip recessions of 1980 and 1981, which ended in November 1982, are counted as a single event.) The bars are scaled by the population of the United States in June 2009 so that the magnitudes of employment changes are comparable.

The ongoing recovery, which began when the Great Recession ended in June 2009, dramatically deviates from the usual pattern. In the forty-six months following the end of the five other recent recessions, government employment increased by an average of 1.7 million. During the current recovery, however, government employment has decreased by more than 500,000. Put together, the policy differences have led to 2.2 million fewer jobs today. Such a large contraction of the public-sector during a recovery is unprecedented in recent American economic history.

The April Jobs Gap

As of April, our nation faces a jobs gap of 10.0 million jobs. The chart below shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close under different assumptions of job growth. The solid line shows the net number of jobs lost since the Great Recession began. The broken lines track how long it will take to close the jobs gap under alternative assumptions about the rate of job creation going forward.

If the economy adds about 208,000 jobs per month, which was the average monthly rate for the best year of job creation in the 2000s, then it will take until April 2020 to close the jobs gap. Given a more optimistic rate of 321,000 jobs per month, which was the average monthly rate of the best year of job creation in the 1990s, the economy will reach pre-recession employment levels by December 2016.

To explore the outcomes under various job creation scenarios, you can try out our interactive jobs gap calculator by clicking here. You can also view the jobs gap chart for each state here.

Conclusion

Policymakers are currently faced with the unenviable task of simultaneously increasing employment and addressing America’s long-term budget deficits, but—at a time when the rate of government employment is at a historic low—sequestration threatens to further slow the growth of the public sector and lengthen the time it will take to close America’s jobs gap. Even when ignoring any indirect impacts, a typical policy response to the Great Recession would have led to a jobs gap that is 2.2 million jobs smaller than current gap of about 10.0 million and commensurately reduced the amount of time until the economy returns to full employment.

It is critical to achieve both employment gains and fiscal stability. The textbook approach is for government to continue to support the recovery and credibly enact deficit reduction that will not take hold until the employment crisis has been mitigated substantially. With respect to deficit reduction, The Hamilton Project recently released a collection of fifteen proposals that seek to reduce the deficit while improving efficiency and promoting broad-based economic growth. To see how these proposals could impact the long-term deficit, you can try our interactive budget calculator here. The Hamilton Project also continues to explore policies to boost employment, including a recent discussion paper on improving worker training programs.

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

Image Source: © Mike Segar / Reuters

Some Good News on April Job Growth

Gary Burtless — Fri, 03 May 2013 11:52:00 -0400

Gloomy news in last month’s jobs report was partially erased by better news in this month’s report. Employers reported payroll gains of 165,000 in April, a considerable improvement compared with the initial estimate that payrolls grew just 88,000 in March. That initial estimate of March job gains turns out to have been too low and was revised in this month’s report. The BLS now estimates that March payroll gains were 138,000—not a terrific number, but 50,000 better than the initial estimate.

The April jobs report also contains a major revision to earlier estimates of job growth in February. The BLS initially estimated that February’s job gains were 246,000, certainly a welcome piece of news. In its March report it revised February’s job gains up to 268,000. And in its latest report, February job gains are now estimated to have totaled 342,000, the fastest rate of job gain we have seen in three years.

Taking the revisions into account, the BLS now estimates that payroll gains have averaged 208,000 a month for the past 6 months. Employment growth was even faster in the private sector, averaging 216,000 a month. Unfortunately, improving conditions in the private sector have been partly offset by weakness in government payrolls. These fell another 11,000 in April.

Government payrolls have shrunk 532,000 since the end of the last economic expansion. In percentage terms, the fall in government payrolls has been larger than the decline in private payrolls over the same period (-2.4% in the government versus -1.8% in the private sector). It is an astonishing development. Public sector employment is typically thought to be more stable than private sector employment. Although government employment was indeed much better protected during the worst months of the downturn, it has turned out to be a persistent source of weakness throughout the recovery. Since December 2009 private-sector payrolls have grown more than 6.7 million. Government payrolls have shrunk 636,000.

The gloomy news in the March employment report was not entirely erased by today’s numbers. Unemployment remains exceptionally high for this stage of an economic recovery, and long-term unemployment remains at historically high levels. Nonetheless, the unemployment rate edged down 0.1 point, to 7.5%, in April, and it has fallen 0.3 points since the end of last year. The unemployment rate has now hit its lowest level since December 2008.

The improvement in the unemployment rate in April was not the result of a shrinking labor force. It occurred because estimated employment levels rose. Respondents to the BLS household survey reported employment gains of 293,000. This number is less encouraging than it sounds, because in March respondents to the same survey reported employment losses of 206,000. Since January, employment gains in the household survey have only averaged about 86,000 a month, a rate of job gain that seems too slow to cause they unemployment rate to fall. For the unemployment rate to fall with such meager job gains the participation rate must fall. Indeed, the adult participation rate has fallen 0.3 points since January, though it held steady in April. The household survey gave us good news on job growth and a dip in unemployment in April, but the longer term picture remains discouraging. The job market continues to improve painfully slowly from its worst downturn since the Depression.

Authors

Gary Burtless

Image Source: © Keith Bedford / Reuters

Unemployment Projected to Remain at 7.6 Percent for April, But Expected to Drop Faster in Near Future

Regis Barnichon — Thu, 02 May 2013 10:30:00 -0400

This post discusses my monthly update of the Barnichon-Nekarda model. For an introduction to the basic concepts used in this post, read my introductory post (Full details are available here.)

Over the past months, the Barnichon-Nekarda model has been surprised by lower than expected unemployment numbers. Taking the positive news from the March report on board, the model now foresees a faster labor market rebound, and anticipates a rising rate of decline in unemployment over the next six months. I now expect a jobless rate of 7.1% in September 2013, compared to 7.6% as of last month.

In March, the unemployment rate dropped to 7.6%, noticeably lower than the model’s forecast (7.8%, see Table 1). As was already the case last month, the model was surprised by the rate of improvement in the job separation rate: the EU rate, comprised mostly of layoffs (Figure 2), has been declining faster than anticipated over the past couple months.

Going forward, the model now sees the recent labor market improvements as signaling a faster rebound in the labor market. It now projects a faster decline in unemployment over the next 6 months, with a progressive increase in the rate of decline. In fact, the jobless rate is now projected to reach 7.1 % by September 2013, significantly lower than the 7.6% projected as of last month’s forecast (Figure 1).

The intuition for this forecast is easily understood by looking at the projected behavior of the “steady-state” unemployment rate. The steady-state unemployment rate, the rate of unemployment implied by the underlying labor force flows—the blue line in figure 5— stands currently at 7.1% (versus7.4% in the previous forecast). Our research shows that the actual unemployment rate converges toward this steady state. With a steady-state unemployment rate significantly lower level than the actual rate, this "steady-state convergence dynamic" is now pushing the unemployment rate down. As the difference between actual and steady-state rates increased since last forecast, the force pushing the unemployment rate down is now stronger, implying a faster decline in unemployment than previously anticipated.

In addition, the model now also foresees a faster decline in the steady-state unemployment rate itself, with a rate of 6.7% in September, significantly lower than the 7.3% anticipated as of last month (Figure 5). The "steady-state convergence dynamic" pushing the unemployment down will gain in strength and generate a rising rate of decline in unemployment.

More specifically, the model propagates forward its best estimate for how the flows between employment, unemployment and out-of-the labor force will evolve over time, and constructs the implications for the steady-state unemployment rate and hence the actual unemployment rate. With continued improvements on the hiring and job separation fronts over the past months, the model now anticipates a markedly faster increase in workers’ job finding rate over the next 6 months (UE, figure 3) and even (for the first time in months) a small decline in the rate of job separation (EU, figure 2). As a result, the steady-state unemployment rate is now projected to decline much faster.

Authors

Regis Barnichon

In the Longer Run, the Short Run Matters

George L. Perry — Tue, 30 Apr 2013 14:28:00 -0400

The worst of the deadlock between the House and the White House has passed, and there are even signs that a compromise may now be reached addressing long-run budget issues. We are in a better place politically than we were late last year, but still in no position to get complacent about near term economic prospects. Chances of renewed recession are low, but so are prospects for vigorous expansion.

For the past two years, the need for fiscal and monetary stimulus has been debated both in Washington and Wall Street. One thing that has been missing from these debates is the potential for longer run damage if the sluggish economy persists. When a recession is brief and the economy returns promptly to high rates of employment, the long-run costs are minimal. But when recovery is weak and joblessness persists for many workers, the long-run costs become meaningful. And they include worsening the long-run fiscal problems that concern everyone.

The economy’s economic potential depends on the size and skill of the work force, the size and quality of the capital stock it works with, and the technical innovations that accompany the new capital. Although future investment can provide the needed capital and innovation, losses on the labor side are likely to be more lasting. In a prolonged slump, unemployment spells become long, discouraged workers stop looking for jobs, and job skills erode or become obsolete. Older workers retire earlier than they had intended. Young workers find few career path job openings and miss the on the job training that is part of the transition from school to the workplace.

Problems remain

All these problems are present today. The job market has improved greatly since the depths of the recession, but there are still 5 million more unemployed than before the recession started. Over this period, the number of people unemployed more than half a year has risen by 3.5 million. Furthermore, the labor force participation rate is 2.3 percentage points lower than it was in 2007. If the overall participation rate had not changed, the labor force would be nearly 6 million larger today. However, this difference reflects both natural changes in participation for various demographic groups and a large number of discouraged workers who have stopped looking for work because of economic conditions. A return to a strong job market would bring back some of these discouraged workers. But the longer the slack labor market continues, the more permanent these effects are likely to be.

The Congressional Budget Office continually updates its projections of potential GDP, and those projections are heavily influenced by its estimates of these labor force developments. Comparing its most recent estimates of potential for 2012 with the projections for 2012 that it made in 2007, we can infer that the recession and slow recovery have reduced potential GDP by $800 billion. Because tax revenues are correspondingly lower and transfer payments somewhat higher, the structural budget deficit, which measures what the deficit would be if cyclical factors were removed, is higher by about $160 billion this year and by perhaps $1.75 trillion over the next ten years. A rapid recovery would improve these prospects and sustained high unemployment could worsen them.

Toward a solution?

All this raises the question of what to do about it.

The Federal Reserve can be expected to continue its monetary easing for as long as necessary. Its example is winning over some foreign central bankers even if not its critics at home. The recent decline in commodity prices, and the persistent low yield on long bonds, provide continuing market evidence that Bernanke and his colleagues are on the right track.

But they need help from the fiscal side. After the initial stimulus package that was passed in 2009, resistance to budget deficits has led to some fiscal tightening in each subsequent year. Last winter’s budget deal that avoided the extreme tightening of the fiscal cliff itself imposed a considerably tighter budget this year.

That’s not good.

Near term fiscal policy should be guided by the doctors’ oath: first, do no harm. While pursuing measures to reign in deficits in the fairly distant future, immediate budgets should be as expansive as politics allows.

Authors

George L. Perry

Publication: Yahoo! Finance

Our Job Deficiency: A Challenge to the IMF-World Bank

Bessma Momani — Mon, 29 Apr 2013 14:12:00 -0400

At the IMF-World Bank meetings this past week, there were plenty of assessments of the state of the global economy that described the post-2008 recovery as anemic. Only a few went so far as to claim that the global economy is comatose. Yet, despite general agreement on the diagnosis, there was little consensus on how to solve the problem. Deciding on what tools and policies to use to stimulate growth is vital if we are going to cure the global economy of persistent enervation.

For a number of years, we've been led to believe that fiscal consolidation or austerity -- code for cutting government budgets -- is the best way to stimulate economic growth. Supposedly, it triggers a virtuous cycle: by increasing the confidence of the private sector, it spurs investment, which leads to economic growth, which further increases confidence, which in turn fuels more growth. It is this fiscal belt-tightening that eventually improves the health of the entire economy. So we are told by influential economists.

The highly prominent Harvard University's Rogoff-Reinhart thesis in 2010 which claimed to show that in highly indebted countries, economic growth will cease or retreat once a magic threshold debt level of 90 per cent of GDP is passed, is but one example among many studies that have been used to support this theory of "expansionary austerity." Now it seems that these two economists were omitting important data points and even succumbed to a simple coding error, which casts doubt on their analysis, and on the theory of expansionary austerity itself.

Fiscal consolidation can sometimes lead to economic growth; whether it will depends on a slew of other important variables such as interest rates (when they've already reached the zero lower-bound), the type of exchange rate in place (a floating exchange rate can help dampen the effects of fiscal contraction); and how supportive external demand is for an economy's goods and services. In the case of Canada in the 1990s, the country was fortunate that it undertook fiscal consolidation with the support of these three variables. For some countries this may not be the case, so we should be cautious of blanket arguments in favour of fiscal consolidation.

To be fair, Rogoff-Reinhart never did explicitly claim causation, only correlation. Note that the the Rogoff-Reinhart findings -- even if the original results still held -- tell us very little if low growth leads to high debt (think Japan) or if high debt leads to low growth (think Greece). This, however, did not stop influential policymakers and politicians like former Republican Vice-Presidential candidate Paul Ryan and European Commissioner Olli Rehn from taking these findings and spinning them to support their own political agendas.

The sole point however is not whether some growth occurs -- it is what kind of growth that should concern us; for growth that results from consolidation is more often anemic than vigorous. Moreover, economic growth alone is not a satisfying benchmark to measure the economy's recovery and future prospects. We need to ask: How do we get economic growth that is inclusive? And what indicators will tell us we're on the right track? "Inclusive" in this context is code for JOBS, and jobs are what we need to be tracking most closely. What is the point of having overall economic growth if this doesn't translate into people working and their wages increasing over time? Without job creation, we cannot increase consumption and generate the tax revenues needed to make important investments in education, health, R&D, and infrastructure, which taken together are prerequisites for long-term economic growth. In other words, without jobs, we get stuck on an anemic economic growth path. This is where we are now, and this is what needs the attention of world policymakers.

Indeed if there are any policy "heroes" of the Great Recession, they are the major central banks of the developed world. These institutions have proven remarkably adept at putting a floor under asset values, and a ceiling above credit spreads. But even with recourse to all this "unconventional" monetary policy, policymakers have still failed to put a ceiling above what truly matters: the unemployment rate. I hope that at the next IMF-World Bank meetings, job creation will be at the top of the agenda. And I hope that we will take the Rogoff-Reinhart thesis as a reminder that what's needed are careful assessments of what each country can do to create jobs, not a one-size-fits-all fiscal fix.

Authors

Bessma Momani

Publication: OpenCanada.org

Image Source: © Yuri Gripas / Reuters

Creating Jobs Where Institutions Matter: Addressing South Africa’s Unemployment Problem

Anne W. Kamau and Andrew Westbury — Fri, 26 Apr 2013 16:30:00 -0400

The South African think tank the Development Policy Research Unit (DPRU) at the University of Cape Town recently conducted some thoughtful analysis on what exactly occludes employment in South Africa. According to DPRU Director Haroon Bhorat, “Institutions matter and nowhere more so than within the labor regulatory environment.” Under the auspices of South Africa’s Labor Relations Act, the Commission for Conciliation, Mediation, and Arbitration (CCMA) is charged with handling all employment disputes in the country. Each year, this group manages nearly 5,300 such claims, with cases ranging allegations of wrongful dismisals to contract violations and requests for wage increases. DPRU’s analysis of these claims indicates empirically that the faster these disputes can be resolved, the more jobs created in the market. In contrast, when these are drawn out, employment rates suffer severely. Indeed, according to the DPRU working paper, Do Industrial Disputes Reduce Employment? Evidence from South Africa, even slight changes with the efficiency of CCMA processes can produce dramatic results. For example, DPRU estimates that a 1 percentage reduction in the agency’s own efficiency index effectively terminates employment for nearly 2,702 South Africans.

Fortunately, the CCMA is actually quite capable. A majority of cases are adjudicated within approximately one month, and the high usage rates of the system demonstrate “the accessibility and legitimacy of the institution”. Unfortunately, despite the crucial role the CCMA plays in South Africa’s labor market, the entity is under-resourced. CCMA is currently funded on the “basis of previous financial year’s caseload”, which allow for little flexibility when the volatility of the current world economy precipitates increase layoffs or other unforeseen market action. Either way, more secure funding and better support of the CCMA seems almost a prerequisite for increased employment in South Africa. The DPRU writes in their working paper, A Nation in Search of Jobs: Six Possible Policy Suggestions for Employment Creation in South Africa: “That an institution as central to labor market efficiency in the country as the CCMA needs to worry about cash flow is an example of a labor market rigidity which can be avoided.” With South Africa suffering from nearly 25 percent unemployment, funding institutions seems like a simple step that can support both workers and employers.

For more information, you can also read recent commentary on South Africa’s rapid economic growth but continued challenges with inequality by scholars from the Brookings Africa Growth Initiative and DPRU in the February edition of Yale Global Online.

Authors

Anne W. Kamau
Andrew Westbury

Image Source: © Siphiwe Sibeko / Reuters

Discussing the Global Investment in American Jobs Act of 2013

Martin Neil Baily — Thu, 18 Apr 2013 09:30:00 -0400

Introduction

I would like to thank Chairman Terry, Ranking Member Schakowsky and the members of the Committee for the opportunity to present my testimony today on the Global Investment in American Jobs Act. I have had the opportunity over the past twenty years or more to do research on issues of productivity, competitiveness and the impact of foreign investment, looking not only at the United States but also at Europe, Japan, Korea and many emerging markets.

The American economy today is improving but fragile. Real GDP growth is expected to be around 3 percent in the first quarter of this year but only about 1 percent in the second quarter and be well below 3 percent for the second half of the year because of the impact of payroll tax increases and the sequester. The number of jobs is increasing but too slowly. After flat-lining in the middle quarters of 2012, business investment picked up in the fourth quarter, but we need a lot more investment in order to create the jobs needed to raise living standards.

To a great extent, the performance of our economy over the next 10 years or so depends on the contributions here at home of U.S. workers and companies. The competitive position of this country in the global economy will play a vital role and I applaud the House for proposing a comprehensive review of how to make the U.S. economy a more attractive place to invest for foreign companies. In the years after World War II, it was American companies that went overseas, bringing with them technology and business expertise as well as capital. These companies helped spread prosperity to the rest of the world, a process that is still happening. But today successful, productive companies from around the world are investing in America, bringing jobs, capital and, in some cases, new technologies and business efficiencies. The auto company that exports the most outside North America is BMW. Toyota makes the bestselling cars in America in its factories here; and Siemens is helping fix the electric power grid.

The inflow of foreign direct investment slowed as a result of the Great Recession, not surprisingly, but there is tremendous potential to increase that flow now and in the future, bringing additional jobs and boosting the economic recovery. Making America a location that attracts good foreign companies is very important and, by the way, those same factors will also make it more attractive for U.S. multinational companies to locate more of their investment here at home.

The Pattern of Foreign Direct Investment

Figure 1 below shows the inflow of foreign direct investment to the United States and the outflow of direct investment by U.S. companies overseas. The figure shows that the magnitudes of the inflow and outflows are comparable, although the outflow has been larger than the inflow for all but one year since around 2001. There was a surge of foreign investment into the U.S. market at the time of the technology boom in the 1990s, which dropped sharply when that boom subsided. The level of foreign inflows has not reached its 2000 peak since then. Is it a problem that the outflows exceed the inflows? The U.S. economy attracts huge amounts of capital from around the world every year. The McKinsey Global Institute estimated that between 2000 and 2007, 85 percent of the international capital available in the world (in the form of total current account surpluses) came to the United States, largely in the form of purchases of financial assets. Almost certainly, the U.S. economy became too reliant on foreign capital at that time. The capital inflows were the counterpart to the large current account and trade deficits and the easy access to funds contributed to the housing boom and subsequent bust. Direct foreign investment inflows are different, however, in that they are stable and brings jobs and production. Bringing in more foreign direct investment, even while we rely less on foreign purchases of U.S. financial assets, would be a plus for the economy.

Figure 1: Foreign Direct Investment in the United States and U.S. Direst Investment Abroad, Annual Flows, 1990-2011 (in billions of dollars)

Source: U.S. Department of Commerce

Figure 2 below looks at direct investment inflows to China compared to the United States. Over the entire period from 1995 to the present, direct investment in the United States was far greater than the flow into China. Of course, China traditionally put up barriers to foreign investment and even today many companies report that it is hard place in which to invest and do business. In 2012, however, based on the first three quarters of data, direct foreign investment into China exceeded the flow into the United States. Is this a matter of concern? Yes and no. China’s economy is growing rapidly and will likely become larger than the U.S. economy in the future. It is not surprising that multinational companies want to access China’s labor pool and its market. It is also notable that the direct investment flowing into China is not coming primarily from U.S. multinationals. Some American companies, like GM or Ford, have set up business in China, but most of the investment in China is from Taiwan, Korea and elsewhere, not from the U.S. On the other hand, the recent weakness in investment inflows in the past few years, visible in Figures 1 and 2, may be indicative of the lack of relative attractiveness of the United States to foreign investors.

Figure 2: Foreign Direct Investment into China and the United States

Source: World Bank, OECD. * Figures for 2012 obtained by annualizing the first three quarters.

Figures 3 below shows information about the stock of foreign direct investment located in the United States by industry and, below that, by country. Two points are notable. First, a disproportionate fraction of foreign investment coming to the United States is in the manufacturing sector. This important sector makes up less than 10 percent of the economy today but a much larger share of foreign investment stock. Over the past twenty years or more there has been concern that the U.S. economy is not devoting enough of its investment to manufacturing, having an adverse impact on competitiveness and contributing to the large chronic trade deficit. It is notable that foreign-based multinationals have shown greater willingness to invest in manufacturing operations and are adding to competitiveness. Second, by far the largest proportion of the foreign investment (71 percent) comes from European countries, with the next largest coming from Asia, notably Japan, but also Korea. The UK, Netherlands, Switzerland, Germany and France are the largest investors from Europe. This pattern of investment coming from Europe and Asia is not perhaps surprising since these economies are among the most developed with global leading companies, strong technologies and efficient business practices. These countries are also strong allies of the United States. The economic problems in Europe and Japan help explain the decline in the inflow of investment. When foreign companies are stressed at home they are less willing to invest here.

Figures 3: The Cumulative Stock of Foreign Investment in the United States by Industry and by Geography.

The Pros of Foreign Investment in the United States

1. Foreign companies can bring new technologies and efficient operations. Overall, the U.S. economy remains the global leader in both productivity and technology, but there are large variations by firm and by industry. We cannot expect to be the country that is the source of every innovation or every good business idea, and we are not. Research that compares productivity across countries has found that the biggest benefits of innovation come from its dissemination through the economy. American innovations in computers and semiconductors now contribute to economic growth around the world. German innovations in auto parts are used by the American auto industry. Foreign direct investment is crucial to distributing innovations and allows the U.S. economy to benefit from the global pool of new ideas.

2. Foreign direct investment provides capital for jobs in America. American corporations are on average very profitable, partly because they are well-run compared to companies world-wide, but also because they set high target rates of return before they are willing to invest. U.S. corporate strategy has emphasized being lean in the use of capital and avoiding making large, risky investments unless the expected returns are high. Without making any judgment on this practice, it means that there are opportunities in America for investment and job creation where projected returns are pretty good but where U.S.-based companies are reluctant to commit the necessary capital. Foreign companies based in Asia now own and operate much of the steel capacity based in the United States. As I will discuss shortly, the energy boom is attracting many foreign companies to build highly capital intensive new plants making petrochemicals in America. Infrastructure is an area where foreign investment could make a contribution to U.S. economic performance.

3. Foreign direct investment increases the competitive intensity of the U.S. economy. A basic tenet of economics since Adam Smith has been that competition benefits consumers. Markets with a dominant single producer or with an oligopoly of companies that reach tacit agreements to limit price competition will result in prices that are too high. More recently, economic research has stressed the dynamic benefits of competition in putting pressure on all market participants to cut costs and develop new and innovative products. Global companies that have established their positions in their own domestic markets can provide important competitive pressure to American industries where the domestic companies have become complacent.

The Cons of Foreign Direct Investment in the United States

1. Foreign investment can displace jobs and production in domestic companies. There is little question that the arrival of Asian and European auto companies producing in North America has resulted in a decrease in the number of jobs in the traditional American companies in the industry. Many of those jobs were unionized. Many Americans look back to a time in history when domestic companies dominated the economy and foreign competition was minor. Much of the apprehension is about imports and the trade deficit, but the changing identity of companies producing in the U.S. market is also a concern.

2. Foreign takeovers of American companies can be motivated by a desire to capture American technology. The fight among countries and companies to take advantage of technology is older than the industrial revolution. Alexander Hamilton orchestrated an effort to bring European technology to post-revolutionary America, while today China is doing its utmost to push its economy into the twenty-first century by grabbing as much technology from around the world as it can. One reason that American companies have been reluctant to invest more in China is because of concerns about violations of property rights. The U.S. government, of course, already has in place safeguards to prevent the capture of vital technologies by foreign entities and all foreign takeovers have to be vetted. The hard question is whether or not this process is striking the correct balance between protecting vital American interests and excluding foreign investors who could contribute positively to our economy.

3. In the event of an economic downturn, foreign-owned companies may protect home country workers and operations at the expense of their U.S. operations. Some multinational companies produce the same, or very similar, products in different locations around the world. These companies have a choice about how to allocate production in situations where they have overcapacity. If workers in their home country have reached agreements to protect their own jobs, the company may decide to keep full employment at home and cut production elsewhere. This concern is a legitimate one, but should not be overstated. Shifting production is costly and most foreign-owned companies with significant operations in the United States are concerned about the long term sustainability of their U.S. operations.

Balancing the Arguments

Although there are real concerns about foreign direct investment, the benefits greatly outweigh the costs. On balance, international trade is beneficial to Americans but the case for expanding trade is a hard one to make to skeptical voters. By contrast, the case for encouraging foreign investment is much easier to make. New green field investments clearly create jobs and benefit local communities. Takeovers of domestic companies by foreign companies are also generally beneficial, providing an infusion of capital and new management that can prevent established companies from failing and allow them to make investments.

How to Make the United States More Competitive

1. Get the macroeconomics right. Chronic U.S. trade deficits since the early 1980s have been sustained by an equal shortfall of domestic saving over investment. The best policies in the world will not restore American competitiveness in the long run as long as there is gap between national saving and investment. Reducing investment is not the right approach. Alternatively, national saving will need to increase once the recovery has taken a firmer hold. There are few if any tools by which government can influence private saving; thus, the increment to national saving will be achieved most effectively by reducing or eliminating the federal budget deficit over the next ten years. It is clear from the past that insufficient levels of national saving drove up the exchange rate, priced U.S. exports out of foreign markets and swelled the volume of imports.

2. Work for trade agreements. Balance in international trade needs to be a more focused objective of U.S. foreign policy. In past negotiations, the United States traded access to U.S. markets for foreign political support or access of U.S. financial firms to foreign markets, to the detriment of admittance for U.S. exports. A major German auto company is siting an assembly plant in Mexico because that country’s free trade agreements will allow it to use the plant as an export platform to Latin America and elsewhere. In addition to obtaining more trade agreements, there is also a need to develop greater international consensus on appropriate guidance for exchange rates.[1]

3. Improve the Corporate Income Tax. The mobility of capital, technology, and production facilities makes the national taxation of production as opposed to consumption increasing impractical. The marginal rate of corporate taxation in the United States is too high, particularly in relationship to the tax rates of other countries, inducing firms to locate overseas. The United States needs to follow the lead of other countries in shifting toward greater reliance on consumption-based taxation.[2]

4. Improve skills. Both American companies and foreign companies investing in the United States say that the skills of the U.S. workforce are comparatively weak. It lags behind many other countries in developing effective vocational education and job training programs, and the educational attainment of young workers is falling behind that of countries like Canada, Japan and Korea. Furthermore, U.S. 15-year-olds rank 25th in math and 17th in science in PISA scores among OECD nations. Germany is an example of a country that has used a high-quality vocational education system to improve the skills of its workforce. While there is no space here to elaborate on what changes should be made, greater attention needs to be paid to reversing the deterioration in workforce skills.

5. Repair and improve infrastructure. Similarly, the country suffers from a deteriorating physical infrastructure that raises the costs of production. The extraordinarily low level of current interest rates suggests that now is a good time to borrow funds to finance the repair and modernization of those systems. The adoption of such a program is constrained by a concern that it is simply an excuse for added deficit spending. That issue can be addressed within a capital budget framework in which each investment is financed with amortized debt for which a portion comes due in each year and is repaid with an explicit tax or dedicated revenue source over the duration of the bond issue. Such financing, if matched by a credible dedicated revenue source, would not add to concerns about an unmanageable level of general fund debt.

6.Take advantage of the energy boom. U.S. natural gas resources have nearly doubled since 2003, driven by the development of shale deposits nationwide. The United States has the second largest recoverable shale gas reserves in the world at 24 tcm (trillion cubic meters), after China’s reserves of 36 tcm. However, the United States is substantially ahead of the rest of the world in having started to tap these reserves at increasing scale. By 2020, shale gas is expected to add 10-15 billion cubic feet per day over current levels and grow to over 25 percent of total gas production. Along with shale gas, light tight oil (LTO) production has also developed rapidly. Current LTO production estimates for 2020 are between 5 and 10 million incremental barrels per day, although even higher numbers are possible. There are environmental dangers involved in this new wave of energy production but with the right regulation it should be possible to develop the oil and gas fields responsibly. It is expected that natural gas will be priced in the United States at $4-6 per million BTUs, well below the $12 price range in Europe and $16 in Asia. Oil prices are set globally, but it is likely that U.S. domestic prices will carry a differential below imported oil and the greater security of domestic supply will be an attraction for users. Cheap natural gas will also keep electricity prices down.

The energy revolution is already making America more competitive. Global companies are investing in new plants here to take advantage of the low price of energy and natural gas as a feedstock. For example, in 2012, Shintech Louisiana LLC, a Japanese company, invested an additional $1.3 billion in a PVC plant in Louisiana.[3] Methanex Corp. (Canada) invested $550 million in the United States in summer 2012 to construct a methanol production facility in Louisiana. This was the corporation’s first U.S.-based facility in over a decade.[4] Sasol Ltd. (South Africa) agreed in December 2012 to build an “integrated gas-to-liquids (GTL) and ethane cracker complex” in Louisiana. This project alone is estimated to create 1,253 jobs directly, “with salaries averaging nearly $88,000, plus benefits,” and thousands of additional indirect job gains. Total investment is estimated to be between $16 billion and $21 billion, with ultimate value approximated at $46 billion by a Louisiana economic impact study.[5] Foreign direct investment is thus making an important contribution towards exploiting new energy sources for the benefit of the economy.[6]

Conclusion

The Obama Administration has been working to make it easier for foreign companies to build new plants and create jobs here. An interagency effort is underway to create one-stop-shopping for companies and I applaud the effort by this subcommittee to seek out ways to make America a more attractive location for foreign companies to invest. More needs to be done to coordinate federal agencies and states and localities in terms of permitting and meeting environmental requirements. Companies also report that the process of obtaining permits is much too slow and too complex.

On balance, foreign direct investment coming to the U.S. economy has been beneficial, generating jobs, making-capital intensive investments and diffusing technology developed in other countries to our economy. There are legitimate concerns about protecting our technology and workers, but these challenges can be met. America is already an attractive place for foreign companies to invest and policymakers should make sure our competitiveness is sustained and enhanced.

[1] A greater reliance on market-determined exchange rates would be preferable in most cases, but countries differ widely in their stages of development and ability to rely on such mechanisms.

[2] The United States also attempts to tax the foreign income of U.S. companies, albeit with a deferral. Most other countries use a territorial-based system in which income is taxed only in the country in which it is earned.

[3] Mark Crawford, “Hot United States FDI Sectors: Advanced Manufacturing,” Area Development Online, http://www.areadevelopment.com/LocationU.S.A/LocationU.S.A2012/U.S.-FDI-sectors-advanced-manufacturing-262000987.shtml.

[4] “At the Epicenter of the U.S. Industrial Rebirth,” Louisiana Economic Development,” http://www.louisianaeconomicdevelopment.com/led-news/articles/at-the-epicenter-of-the-us-industrial-rebirth.aspx.

[5] “Sasol Announces Largest Manufacturing Investment In Louisiana History, Creating More Than 7,000 Direct And Indirect Jobs,” Louisiana Economic Development, December 3, 2012, http://www.louisianaeconomicdevelopment.com/led-news/news-releases/sasol-announces-largest-manufacturing-investment-in-louisiana-history,-creating-more-than-7,000-direct-and-indirect-jobs.aspx?c=News%20Releases&id=39.

[6] There are exaggerated claims being made about the extent to which the energy boom will improve U.S. competitiveness and create manufacturing jobs. The discovery of new ways to extract natural gas and oil may make the U.S. self-sufficient in energy and reduce the trade deficit, but it will also increase the value of the U.S. dollar, partially or fully offsetting the cost advantage of cheap energy. This is an example of the “Dutch Disease” that afflicted Dutch manufacturing some years ago when large gas reserves were discovered.

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Testimony Prepared for the Hearing: Discussion of the Global Investment in American Jobs Act, 2013

Authors

Martin Neil Baily

Publication: United States House of Representatives, Subcommittee on Commerce, Manufacturing, and Trade, Committee on Energy and Commerce

Image Source: © Paul Vernon / Reuters

Job Sprawl Stalls: The Great Recession and Metropolitan Employment Location

Elizabeth Kneebone — Thu, 18 Apr 2013 00:00:00 -0400

As policymakers and regional leaders work to grow jobs and connect residents to economic opportunity following the Great Recession, where jobs locate matters. The location of employment within a metro area intersects with a range of policy issues—from transportation to workforce development to regional innovation—that affect a region’s long-term health, prosperity, and social inclusion.

Job Sprawl in 100 Largest Metropolitan Areas, 2010
Share of jobs 10-35 miles from a central business district
Click a metro area to view its detailed profile (PDF)

An analysis of the location of private-sector employment within 35 miles of a downtown in the nation’s 100 largest metropolitan areas from 2007 to 2010, and across the 2000s, finds:

Steep employment losses following the Great Recession stalled the steady decentralization of jobs that characterized the early to mid-2000s. After dropping 2 percentage points from 2000 to 2007, the share of metropolitan jobs within 3 miles of downtown stabilized from 2007 to 2010. However, by 2010 nearly twice the share of jobs was located at least 10 miles away from downtown (43 percent) as within 3 miles of downtown (23 percent).

Job losses in industries hit hardest by the downturn, including construction and manufacturing, helped check employment decentralization in the late 2000s. Together, construction, manufacturing, and retail—each among the most decentralized of major industries—accounted for almost 60 percent of all job losses between 2007 and 2010, with half of those losses occurring at least 10 miles from downtown.

In all but nine of the 100 largest metro areas, the share of jobs located within three miles of downtown declined during the 2000s. Only Washington, D.C. experienced an increase in both the number and share of jobs located in the urban core during the 2000s. At the same time, the share of jobs at least 10 miles from downtown rose in 85 regions between 2000 and 2010.

A metro area’s total employment, and policy and planning decisions around land use, economic development, and zoning, help shape the location of its jobs. Employment is more decentralized in metro areas with at least 500,000 jobs. But even large metro areas with high degrees of job decentralization like Chicago and Detroit concentrate many of their jobs in dense locations outside the urban core.

In the wake of the Great Recession, policymakers and regional leaders have the opportunity to make strategic decisions about how they will pursue metropolitan growth. If the next period of economic expansion reinforces low-density, diffuse growth in metropolitan America, it will be that much harder for metro areas to achieve sustainable and inclusive growth over the long term.

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Authors

Elizabeth Kneebone

Image Source: © Gary Cameron / Reuters

Using Data to Improve the Performance of Workforce Training

Louis Jacobson and Robert J. LaLonde — Wed, 17 Apr 2013 08:00:00 -0400

Abstract

Training programs provide opportunities for low-income individuals to qualify for better jobs and enter the middle class. These programs also provide opportunities for workers who lost long-held jobs to qualify for new positions that can offset a substantial fraction of their earnings losses. Although millions of workers seek out career and technical training options in the pursuit of financial security and better lives, many ultimately choose programs that do not suit their needs. Some individuals do not complete their training programs, some find that their new skills do not match the needs of local employers, while many others, uncertain of the outcomes, hesitate to invest time and money into training programs altogether. Too many workers are making poor choices in training, but fortunately, this problem can be resolved by helping workers select programs that they are more likely to complete and that are more likely to raise their earnings potential. This paper proposes a state-by-state solution, relying on a competitive framework to encourage states to help prospective trainees make better-informed choices. The plan will increase the return on training investments by developing the data and measures necessary to provide the information prospective trainees need, by presenting the information in user-friendly “report cards,” by providing help for prospective trainees to use the information effectively, and by creating incentives for states to implement permanent information systems once they prove cost-effective. Using a mix of online systems coupled with assistance from career counselors, the ultimate goal of this proposal is to provide unambiguous evidence about how information systems can improve training outcomes for prospective trainees. With the earnings divide between skilled and unskilled workers at a historic high, it is imperative that we raise overall workforce skills in order to enhance America’s competitiveness and ensure economic growth for all Americans.

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Using Data to Improve the Performance of Workforce Training -- Full Paper

Authors

Louis Jacobson
Robert J. LaLonde

Publication: The Hamilton Project

Image Source: Catherine Yeulet

The Paradox of Worker Shortages at a Time of High National Unemployment

Darrell M. West — Wed, 10 Apr 2013 16:56:00 -0400

At a time of high national unemployment, it has become a truism that there are few worker shortages and employers have numerous applicants for every available slot. After all, that is the very definition of joblessness. High unemployment results when there are many more workers seeking positions than available jobs.

Yet the paradox of the contemporary situation is that in this time of stubbornly high unemployment, a number of fields report a shortage of American workers and problems filling key positions. For example, even as the country as a whole experiences high unemployment, the Bureau of Labor has found that there are over 3.5 million open jobs – openings across the country and across sectors. In some specialized sectors, such as high-tech, advanced manufacturing, and medical specialties, unemployment rates are as low as three, four, or five percent. And on the labor-intensive side of the economy, agricultural companies report difficulty finding workers to pick vegetables and fruits, and hotels and restaurants indicate they have problems filling key positions.

The ripple effects of job vacancies spread throughout the economy. Companies that have been unable to fill key positions have closed down, moved entire operations abroad or delayed expansion plans. Conversely, filling worker shortages allows companies to better compete, grow, and create more jobs for American workers.

This report aims to provide a roadmap for where worker vacancies exist, and how they can most effectively be filled to help companies grow and expand. Labor shortages are identified through analysis of job outlook surveys, government reports, and interviews with business and labor leaders. To estimate the impact of filling these shortages in specific industries across the economy, interviews were conducted with business and labor leaders in the accommodation, agriculture, food service, health care, manufacturing, technology, and life sciences sectors.

The data and interviews confirm that worker shortages exist in each of the sectors, and that these shortages cannot be filled by available American workers, even with high unemployment across the nation, due to retirements, demographic gaps, geographic differentials, and the failure of educational institutions to deliver employees in key sectors. Examples of the costs of shortages in various industries include:

Agriculture: Lack of access to workers has led to (1) food processing operations for frozen broccoli and cauliflower moving to Mexico, (2) some of the nation’s most productive farms closing down, and farmers from states like Wisconsin, North Carolina, Maryland, Louisiana, and Washington delaying expansion plans.
Health Care: At a time where increased retirements and new mandatory health insurance promise to dramatically increase the demand for medical care, 30 percent of hospitals are already reporting shortages in specialty services. The shortages of nurses alone are estimated to top 115,000. 80 percent of hospital CEOs are currently making efforts to increase the number of primary care physicians.
Manufacturing: Employers in the manufacturing sector report difficulty filling available high-skilled positions. Even at the height of the Great Recession in 2010, companies reported 227,000 open jobs. Factory owners note that is difficult to bring manufacturing jobs back when they cannot find the talent they need to expand.
Technology: Microsoft has 200 employees in its software center in Vancouver because it couldn’t get engineers into the US. Google developed its news aggregator outside the US for similar reasons, and companies like ON Semiconductor in Phoenix are revving up their overseas hiring because they cannot find workers in the US. The problem is especially acute at the governmental level, where more than half of state governments (54.8 percent) report difficulty filling vacant IT positions.

There are two potential ways to fill these gaps, and both should play an important part in the country’s economic recovery. The first is to retrain American workers to ensure that their skill sets match the needed requirements. The second is to take advantage of foreign workers with the skill set and mobility to fill the existing gaps.

These two solutions to worker shortages—training American workers and bringing in foreign-born workers—need not be in opposition. There are two competing theories on the role of immigrant labor in America – do they compete with or complement American workers? In the framework of compete, the American economy and labor force are seen as a zero-sum game and every job taken by an immigrant workers is one less job for an American worker. But economies are more complex than that, growing and generating new jobs as companies innovate and expand, creating new jobs, or in some cases, new industries and sectors of the economy. In this context, immigrant workers can be seen as complementing American workers. Immigrants tend to have different skill sets and different education levels than American workers.

They are more likely to have a PhD and less likely to have finished high-school. As a result, immigrant workers can complement American workers by filling in specialized roles at both ends of the economy.

The findings presented in this paper are consistent with prior research in this area. For example, research by the World Economic Forum and the Boston Consulting Group projects that within the decade there could be as many as “20 million vacant U.S. jobs unless the current education-to-employment system undergoes significant changes.” The takeaways from these findings are clear. Addressing worker shortages — whether through job retraining or immigration—is a necessary part of our economic recovery that will create more American jobs.

When skill and labor shortages aren’t met, the economy suffers. A smart immigration system can help prevent this by filling needs so companies can expand operations in the U.S. and don’t have to move them overseas. But America’s immigration system is not designed for today’s economy, and remains largely unchanged since 1965. In fact, of the approximately one million green cards given out by the U.S. in 2011, around 139,000 (or 13 percent) were given out for economic reasons, a number far too small to meet the needs of the world’s largest economy. By comparison, Canada provides a much higher percentage of employment-based visas than the U.S. even though it has a much smaller population. America’s immigration system must always help families reunite and provide a safe harbor for refugees and asylum-seekers. But as America rethinks its immigration system, there is a unique opportunity to secure growth and prosperity by ensuring that it meets the needs of a 21st century economy.

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Authors

Darrell M. West

An American Future Filled with Promise

Michael E. O'Hanlon and Gen. David Petraeus — Mon, 08 Apr 2013 12:29:00 -0400

As politicians in Washington focus on reining in America’s worrisome deficit, they tend to have attitudes of doom and gloom. They convey fears of shortchanging future generations, overtaxing workers, depriving the needy, killing the fragile economic recovery and failing to make crucial investments.

This narrative contains elements of truth. But it is too pessimistic and contributes to our psychological and political paralysis, reinforcing convictions held by members of both parties that they must not yield on core principles, lest the country’s future be compromised. There is, however, a more positive and more accurate reality. The United States could be on the threshold of a period of remarkable progress. It has a number of unique opportunities, including:

An energy revolution. We are the world’s largest producer of natural gas, with a 100-year supply, and we are on track to become among the largest producers of crude oil.
A manufacturing revolution. We are rapidly developing robotics and 3-D printing, areas in which the United States is among the world’s leaders.
A revolution in life sciences. Genetics and stem-cell technology offer great potential in fields such as agriculture and pharmaceuticals and fundamentally new approaches in medicine.
The IT revolution and the transition to cloud computing, in which we are also leading.

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Authors

Michael E. O'Hanlon
Gen. David Petraeus

Publication: The Washington Post

Bad News in March: Tepid Job Gains and a Shrinking Workforce

Gary Burtless — Fri, 05 Apr 2013 10:49:00 -0400

Employers added only 88,000 workers to their payrolls in March, far off the pace of job gains in the previous six months. Between August 2012 and February 2013 payrolls grew at an average rate of 197,000 a month; private payrolls rose slightly faster than 205,000 a month. The much slower pace of job gains in March may foreshadow a slowdown in payroll growth over the next few months as fiscal contraction at the federal level begins to bite.

Employment gains reported in the household survey show an even bleaker picture of the job market. The number of adults in the household survey who report holding a job fell 206,000 in March, capping a 5-month period in which reported employment losses have averaged 34,000 a month. The unemployment rate declined 0.3 percentage points between October and March, and 0.1 percentage point in March, because the labor force shrank an average of 137,000 a month during the period.* The labor force participation rate reached a 35-year low in March, dipping to just 63.3% of the adult population. The last time the participation rate was this low was in the Carter Administration.

A small part of the recent drop in the labor force is traceable to population aging. The large baby boom generation is now in its 50s and 60s, ages when participation in the workforce falls rapidly. However, most of the drop since last November is explained by continued weakness in the job market and the decline in the availability of long-term unemployment benefits. When it is hard to find a job, some workers become discouraged and stop looking. Others who would be expected to join the workforce fail to do so. Some workers who cease looking do so because they’ve exhausted their eligibility for unemployment benefits. In order to collect an unemployment check nearly all laid-off workers must actively search for a new job. They have less reason to pore over want ads and pound the pavement when their unemployment check stops. As the maximum duration of regular and extended benefits has been scaled back, laid-off workers are now exhausting their unemployment benefits sooner after a layoff than was the case a year or two ago.

The March jobs report shows some continued areas of strength. The average workweek edged up 0.1 hours. Employment in the construction industry increased for the 10^th consecutive month, though at a slower pace. Professional and business services and the health care sector also showed continued strength. Retail employment, however, fell 24,000 after enjoying a year of solid gains.

As usual, government payrolls shrank in March, falling 7,000, about the average rate of monthly decline in the previous year. Federal government employment declined 14,000 in March, more than offsetting small gains in state and local government employment. The drop in federal government payrolls accounts for almost two-thirds of the overall drop in public employment over the past year. Policymakers in Washington seem intent on scoring an own goal. Not only have they adopted fiscal policies that weaken demand for private-sector workers, they are directly contributing to the nation’s job woes by trimming the government workforce and reducing the annual pay of federal employees. Job seekers will have to hope that continued strength in the private sector prevails against these headwinds.

* The estimated 5-month changes in employment and the labor force account for BLS’s annual population adjustments in January.

Authors

Gary Burtless

An Evidence-Based Approach to Improving Worker Training Programs

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 05 Apr 2013 09:13:00 -0400

The pace of job gains slowed last month, according to the Bureau of Labor Statistics. In March, the economy added 88,000 jobs, down from the higher-than-expected gains of 148,000 and 268,000 jobs in January and February, and below the average monthly gain of 169,000 per month recorded over the prior 12 months. The unemployment rate was little changed at 7.6 percent and the fraction of the population with a job edged down. Since March 2012, the unemployment rate has declined from 8.2 percent to 7.6 percent, but much of this decline appears to reflect changes in labor force participation--the fraction of the population employed is unchanged over the year. Over the last twelve months, the private sector has added roughly 2 million jobs; in contrast, employment in state, local, and federal governments has declined by more than 75,000.

Reducing unemployment and building the foundation for a more robust job market are just two of the challenges facing policymakers at every level of government. But given today’s austere budget outlook, the resources available to address the nation’s most pressing problems—from recidivism to school readiness to obesity to workforce development—are shrinking. Indeed, continuing to make progress on these social issues necessitates producing more value with each dollar that the government spends. The solution is to take advantage of the tremendous opportunities for using data and evidence to identify the highest-payoff uses of taxpayer dollars.

One area where better use of evidence could significantly improve outcomes for many individuals is workforce training programs. Covering a wide range of fields—from information technology to healthcare to auto repair—these programs offer the prospect of boosting incomes, increasing employment, and improving the nation’s productivity. Too often, though, these benefits go unrealized, largely because prospective trainees have little access to the information and guidance necessary to make well-informed decisions. These lost opportunities are especially poignant in the current environment of elevated unemployment.

In this month’s employment analysis, The Hamilton Project explores how policymakers can better gather and disseminate evidence on worker training programs to help displaced and low-income workers determine which programs can help them find employment and increase their earnings most effectively. We also continue to explore the “jobs gap,” or the number of jobs that the U.S. economy needs to create in order to return to pre-recession employment levels.

The Potential of Training Programs

Education, in some form or another, has always been the key to the American Dream, as the development of new skills—paired with hard work and good fortune—leads Americans to better jobs and increased prosperity. For some, these skills are gained in primary and secondary school and culminate in a four-year college degree. But many others, particularly students pursuing career or technical training, obtain important education and skills at community colleges or through other workforce development programs that can help them secure a good job.

Indeed, for some workers, the benefits of worker training programs are large. The chart below, which draws on cutting-edge research and data systems from Florida, shows that students who complete two-year degrees in high-return fields, or who complete two-year programs that lead to four-year degree programs, earn more than $35,000 per year after graduating. Students who receive certain career-oriented certificates earn similar salaries.

But these positive outcomes are too often the exception rather than the rule. Students who complete low-return programs or who drop out before finishing a degree earn 33 percent less than their counterparts in high-return programs. The median salary for those who complete two-year degrees with low returns is a mere $24,100. As the light green bars in the figure above show, the vast majority of students fall into these lower-earning categories. More than 40 percent take less than a year of credits before leaving school, almost a quarter spend more than a year in community college before dropping out without a degree or certificate, and another 12 percent complete a degree in a field that does not lead to a good-paying job.

What is most concerning about these results is that the qualifications of many of these students are similar across the groups. Many, for example, have comparable high-school GPAs and work experiences. Yet too many end up in programs that they are unlikely to complete, or complete programs that are unlikely to raise their earnings. And furthermore, even more workers who could benefit from training fail to enter programs at all because they are unsure of the potential benefits. The result is that the economic opportunities of training for these workers are not adequately realized.

Developing and disseminating information on the effectiveness of various training programs, and helping prospective students use that information in their decision-making, are important parts of the solution. Today, prospective students make their enrollment decisions without knowing whether they are likely to succeed within a particular program, or whether they are likely to find a good-paying job in that field after completion. Gathering the information necessary to help students make better choices and guiding trainees to more appropriate courses of study could help increase the returns students realize on their investments of time and money.

The March Jobs Gap

As of March, our nation faces a “jobs gap” of 10.1 million jobs. The chart below shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close under different assumptions of job growth. The solid line shows the net number of jobs lost since the Great Recession began. The broken lines track how long it will take to close the jobs gap under alternative assumptions about the rate of job creation going forward.

To explore the outcomes under various job creation scenarios, you can try out our interactive jobs gap calculator by clicking here. You can also view the jobs gap chart for each state here.

Conclusion

Workforce development programs are just one example of how the use of evidence in policymaking can create government programs that more effectively serve the American people. Evidence-based policymaking allows lawmakers, in essence, to do more with less. While this is especially important in today’s era of tight budgets, a key goal of government—regardless of the fiscal climate—is always to achieve the most social good with taxpayer dollars.

To that end, The Hamilton Project, in partnership with Results for America, will host an event and release two new proposals on April 17th focusing on the importance of evidence in policymaking. A new paper by Louis Jacobson and Robert LaLonde provides a roadmap for using evidence to guide students to higher-return training programs that could vastly increase the economic benefits of career and technical education. A second proposal by Jeffrey Liebman discusses how the federal government can adopt strategies for more effective evidence-based policymaking across the board. The event will also feature a roundtable discussion with Senators Rob Portman (R-OH) and Mark Warner (D-VA), Chairman of the President’s Council of Economic Advisers Alan Krueger, and former U.S. Treasury Secretary Robert E. Rubin on the importance of evidence in driving public dollars toward policies that work.

The full agenda for the event can be found here. For more information about the event and new papers, follow us on Twitter @hamiltonproj and join the conversation using #evidenceworks.

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

Jobs Alone Do Not Explain the Importance of Manufacturing

Scott Andes and Mark Muro — Wed, 03 Apr 2013 12:41:00 -0400

When it comes to American manufacturing the U.S. media seems a bit confused. Last year, a bunch of stories (example here) argued that manufacturing job losses over the last decade don’t matter because productivity looks so good. Now, stories like this one are suggesting that manufacturing itself doesn’t matter much after all because the sector isn’t creating enough jobs. The current argument in vogue maintains that job growth figures just haven’t been robust enough in manufacturing to warrant policies that support the sector.

What the authors miss is mass employment is not the fundamental reason we need a healthy and vibrant manufacturing sector. Manufacturing—or rather advanced manufacturing—is essential to the U.S. economy because it is the main source of innovation and global competitiveness for the United States. Simply put, advanced manufacturing is the U.S. pipeline for new products and productivity-enhancing processes. While the sector makes up just 11 percent of the economy, manufacturers conduct 68 percent of private sector R&D, as reported by our colleagues Sue Helper and Howard Wial last year. And on average, they noted, 22 percent of manufacturers introduce new processes to increase productivity compared to just 8 percent of non-manufacturers. This is important because innovation that emerges from America’s manufacturing sector also fuels growth within the service sector because intermediary goods—the machines used by services (e.g. automated self check-out kiosks at grocery stores)—drive service sector productivity.

Some ask, meanwhile, why the nation should not simply import the advanced machinery needed for service-sector productivity. The problem with this argument is that services are, and will remain, largely non-traded. Regardless of how productive services become, the sector’s growth will be tethered to domestic demand. No amount of efficiency will allow a domestic grocery store to service international consumers. If the U.S. economy becomes one in which the U.S. imports all of the machinery that makes the service sector productive and no longer export any products of our own then inevitably we will consume more than we produce and incomes in services and manufacturing will decline. This is overwhelmingly clear in recent trade statistics. In 2012 manufacturing represented roughly 60 percent of U.S. exports despite only being 11 percent of the economy. By punching far about its weight class in exports the manufacturing sector is vital to U.S. global competitiveness.

In sum, the number of jobs within manufacturing is important, but taken by themselves employment figures miss the real reason manufacturing is an American imperative. U.S. quality of life, the ultimate benchmark of the direction of the economy, is contingent upon the competiveness of our traded sector and the speed at which innovative products and processes reach the market. On both metrics manufacturing is essential.

Authors

Scott Andes
Mark Muro

Unemployment Projected to Rise Very Slightly to 7.8% for March

Regis Barnichon — Wed, 03 Apr 2013 00:00:00 -0400

The unemployment numbers for February were in line with last month's forecast: The labor market keeps improving thanks to a slow but steady improvement in hiring. However, progress remains very slow, and I project a jobless rate of 7.8% in March, going down to 7.6% by September 2013.

This post discusses my monthly update of the Barnichon-Nekarda model. For an introduction to the basic concepts used in this post, read my introductory post (Full details are available here.)

In February, the unemployment rate was 0.2 percentage point lower than in January, in line with my February forecast (see Table 1), but the decline was a little faster than anticipated. This is mostly due to a stronger than expected decline in the rate of job separation (the EU rate, comprised mostly of layoffs), as can be seen in Figure 2.

Going forward, the model sees that stronger decline in layoffs as transitory, and I anticipate the unemployment rate to tick back up slightly to 7.8% in March (specifically, from 7.74%, rounded to 7.7% in February, to 7.79%, rounded to 7.8% in March), reversing some of the gains on the layoff front. Thereafter, improvements in the labor market will continue, albeit at a slightly slower pace than anticipated in February, and I project the unemployment rate to decline slowly over the next 6 months to reach 7.6 % by September 2013.

The intuition for this forecast is easily understood by looking at the projected behavior of the “steady-state” unemployment rate. The steady-state unemployment rate, the rate of unemployment implied by the underlying labor force flows—the blue line in figure 5—stands currently at 7.4% (unchanged from February). Our research shows that the actual unemployment rate converges toward this steady state. With a steady-state unemployment rate at a lower level than the actual rate, this "steady-state convergence dynamic" is now pushing the unemployment rate down. However, because the difference between actual and steady-state rates is small (7.7% versus 7.4% in February), the force pushing the unemployment rate down is weak, and the decline in the unemployment rate is slow.

Over the next six months, the model propagates forward its best estimate for how the flows between employment, unemployment and out-of-the labor force will evolve over time, and constructs the implications for the steady-state unemployment rate and hence the actual unemployment rate. In February, job openings decreased, indicating a possible moderation in the (already slow) pace of hiring. Taking this new information on board, and compared to February, the model now predicts an even slower increase in workers’ job finding rates (figure 3) over the next 6 months. As a result, the steady-state unemployment rate is now projected to decline to only 7.4% by September 2013, instead of 7.2% in my February forecast, implying a slower decline in the actual unemployment rate.

Finally, let me end this post with a few words of congratulation for the model’s remarkable performance over the past 6 months: Back in October, for the first update of this series of monthly forecasts, the model predicted that "Unemployment [was] Likely to Stay Around 7.8% for Six Months," and this is exactly what happened. Of course, this need not always be the case, but this is a notable achievement that speaks for the potential of this new approach to forecasting unemployment.

Authors

Regis Barnichon

GCI Atlanta: Greater Atlanta and the Next Economy

Bruce Katz — Wed, 20 Mar 2013 00:00:00 -0400

Editor's Note: On March 20, 2013, Brookings vice president Bruce Katz spoke at the Metro Atlanta convening of the Global Cities Initiative, a joint project of Brookings and JPMorgan Chase to catalyze high-level discussions of metropolitan leadership in the world economy and the actions metro leaders can take to improve trade relationships with cities in mature and rising markets. Hosted by the Georgia Institute of Technology, the forum brought together distinguished regional, national, and international leaders from the business, civic, government, and philanthropic communities to explore how the Atlanta metropolitan area can enhance its ability to compete globally.

Bruce Katz - Global Cities Initiative

View the roundtable agenda »

Authors

Bruce Katz