Edward Conard

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  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
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Macro Roundup


Thursday, March 21, 2019

AI Summary. Unemployment rates for less-advantaged workers — including Black and Hispanic workers and those without a college degree — are more cyclically sensitive, rising more in downturns and falling more in expansions than those of more advantaged groups. This indicates high-pressure economies deliver disproportionate employment gains to these groups, though their labor force participation and employment-to-population ratios remain lower.

Stephanie R. Aaronson Brookings Papers on Economic Activity
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Tight labor markets boost employment of marginal workers, such as blacks, Hispanics, and those without a college degree, increasing their opportunities. @StephanieRAaronson

Do less-advantaged workers gain disproportionately from a strong economy?

Core argument: Unemployment rates for Black workers, Hispanic workers, and those without a college degree are more cyclically sensitive than those of more advantaged groups, rising more in downturns and falling more in expansions.

In tight labor markets, employment opportunities for marginal workers, such as blacks, Hispanics, and those without a college degree, increase significantly. The unemployment rates for these groups are more cyclically sensitive, rising more in downturns and falling more in expansions, compared to their more advantaged counterparts. This indicates that when the economy strengthens, these less-advantaged groups experience disproportionate improvements in employment. However, their labor force participation rates and employment-to-population ratios remain lower than those of more advantaged groups. The data suggests that high-pressure economies provide greater benefits to these groups, although the extent of these benefits varies across different economic cycles.

Takeaways by Macro Roundup® AI

  1. Unemployment rates for Black workers, Hispanic workers, and those without a college degree are more cyclically sensitive than those of more advantaged groups, rising more in downturns and falling more in expansions.
  2. Tight labor markets increase employment opportunities for marginal workers, with less-advantaged groups experiencing disproportionate employment improvements when the economy strengthens.
  3. Labor force participation rates and employment-to-population ratios for less-advantaged groups remain below those of more advantaged groups, and the benefits of high-pressure economies vary across economic cycles.

Stephanie R. Aaronson, Mary Daly, William Wascher and David Wilcox, "Okun Revisited: Who Benefits Most From a Strong Economy?" Brookings Paper's on Economic Activity, March 8, 2019, https://www.brookings.edu/wp-content/uploads/2019/03/Okun-Revisited-Who-Benefits-Most-From-a-Strong-Economy.pdf

"....We use two variables: annual own income (sum of all earnings and all other income) and annual household income (sum of all income across all household members). All measures from the ADF are annual and refer to the years 1988 to 2017, corresponding to the calendar year preceding the survey year. In line with previous research we focus our attention on 25-64 year olds because this age group consists of individuals who are most likely to be finished with schooling and below normal retirement age. Within this group we examine the relative outcomes of historically less advantaged groups defined by race, gender, and educational attainment. We define three mutually exclusive groups for race and ethnicity: African Americans/blacks (we will use the terms interchangeably); Hispanics or Latinos (again, we will use the terms interchangeably); and whites.....A key feature evident in figure 2 is that fluctuations in the unemployment rates for African Americans and Hispanics—both males and females—are roughly synchronized with fluctuations in the unemployment rate for whites (top tier of panels). However, these rates are uniformly higher than the rates for white men and women and exhibit considerably greater amplitude. As a result, when the labor market weakens, the gaps between these rates widen markedly; they then shrink again when the labor market tightens. Compared to the unemployment rate, the labor force participation rate (middle tier of panels) is considerably less cyclically sensitive. A much greater fraction of the variation in the gaps in labor force participation rates across different races and ethnicities appears to reflect secular trends. Overall, black men have lower labor force participation rates than white or Hispanic men. Among women, Hispanic women participate at a lower rate than either black or white women. Finally, the employment-to-population ratio (EPOP), which combines the information in the unemployment rate and the labor-force participation rate, also varies considerably over the business cycle.9 In terms of levels, black men and Hispanic women have lower EPOPs than their counterparts, reflecting both their lower rates of labor force participation and higher unemployment rates....Figure 3 presents similar information for groups at different levels of educational attainment. On average, the unemployment rates (top two panels) of individuals without a college degree are more cyclically sensitive, rising by more in downturns and falling by more in expansions. At all points the unemployment rates for those without a college degree are higher than the rates for those with a college degree....On average, the unemployment rates (top two panels) of individuals without a college degree are more cyclically sensitive, rising by more in downturns and falling by more in expansions. At all points the unemployment rates for those without a college degree are higher than the rates for those with a college degree. Labor force participation rates and EPOPs (the middle and lower panels) are lower for those with less education.Similar to the results by race and ethnicity, labor force participation exhibits very little observable cyclical sensitivity. EPOPS are slightly more cyclical. The gaps in both LFPRs and EPOPs by educational attainment are large and persistent.....That said, there is very little visual evidence that the strength of the labor market affects the gaps in these variables across less-advantaged and more advantaged groups. In general, these aggregate income measures for blacks and Hispanics are far lower than the analogous measures for whites; similarly, the average incomes of those with lower educational attainment are well below those of persons with higher educational attainment....... A few observations seem clear. First, as previous researchers have shown, when the economy gets weak everyone suffers and when the economy gets stronger, everyone benefits. This is seen most clearly in unemployment rates: Over our entire sample, the unemployment rates of each group we study moves in tandem with the aggregate unemployment rate. Second, like others, we also find that the fluctuations of less advantaged groups including blacks, Hispanics, and those with less than a college education are more pronounced. When the labor market weakens, these groups tend to suffer disproportionately; when it recovers, their experience improves disproportionately.Third, inspired by Arthur Okun, we have also searched for evidence that high-pressure economies are qualitatively different, and found suggestive evidence that this is the case. A high-pressure economy does afford greater improvement for some less-advantaged groups in some key labor market variables, although the evidence is complicated by the heterogeneity observed across the various cycles. Finally, we also find suggestive evidence that these benefits persist at least for a while. All in all, the evidence presented here supports the idea that high-pressure economies are different than normal expansions, but just how different remains a topic of further study...."

Fed economist are presenting this at Brookings tomorrow. Supports your view of the high cost of low skilled workers, paper finds that tight labor markets boost the employment of marginal workers, "...Over our entire sample, the unemployment rates of each group we study moves in tandem with the aggregate unemployment rate. Second, like others, we also find that the fluctuations of less advantaged groups including blacks, Hispanics, and those with less than a college education are more pronounced. When the labor market weakens, these groups tend to suffer disproportionately; when it recovers, their experience improves disproportionately...."

Ed Comment:3 possibilities: Low skilled are high cost because they require a lot of supervision. So you only hire them if you have to. Either value/cost nears 1 or value-cost nears zero. Not sure how to think about it but 2/1=2 and 2-1=1 whereas 20/10= 2 but 20-10=10. In the additive case, you make money on high skilled. so when push comes to shove you fire low skilled. However you sure hire what you need for the job you have ie you don't hire an expensive high skilled guy for as low skilled job. Or the cost to fire and replace a low-skilled is cheaper because it's cheaper/easier to evaluate them without them having to work for you. You save the workers who are expensive to replace. This has a cascading effect because employers know who the good employees are and keep them so the pool of available hard to evaluate workers is poor. Persumably, high skilled is hard to evaluate. Or it could be that mistaken high skilled workers are more costly to fire because you have to offer them more protection to hire them. Although that should 1) make you more reluctant to hire them and affect the second point above. Presumably all the effects are at work.

AI Summary. Real risk-free interest rates fell over three decades while returns on private capital held steady or rose, widening the gap between public and private returns. The authors attribute about half of that widening spread to rising market power and half to increased macroeconomic risk, with accounting for intangibles reducing the market-power share.

Emmanuel Farhiy Brookings Papers on Economic Activity
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Market power and macroeconomic risk may have driven a rising equity risk premium since 2000, according to @EmmanuelFarhiy.

Why has the gap between private capital returns and risk-free rates widened?

Core argument: The average real one-year risk-free rate fell from 2.8% in 1984–2000 to -0.3% in 2001–2016, while the long-term real rate dropped from 3.9% to 1.1%.

Over the past 30 years, real risk-free interest rates have declined, with the average one-year rate dropping from 2.8% (1984-2000) to -0.3% (2001-2016), and the long-term rate falling from 3.9% to 1.1%. Despite this, the return on private capital has remained stable or increased, leading to a growing gap between public and private returns. This divergence is primarily driven by rising market power and macroeconomic risk, suggesting that the equity risk premium may have risen since 2000. The study finds that about half of the increase in the spread between private capital returns and the risk-free rate is due to rising market power, with the other half attributed to increased risk. Incorporating intangibles reveals a significant unmeasured component contributing to this trend, reducing the estimated role of market power while maintaining the impact of risk.

Takeaways by Macro Roundup® AI

  1. The average real one-year risk-free rate fell from 2.8% in 1984–2000 to -0.3% in 2001–2016, while the long-term real rate dropped from 3.9% to 1.1%.
  2. Returns on private capital remained stable or rose even as risk-free rates declined, widening the spread between private and public returns, which the study attributes about half to rising market power and half to increased risk.
  3. Incorporating intangibles reveals an unmeasured component behind the widening spread, reducing the estimated role of market power while leaving the contribution of risk intact, and the study suggests the equity risk premium may have risen since 2000.

Paper Martin Sandbu mentioned

"....Real risk-free interest rates have trended down over the past 30 years. Puzzlingly in light of this decline, (1) the return on private capital has remained stable or even increased, creating an increasing wedge between public and private rates of return; (2) stock market valuation ratios have increased only moderately; (3) investment has been lackluster....Our main empirical result here is that the rising spread between private and public capital is driven mostly by a confluence of two factors: rising market power and rising macroeconomic risk. This rising macroeconomic risk in turns implies that the equity premium, which previous researchers have argued fell in the 1980s and 1990s, may have risen since 2000.Moreover, we show how previous researchers, who have used models without risk, have attributed too big a role to rising market power. We also find little role for technical change. Our estimates offer a better understanding of the drivers of investment, profitability, and valuation ratios. Finally, stepping outside of the model, we provide further independent corroborative evidence of the increase in the equity premium using simple reduced-form methods. When we incorporate intangibles, we see that a significant increase in their unmeasured component can help explain the rising wedge between the measured marginal product of capital and the risk-free rate. Interestingly, we find that intangible capital reduces the estimated role of market power in our accounting framework, while preserving the role of risk.... Table 1 shows that the average one-year rate falls from around 2.8% in the first half of our sample (1984-2000) to -0.3% in the second half of our sample (2001-2016). The long-term rate similarly falls from 3.9% in the first half to 1.1% in the second half....We provide a simple accounting framework that allows decomposing the changes observed over the past 30 years in some key macro-finance trends into “semi-structural”parameters using a fairly clear identification. We say “semi-structural” because, allowing these parameters to vary over time flexibly suggests they are not microfounded and invariant to policy. Yet we find the results useful because deeper explanations have to be consistent with the changes of parameters implied by our approach. We find that about half of the increase in the spread between the return on private capital and the risk-free rate is due to rising market power, and half due to rising risk. Technical change plays little role. Higher savings supply and higher risk are the prime proximate contributors to the decline of the risk-free rate. Rising market power help explain the evolution of the capital share, profitability, and capital accumulation, but its contribution is substantially overstated if the model is estimated using a macro approach that abstracts from risk. Finally, taking into account intangibles reduces further the estimated increase in the market power. One limitation of our approach is that we treat the parameter changes as independent causal factors, but they might actually be driven by common causes; for instance, higher market power might reduce innovation and hence productivity growth, but we treat these as independent. Our analysis also does not incorporate some factors which could help explain the evolution of some of the big ratios that we study. In particular, we abstract from taxes and from agency issues (e.g. external finance or corporate governance frictions) or market incompleteness, that could also give rise to wedges that might vary over time. Our study of transitional dynamics is only scratching at the vast possibilities. Finally, it would be interesting to study these issues taking into account the specific open economy considerations or at least to study these same facts for a variety of countries...."

Emmanuel Farhiy and FranÁois Gourioz, " Accounting for Macro-Finance Trends: Market Power, Intangibles, and Risk Premia," Brookings Papers on Economic Activity, September 13, 2018, https://www.brookings.edu/wp-content/uploads/2018/09/BPEA_Fall2018_Accounting-for-Macro-Finance-Trends.pdf

Monday, March 25, 2019

AI Summary. The U.S. labor force participation rate for those aged 16 and over has stabilized near 63%, countering a decline that ran from 2001, and the number of people outside the labor force fell by 1m over six months. The gains are concentrated among 25-to-54-year-olds, including workers with disabilities and those previously discouraged from job-seeking.

Ernie Tedeschi Wall Street Journal
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Strong economy offsets demographic headwinds, defying predictions of continued labor force participation declines, according to @ErnieTedeschi of Evercore ISI.

Is a strong economy reversing the projected decline in labor force participation?

Core argument: The U.S. labor force participation rate for those aged 16 and over has stabilized near 63% since bottoming out in September 2015, countering a decline trend in place since 2001.

Since bottoming out in September 2015, the Labor Force Participation [LFP] rate for those aged 16 and over has stabilized around 63%, countering a decline trend since 2001. In the past six months, the number of people outside the labor force decreased by 1m, marking the largest such decline on record. This improvement is primarily driven by 25 to 54-year-olds, with participation rising by 0.6 percentage points for men and 1.5 points for women since 2014. Notably, higher participation rates among workers with disabilities or those previously discouraged from seeking employment have contributed significantly to this trend, as analyzed by Ernie Tedeschi of Evercore ISI. The strong economy has thus played a crucial role in offsetting demographic headwinds, defying earlier predictions of continued LFP declines.

Takeaways by Macro Roundup® AI

  1. The U.S. labor force participation rate for those aged 16 and over has stabilized near 63% since bottoming out in September 2015, countering a decline trend in place since 2001.
  2. The number of people outside the U.S. labor force fell by 1 million over the past six months, the largest such decline on record.
  3. The participation improvement is driven primarily by 25-to-54-year-olds, up 0.6 percentage points for men and 1.5 points for women since 2014, with higher rates among workers with disabilities and previously discouraged workers, per Ernie Tedeschi of Evercore ISI.

".... Since bottoming out in September 2015, the share of the population aged 16 and over working or looking for work has stabilized around 63%, cutting against an extended decline tracing back to 2001.Many economists had been predicting continued declines in the rate. In just the past six months, the number of people outside the labor force has fallen by 1 million, the largest such decline on record..... Most of the improvement comes from 25 to 54-year-olds. Among prime-age workers, participation has risen by around 0.6 percentage point for men and 1.5 points for women since 2014. Most of the increases have stemmed from higher participation rates by workers who reported that they had a disability or were discouraged, meaning they wanted to work but stopped actively seeking employment, according to an analysis by Ernie Tedeschi, an economist at Evercore ISI....."

Nick Timiraos and Sarah Chaney, "Fueled by Strong Economy, U.S. Labor Force Defies Projected Declines,"Wall Street Journal, March 23, 2019, https://www.wsj.com/articles/fueled-by-strong-economy-u-s-labor-force-defies-projected-declines-11553338801