Macro Roundup

The labor force participation rate for 20-24 year-olds has dropped to 70.8% relative to a pre-pandemic level of 72.1%, without a corresponding increase in educational enrolment

Bryan Mena, "Labor Market Mystery: Where Are the Older Gen Z Workers?"Wall Street Journal, November 13, 2022, https://www.wsj.com/articles/labor-market-mystery-where-are-the-older-gen-z-workers-11668278379

Labor Market Mystery: Where Are the Older Gen Z Workers?

The exodus from the labor force in the pandemic’s early months has mostly reversed, but one group remains oddly absent: people in their early 20s.

For people over age 15, the labor-force participation rate—the share of people employed or actively seeking a job—dropped from an average of 63.1% in 2019 to 61.7% in 2021, and recovered to 62.2% in October. But for people ages 20 to 24, participation that averaged 72.1% in 2019 stood at just 70.8% in October.

That equals a shortfall of about half a million workers in their early 20s when comparing the current size of that workforce with 2019 levels.

Those reasons don’t apply to people in their 20s, who are usually just starting out in their careers.

Demand for workers is intense. As states reopened their economies in 2021, employers were competing from a smaller pool of available workers. Wages rose robustly, job openings became plentiful and some employers even reduced their requirements to fill jobs.

That did the trick in luring 16- to 19-year-olds into the workforce, and they raked in the fastest wage increases of any age group last year. That group’s participation rate averaged 36.2% in 2021, the highest since 2009, and has since climbed to 36.6% this year through October.

Economists cite several possibilities for why so many people in their early 20s stayed on the sidelines.

In the past, a decline in labor-force participation among younger people has usually coincided with an increase in their school enrollment, generally reflecting higher relative demand for educated or highly skilled workers, especially in a weak labor market, economists said. That’s what happened during the 2007-09 recession—but it hasn’t been the case this time around.

About 1.5 million fewer students were enrolled in college this fall compared with before the pandemic, according to the National Student Clearinghouse, an educational nonprofit. College enrollment had been declining for a decade in part because of concerns about student debt and the rise of alternative credentials.

Overall enrollment in graduate and undergraduate programs across all ages was 3.2% lower in this fall semester versus two years ago. However, enrollment in graduate school among those ages 21 through 24 was 8.5% higher during the same period. That age group almost entirely drove the 1.6% increase in graduate-school enrollment from 2020 to 2022.

That might indicate that some workers in their early 20s aren’t working because they are pursuing a graduate degree, although some might be working while in school, said Andria Smythe, an economist at Howard University.

Workers in their early 20s may have decided to continue their education because of pandemic disruptions in 2020, when schools pivoted to online instruction.

“For a vast majority of students, going to college is just as much about the experience as it is getting the degree, so if that’s the case, they’ve missed out on the experience and want to figure out a way of getting it,” said Ron Hetrick, an economist at data-analytics firm Lightcast.

Some people in their early 20s are neither in school nor working. The Organization for Economic Cooperation and Development, an intergovernmental group that promotes economic growth, tracks the share of people who aren’t in employment, education or training, known as the NEET rate. The NEET rate for U.S. workers ages 20 to 24 rose from 14.67% in 2020 to 18.27% in 2021, the highest since 2014.

The NEET rate might have increased specifically for workers ages 20 to 24 because some of them might have dropped out of school in the early days of the pandemic when they were high-school seniors, according to Alejandra Grindal, senior international economist at Ned Davis Research Group.

“The NEET rate is always much higher among people who don’t even have a high-school education,” Ms. Grindal said.

These people appear to be disconnected from work, for reasons that include child care, the toll of long Covid, fear of catching Covid-19 and mental health.

An analysis of Census Bureau data by Gad Levanon, chief economist of The Burning Glass Institute, found workers in their early 20s who aren’t in school or the labor force overwhelmingly cited caretaking responsibilities, though the numbers hadn’t changed much since 2019. Covid-19 may also be keeping some of these workers on the sidelines.

Finally, 20-somethings might simply be waiting for the right job opportunity to come along, a luxury afforded by the ease of finding a job in the still-tight U.S. labor market.

“They might just be making decisions that are best suited to them and not necessarily rushing into the labor market to get the first job out there,” said Nicole Smith, chief economist of Georgetown University’s Center on Education and the Workforce.

Job openings began to soar in 2021 and have remained historically high this year. The number of workers quitting their jobs has also remained elevated, reflecting confidence in finding a new job.

“Movements like ‘work your wage’ and ‘quiet quitting‘ are very revealing of this changed mind-set for these young workers. They think that they have more bargaining power so some of them became more picky,” Justine Hervé, an economist at the Stevens Institute of Technology in Hoboken, N.J., said.

“Quiet quitting” and “work your wage” are both phrases popularized this year that mean working no harder than the job, or its pay, deserves.

Evidence from France suggests public research spending spills over to the private sector. Firms in the top 25% of exposure to academic funding increase their R&D effort by 20% relative to firms with the lowest exposure. "...Firms in the top quartile of exposure to increase their R&D effort by 20% compared to the bottom quartile. We exploit reports produced by funded clusters, complemented by data on labor mobility and R&D public-private partnerships, to provide evidence on the channels for these spillovers. We show that spillovers are driven by outsourcing of R&D activities by the private to the public sectors and, to a lesser extent, by labor mobility from one to the other and by informal contacts. A few years after the treatment, industry-location pairs exposed more to the local public research funding shock witnessed increased spending on R&D labor. Five years after treatment, we observe an increase of around 1.5% in R&D wage bill when the exposure of an industry in a commuting zone is doubled...."
“..We first propose a new measure of scientific proximity between public research groups and industrial sectors, allowing us to measure the exposure of private firms to the program. Based on this measure, we use the funding shock to estimate the causal impact of public research on private sector outcomes. We find that firms spatially and scientifically “close” to funded research groups increase their spending on R&D inputs and achieve higher levels of R&D outputs compared to less exposed firms…”

Three Primary Findings

“…Our first contribution is to construct a new measure of proximity. The key idea is to use the distance between the science used by firms and the science produced by research groups, as a proxy for the share of ideas produced by the research group which are relevant for a firm in a given industry.2 Importantly, this measure assigns a scientific position to firms rather than using the typical approach in the literature that attempts to assign a technological position to an academic group. An academic group and an industry can be close according to our measure, even if the papers published by the group are not yet cited in patents, and would thus be categorized as distant with the traditional approach. We then test and exploit this measure in the context of the LabEx program that selected 170 academic clusters in 2010 and 2011. These clusters bring together public researchers from different research units, not necessarily from the same institution, planning to work together on a common theme. The funding was run as a competition, with an international jury evaluating 436 proposals. We obtained a number of key pieces of data from the agency organizing the competition, for both accepted and rejected projects, in particular the full bibliography of the proposals and the grades awarded by the jury. The articles listed in the bibliography of the proposal are used to construct the proximity between LabEx projects and industrial sectors through the above procedure, while the identity and grades of rejected projects are the basis for various robustness checks.

“…Our second contribution is to use this natural experiment to estimate the causal effect of a positive shock in funding of public sector research on private sector R&D. For a given pair of commuting zone (henceforth “CZ”) and industry, we calculate exposure as the sum of funding obtained by the LabEx proposals in the CZ, weighted by the proximity of the LabEx to this industry. We then implement a difference-in-differences estimation that exploits the fact that a given industry in a given commuting zone will be more exposed to the shock if it is close technologically and geographically to a funded LabEx. We show that firms in high exposure pairs of CZ and sector significantly increase their employment in R&D after the start of the program, controlling for CZ specific time effects. The magnitude is large: a firm in the top quartile of exposure increases total spending on wages of R&D workers by more than 20% compared to the bottom quartile. We also find significant impacts on outputs of the R&D process in the more exposed sectors, in particular on the creation of new plants and on the production of new patents….”

“…Our third main contribution is to shed light on the channels through which the important spillovers from public to private research occur. There are three main candidates. First, spillovers could be due to direct collaboration between researchers in the academic cluster and the exposed firms (see e.g. Fernandes and Ferreira, 2013). Second, they could result from mobility of researchers from the public to the private sector or creation by these researchers of startups (see e.g. Agrawal and Henderson, 2002). Third, spillovers could simply be due to informal contacts between researchers from the public and the private sectors, for instance during events organized by the LabEx…”

The Evidence

R&D efforts

“..We first study how the financing of public research affects private R&D efforts. Figure 1 presents the results of the estimation of the dynamic model (equation (4)) using as outcome variable the total R&D wage bill (in log

"… We present the results using the continuous measure of exposure in Figure 1(a) and we show the effect by quartile of exposure in Figure 1(b). The results show that a few years after the treatment, industry-location pairs that were more exposed to the local public research funding shock witnessed an increase in spending on R&D labor. 5 years after treatment, we observe an increase of around 1.5% in R&D wage bill when the exposure of an industry in an commuting zone is doubled. This Figure also shows the absence of differential pre-trends in the years building up to the financing, which is evidence in support of our identification strategy. Figure 1(b) shows that the effect is mostly driven by pairs of industry-location that are in the top quartile of exposure. On average, these pairs increase their spending on employment in R&D by 20% compared to the least exposed units (which received no funding)...."

R&D outputs

“..The impact on patenting is explored in the second part of Table 3….To measure the effect of the LabEx program on the creation of new plants, we use the registry of plants administrated by the Insee and calculate the number of new establishments in each CZ and each sector. Table 3 shows a positive effect of LabEx exposure on the probability of creation of a new plant in an industry-CZ pair, corresponding to an increase of 0.2 percentage points when exposure doubles. Decomposing this effect between plant creation from new and incumbent firms shows that it stems almost entirely from new firms. The impact on patenting is explored in the second part of Table 3. As is standard in the literature, we use a Poisson regression to estimate the coefficient, which takes into account the very large number of observations with no patent. The baseline model yields an insignificant static coefficient along with non zero pre-trend. However, when sector-year fixed effects are added to the model, the coefficient becomes positive and significant and the pre-trends are no longer significant…”

Spillovers By Sector

“…. While an empirical comparison of the relative impact of these two instruments on private sector innovation is beyond the scope of this paper, we can shed light on the question of what sectors are more affected by these two instruments. To perform this comparison, we allocate the total funding of the two instruments by industry: the LabEx funding is allocated using the sum of exposures over all labs, while the research tax credit is using the claims made by firms. The results are presented in Figure 3. We see that the distribution of exposure to the LabEx program is much more skewed towards a few sectors. The two sectors that benefit the most are the scientific R&D (almost 30%) and the pharmaceutical sector (more than 20%).On the contrary the benefits of the CIR are much more evenly distributed across sectors, including in sectors where innovation should not be central, such as computer consultancy. This evidence is coherent with the idea that financing public research to spur private sector innovation might be a better instrument to target truly innovative firms than more direct tools such as tax credit programs. Comparing these instruments and understanding their complementarities is an important avenue for future research….”

Antonin Bergeaud, Arthur Guillouzouic, Emiric Henry and Clément Malgouyres, "From public labs to private firms: magnitude and channels of R&D spillovers,"London School Of Economics, October 2022, https://poid.lse.ac.uk/textonly/publications/downloads/poidwp041.pdf

Brad Plumer, Lisa Friedman and Somini Sengupta, "Developing Nations Have a Message at Global Climate Talks: Polluters, Pay Up,"New York Times, November 6, 2022, https://www.nytimes.com/2022/11/06/climate/loss-and-damage-climate-cop27.html

Developing Nations Have a Message at Global Climate Talks: Polluters, Pay Up

In Pakistan, flooding this summer killed 1,700 people and left one-third of the country underwater. In Fiji, entire villages are retreating inland to escape rising seas. In Kenya, persistent drought has killed livestock and devastated livelihoods.

They are among scores of developing countries that face irreversible damage from climate change but have done little to cause the crisis. And they are demanding compensation from the parties they see as responsible: wealthier nations that have burned oil, gas and coal for decades and created pollution that is dangerously heating the planet.

Across cultures and centuries, the idea that if you harm your neighbor’s property, you owe restitution is a commonly held notion, found even in the Bible.

But as a legal and practical matter, it has been extraordinarily difficult to apply that principle to climate change. Rich nations and blocs like the United States and the European Union have opposed the idea of explicitly compensating poorer countries for climate disasters already underway, fearing it could open them to unlimited liability.

As United Nations climate talks open Sunday in Sharm el Sheikh, Egypt, the debate over loss and damage will be front and center. Egypt, the host country and Pakistan, which is leading a group of 77 developing nations, succeeded in placing the issue on the formal agenda for the first time.

Simon Stiell, the U.N. climate chief, said the decision to include it on the agenda “bodes well” for a compromise by the end of the summit.

The issue is unavoidable this year, with leaders from nearly 200 nations gathering on the African continent, where millions are at risk of famine because of drought intensified by climate change. And developments in science have allowed researchers to quantify the role global warming plays in disasters, bolstering the argument that rich nations, which have emitted half of all heat-trapping gases since 1850, bear heavy responsibility.

“What we seek is not charity, not alms, not aid — but justice,” Bilawal Bhutto Zardari, Pakistan’s foreign minister, said in September, discussing the country’s devastating floods that scientists say were worsened by global warming. “Thirty three million Pakistanis today are paying in the form of their lives and their livelihoods for the industrialization of bigger countries.”

Last year, wealthy nations vowed to provide $40 billion per year by 2025 to help poorer countries with climate adaptation measures such as building flood defenses. But a United Nations report estimates this is less than one-fifth of what developing nations need. That has fueled calls for separate loss and damage funding to deal with the aftermath of climate disasters that nations can’t protect themselves against.

Facing growing pressure, John Kerry, President Biden’s climate envoy, has agreed to discuss the idea of financing for loss and damage — a move that helped avoid a bitter fight over the summit’s agenda.

But that’s a far cry from agreeing to a new fund. The United States is already behind on previous promises to help poorer countries shift to cleaner energy or adapt to climate threats by building sea walls, for example. Last year, Senate Democrats sought $3.1 billion in climate finance for 2022 but secured just $1 billion. With Republicans, who largely oppose climate aid, poised to make gains in Tuesday’s midterm elections, the prospects of new funds appear dim.

“The political foundation is simply not there,” said Senator Jeff Merkley, Democrat of Oregon, adding that he believes the United States has a “moral responsibility” to address loss and damage.

Europeans worry that if they agree to a fund, they could be left holding the bag if the next U.S. president repudiates the idea.

In Turkana, a semiarid region in northwest Kenya that is among the nation’s poorest, loss and damage is far from abstract.

The region is now suffering its fourth straight year of extreme drought, and some scientists see a long-term drying trend. Most of Turkana’s 900,000 people are pastoralists who make a living raising livestock, and they have watched herds perish for lack of water. Half the population faces starvation. Some herders have crossed into Uganda or South Sudan in search of greener pastures, triggering violent conflicts.

Local officials have drawn up urgent plans to adapt: drill more wells to tap aquifers, build dams to store water when rain does come and help people shift to more resilient forms of agriculture. But money is a hurdle. The full plan could cost roughly $200 million per year, double the county’s annual budget, said Clement Nadio, Turkana County’s director for climate change.

That has left Turkana acutely vulnerable in the current crisis. Officials are struggling to provide emergency food aid this year, leaving fewer resources to adapt to future droughts.

“Right now we need to focus on saving lives, dealing with malnutrition,” Mr. Nadio said. “But we also need to focus on making people resilient to future climate shocks. We are trying our best. But we can’t do it all with the funding we have available.”

While the United Nations hasn’t formally defined loss and damage, it could include destruction caused by extreme weather exacerbated by global warming. In 2019, Hurricane Dorian overwhelmed the Bahamas, bringing winds up to 185 miles per hour and 23-foot storm surges that destroyed homes, roads and an airport. The damage: $3.4 billion, one-quarter of the nation’s economy.

It might also include slower-moving losses that are harder to quantify, as in the case of salt farmers in Bangladesh who lose their jobs because tidal surges and heavy rainfall have hindered production, or communities in Micronesia that have watched ancient burial grounds tumble into the encroaching oceans.

“If we had cut emissions early enough, we wouldn’t have to adapt, and if we had adapted early enough, we wouldn’t have loss and damage,” said Avinash Persaud, an adviser to the prime minister of Barbados. “But we didn’t act early enough, so now we have to do all three.”

Because the definitions are broad, it’s hard to calculate exactly how much money loss and damage would entail. One frequently cited study estimated that developing countries could suffer $290 billion to $580 billion in annual climate damages by 2030, even after efforts to adapt. That could rise to $1.7 trillion by 2050.

In the past, wealthy countries have suggested that such disasters could be alleviated by existing humanitarian aid or insurance.

Developing countries say that’s unacceptable. By some estimates, over half of U.N. appeals for donations after weather disasters already go unfilled. And insurance doesn’t work for homes that will soon be swallowed by rising seas. Instead, poorer nations have been forced to take on debt to rebuild.

Without dedicated loss and damage funding, said Lia Nicholson, a senior adviser for the Alliance of Small Island States, climate impacts will force island nations “into unsustainable debt, arresting development and holding us hostage to random acts of charity.”

With so much money at stake, discussions of loss and damage in Egypt are certain to prove contentious.

Behind the scenes, U.S. officials say they’re concerned a new fund could be poorly defined and unwieldy.

Some wealthy countries also say China, currently the world’s largest emitter, as well as fossil fuel exporters like Qatar and Saudi Arabia, should contribute. That could spur a major fight, since those countries have not traditionally been held responsible for climate aid.

Perhaps the biggest challenge is that each side is dug in: Developing countries and activists view loss and damage as a matter of justice while wealthy nations blanch at the idea of accepting blame.

Mr. Kerry acknowledged the United States, which has burned coal for electricity since the 1880s and is the biggest historical emitter, bears responsibility for climate change. But he also argued that by the 1980s, when governments widely agreed that carbon dioxide emissions from oil, gas and coal were warming the planet, emerging nations were burning fossil fuels, too.

“If you want to measure from there, at the rate we’re going, a couple of countries have the ability to eclipse our historical emissions,” Mr. Kerry said. “So yeah, we burned coal and we did this. But guess who else burned coal? Every single one of those other countries. Are they absolved?”

Difficult issues ahead

If nations agree, at least in principle, to create a loss and damage fund, they will have to wade through difficult issues: Who deserves help and how much? How to guarantee money is spent in ways to benefit people who most need it?

David Michael Terungwa is the president of Global Initiative for Food Security and Ecosystem Preservation in Nigeria. He recently learned a friend’s home had been submerged in Benue state in floods that displaced more than 100,000 people and destroyed 140,000 hectares of farmland.

“I spoke with a young man who lost all his chickens in the floods,” Mr. Terungwa said. “If there was something, climate insurance, it could be recovered and he could start life again or start a business. When we discuss loss and damage, this is what I think of, the local farmers.”

But he also said he worries that governments will use the money to simply rebuild in vulnerable areas that will be washed away in future disasters.

Developing countries say questions like these are no reason for inaction. The first step is agreeing that loss and damage funding should exist; details can be resolved later.

For now, the losses continue.

Hassan Abou Bakr, an agriculture professor at Cairo University who owns an olive grove outside the city, said he has sunk into depression as repeated heat waves have ravaged his crops by depriving them of the winter “chilling hours” they need to flourish. This year, his olives were smaller than ever, and most were rejected in the market.

“Climate change is not something that will happen in the future,” he said. “It is here and now and it is hitting us.”

Restitution would help, but Mr. Abou Bakr’s worries extend beyond that.

“You can give money, but what about the olive trees?” he said. “We need to save the trees.”