DREAMING AND OUR LABOR MARKET

Where there is a worker, there lies a nation. ~ Evita Peron

Once again I have begun working with IB and AP Economics class students at my local high school. We offer them information about “resource (or factor) markets,” that includes the labor market. The economy’s factor markets encompass the three factors of production: land, labor and capital that provide businesses with needed inputs to produce final goods and services that are sold in the product markets. This is the simplistic, informative and distinctive Circular-Flow Diagram that you may remember from your Econ 101 days. Our white-board explanation describes the demand for and supply of labor is a straightforward function of the price of labor – the wages or income earned by employees.

This blog examines several aspects of the US labor market including one slender slice of it that has gained recent prominence, the roughly 800,000 Dreamers. I also examine the current status of the nation’s labor market and President Trump’s record on creating jobs.

A “Dreamer” refers to a child who was brought into the US (under the age of 16) usually by a parent or relative without legal permission, who has lived in the US continuously since June 2007, completed high-school and attended at least two years of post-high school education or served honorably in the military and is currently under the age of 35 years old. In August 2012 President Obama implemented a new immigration program, through executive action, that deferred deportation for these people. This program is called DACA, Deferred Action for Childhood Arrivals.

On September 5th Mr. Trump ended the DACA program, despite tweeting that he “loved” Dreamers. Go figure. In a specious attempt to justify his boss’ decision, Jefferson Beauregard Sessions, the Attorney General, perjured himself in wrongly stating that Dreamers are stealing jobs from Americans. An average of 30,000 Dreamers could lose their jobs every month if DACA were repealed or work permit renewals were held up, according to a report issued by an advocacy group.

The president called on Congress to pass legislation within six months to continue the DACA program. Last week he surprisingly announced that he had agreed with Senator Chuck Schumer and Representative Nancy Pelosi on legislation to extend DACA. Or did he? Characteristically, the President later contradicted himself regarding his discussions with the Democratic leaders about DACA. The unforeseen sunlight of a possible bipartisan agreement on legitimizing DACA proved temporary and has faded into all too usual leaden fog of this presidency.

Dreamers’ futures thus remain nightmarish and utterly uncertain due to the heartless action of the president. Their prospects are now completely dependent on our plagued, legislatively-barren Congress for speedy remedy.

Beyond Dreamers, how is the US labor market doing? Overall, it’s in reasonably decent shape, as shown in the table below. Our labor market reflects the accrued benefits of our now five year old expansion, longer than the post-WWII average of 4.8 years.

US Labor Market

Characteristic\Time Period	August 2017	August 2016
Size of labor force	160,571,000 (3.7%)	154,763,000
Unemployment rate - U - (Overall)	4.4%	4.9%
U (Youth, 16-24 years)	8.9%	10.2%
U (Not finished high school)	6.0%	7.3%
U (Completed high school)	5.1%	5.1%
U (With a BA or higher degree)	2.4%	2.7%
Average hourly earnings	$26.39/hr (2.5%)	$25.74/hr

Source: Bureau of Labor Statistics (BLS). Figures in parentheses indicate yearly increase.

The US labor force has grown by 3.7% during the past 12 months; already-low unemployment rates have dropped a bit in August for all the age and education-level categories, except for people who have completed high school and not gone to college. Youth unemployment has declined, but remains at a stubbornly elevated rate, as it has since the Great Recession. The 4.4% overall unemployment rate indicates the economy is in close proximity to full employment.

Illustrating the budding tightness of our labor market, hourly earnings have increased 2.5% during the past 12 months, equivalent to $54,891 per year. For the second year in a row, median household income increased in 2016 to $59,039 (3.2% from 2015), after adjusting for inflation. The August labor force participation rate, which measures the share of the work force (16 years and older) that is currently employed or seeking employment, was 62.9%, virtually unchanged over the last year.

Many economists expect that in the coming decade the US will be facing an entirely new challenge with respect to our workforce – a lack of workers – caused by two factors. The first factor centers on demographic changes in the labor force. Boomers are now retiring in droves and, due to ever-lower US birth rates, there are fewer younger working-age people who will be replacing them.

A statistic that illustrates this change is the Age Dependency Ratio (ADR). This ratio represents the percentage of non-working age population (people younger than 15 or older than 64) – to the working-age population (those between the ages 15 and 64). According to the UN’s Population Division, the US ADR in 2015 was 51.2%, meaning that the non-working age population in 2015 represented a slim majority of the working-age population; more people were of non-working age than working age. By 2040 the ADR will increase to 64.9%, which means relatively fewer workers will carry an increased and heavier burden to provide schooling and care for more non-working aged folks.

The second factor, Trumpian immigration, trade and fiscal policies, will exacerbate the labor force challenge of fewer workers and reduce potential macroeconomic growth. Closing our borders to immigrants – even skilled H-1B workers – as the president and conservative Republicans have done, means fewer potential workers will be available to US employers. Threatening to tear up trade agreements – like NAFTA and South Korea’s – will reduce US exports (that require US workers to produce them) after our trading partners retaliate. Republican fantasies about reducing corporate taxes to spur economic growth are just that. Empirical evidence that shows a strong, causal relationship between increases in GDP and lower tax rates is lacking. Mark Zandi, the chief economist at Moody’s Analytics, told a New York Times columnist, “Over the next 20 to 25 years, a labor shortage is going to put a binding constraint on growth,” unless appropriate policies are put in place.

Wherever he campaigned, Mr. Trump focused on jobs. He said “I am going to be the greatest jobs president that God ever created.” So far, he hasn’t met that absurd standard. During his first five months in office the economy added on average 172,600 jobs per month. That's good, but not quite as many as the average number of jobs added during President Barack Obama's last five months in office, 181,600. In fact, the president has emphasized increasing jobs in sectors that are very unlikely to produce many new workers – coal mining and manufacturing.

Mr. Trump has loudly emphasized his dedication to increasing jobs in coal mining, something that would require him and his administrators to reverse years of economically-driven decline in coal usage by electric utilities and other industries. The current number of workers in coal mining represents only 29% of its peak employment in January 1985. Except for the principal resident of 1600 Pennsylvania Avenue, coal’s declining market position is broadly understood to be based on advances in non-fossil energy technologies (solar and wind) and, more prominently, on the large declines in the price of natural gas, a cleaner substitute fuel. It hasn’t been a political war on coal as the president alleges; it’s been a market-based economic one that coal has been steadily losing.

Coal-related jobs have been declining since 2011. Scott Pruitt, the Voldemortian head of the EPA, erroneously stated that Mr. Trump’s efforts have increased coal sector jobs by 50,000 workers. That’s impossible. The BLS says there are 53,420 workers in the entire coal mining sector and that there have been only 700 coal mining jobs added since the president took office in January. It’s yet another example of the president and his senior cronies being deceitfully fact-free.

Perhaps unknown to our never-connect-the-dots, zero-sum president, there are three times as many people working in the solar and wind power industries as work in the coal industry according to a January Dept. of Energy report. If the president were truly interested in job development, he should be promoting renewable energy and take (undue) credit for the solar industry’s impressive 25% growth in jobs during the past year. That’s highly unlikely since Mr. Trump seems to be stuck in a coal seam where the sun doesn't shine.

In addition to coal miners, manufacturing jobs are near and dear to the president’s heart. He wants firms to hire more manufacturing workers, a fine but exigent goal. Just like coal jobs, US manufacturing employment has steadily declined over the past six decades. Since the 1950s manufacturers have substituted capital equipment – using advanced, additive automation and other technologies – for lower-skilled labor. As a consequence, today’s manufacturers use far fewer workers, who are more highly-skilled operators of computer-based machinery, than the assemblers, wrench-handlers and welders of yore. Despite hiring fewer workers, US manufacturers have increasingly produced higher-valued, greater output.

Diversified Engineering & Plastics (DEP), a small auto parts manufacturer located near Detroit, typifies the trials now facing smaller manufacturers. Diversified has 78 employees; more than a decade ago it had 300 workers. Hiring qualified personnel is a constant struggle for Anita-Maria Quillen, DEP’s president. According to her, “I’ve noticed their [Millennials’] sense of responsibility to come to work is nonexistent.” After two days of orientation, her new hires are sent for a drug test. Sixty percent never show up for the test.

Diversified’s clients are much larger “Tier One” firms that directly supply parts to auto/truck/motorcycle makers. As she put it, “Tier Ones are eating whole peanuts. We take the crumbs.” Ms. Quillen works in a mature market where lower costs are always a priority. Carmakers are “constantly pushing costs down, down, down,” she said. “But meanwhile people want $15 an hour for minimum wage.” A typical DEP machine operator makes $9.50 to $11.50 an hour. Smaller manufacturers like DEP in the auto sector and in other industries are caught in a tightening vise. They find it tough to boost their employment unless they further improve productivity and raise wages that their clients are loath to pay for. 

In these trying times, it’s valuable to remember John Locke’s words, “All wealth is the product of labor.”