Economic Updates

Weekly Report – January 11, 2016

1. The Los Angeles Economy 

Last week the Southern California Association of Governments hosted its six annual economic summit to highlight their economic research on Southern California’s six county region.

L.A. County’s unemployment rate now stands at 5.7 percent, which is 7.5 percentage points below its July 2010 peak of 13.2 percent, but still higher than the prerecession low of 4.3 percent.

Around 4.4 million people are now in jobs, which is 73,200 jobs more than the previous year, a year-over-year increase of 1.7 percent.

Their research shows that several industries will add jobs over the next five years and lead in job growth:

• Construction: After suffering severe employment losses through 2011, and with slow recovery in the housing market and financial system, this sector is now expected to grow robustly.
• Information: The information sector, which includes motion picture production, broadcasting, publishing and new media industries, will continue to gain employment.
• Professional and Business Services: This large and diverse sector is forecast to add almost 75,000 new jobs over the next five years, led by growth in administrative and support industries (which includes temporary employment).
• Education and Health Services: The education and health services sector is expected to add almost 100,000 new jobs over the next five years, almost all of which will be in health care and social assistance.
• Leisure and Hospitality: The leisure and hospitality sector continues to grow, but most of the projected job growth will be in food services.

Several industries are emerging and have the potential to be future drivers:

• Digital Media/Digital Tech: The regional growth of media companies is converging with digital technology and multi-platform delivery of content and services to produce a fast-paced innovative 21st century industry in L.A. County. As the center of this transformation, Los Angeles will continue to demonstrate competitive strength and enjoy significant growth.
• Advanced Transportation and Fuels: As the automobile capital of the nation, L.A. is the recognized center of automotive design and transportation innovation. Additionally, current environment policy is motivating significant investment and research into this industry. This momentum suggests that there is a high growth potential in Los Angeles County.
• Biosciences: Los Angeles is home to some of the leading medical and bioscience research institutions in the nation. The biosciences industry is demonstrating the potential to grow and thrive in the L.A region, motivated in part by partnerships among private, non-profit and public agencies to develop competitive strength and capability here.

They concluded that, as the unemployment rate continues to fall, it is expected that the labor market will tighten and wage growth will finally begin. Their caveat – in general, occupations requiring higher levels of educational attainment are those that will experience the largest wage increase in the region. (It remains to be seen if those are the occupations that will be growing most quickly over the next few years and whether there will be more opportunities for economic mobility and higher standards of living for all Angelenos.)

1. This is Where it Gets Interesting

One of the dramatic ways in which the economy is different in the United States (and L.A. and California) today from what it was, say, before 1980, and different from almost any other country, is that in the past when productivity from workers went up, wages went up commensurately.

Research shows that since the late 1970s, the productivity of workers has doubled, but wages have stagnated. So the fact that productivity is going up is saying that the economy as a whole is getting more productive, and GDP is going up, but the fact that wages are stagnating is saying that workers are not participating in this.

Last week the United State’s Department of Labor showed that average hourly earnings for workers who aren’t managers rose by 2.4 percent, over the course of 2015, a figure many economists consider disappointing. Including managers, wage growth rose by 2.5 percent for all private employees. In the late 1980s, late 1990s and mid-2000s, wage growth for production and nonsupervisory workers was climbing by more than 4 percent. (The curve ball – wage growth is growing faster than prices (inflation) which complicates that issue. Do workers want more wage growth, which is usually tied to inflation or slower wage growth with less inflation?)

L.A. faces the same challenge as the nation – the unemployment rate has fallen substantially since the end of the Great Recession, but wages haven’t accelerated upward, as many had expected. In fact, the labor market is a lot softer than the jobless rate would indicate. This disappearance of several million workers — as labor force dropouts they are not factored into the jobless rate — has meant continued labor market weakness, which goes far to explain why wage increases remain so elusive.

III. How is this Affecting the Overall Economy? 

Last month the Pew Research Center released a report that showed the nation’s middle class has shrunk to the point where it no longer constitutes the majority of the adult population. Many analysts and policymakers regard the shift as worrisome for economic and social stability. Historically middle-income households have driven consumer spending and economic and social stability for generations of Americans.

The tipping point for the middle class occurred over the last couple of years of the recovery from the Great Recession as the economy continued to reward highly educated workers, well-to-do investors and those with technical skills. Pew defined middle class as households earning two-thirds to twice the overall median income, after adjusting for household size. A family of three, for example, would be considered middle income if its total annual income ranged from about $42,000 to $126,000.

Key findings from report:

• Rapid growth of upper-income households, coupled with an increase in less-educated low earners, has driven the decline of the middle-income population to a hair below 50% of the total this year, Pew found. In 1971, the middle class accounted for 61% of the population, and it has been declining steadily since.
• Although the median incomes of upper, lower and middle tiers have all lost ground since 2000, primarily because of the Great Recession in late 2007 to mid-2009, upper-income households saw the smallest decline through 2014.
• The declining middle also reflects demographic shifts, such as the arrival of more low-skilled immigrants, which can be seen in the overall slippage of Latinos in the income ladder since 1971. By race, black adults made the biggest strides in income status from 1971 to 2015, although they are significantly less likely to be middle income compared with adults overall. At the same time, the increase of women in the workforce since the early 1970s has tended to boost household incomes, as has higher college education enrollment.

The Pew study did not address economic mobility — an issue that many economists believe is more important than the change in income distribution. But research on income mobility across generations has found the U.S. as a whole lags behind other Western countries.

1. The Historic Divergence Between Productivity and Typical Worker’s Pay 

In September 2015 Josh Bivens and Lawrence Mishel released a research paper Understanding the Historic Divergence Between Productivity and a Typical Worker’s Pay to highlight the connection between wage stagnation and inequality and how better policy choices, made with low- and moderate-wage earners in mind, can lead to more widespread wage growth and strengthen and expand the middle class.

Their conclusion on why is there a growing gap between overall productivity growth and the pay of the vast majority of workers since the 1970s.

• Essentially none of the past few decades productivity growth flowed into the paychecks of typical American workers. An overall shift in how much of the income in the economy is received by workers in wages and benefits, and how much is received by owners of capital. The share going to workers decreased, especially after 2000. We sometimes refer to this as the “loss in labor’s share of income” wedge.
• Pay failed to track productivity primarily due to two key dynamics representing rising inequality: the rising inequality of compensation (more wage and salary income accumulating at the very top of the pay scale) and the shift in the share of overall national income going to owners of capital and away from the pay of employees. Over the entire 1973–2014 period, rising inequality explains over two-thirds of the productivity–pay divergence. The gap between the growth of average and median hourly compensation reflects the growing inequality of compensation, as the highest-paid workers enjoyed far faster growth in their compensation.
• Boosting productivity growth is an important long-run goal, this will not lead to broad-based wage gains unless we pursue policies that reconnect productivity growth and the pay of the vast majority. Policies to spur widespread wage growth, therefore, must not only encourage productivity growth (via full employment, education, innovation, and public investment) but also restore the link between growing productivity and the typical worker’s pay.
• Finally, the economic evidence indicates that the rising gap between productivity and pay for the vast majority likely has nothing to do with any stagnation in the typical worker’s individual productivity. For example, even the lowest-paid American workers have made considerable gains in educational attainment and experience in recent decades, which should have raised their productivity. Yet, in “terms-of-trade”, which concerns the faster price growth of things workers buy relative to the price of what they produce. This wedge is due to the fact that the output measure used to compute productivity and net productivity is converted to real, or constant (inflation-adjusted), dollars based on the components of national output (GDP), while the compensation measures are converted to real, or constant, dollars based on measures of price change in what consumers purchase.

1. Can We Close the Wage and Inequality Gap

A National Bureau of Economic Research paper released earlier this year claimed that the rise in inequality since 1980 was between firms, not within firms, implying executive pay played no role. The paper looked at a large sample of more than 100 million employees and linked their pay to the average pay within their own firm.

They found that while incomes of the highest-paid workers (e.g., those earning more than 90% or 99% of all others) had indeed grown faster than the median, they had not grown faster than those of their co-workers. For example, the employee at the 90th percentile earned 1.69 times as much as his firm’s average wage in 1980, and 1.73 times as much in 2013. An employee at the 99th percentile earned 3.57 times his firm’s average in 1980, and 3.48 times in 2013.

The researchers concluded that “virtually all of the rising dispersion between workers” was caused by the dispersion between firms, contradicting Thomas Piketty, author of “Capital in the Twenty-First Century,” and others who say it’s due to the top 1 percent pulling away. though they did find the top 0.2 percent of earners at firms with more than 10,000 employees did see their income grow much faster than other workers at their own firms. This suggests that rising executive pay is indeed part of the story.

Nonetheless, the findings still suggest the predominant driver of inequality is the gap between, not within, firms, which largely corroborates other research.

Last year another National Bureau of Economic Research paper concluded most of the rise in inequality from the 1970s to 2010 was driven by differences between firms. This raises an important question: Why are companies growing apart? Researchers have expressed some thought on the following:

• “Sorting”. Firms are becoming more specialized, with the most productive workers gravitating toward the most successful firms. This may be because new business models have allowed the super productive to rise above the rest.
• Companies have increasingly carved out their lower-paying parts through the use of franchises, subcontractors and turning employees into independent contractors. They can they thus focus compensation–whether salary, employee benefits or stock options—on their core employees instead of support staff.
• Another possibility is that some firms are becoming more profitable because of high barriers to entry, and they are sharing some of those benefits—what economists call “rents”—with their employees. This could explain why, for example, workers are becoming less mobile. If doing exactly the same job earns you more at company with a dominant market position than one without, you’d be foolish to leave.