Employment: tortoise slow, tortoise steady?

Since

Summer 2011 job growth has generally outpaced population growth, adjusting for the retirement of the baby boomers. However, it's a small mountain that we need to climb, given the severity of the Great Recession. As a result, the economy remains several years away from normal levels – an optimistic projection shows we might be back to normal as early as summer 2017. More realistically, we're looking at late 2018 or early 2019, given headwinds to the economy. These include slowing global growth and a strong dollar, and the end of the oil boom, which is hurting investment faster than lower gasoline prices are adding to consumption. In any case, the economy remains 6 million jobs shy of where we need to be. That's reflected in many things, large and small. To give one example, I sit on the board of the local United Way of Rockbridge. We hear that local non-profits that attempt to meet emergency needs for utilities, food and rent see more rather than less need, with more working poor showing up than two years ago: jobs are failing to provide income sufficient to keep up with long-run needs.

Let me reiterate that the economy continues to improve, bit by bit. One indicator that I follow (which underlies the "normal job" level calculation) is the employment to population ratio. This avoids the challenge of counting discouraged workers, which over the past 8 years has swayed the unemployment rate in ways that make it a weak indicator of the job market. Now this participation rate likewise is imperfect as a measure, as it doesn't allow a distinction between part-time and full-time work, and one feature of the Great Recession was a large increase in those put on short hours. The BLS began collecting that data in 1994, and while it peaked at 6% during the depths of the recession, the current 4% rate remains higher than at any point during 1994-late 2008. The third graph provides that data for younger workers. Employment fell by 6% for prime-age workers during the Great Recession. Given noise in the data, it was unclear in spring 2013 that that rate had improved.

During the past two years, however, the share working has clearly been recovering, though it is still 3% below normal levels. The exception is among the young. Some 8% of those age 20-24 have yet to start their work-lives, relative to the stable rate prior to the Great Recession. While according to annual data from the BLS the majority of the difference appears to be accounted for by an increase of those in school, from 8-9% prior to the Great Recession to 13% in 2014. It's unclear to me as an economist what change in the economy would suddenly lead to education becoming more valuable. Instead, it's the opportunity cost that's changed: if (good) jobs aren't available, and in particular if career-oriented entry-level jobs aren't available, there's much less downside to remaining in school. (For those age 16-20 the shift is more dramatic: labor force participation among this group of young Americans fell from roughly 50% to 40%, which is a drop of 10 percentage points (or a 20% decline). Almost all of this appears offset by an increase in schooling. (See the table at the bottom.)

One component of slow growth is the lack of recovery in the housing sector. Now the rate of new housing starts shows a long-run decline, reflecting a decline in the birthrate, the aging of the population and a consequent decrease in the rate of new household formation. I've not tried to model that, and a quick search did not find any papers doing quite what I wanted. It is clear that household formation falls during recessions. For example, FT Alphaville notes the rise in children living with parents; there's no reason to think this is other than a response to the recession. (Kwan Ok Lee & Gary Painter (2013) "What happens to household formation in a recession? Journal of Urban Economics 76:1, 93-109 model this statistically.) What is clear is that housing starts remain very low and for the last year have shown no tendency to rise. So not only construction jobs but housing-related consumer durables suffer.

Will this component of our economy rebound, and offset the headwinds? Theory is unclear, as there are many margins of adjustment, tied to incomes of the young but also the age composition of the population, shifts in the nature of rental housing, and the price of owner-occupied housing. The empirical record is one of volatility. So there's no grounds that I can see for projecting change.

Finally, all this ties into interest rate policy. There's a 6 month lag between a change in interest rates and the start of the impact of higher rates on the economy, and the full impact is not felt for 12-18 months. If the economy will normalize in 24 months, then the Fed needs to start gradually raising interest rates later this year. Given the tendency of the Fed to move in increments of 25 basis points and FOMC meetings generating roughly 8 decision points per year, a 2016 start could lead to short-term rates of 2.5% by sometime in 2017. But if my analysis is accurate, we are still 3-4 years out, and there's no rush. Since it's easier to use monetary policy quell inflation than to spur growth, that reinforces the argument for delay: if you have to make a mistake, it's better to be too late than too early.

	Age 16-20			Age 21-25
Year	Labor Force Participation Rate	In School or Training	Either Work or School	Labor Force Participation Rate	In School or Training	Either Work or School
1998	56.2	31.0	87.3	80.3	7.6	87.7
1999	55.6	31.8	87.4	79.8	7.8	87.6
2000	56.0	32.1	88.1	80.0	7.5	87.5
2001	54.0	34.0	88.0	79.4	7.9	87.3
2002	51.8	35.9	87.7	79.1	8.3	87.4
2003	49.4	38.7	88.1	77.8	9.0	86.9
2004	48.7	39.3	88.0	77.4	9.4	86.8
2005	48.6	39.2	87.8	77.1	9.1	86.3
2006	48.5	40.1	88.5	77.4	9.5	87.0
2007	46.3	42.1	88.4	77.5	9.6	87.1
2008	45.5	43.0	88.5	77.2	10.0	87.2
2009	42.8	44.9	87.7	76.3	10.4	86.6
2010	40.7	46.9	87.6	75.1	11.4	86.5
2011	40.1	47.8	87.9	74.7	11.9	86.6
2012	39.9	47.8	87.7	74.3	12.2	86.5
2013	39.8	48.1	87.9	74.0	12.1	86.2
2014	36.0	53.2	89.2	73.2	13.3	86.5

Lambo: A Rampage of Conspicuous Consumption

mike smitka

If vehicles were purely practical devices to get from point A to point B then car enthusiasts would not exist. Colors? – everything would be gray, easier than white but cooler and less prone to showing dirt than black. Acceleration? – why? Comfort, yes, critical for the commuter, and autonomous cruise control would be part of every vehicle, overriding any attempt at aggressive driving while eliminating rear-end collisions. Perhaps seats could be customized for those unusually tall or short, or for the minority with trim physiques. Sizes, well, there surely would need to be a range, from 2-seat commuters to soccer mom SUVs. And cost! – without superfluous variety, engineering and tooling would be spread across production runs of a few million, while advertising would be unnecessary. There'd be no need to maintain much inventory in the system, either -- in contrast to the 60+ days of inventory in the system today, and the megadealer with 300 vehicles on their and hundreds more off-site. Repairs would be cheaper, and so would insurance, so depreciation aside, the cost of ownership would be lower. Used cars would likewise be a commodity, carrying a minimal markup, and easy to sell.

Linked from the Lamborghini Museum web site

Think VW Beetle, and the underlying vision of a "Volkswagen", a People's Car or Kokumin-sha / Guomin-che (国民車) that bureaucrats in China or India or Japan or Russia made the focus of their industrial policy. Fortunately (?!) for consumers, in the long run these bureaucrats failed to get their way, while in Germany Fordwerke and Opel [and later BMW and Mercedes] provided alternatives. In the US you have perhaps 600 new models to choose from, and even more in China. Europe is surely similar.

The reality is that "our" motor is a status symbol, a statement of personality, a consumption good independent of its value as transport. Indeed, this is central to the industry's business model: profits depend on it.

So let's contemplate the opposite end from that of quotidian transport, a vehicle as a pure status symbol, a la Thorstein Veblen.

Think Lamborghini.^Note What matters isn't the vehicle itself, but that you have one.

First, such a vehicle has to be visually distinctive. That doesn't mean pretty. The Prius succeeded in the US because of its cult status, not because of its value proposition, as its fuel efficiency is far short of what would be required to justify its price. But to gain that status, you had to know what it was, and it was ugly. To reiterate: being ugly was absolutely critical to its success. No one copied the styling. No one wanted to! But while Toyota later offered other hybrids, at markups lower than that for the Prius, those were all versions of existing models indistinguishable from the plain gas version. None sold. Supercars are even more visibly distinctive. By happenstance, and unlike the Prius, some of them are also beautiful.

Second, as a pure status good a vehicle has to have exclusivity. That means price. A Prius is partly an affirmative purchase, commensurate with the self-image of a Yuppie with a social conscious, owned by many with similar affinities. Toyota can and does charge a premium: it sells mainly the loaded trim Levels IV & V, in contrast to the subtle message that it's an economical vehicle, not an extravagance. So it's not exclusive, though also not what a sensible person on a tight budget would purchase. There's no doubt though that a Lambo is a wildly expensive, in-your-face, I-can-afford-it drive.

Third, it helps if the status good at hand is, well, not very good. Let's face it: a Lambo is impractical, verging on useless. It's small, noisy, uncomfortable, and requires a modicum of attention to what you're doing. Texting while driving??? - no way. It's not good for a quick shopping trip, not good for a long drive, and (if you have performance tires) not good in inclement weather. Let's not even think about insurance and maintenance, because it's a statement that you have the wherewithal to own an expensive vehicle that sits in a garage 99+% of the time, with something else as your daily drive. A supercar wouldn't have the same cachet if the designers made compromises – a bit of soundproofing? – to make it a practical vehicle.

So to what extent is your drive visibly distinctive, overpriced and impractical? Surely almost every vehicle has a bit of that, including the '88 Chevy truck that sits in my drive for a week or more between uses, but lets me blend better in my neck of the woods even though I don't have it up on blocks. [OK, for two months I lent it as a daily work vehicle to a friend who is a contractor…it isn't a practical vehicle for me.]. We – even I – care about status. We also care about having consumer products that fit our self-image, and that fit our neighborhood. Both, of course, are obvious sub-texts in car ads.

A Lambo, though, is pure conspicuous consumption.

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Note: I would have used a Porsche 911 as an example, except that, while acknowledging how impractical it is, it's the daily drive of one former student.