THERE’S been much debate about the state’s economy and labor market. While both continue to improve following the depths of the recession, some have suggested that the labor market is struggling as evidenced by the state’s slow growth rates relative to the rest of the nation. However, this argument is flawed because the state-to-state or state-to-nation comparisons do not account for variances in those economies which effect growth. For instance, demographics impact economies, and in Maine, the state’s slowly growing labor force is one reason why job growth is relatively slow.
Despite this slow job growth, Maine’s unemployment rate (UER) continues to drop, while the employment population rate (EPR) continues to rise. These metrics coupled with the explanation for slow job growth might suggest that Maine’s labor market is doing well.
However, these structural explanations for slow job growth coupled with overstating what the value of the UER is masking weaknesses in the state’s labor market. While while the state’s demographics shifts are likely having some impact on the job growth, the state’s labor force continues to grow (though slowly), spurred on by an increasing percentage of 55+ year olds active in the labor force. This cannot account for all of the unemployment. As is explained below, despite suggestions to the contrary, Maine’s labor market is still suffering from cyclical problems.
It was recently argued that Maine is nearing full employment given that the total number of unemployed persons dropped below 40,000, and estimates suggest that full-employment is in the low 30,000 range. Quick rundown: full employment is not where the economy reaches a UER of 0%, but an economy that “includes no cyclical (also known as deficient-demand, or Keynesian) unemployment – in other words, when there is enough overall demand in the economy for everyone who wants a job to have one.” An economy will always have unemployed persons. Those unemployed persons are frictionally unemployed–that is, they are voluntarily unemployed while transitioning from one job to the next or looking for a new job–, rather than unemployed because of a dearth of job opportunities. So, an economy can reach full employment even though the UER is above 0%. That rate is referred to by same as the full employment unemployment rate. That rate is, of course, up for debate, but the general concept holds regardless of the exact figure; full employment is when an economy has no (or nearly no) cyclical unemployment.
One problem with the concept of full employment lies with the measurement used to determine it; the UER. While the widely used labor market metric, it is also highly fallible in terms of measuring labor market health or slack. First, the UER only measures the rate of those employed as a percentage of the labor force. In severe economic downturns, the labor force can contract as people abandon their job searches. As a result, the UER will drop even though not one single job was created. Second, and more importantly, is that the UER does not measure the quality of jobs. That is, part-time work, underemployment, low wages, and so forth are not captured by the UER. So, cyclical weaknesses (namely underemployment) can exist even when an economy reaches “full employment.”
Statistics on prime age workers (25 – 54 years old) are, arguably, one of the better measures of a labor market’s health (at least in terms of detecting cyclical problems in the labor market). Unlike younger workers and older workers who might not be working, looking for working, or working full-time due to school, retirement, health, and so forth, unem-/under-employment of prime age workers is usually caused by economic downturns and labor market weakness. If the slow job growth in Maine were mainly due to structural factors such as an aging labor force, then we should expect to see the prime age working cohort near full employment, or at least at pre-recession levels. However, as highlighted in the two graphs below, the metrics on the prime age worker cohort suggests there’s plenty of cyclical problems in the state’s labor market:
While the metrics for prime age workers are improving, as noted previously, if the current EPR for 25 – 54 year olds were increased by three percentage points, ceteris paribus, employment in Maine would increase by roughly 16,000, which in turn would drop the state’s UER to 3.3%.
Of course, EPR, like UER, cannot capture job quality (i.e., part-time vs full-time, wages, etc.), which points to another problem with how full employment is often measured; accounting for underemployment. The BLS releases a variety of unemployment rate statistics. The commonly cited on is the U-3, which measures employment as a percentage of people in the labor force. The U-6, sometimes referred to as the “true unemployment rate”, is a broader measure of unemployment. It includes two groups od people the U-3 does not; part-time for economic reasons (PTER), as well as marginally attached workers (workers who want work and have actively looked for it in the past 12 months) and discouraged workers (workers who want work but have completely given up looking).
Using this broader measure reveals a lot more slack in the labor market:
The U-6 rate will likely always be higher than the U-3 rate, so the issue is not that it s higher, but that the gap between the two measures has grown over the past few years. This growing gap indicates a growing under-utilization of the state’s labor force (under-employment) as employment has increased.
Third, one of the reasons for the elevated U-6 rate is elevated PTER., which, as MECEP has noted, has remained high during the recovery. PTER is counter-cyclical (meaning it rises during economic downturns, and decreases during economic booms). Because of this, PTER is a useful indicator of cyclical weaknesses in a labor market, and suggests that Maine’s labor market is not as tight as the UER might indicate:
Although 2014 has thus far seen a down-tick in the PTER rate, it is still twice pre-recession levels indicating cyclical weakness in the labor market.
Another indicator of labor market tightness are wages. As labor becomes scarce, firms have to bid against one another for the available labor. There is nothing to suggest that labor is scarce as hourly and average annual wages per employee are not rising:
So, what does this all mean?
To be sure, the state’s economy and labor market have improved since the depths of the recession. However, even though there are structural problems constraining Maine’s growth relative to other states, the state is still facing cyclical problems. As noted, PTER is still elevated, and the U-6 rate is not dropping at the same rate as the U-3, meaning Maine’s labor force is underutilized. Further, wages have been relatively flat over the past years, suggesting there is still plenty of slack in the labor market.
Most importantly is that labor market indicators for the state’s prime age workers are weak. The problem here is, as noted previously, that persistent cyclical unemployment can turn into structural unemployment brought on by extended periods of un-/under-employment. This will exacerbate the structural issues the state faces down the road.
To shift the blame for weak growth figures solely onto demographics (ala the White House’s ‘blame it on the boomers’ excuse) overstates the structural issues in the labor market. There’s still plenty of slack in the state’s labor market lingering from the 2008 recession.