(What’s Left of) Our Economy: Worker Pay Keeps Lagging, Not Leading, U.S. Inflation

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benefits, core services, cost of living, ECI, Employment Cost Index, Federal Reserve, inflation, Jerome Powell, Labor Department, private sector, services, stimulus, wages, workers, {What's Left of) Our Economy

The Federal Reserve, the agency with the U.S. government’s main inflation-fighting responsibilities, has made clear that it’s paying special attention to worker pay to figure out whether it’s getting living costs under control or not, and that its favored measure of pay is the Labor Department’s Employment Cost Index (ECI).

Therefore, it’s genuinely important that the new ECI (for the fourth quarter of last year) came out this morning. Even more important, the results undercut the widespread beliefs (especially by Fed leaders) both that worker compensation has been a driving force behind the inflation America has experienced so far, and/or has great potential to keep it raging.

Consequently, the new numbers seem likely to influence greatly the big choice before the Fed. Will it keep trying to raise the cost of borrowing for consumers and businesses alike in the hope of slowing spending enough to cool inflation even at the risk of producing a recession? Or will it decide that it’s made enough inflation progress already, and can tolerate current levels of economic growth – which the latest data tell us are pretty good) rather than stepping on the brakes harder.

The central bank likes the ECI better than the hourly and weekly also put out by Labor for two main reasons. First, it measures salaries and non-cash benefits, too. And second, it takes into account what economists call compositional effects.

That is, the standard wage figures report hourly and weekly pay for specific sectors of the economy, but they don’t say anything about labor costs for businesses for the same jobs over time. The ECI tries to achieve this aim by stripping out the way that the makeup of employment between industries can change, and the way that the makeup of jobs within industries can change (e.g., from a majority of lower wage occupations to one of higher wage occupations).

According to the new ECI report, when you adjust for the cost of living, “private wages and salaries declined 1.2 percent for the 12 months ending December 2022” and “ Inflation-adjusted benefit costs in the private sector declined 1.5 percent over that same period.”

So for the last year, total compensation has risen more slowly, rather than faster, than inflation, That’s not the kind of fuel I’d want in my vehicle or home. (As known by RealityChek regulars, private sector trends are the ones that count because compensation levels there are set largely by market forces, rather than mainly by politicians’ decisions, as is the case for public sector workers.)

Blame-the-workers (or their bosses) types can argue that since late 2021, compensation has caught up some with inflation rates. Specifically, from December, 2020 through December, 2021, it had fallen in after-inflation terms by 2.5 percent. Between the next two Decembers, it had dropped by less than half that rate – 1.2 percent.

But it was still down – and this during a period when private business claimed it was frantic trying to fill unprecedented numbers of job openings in absolute terms.

Moreover, the new ECI release contained signs that even this modest compensation catch up could soon reverse itself. Between the first quarter of last year and the fourth, in pre-inflation terms, the total compensation increase weakened from 1.4 percent to one percent even. And for what it’s worth, both economists and CEOs still judge that the odds of a recession this year are well over 50 percent.

Fed Chair Jerome Powell has also expressed concerns about wage trends in what he calls the core service sector, because, as he put it at the end of last November:

“This is the largest of our three categories, constituting more than half of the core PCE index.[the Fed’s preferred gauge of prices]. Thus, this may be the most important category for understanding the future evolution of core inflation. Because wages make up the largest cost in delivering these services, the labor market holds the key to understanding inflation in this category.”

The ECI releases don’t contain figures for this group, but if you look at total compensation for private service sector workers, it’s tough to see how they’ve been en fuego lately, either. Between the first and fourth quarter of last year, their rate of increase dropped by the exact same rate as that for the private sector overall. And although most economic growth forecasts lately have been far too pessimistic, almost no one seems to expect the current expansion to strengthen.

And if workers haven’t been able to reap a major inflation-adjusted compensation bonanza in the conditions that have prevailed for the last few months, or during earlier strong growth bursts since the CCP Virus struck the United States in force, when will they?

I remain concerned that living costs could remain worrisomely high – though not that they’ll rocket up again – because consumers still have lots of spending power, which will keep giving businesses lots of pricing power. But that’s not because Americans’ pay has exploded. It’s because government stimulus has been so mammoth in recent years, and could well stay unnaturally high.

Further, since such government spending is politically popular – and will remain more tempting for politicians to approve as the next election cycle approaches – my foreseeable-future forecast for the U.S. economy remains stagflation.  In other words, growth will be rather stagnant, and inflation will stay way too high.  And as the new ECI release suggests, workers could be left further behind the living cost eight ball than ever.       

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(What’s Left of) Our Economy: Why the Really Tight U.S. Job Market Isn’t Propping Up Much Inflation

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CCP Virus, consumer spending, consumers, coronavirus, cost of living, COVID 19, Federal Reserve, headline PCE, inflation, inflation-adjusted wages, interest rates, Jerome Powell, monetary policy, PCE, personal consumption expenditures index, prices, recession, stagflation, stimulus, wages, {What's Left of) Our Economy

It’s been widely assumed that even though very tight U.S. labor markets haven’t yet touched off the kind of wage-price spiral that can supercharge inflation, they’ve been helping consumers offset the effects of rapidly rising prices – and therefore helping to keep living costs worrisomely high.

The intertwined reasons? Because even though when adjusted for inflation, wages generally have been falling since price increases took off in early 2021, rock-bottom unemployment rates and the wage hikes that have been received have enabled healthy consumer spending – and given business unusual pricing power.

Most important, this is what the Federal Reserve believes, and it’s the federal government institution with the prime responsibility for fighting inflation. According to Chair Jerome Powell, “demand for workers far exceeds the supply of available workers, and nominal wages have been growing at a pace well above what would be consistent with 2 percent inflation over time.”

For good measure, Powell said that the labor market “holds the key to understanding inflation” especially in U.S. services industries other than housing, which make up more than half of the set of inflation data favored by the Fed, and where “wages make up the largest cost.”

How come, then, when you look at the wage data put out by the federal government, it’s so hard to find evidence that recent wage levels have significantly bolstered U.S. workers’ spending power during this current high inflation period?

Given the Fed’s power, it makes sense to use the inflation measure it values most – which as RealityChek regulars know is the Personal Consumption Expenditures (PCE) Price Index. As the Fed prefers, we’ll focus on the “headline” gauge, which includes the food and energy prices that are stripped out of a different (“core”) reading supposedly because they’re volatile for reasons having nothing to do with the economy’s underlying prone-ess to inflation.

And for the best measure of the wages workers are taking home, we’ll use weekly wages. What they show is that since the headline PCE rate first breached the central bank’s two percent target, in March, 2021, inflation-adjusted weekly pay (as opposed to the pre-inflation wages Powell oddly emphasizes) is actually down – by 4.60 percent. For production and non-supervisory workers (call them “blue collar” workers for convenience’s sake), real weekly wages were off by a more modest but still non-trivial 3.52 percent.

And this has propped up American consumer spending exactly how?

The Fed actually looks more closely at a wider official measure of compensation than the wage figures. It’s called the Employment Cost Index (ECI) and it takes into account salaries as well as wages, along with non-wage benefits. The ECI only comes out quarterly, and the next one, for the fourth quarter,of last year, won’t be out till January 31. But from the second quarter of 2021 (roughly when headline annual PCE inflation rose higher than that two percent Fed target) through the end of the third quarter of 2022, the ECI for private sector workers) also dropped in after-inflation terms – by 2.39 percent.

But if American workers’ pay isn’t doing much to power their still-strong consumption, what is? Obviously, the answer is mainly the excess savings piled up thanks to pandemic stimulus programs and government measures aimed at…compensating them for high inflation.

When it comes to fighting inflation, there’s good news stemming from the status of these enormous amounts of cash injected into American bank accounts: They’re being run down significantly or are just about gone for everyone except the wealthy. That no doubt explains much of the recent evidence of the cooling of the white hot levels of consumer demand that filled so many businesses with confidence that they could jack up prices dramatically are cooling, and why headline PCE is showing some signs of ebbing.

The bad news remains what it always has – that meaningfully reduced consumer spending, combined with the Fed’s continued stated determination to keep increasing the price of the borrowing that spurs so much spending, could trigger more unemployment, even worse wage trends, and a possibly painful recession.

Yet as I wrote in that above-linked RealityChek post, the $64,000 questions that will determine inflation’s fate remains unanswered: Will recession fears lead the Fed to chicken out, and at least pause its inflation-fighting interest rate increases? And will Congress and the Executive Branch decide to ride to the rescue as well, with new politically popular stimulus programs – which are likely to stimulate inflation, too?  My answer remains a pretty confident “Yes,” which is why my forecast for the economy calls for a short, fairly shallow downturn followed by a significant stretch of “stagflation” – sluggish growth and above-Fed-target inflation.   

(What’s Left of) Our Economy: No, Immigration Curbs Haven’t Caused U.S. Labor Shortages

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CCP Virus, Center for Immigation Studies, coronavirus, COVID 19, immigrants, Immigration, Karen Ziegler, Labor Force Participation Rate, labor shortages, LFPR, prime-age population, productivity, Steven A. Camarota, Trump administration, wages, workers, {What's Left of) Our Economy

Thanks to the non-partisan Center for Immigration Studies (CIS), one of the biggest and most harmful recent claims about the American economy has been exposed as a sham: that the current shortages of labor about which employers keep whining are due to a shortage of immigrant workers spurred by the Trump administration’s restrictive policies and worsened by the CCP Virus pandemic.

As known by RealityChek regulars, the very idea of a chronic labor shortage – as opposed to the kinds of temporary supply and demand mismatches that occur regularly in every market-based economy – is un-serious mainly because the solution typically is so simple: raise wages enough to attract new employees. And standard labor shortage claims tend to be harmful because they’re usually covers for business demands for more mass immigration – which enables them to keep wages down rather than respond by investing in labor-saving equipment and improving efficiency in ways that boost productivity and therefore benefit the entire economy, especially long term.

But leaving such broader considerations aside, CIS, a Washington, D.C.-based think tank, has demonstrated that blaming immigration restrictions for all the Help Wanted signs that do indeed seem to be appearing all over the country is simply wrong on its face. According to a December 22 CIS study by Steven A. Camarota and Karen Ziegler, the biggest culprit by far is a continuing decline in the number of U.S.-born residents of the country looking for work.

The authors use Census data to show that although the number of immigrants (legal and illegal) working in America did fall from 27.8 million in November, 2018 (the Trump-era peak) and 27.7 million the following November (just before the pandemic arrived in the United States), by last month (the latest available) data, it was back up to 29.6 million. So there the immigrant worker population has not only recovered all of its pre-pandemic losses. It’s 1.9 million greater than its pre-CCP Virus level.

More important statisically speaking, that November, 2022 immigrant worker number is above the level it would have reached had this population’s growth trend going back to 2000 simply continued uninterrupted.

Meanwhile, the number of U.S.-born U.S. residents in the workforce has continued its long-term decline despite a modest rebound from pre-pandemic lows. The standard measure is the Labor Force Participation Rate (LFPR), which shows the share of working-age Americans are either on the job or looking for one.

The LFPR for all U.S.-born residents of the country fell from 77.3 percent in November, 2000 to 74.1 percent in 2019, dropped further in pandemic-y 2020, and has only bounced back modestly as of November, 2022 to 73.5 percent. And the post-2019 fall-offs for the most closely followed groups – “prime age” men and women, defined as the 25-54- year olds – have generally been steeper. As a result, the number of U.S.-born Americans at work now is 2.1 million smaller than in November, 2019.

In fact, Camarota and Ziegler calculate that if the total U.S. LFPR today was the same as in 2000, 6.5 million more U.S.-born residents would be either working or looking for work today. That’s 3.42 times more than the number of foreign-born residents who have been added to the working population during the pandemic era.

So whatever labor shortages have been experienced lately have been home-grown – and unrelated to immigration restrictions. And if the business community and others favoring more immigration were really interested in easing them meaningfully, they’d be spending more of their time figuring out how to attract more U.S.-born residents to the workplace. That wouldn’t boost national productivity or wages. But the social benefits of ending idleness and welfare dependency in the working-age population should hardly be ignored.

Unfortunately, as Camarota and Ziegler write, the push to fill the gap with immigrants both threatens to keep the native-born on the occupational sidelines and increase their vulnerability to crime, addiction, mental health issues, and obesity, as well as to “reduce political pressure from employers and society in general to address” the domestic LFPR decline.

(What’s Left of) Our Economy: Two New Must-Read Reports on U.S. Trade Policy

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African Americans, Ana Swanson, China, Donald Trump, globalization, imports, Information Technology and Innovation Foundation, intellectual property, ITIF, Jobs, manufacturing, mercantilism, minorities, non-market economy status, protectionism, Section 337, The New York Times, Trade, trade law, U.S. International Trade Commission, USITC, wages, {What's Left of) Our Economy

Good things just came in twos on the U.S. trade policy front, in the form of two separate reports that spotlighted a major, vastly under-appreciated result of America’s approach to the international economy for many decades, and that proposed an excellent new idea for shielding U.S.-based workers and businesses from Chinese (and some other foreign) predatory trade practices.

The first study was released November 14 by the U.S. International Trade Commission (USITC) and alertly covered by Ana Swanson of The New York Times. The USITC researchers usefully reviewed the academic literature on trade policy’s impact on various U.S. population groups and found that overall, and came to two major conclusions. First, “in the face of trade shocks [like the soaring levels of imports from China that followed Washington’s decision in the 1990s to expand greatly bilateral economic ties], Black and other Nonwhite workers [fared] worse than their White counterparts.” Second, “import competition had a large and disproportionately negative effect on wages of minority workers.”

The reasons, the USITC stressed, were many and varied, and included discrimination in hiring and firing practices and the generally lower education levels of minority groups, which has tended to concentrate them in labor-intensive manufacturing sectors that have been vulnerable the longest to penny-wage competition from China and other developing countries. But one conclusion that shone through was the historic importance of manufacturing generally – including the kind of heavy manufacturing found in the Midwest, to minority prospects for economic progress.

And these conclusions will come as no surprise to RealityChek regulars, as the harm done to minority communities by a trade policy that I’ve long argued has been offshoring- and import-friendly has been the subject of two posts from several years back. (See here and here.) But as the X indicated, and the USITC report emphasized, too many gaps remain in the data currently available and too much of what can be accessed is too poorly structured to create a genuinely satisfactory picture. So how about USITC folks getting on the horn to their Census Bureau counterparts to get cracking?

One other point worth mentioning (which the USITC understandably didn’t include): The first recent President who tried at all to change the trade policies that apparently have hit U.S. minorities hardest was one Donald Trump – who’s still being widely pilloried as a white supremacist.

The second, more forward-looking report was released Monday by the Infomation Technology and Innovation Foundation (ITIF), a Washington, D.C.-based think tank, and recommended a creative way to use U.S. trade law to shut out of the American market products whose competitiveness has benefited from “unfair trade practices in non-market, non-rule-of-law economies such as China.”

The trade law provision ITIF would employ is called Section 337. The reason? Unlike other U.S. trade law measures, rather than authorize the imposition of tariffs on imports that are sold to Americans at below-market prices (dumping) or enjoy certain kinds of subsidies, or profit from intellectual property theft (the main alleged trade crimes addressed by American trade law), in certain circumstances Section 337 authorizes completely banning U.S. imports from foreign entities shown to have profited from such practices.

ITIF proposes to increase greatly the number of these circumstances, especially for cases not involving intellectual property, for transgessions by China and other economic rogues.

Perhaps most important, in cases involving such outlier countries, it would eliminate the (already weakened) requirement that a plaintiff domestic company or industry has been injured by predatory trade practices. (In the U.S. trade law system, plaintiffs not only need to demonstrate that an outlawed practice exists, but that it has seriously harmed them.) As ITIF argues,

“It should be irrelevant if the domestic company is harmed in the here and now. The point is that the unfair practices should not be rewarded, period. The other point is that all too often, especially in technologically complex industries, by the time harm is determined it is too late: The company has suffered irreversible decline in its competitive position. Adjudicating blame becomes a coroner’s inquest over dead U.S. companies.”

Two other crucial ways ITIF would lower barriers to winning Section 337 cases involving non-market economies: First, it would spur U.S. trade law to cover foreign governments that provide predatory support for their entities, as well as specific foreign entities themselves. This improvement matters a lot because in so many instances (for example, in every single instance of Chinese transgressions), American businesses and workers are facing an entire national system aimed at creating advantages having nothing to do with free market forces. As a result, U.S. plaintiffs typically wind up facing a defendant with ultimately much deeper pockets, and the high costs of American trade lawyering and the uncertain chances of success deter many from going this route to begin with.

Second, current U.S. trade law implicitly assumes that the damage inflicted by foreign trade predation is limited to a plaintiff company or industry. But given all the linkages among industries nowadays, that view is way too narrow, and can leave the entire economy exposed to much wider-ranging and long-term damage.

To remedy both problems, ITIF would also entitle Washington to take up their causes by permitting any U.S. government agency to file a trade case against a non-market economy.

I’ve got a few bones to pick with these ITIF recommendations. For example, damaging trade predation is by no means confined to China. Many economies that it would let off the hook, especially in East Asia, operate national systems of protection and predation, too. At the same time, as the report suggests, this approach could induce the kind of international cooperation that would increase by orders of magnitude the price China – clearly a culpit in a class by itself – would pay for what ITIF rightly calls its “economic aggression.”

Moreover, the new trade law regime wouldn’t encompass “multinational firms operating in China.” That’s an awfully big loophole, not only because it’s these companies (including U.S.-owned companies) send stateside lots of products that benefit from China’s mercantilism, but because taking advantage of these predatory practices has been a prime reason for moving their factories to China to begin with (as well as lying behind their support for admitting China into the World Trade Organization, and thereby providing these exports with a vital layer of international legal protection against effective, unilateral responses from Washington).

But in the name of making sure the perfect doesn’t prevent the good, I can support this policy, too (at least as a start). And because ITIF’s proposals would go far toward adjusting the decades-old U.S. trade law system to recent global economic reality, I hope both major paties in Washington get behind it ASAP.

(What’s Left of) Our Economy: America’s Long-Time Productivity Slump Looks Like it’s Deepening

Tags

CCP Virus, coronavirus, COVID 19, inflation, Labor Department, labor productivity, productivity, total factor productivity, wages, {What's Left of) Our Economy

Since strong productivity increases are America’s best hope for improving living standards, sustainable prosperity and robust non-inflationary economic growth, it’s clearly bad news that the nation may be on the edge of a productivity growth cliff – and staring into a canyon. That’s the clear message being sent by the new official U.S. preliminary data on labor productivity for the second quarter of this year released by the Labor Department this morning.

At least as bad: The lousy labor productivity figures strengthen the case that even though U.S. wages aren’t rising nearly as fast as living cost, they still could be fueling some of the torrid inflation of the last year and a half or so.

There’s a possibility that this dreadful performance is just another hangover from the CCP Virus pandemic and related lockdowns and curbs on individuals’ voluntary activity (along with the massive covid relief measures provided by Washington), which has played havoc with the entire economy and the data used to monitor its health. But it’s crucial to remember that the nation is also suffering a long-term productivity growth slump, so any virus distortions aren’t reflected in the numbers may not be game-changing.

As known by RealityChek regulars, labor productivity is the narrower of the two measures of efficiency tracked by Labor, and measures the output of each worker per each hour on the job. The Department itself made clear how awful the second quarter results were for the non-farm business sector – the numbers that are followed most closely:

“The 2.5-percent decline in labor productivity from the same quarter a year ago [actually, it was 2.55 percent] is the largest decline in this series, which begins in the first quarter of 1948.” (Actually, the Department’s own raw data tables go back to the first quarter of 1947.) Let’s all agree that a 75-year all-time worst is really alarming.

The quarterly figures were stomach-turning, too. Labor productivity sank at an annual rate of 4.71 percent sequentially – the fifth biggest such drop ever. Further, this followed on the heels of the first quarter’s sequential 7.64 percent nosedive – the second worst since the 12.26 percent crash of the third quarter of 1947.

And here’s some thoroughly depressing context: Such back-to-back quarterly declines are rare. Before that latest stretch, they – or longer labor productivity losing streaks – had only happened eleven times over the last three quarters of a century.

Two consecutive declines in labor productivity aren’t the longest such stretch on record. That dubious honor belongs to the five-quarter period between the second quarter of 1973 and the third quarter of 1974. But the latest cumulative quarterly deterioration of 12.26 percent at annual rates is the worst of all time. True, it’s just slightly greater than the 12.24 percent cumulative drop suffered during that 1973-74 productivity depression. But don’t forget – the current streak may not be over yet!

As for that 2.51 percent annual decline in labor productivity, the context here is completely gloomy, too. As with the sequential results, it represented the second straight worsening – following the 0.58 percent drop in the first quarter. And two or more straight annual labor productivity decreases have only happened six times before this morning’s release.

Also as with the quarter-to-quarter figures, a stretch of two straight decreases isn’t the longest ever. Between 1973 and 1974, annual productivity fell four consecutive times. But the current annual slump is the deepest since that which lasted between the first and third quarters of 1982. And of course, today’s slump isn’t over yet, either.

As I’ve written previously, productivity is the measure of economic performance in which most economists are least confident (especially in service industries that make up the vast bulk of the U.S. economy). Further, labor productivity is a narrower measure of efficiency than total factor productivity, which measures output as a function of a wide range of inputs used by business (not only workers but capital, technology, materials, etc.) And today’s second quarter results will be revised next month (which recently I mistakenly reported as the date for these preliminary numbers), with the latest set of (annual) revisions coming this fall.

But most legitimate doubts about the productivity data mainly concern their precision, not the direction they show. And all-time worsts and near-worsts surely can’t be mainly attributed to measurement flaws. And as for the total factor results, for decades, they’ve been no great shakes, either, as made clear in the above linked RealityChek post. Maybe the revisions will substantially brighten the picture?

So far, though, that’s just a “maybe.” The best information available indicates that America’s long-time productivity woes are taking a big turn for the worse, and that in combination with recent wage increases could be embedding unacceptably high inflation – and stagnating living standards – into the U.S. economy’s foreseeable future.

(What’s Left of) Our Economy: The Worst of All Possible Inflation Worlds for U.S. Workers?

Tags

ECI, Employment Cost Index, Federal Reserve, inflation, Jerome Powell, Labor Department, labor productivity, PCE, personal consumption expenditures index, productivity, recession, stagflation, wages, workers, {What's Left of) Our Economy

The newest report on a key official measure of worker compensation has just shown that, during today’s high inflation era, American workers could be both significantly fueling the soaring prices that are dominating the U.S. economy and getting shafted by them.

This measure – called the Employment Cost Index – is tracked by the Department of Labor, and is watched closely by the Federal Reserve (the government’s chief inflation-fighting agency) for two major reasons. First, it includes not just wages, but salaries and non-cash benefits. Second, unlike the Labor Department’s average wage figures, it takes into account what economists call compositional effects.

In other words, the those wage figures report hourly and weekly pay for specific sectors of the economy, but they don’t say anything about labor costs for businesses for the same jobs over time. The ECI tries to achieve this aim by factoring in the way that the makeup of employment between industries can change, and the way that the makeup of jobs within industries can change (e.g., from a majority of lower wage occupations to one of higher wage occupations).

In his press conference last Wednesday following the Federal Reserve’s announcement of a second straight big increase in the interest rate it controls directly, Chair Jerome Powell mentioned that the ECI report coming out on Friday would greatly influence the central banks’ decision on how much more tightening of credit conditions would be needed to slow the economy enough to cool inflation acceptably.

That’s because, as he has explained previously, the supposedly superior insights on worker pay provided by the ECI enable the Fed to figure out whether a major inflation engine has started to rev up – employee compensation rising faster than worker productivity. Industries (or entire economies) in this situation are denied the option of absorbing wage increases by achieving greater efficiencies in their operations Therefore, they face more pressure to maintain earnings and profits by passing pay increases onto their customers, their customers face more pressure to keep up with living costs by pushing for pay hikes themselves, and what economists term a classic and hard-to-break wage-price spiral takes off.

The new ECI results per se looked alarming enough from this perspective. They showed that between the second quarter of 2021 and the second quarter of 2022, total employee compensation for the private sector ose by 5.5 percent. That’s the fastest pace since this data series began in 2001. Moreover, this record represented the third straight all-time high. (RealityChek regulars know that private sector numbers are the most important gauge, since its pay and other indicators are mainly driven by market forces, unlike the statistics for government workers, where the indicators largely reflect politicians’ decisions.)

Sadly, though, according to the Fed’s favorite measure of consumer inflation (the Commerce Department’s Personal Consumption Expenditures price index), living costs increased by 6.45 percent. So workers fell further behind the eight ball.

Perhaps worst of all, however, productivity growth is in the toilet. We won’t get the initial second quarter figures until September 1, but during the first quarter, for non-farm businesses (the most closely followed measure for the private sector), it fell year-on-year by 0.6 percent – the worst such performance since the fourth quarter of 1993.

Nor was this figure a one-off for the current high inflation period. From the time consumer prices began their recent speed up (April, 2021) through the first quarter of this year, labor productivity is off by 1.36 percent, the ECI is up 3.95 percent, and PCE inflation has risen by 4.65 percent. So a strong case can be made that workers, businesses, and the economy as a whole are in the worst of all possible worlds.

Whenever productivity is the subject, it’s important to note that it’s the economic performance measure in which economists probably have the least confidence. And even if it’s accurate, don’t jump to blame workers for sloughing off. Maybe management is doing a lousy job of improving their productivity. Alternatively, maybe managers simply haven’t figured out how to do so in the midst of so many unusual challenges posed by the pandemic and its aftermath – chiefly the stop-go nature of the economy’s early aftermath, and the resulting turbulence that, along with the Ukraine war and China’s Zero Covid policy, is still roiling and stressing supply chains.

Whatever’s wrong, though, unless a course correction comes soon, it looks like the odds of the economy sinking into prolonged stagflation – roaring inflation and weak economic growth – are going up. And ultimately, that matters more to the American future than whether some form of recession is already here, or around the corner.

Making News: Back on National Radio Tonight on China Tariffs and Inflation…& More!

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agriculture, Biden, Breitbart.com, CBS Eye on the World with John Batchelor, China, food, Gordon G. Chang, Immigration, inflation, Making News, Neil Munro, Newsweek, productivity, tariffs, Trade, Ukraine-Russia war, wages

I’m pleased to announce that I’m scheduled to return tonight to the nationally syndicated “CBS Eye on the World with John Batchelor.” I don’t know yet exactly when the taped segment will be broadcast, but John’s show airs week night’s between 10 PM and midnight EST, he’s always worth tuning in, and tonight’s segment will cover President Biden’s ongoing flirtation with the (ignorant) idea that cutting tariffs on imports from China will help cool torrid U.S. inflation.

You can listen live at website like this, and as always, if you can’t, I’ll post a link to the podcast as soon as it’s available.

In addition, it was great to be quoted by John’s frequent co-host Gordon G. Chang on the weaponization and balkanization of world food trade that’s resulted from the Ukraine-Russia war. You can read his June 21 Newsweek column on this subject at this link.

Moreover, it was just as gratifying to be cited by Breitbart.com‘s Neil Munro in this piece the same day on the often misunderstood relationship between immigration, wages, and productivity growth. Click here to read.

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

(What’s Left of) Our Economy: You Bet that Mass Immigration Makes America Less Productive

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amnesty, Bureau of Labor Statistics, construction, demand, Donald Trump, economics, Forward.us, hotels, illegal aliens, immigrants, Immigration, labor productivity, productivity, restaurants, supply, total factor productivity, wages, {What's Left of) Our Economy

An archetypical Washington, D.C. swamp denizen thought he caught me with my accuracy pants down the other day. Last Sunday’s post restated a point I’ve made repeatedly – that when countries let in too many immigrants, their economies tend to suffer lasting damage because businesses lose their incentives to improve their productivity – the best recipe for raising living standards on a sustainable, and not bubble-ized basis, as well as for boosting employment on net by fostering more business for most existing industries and enabling the creation of entirely new industries.

The reason mass immigration kneecaps productivity growth? Employers never need to respond to rising wages caused by labor shortages by buying labor-saving machinery and technology or otherwise boost their efficiency. Instead, they continue the much easier and cheaper approach of hiring workers whose pay remains meager because immigrants keep swelling the workforce.

It’s a point, as I’ve noted, strongly supported by economic theory and, more important, by evidence. But Todd Schulte, who heads a Washington, D.C.-based lobby group called Forward.us, wasn’t buying it. According to Schulte, whose organization was founded by tech companies like Facebook with strong vested interests in keeping U.S. wages low, “the decade of actual [U.S.] productivity increases came directly after the 1986 legalization AND 1990 legal immigration expansion!”

He continued on Twitter, “giving people legal status and… expanding legal immigration absolutely has not harmed productivity in the last few decades in the US.”

So I decided to dive deeper into the official U.S. data, and what I found was that although there are bigger gaps in the productivity numbers than I’d like to see, there’s (1) no evidence that high immigration levels following the 1986 amnesty granted by Washington to illegal immigrants and the resulting immigration increase mentioned by Schulte improved the national productivity picture over the pre-amnesty period; and (2) there’s lots of evidence that subsequent strong inflows of illegal immigrants (who Schulte and his bosses would like to see amnestied) have dragged big-time on productivity growth.

First, let’s examine the productivity of the pre-1986 amnesty decades, which provides the crucial context that Schulte’s claim overlooks.

According to U.S. Bureau of Labor Statistics figures, during the 1950s, a very low immigration decade (as shown by the chart below), labor productivity grew by an average of 2.63 percent annually. Significantly, this timespan includes two recessions, when productivity normally falls or grows unusually slowly.

Figure 1. Size and Share of the Foreign-Born Population in the United States, 1850-2019

During the 1960s expansion (i.e., a period with no recessions), when immigration levels were also low, the rate of labor productivity growth sped up to an annual average of 3.26 percent.

The 1970s were another low immigration decade, and average labor productivity growth sank to 1.87 percent. But as I and many other readers are old enough to remember, the 1970s were a terrible economic decade, plagued overall by stagflation. So it’s tough to connect its poor productivity performance with its immigration levels.

Now we come to the 1980s. Its expansion (and as known by RealityChek regulars, comparing economic performance during like periods in a business cycle produces the most valid results), lasted from December, 1982 to July, 1990, and saw average annual labor productivity growth bounce back to 2.24 percent.

As noted by Schulte, immigration policy changed dramatically in 1986, and as the above chart makes clear, the actual immigant population took off.

But did labor productivity growth take off, too? As that used car commercial would put it, “Not exactly.” From the expansion’s start in the first quarter of 1982 to the fourth quarter of 1986 (the amnesty bill became law in November), labor productivity growth totalled 10.96 percent. But from the first quarter of 1987 to the third quarter of 1990 (the expansion’s end), the total labor productivity increase had slowed – to 5.76 percent.

The 1980s are important for two other reasons as well. Nineteen eighty-seven is when the Bureau of Labor Statistics began collecting labor productivity data for many U.S. industries, and when it began tracking productivity according to a broader measure – total factor productivity, which tries to measure efficiency gains resulting from a wide range of inputs other than hours put in by workers.

There’s no labor productivity data kept for construction (an illegal immigrant-heavy sector whose poor productivity performance is admitted by the sector itself). But these figures do exist for another broad sector heavily reliant on illegals: accommodation and food services. And from 1987 to 1990 (only annual results are available), labor productivity in these businesses increased by a total of 3.45 percent – worse than the increase for the economy as a whole.

On the total factor productivity front, between 1987 and 1990 (again, quarterly numbers aren’t available), it rose by 1.23 percent for the entire economy, for the construction industry it fell by 1.37 percent, for the accommodation sector, it fell by 2.30 percent, and for food and drinking places, it increased by 2.26 percent. So only limited evidence here that amnesty and a bigger immigrant labor pool did much for U.S. productivity.

As Schulte pointed out, the 1990s, dominated by a long expansion, were a good productivity decade for the United States, with labor productivity reaching 2.58 percent average annual growth and total factor productivity rising by 10.87 percent overall. But when it comes to labor productivity, the nineties still fell short of the 1950s (even with its two recessions) and by a wider margin of the 1960s.

But did robust immigration help? Certainly not in terms of labor productivity. In accommodation and food services, it advanced by just 0.84 percent per year on average.

Nor as measured by total factor productivity. For construction, it actually dropped overall by 4.94 percent. And although it climbed in two other big illegal immigrant-using industries, the growth was slower than for the economy as a whole (7.17 percent for accommodation and 5.17 percent for restaurants and bars).

Following an eight month recession, the economy engineered another recovery at the end of 2001 that lasted until the end of 2007. This period was marked by such high legal and illegal immigration levels that the latter felt confident enough to stage large protests (which included their supporters in the legal immigrant and immigration activist communities) demanding a series of new rights and a reduction in U.S. immigration deportation and other control policies.

Average annual labor productivity during this expansion grew somewhat faster than during its 1990s predecessor – 2.69 percent. But annual average labor productivity growth for the accommodation and food services sectors slowed to 1.19 percent, overall total factor productivity growth fell to 1.19 percent, and average annual total factor productivity changes in accommodations, restaurants, and construcion dropped as well – to 6.36 percent, 2.67 percent, and -9.08 percent, respectively.

Needless to say, productivity grows or shrinks for many different reasons. But nothing in the data show that immigration has bolstered either form of productivity, especially when.pre- and post-amnesty results are compared. In fact, since the 1990s, the greater the total immigrant population, the more both kinds of productivity growth deteriorated for industries relying heavily on illegals. And all the available figures make clear that these sectors have been serious productivity laggards to begin with.

And don’t forget the abundant indirect evidence linking productivity trends to automation – specifically, all the examples I’ve cited in last Sunday’s post and elsewhere of illegal immigrant-reliant industries automating operations ever faster — and precisely to offset the pace-setting wage increases enjoyed by the lowest income workers at least partly because former President Trump’s restrictive policies curbed immigration inflows so effectively. 

In other words, in the real world, changes in supply and demand profoundly affect prices and productivity levels – whatever hokum on the subject is concocted by special interest mouthpieces who work the Swamp World like Todd Schulte.

(What’s Left of) Our Economy: Everything You Wanted to Know About Immigration & the Economy — & Less

Tags

economics, immigrants, Immigration, innovation, labor shortages, Open Borders, productivity, The Washington Post, wages, {What's Left of) Our Economy

Leave it to the zealously pro-Open Borders Washington Post. It chose as the reviewer of a book by two economic historians apparently unaware of the relationship in U.S. history between immigration levels and productivity improvement a business professor seemingly just slightly less clueless about this crucial link either historically and going forward.

Doubt that? Then take a look at this morning’s rave by Harvard business professor Michael Luca about a new study by Ran Abramitzky and Leah Boustan of Stanford and Princeton Universities, respectively, titled Streets of Gold: America’s Untold Story of Immigrant Success.

According to Luca, Streets of Gold “reflects an ongoing renaissance in the field of economic history fueled by technological advances — an increase in digitized records, new techniques to analyze them and the launch of platforms such as Ancestry — that are breathing new life into a range of long-standing questions about immigration. Abramitzky and Boustan are masters of this craft, and they creatively leverage the evolving data landscape to deepen our understanding of the past and present.”

And their overall conclusion (which rightly takes into account the non-economic contributions of immigrants to American life) is that (in Abamitzky’s and Boustan’s words): “Immigration contributes to a flourishing American society” – especially if you take “the long view.”

But there’s no indication in Luca’s review that the authors weigh in on a key (especially in the long view) impact of immigration on the U.S. economy – how it’s affected the progress made by the nation in boosting productivity: its best guarantee for raising living standards on a sustainable basis.

As I’ve written repeatedly, mainstream economic theory holds that one major spur to satisfactory productivity growth is the natural tendency of businesses to replace workers with various types of machinery and new technologies when those workers become too expensive. Most economists would add that although jobs may be lost on net in the short-term, they increase further down the road once these productivity advances create new companies, entire industries, and therefore employment opportunities.

By contrast, when businesses know that wages will stay low – for example, because large immigration inflows will keep pumping up the national labor supply much faster than the demand for workers rises – these companies will feel little need to buy new machinery or otherwise incorporate new technologies simply because they won’t have to.

And more important than what the theory says, abundant evidence indicates that businesses have behaved precisely this way in the past (when scarce and thus increasingly expensive labor prompted acquisitions of labor-saving devices that helped turn the United States into an economic and technology powerhouse), into the present (as industries heavily dependent on penny-wage and often illegal immigrant labor have tended to be major productivity laggards).  

Reviewer Luca demonstrates some awareness that this issue matters in the here and now and going forward, writing that “Compared with the rest of the country, businesses in high-immigration areas have access to more workers and hence less incentive to invest in further automation.”

He also points out that “This has implications for today’s immigration debates.”

But his treatment of the current situation is confused at best and perverse at worst (at least if you buy the economic conventional wisdom and evidence concerning the productivity-immigration relationship).

Principally, he claims that “the United States is expected to face a dramatic labor market shortage as baby boomers retire and lower birthrates over time result in fewer young people to replace them.” Let’s assume that’s true – despite all the evidence that more and more employers are filling all the job openings they’ve been claiming by automating. (See, e.g., here, here, and here.)

Why, though , does Luca simply conclude that “Increased immigration is one approach to avoiding the crunch. Notably, the other way to avert this crisis is through further automation, enabled by rapid advances in artificial intelligence. Immigration policy will help shape the extent to which the economy relies on people vs. machines in the decades to come.”

Is he really implying that a low-productivity — and therefore low-innovation — future would be a perfectly fine one for immigration (and other) policymakers to be seeking?

Just as important, although Luca clearly recognizes that these questions have at least some importance nowadays, he provides no indication of where the book’s authors stand.

So let the reader beware. Luca clearly believes, as Post headline writers claim, that Streets of Gold makes clear “What the research really says about American immigration.”  What his review makes clear is that this claim isn’t even close.

   

(What’s Left of) Our Economy: More Evidence that Pay Really is Worsening U.S. Inflation

Tags

ECI, Employment Cost Index, Federal Reserve, inflation, Labor Department, labor productivity, multifactor productivity, productivity, recession, wages, workers, {What's Left of) Our Economy

Back in February, I wrote that although U.S. workers’ hourly wages were rising more slowly than the standard measure of consumer prices (the Consumer Price Index, or CPI), and therefore on that basis couldn’t be blamed for the recent, historically high inflation, there was one reason to be worried about the last few years’ healthy pay hikes: Such pay was rising faster than worker productivity.

I explained that this trend inevitably fueled inflation because “when businesses are in situations where wages are rising but their operations are becoming more efficient at a faster rate, they can maintain and even increase profits without passing higher costs on to their customers. When productivity is rising more slowly than inflation, this option isn’t available – or not nearly as readily.”

And more important than my views on the subject, these concerns have been expressed by Jerome Powell, Chairman of the Federal Reserve, the U.S. central bank that has the federal government’s main inflation-fighting responsibilities.

So it’s discouraging to report that new government data on both pay and productivity have come out in the last two weeks, and they make clear that the pay-productivity gap has just been widening faster than ever.

The pay data come from the Labor Department’s latest Employment Cost Index (ECI), which tracks not only hourly wages but salaries and benefits, while the productivity figures come from Labor’s new release on labor productivity, which measures how much output a single worker turns out in a single hour. And conveniently, both releases take the story through the first quarter of this year.

The results? From the fourth quarter of last year through this year’s first quarter, total compensation for all private sector workers, the ECI increased by 1.42 percent, while labor productivity for non-farm businesses (the category most closely followed, and basically identical with the private sector) fell by 1.93 percent. That last number was labor productivity’s worst such performance since the third quarter of 1947. (As RealityChek regulars know, I focus on private sector workers because their pay levels largely reflect market forces, not politicians’ decisions, and consequently reveal more about the labor picture’s fundamentals.)  

The year-on-year statistics aren’t much better – if at all. Between the first quarter of last year and the first quarter of this year, the ECI for the private sector grew by 4.75 percent, but labor productivity dipped by 0.62 percent.

And since the U.S. economy began recovering from the first wave of the CCP Virus pandemic, during the third quarter of 2020, the private sector ECI is up by 6.61 percent, while labor productivity is down by 0.78 percent.

As also known by RealityChek readers, labor productivity isn’t the economy’s only measure of efficiency. Multifactor productivity is a broader, and therefore presumably more useful gauge. It’s not as easy to work with because its results only come out annually, and the latest only take the story up to the end of last year.

The picture is decidedly more encouraging – at least recently. From 2020-2021, multifactor productivity for non-farm businesses improved by 3.17 percent. But it still wasn’t good relatively speaking, since from the fourth quarter of 2020 through the fourth quarter of 2021, the private sector ECI increased by 4.38 percent.

Worse, from 2001 (when the Labor Department began the ECI) to last year, pay b that gauge was up 74 percent while non-farm business multifactor productivity had advanced by a mere 16.46 percent.  Therefore, clearly the recent pay and productivity numbers don’t simply stem from pandemic-related distortions of the economy. 

To repeat important points from last February’s post, the productivity lag doesn’t mean that U.S. workers overall don’t deserve nice-sized raises and better benefits, and it certainly doesn’t mean that they’re solely or largely to blame even for poor labor productivity growth. After all, managers are paid as handsomely as they are fundamentally to figure out how to make their employees more productive. Also, productivity is a barometer of economic performance that’s unusually difficult to determine precisely.

But the new figures do strengthen the case that labor costs bear significant responsibility for boosting inflation, and that a major fear surrounding overheated price increases – that inflation acquires powerful momentum as surging prices lead to big wage hike demands and vice versa, and create a spiralling effect that’s excuciatingly difficult to end without the Fed throwing the economy into recession. Just as depressingly, the new pay and productivity figures also strengthen the case that, unless the economy becomes a lot more productive very quickly, the sooner this harsh medicine is administered, the better for everyone in the long run.