August 25, 2014

Are Seventh District Labor Markets Still Slack?

By Bill Testa and Jacob Berman

There is no question that the U.S. labor market has been gradually but steadily healing after the Great Recession. The national unemployment rate peaked at 10% in October 2009, but it has since fallen to 6.2% (as of July 2014). The nation experienced a net loss of 8.7 million jobs during the downturn, and finally finished making up for those job losses just this past May. So, undeniably, progress has been made in the labor market, but now the questions facing policymakers and other government officials are how much slack capacity in the employable population remains and whether further tightening of labor market conditions will push up wages and prices.

Recently, short-term unemployment—defined as the share of the labor force that has been unemployed for 26 weeks or less (see below)—has fallen to levels that have been historically associated with robust economic conditions. In contrast, despite post-recessionary declines in long-term unemployment (i.e., the share of the labor force that has been unemployed for greater than 26 weeks), its recent levels remain well above the historical norm. Though high long-term unemployment may be a sign of considerable labor market slack, some argue that the vast majority of the long-term unemployed lack the specific skills and other characteristics to be hired or trained. If this proves to be correct, it would imply that the U.S. labor market is nearing its full capacity.


Source: U.S. Bureau of Labor Statistics, Current Population Survey, from Haver Analytics

In order to provide more useful guideposts for macroeconomic policymaking, economists Dan Aaronson and Andrew Jordan recently investigated the relationships between rising wages and indicators of labor market tightness. In their recent Chicago Fed Letter, the authors find a strong correlation between real wage growth and two prominent measures of labor market slack—medium-term unemployment (i.e., the share of labor force unemployed for five to 26 weeks) and the percentage of the labor force reporting they are working part-time involuntarily for economic reasons (such as unfavorable business conditions or seasonal decreases in demand). Partly because both of these measures of labor slack remain elevated today, the authors conclude that real wage growth in June 2014 would have been one-half of a percentage point to one full percentage point higher under the labor market conditions of the 2005-07 U.S. economy.

While we often speak of the labor market as one monolithic term, labor market conditions vary widely by occupation, industry, and location. In their analyses, Aaronson and Jordan identify statistical relationships between real wage growth and labor market conditions by observing individual states. In the chart below, we see the general pace of employee compensation for both the United States and for the East North Central Region, which includes four of the five states of the Seventh Federal Reserve District.[1] In both the nation and the region, recent growth in labor compensation continues to fall short of that in the pre-recessionary period.[2]


Source: U.S. Bureau of Labor Statistics, Current Population Survey, from Haver Analytics

Also, as seen in the next three charts, Seventh District states generally exhibited signs of greater labor market slack in 2013 relative to the pre-recession year of 2007.[3] Long-term unemployment—both in the Seventh District states and in the nation—has stayed high during the economic recovery. In 2013, the long-term unemployment rate in Illinois was the highest among the District states (followed by Michigan). Notably, Michigan’s long-term unemployment rate had been at a high rate already in 2007 as a result of the severe restructuring of the automotive industry in the past decade.


Source: U.S. Bureau of Labor Statistics, Current Population Survey, from Haver Analytics

Medium-term measures also remained elevated among Seventh District states in 2013. However, they suggested that the District’s state labor markets may be less slack than the national one; in particular, Iowa and Wisconsin, where 2013 medium-term unemployment rates had almost returned to their 2007 levels, showed their labor markets may be improving faster than the nation’s.


Source: U.S. Bureau of Labor Statistics, Current Population Survey, from Haver Analytics

According to the measures of the percentage of the labor force who are involuntary part-time workers, there also appeared to be additional work force supply available in both the Seventh District states and the nation in 2013 as compared with 2007. This was the case for all five District states. Moreover, it should be noted that Michigan, Indiana, and Illinois displayed a higher percentage of involuntary part-timers than the nation did in 2013. Involuntary part-time workers are those who would choose to work more hours if it were possible. Typically, such workers have had their hours cut back in their current job, or they are part-time workers who cannot find a full-time job due to poor economic conditions in their occupation.[4]


Source: U.S. Bureau of Labor Statistics, Current Population Survey, from Haver Analytics

As these measures indicate, even while labor markets continue to tighten in the economic recovery, there is significant variation across states. According to the charts above, state labor markets in the Seventh District continue to be somewhat slack. Further, the observed pace of wage and employee compensation increases are still below those of the pre-recessionary period.
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[1]The Federal Reserve’s Seventh District comprises major parts of Indiana, Illinois, Michigan, and Wisconsin, as well as the entirety of Iowa. The U.S. Census Bureau’s East North Central Region comprises Ohio and the entirety of the Seventh District states excepting any part of Iowa.(Return to text)

[2]Labor compensation includes both employee wages and benefits.(Return to text)

[3]State averages are reported here, though we acknowledge that local conditions and markets for specific skills and occupations differ. The Chicago Fed’s regional research staff keeps abreast of such conditions and markets through local meetings with labor market participants and businesses, as well as through formal surveys.(Return to text)

[4]For a full discussion see Rob Valletta and Leila Bengalli, "What’s Behind the Increase in Part-time Work?"(Return to text)

Posted by Testa at 8:46 AM | Comments (0)

August 18, 2014

Economic Development in Chicago

By Rick Mattoon

This last blog in our series on the largest cities in the Chicago Fed’s District focuses on Chicago. (For a complete profile of all five cities, see Industrial clusters and economic development in the Seventh District’s largest cities.) Chicago holds a different place in the urban hierarchy than the other large cities in the District. More than just a large midwestern city, Chicago has obtained global city status and competes with other global cities in the U.S. (New York, Los Angeles, Washington and San Francisco) and abroad (London, Paris, Tokyo, and Hong Kong to name a few) for investment and reputation. Chicago is the home to world-class museums, cultural institutions and universities, as well as corporate headquarters and one of the busiest airports in the world. Importantly, one of Chicago’s primary advantages is its ability to attract human capital. Recent work by Bill Testa and Bill Sander highlighted the ability of Chicago’s downtown core to attract educated young adults.[1] As this survey of city economic strategies has shown, human capital accumulation is a primary strategy for growth, and Chicago appears to have advantages in attracting and retaining skilled workers.

Chicago’s economy underwent a profound shift in the 1990s. As manufacturing jobs began to decline, the Chicago-area economy shifted toward business and professional services. These sectors provided the city with high-paying jobs and helped lift its economy relative to other manufacturing-dependent Midwest cities. As we can see in the data (table 1), Chicago has a highly diversified economy, which closely mirrors the structure of the U.S. economy. Chicago does have challenges. The fiscal condition of the city (and the state) is precarious, highlighted by large underfunded public pension obligations. Also, the city has struggled to emerge from the Great Recession, as highlighted by slow job growth (figure 1).

Chicago’s Industry Structure

As figure 1 shows, Chicago has eight industries with higher employment and location quotients (LQs than the U.S. average.) [2] They are: manufacturing (LQ 1.04), wholesale trade (1.14), professional and technical services (1.13), management of companies (1.28), administrative and waste services (1.20), educational services (1.44), transportation and warehousing (1.24), and finance and insurance (1.16). This provides a highly diverse mix of high-end professional services (accounting, consulting, and advertising) with retained strength in manufacturing and logistics and warehousing.

Economic Development Strategy in Chicago

In 2012, Chicago unveiled a new economic development strategy that was based on a study conducted by World Business Chicago (WBC), which is the city’s public–private economic development agency. The study was based on a series of reports by subcommittees that focused on the recent strengths and weaknesses of Chicago’s economy. In the end, the report identified ten strategies, which included a focus on specific industry clusters—advanced manufacturing, professional services, and headquarters operations—as well as infrastructure improvements. The strategies are as follows:
• Support advanced manufacturing—high-value-added manufacturing.
• Increase the region’s attractiveness for business services and headquarters.
• Enhance the city’s competitive position as a transportation and logistics hub.
• Make Chicago a premier destination for tourism and entertainment.
• Make the city a leading exporter—support export activities, particularly for small and mid-sized businesses.
• Develop a work force in a demand-driven and targeted manner.
• Support entrepreneurship and innovation in both mature and emerging sectors (with an emphasis on product commercialization).
• Develop next-generation infrastructure and new models of public–private funding.
• Support neighborhood vitality that supports regional growth (small and medium-sized enterprises).
• Develop a good business climate. This includes streamlining regulation and providing businesses with a supportive infrastructure.

To implement the plan, WBC has created a series of task forces to develop specific metrics to measure progress toward each goal. As figure 2 shows, part of the desire to articulate a new development plan for the city came from the sluggish job growth that occurred coming out of the Great Recession. While Chicago had grown faster than the District as a whole leading up to the recession, its performance from 2010 to 2012 was lackluster and is still somewhat sluggish.


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[1]William A. Testa and William Sander, “Household Location and Economic Development in the Chicago Metropolitan Area,” mimeo. (Return to text)

[2]The U.S. Bureau of Labor Statistics (BLS) defines LQs as "ratios that allow an area's distribution of employment by industry to be compared to a reference or base area's distribution". (Return to text)

Posted by Testa at 1:30 PM | Comments (0)

August 11, 2014

Economic Development in Detroit

By Rick Mattoon

Detroit is the focus of this blog examining economic development issues in the five largest cities in the Chicago Fed’s District. (For a complete profile of all five cities. see “Industrial clusters and economic development in the Seventh District’s largest cities”). Relative to the other large cities, Detroit faces some special challenges. Home to the domestic auto industry, Detroit grew and flourished until increased foreign auto competition began to erode the dominant position of Detroit-based auto producers. With a challenged industrial base and increasing racial strife culminating in the 1967 riots, Detroit began a long process of population out-migration. The city’s population fell from a high of 1.8 million in 1950[1] to the most recent estimate of just under 700,000.[2] This combination of industrial and population decline severely challenged the fiscal condition of the city. The city’s large geographic footprint (140 square miles) and declining tax base made it increasingly difficult to provide city services, culminating in a 2013 Chapter 9 bankruptcy filing, which is still being resolved. Not surprisingly, the city’s immediate economic development plans aim to stabilize its population, restore government services, and attract new businesses that should find its relatively low property prices attractive.

Detroit’s Industry Structure

Figure 1 shows Detroit’s employment structure and industry concentrations (location quotients or LQs) relative to the U.S. Detroit has five industries with above U.S. average employment shares and location quotients above 1. These industries are manufacturing (LQ of 1.29 or 29% above the U.S. average), professional and technical services (LQ 1.45), management of companies (LQ of 1.34), administrative and waste services (1.15), and health care and social assistance (1.09). This reflects recent efforts by the city to develop business and professional services in the downtown business district, which has led to investments by Quicken Loans and Compuware.

Economic Development Strategy in Detroit

In December 2012, the Detroit Strategic Framework Plan was released.[3] The long-term planning aspect of the report was produced by a mayor-appointed, 12-member steering committee drawn from the business, community, faith-based, government, and philanthropic communities. The Detroit Economic Growth Corporation managed the project. The plan is designed to recognize core assets that the city has and to examine ways to leverage those assets to restore and stabilize the Detroit economy. The plan creates four benchmark goals for the city to achieve by 2030.

• Stabilize the residential population at between 600,000 and 800,000.
• Increase the number of jobs available per city resident from the current level of 27 per 100 people to 50 per 100 people.
• Enhance the regional transportation network to better integrate Detroit and the rest of the MSA and develop land-reuse plans that will repurpose existing vacant tracks for new types of development.
• Establish an ongoing framework for civic involvement.

The plan also has specific economic development elements that are captured by five implementation strategies.

• Emphasize support for four key sectors with highest potential growth—education and medical, industrial, digital/creative, and local entrepreneurship. To support growth in these sectors, the plan calls for aligning private and civic investments. This includes having work force development strategies specific to these four industry clusters.
• Use a place-based strategy for growth. In practice, this would target “employment districts” where resources would be channeled to promote growth. The plan establishes seven of these districts and assumes these geographic areas have the greatest ability to bring job growth to scale. This would be complimented by growth in industrial business improvement districts and developing capacity for green business.
• Encourage local entrepreneurship and minority business participation. The strategy here is to develop local business clusters that serve the Detroit market—for example, using local suppliers to feed existing businesses as well as seeking to diversify the economic base of the city. This strategy assumes the provision of low-cost shared space and improvements in other local services that are currently being underprovided in Detroit.
• Improve skills and support education reform. Much of this focuses on improving existing work force training by linking it more closely to the private sector and aligning training to local industry needs. It also calls for better integrating work force development with transportation, encourages hiring of Detroit natives, and calls for a study designed to improve city-wide graduation rates.
• Review land regulations, transactions, and environmental actions. This is a broad land-reuse program that focuses on land banking for industrial and commercial property as well as improving development outcomes by speeding permitting in employment districts and identifying alternative sources of capital for development.

It is clear that much of Detroit’s plan emphasizes stabilizing the current economic base as a necessary step to attract new investment. The plan also emphasizes the creation of home-grown businesses, which is likely necessary to fill in declines in retail and other services found in many Detroit neighborhoods.

If we look at Detroit’s recent history of employment growth over the recent business cycle (figure 2), we see that for almost the entire 2000s, Detroit had negative year-over-year employment growth and performed significantly below the average for the Seventh District. However, emerging from the Great Recession, Detroit’s employment growth is above the Seventh District average up until late 2013 and early 2014, which happens to coincide with the bankruptcy filing. The rise coming out of the recession likely reflects the rebound in the domestic auto industry, which still exerts a heavy influence on Detroit’s economy.

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[1] http://www.freep.com/interactive/article/20130723/NEWS01/130721003/detroit-city-population (Return to text)

[2] http://www.detroitnews.com/article/20140521/METRO08/305210136 (Return to text)

[3] http://detroitworksproject.com/the-framework/ (Return to text)

Posted by Testa at 8:29 AM | Comments (0)