Category Archives: Employment

Work Force Adjustment Conference in Detroit

The Midwest automotive belt faces an extraordinary challenge of work force transition; namely, profound structural change in the auto sector on top of the cyclical impact of a deep national recession. At an upcoming conference, the Federal Reserve Bank of Chicago will partner with the Brookings Institution’s Metropolitan Policy Program, the Federal Reserve Bank of Cleveland, and the Upjohn Institute for Employment Research to gauge the dimensions of the challenge, provide conceptual and evaluative foundations for work force and human capital policies, and discuss regional and federal initiatives for workers and their communities in the Midwest.

Given the dismal national unemployment picture, the state of worker dislocation in Michigan and other Midwest automotive communities may not be fully appreciated. But unemployment in these communities is significantly worse than national averages. While the national unemployment rate has just now reached 9.7%, Michigan’s unemployment rate is now at 15.2% and has exceeded 10 percent since December of last year. Payroll employment in Michigan has fallen (year over year) in every year of this decade. Coupled with the current national downturn, an industry shift of automotive production away from Michigan has meant the state has lost more jobs in automotive than those jobs that remain. If current expectations are met, national economic recovery will offer only limited help. So, although job recovery is expected to unfold nationally, albeit at a slow pace, throughout 2010, areas dependent on the auto sector will lag significantly. Unlike the recovery period following the deep 1980-82 recessionary period, North American automotive sales are not expected to bounce back smartly this time.

In view of this bleak outlook, redevelopment of both industry and work force in the Midwest will be needed. Michigan communities are working hard to develop and attract new industries to the state and to attract capital investments. Most notable among emerging industry sectors here are energy technology initiatives, medical-related technology companies, health care, and tourism.

For workers, the current environment poses some particular challenges. Among these are fewer prospects for re-employment in other regions due to relatively high unemployment in many parts of the country. Neither do today’s demographics in Michigan favor easy out-migration; on average, the state’s work force is older and less educated. So too, falling home prices mean that households cannot easily tap pools of home equity to use in re-locating to job markets in other regions.

With so much working against the state’s economy, and with so much at stake, it is important that the many work force adjustment and re-training programs underway are effective. Rebuilding Michigan’s economy will require effective training, job placement, and other support services.

The central idea of the October 8–9 conference event will be to hold up work force programs and initiatives against the realities of current conditions and the state of knowledge about what works and what doesn’t work. Accordingly, conference sessions will be grouped by general category of work force initiative. Sessions will address first-response initiatives in the job placement and retraining arena, followed by discussion of worker training targeted toward the expected emergence of specific industries, such as health care and energy technology. The conference will also address entrepreneurial programs that promote both self-employment and the subsequent development and support of new firms and industries.

Midwest in Recession: Then and Now

By Bill Testa and Vanessa Haleco-Meyer

Longtime Midwest residents may be befuddled by ongoing comparisons of the current national recession with those of 1974-75 and 1981-82. While the headlines suggest this recession compares, so far, with the deepest recessions of the past 50 years[1], we in the Midwest have a somewhat different perspective. For us, the recessions of 1974-75 and 1981-82 were far worse, at least so far. An exception may be made here for Michigan, which has been experiencing a recession of sorts all decade long.

Statistical comparisons of regional recessions with the nation are difficult for a number of reasons. Arguably, the best basis of comparison can be made using payroll employment data which are available monthly from the Bureau of Labor Statistics.[2] In the charts that follow, we index job levels in states, the Seventh District (Illinois, Iowa, Indiana, Michigan, and Wisconsin), and the U.S. to a beginning value of 1.0. We begin the time series at the quarter in which employment levels peaked in the state, region, or nation. Since employment peaks may differ between a state or region and the U.S., we sometimes begin comparative series at slightly different dates. For example, employment in the Seventh District last peaked in the second quarter of 2007, but the U.S. peaked in the fourth quarter of 2007. (On the charts, the indexed lines will appear to begin in the same quarter). We use seasonal adjustment to iron out variations in employment that typically occur every year.

The chart below compares payroll job growth for the Seventh District versus the U.S. during the 1974-75 downturn, the 1980s downturn(s), and the 2008 downturn. The U.S. economy officially recorded two back-to-back recessionary periods in the early 1980s. Since the episodes took place so close together, and since the Midwest experienced virtually no pause between downturns, we index jobs beginning from the previous peak (1980-Q1 for the U.S. and 1979-Q2 for the Seventh District) through to the final trough.

In examining payroll job performance during these recessionary periods, the first thing to note is that payroll employment dropped more rapidly in the 1974-75 recession (blue lines) than in subsequent recessions. Seventh District payroll job levels fell by 4% in the four quarters following their peak in the third quarter of 1974 (before turning upwards). In comparison, and despite the dramatic declines over the past few months, the current recession has experienced a shallower and slower decline from the previous employment peak (green lines).

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Recent job declines have also been shallower so far than the fairly dramatic declines the Midwest experienced in the 1980s (red lines). After reaching a peak in 1979, payroll jobs in the District fell for four years, reaching bottom in the first quarter of 1983 at 10% below the peak. The U.S. experience of that time was quite different. Following a slight decline in 1980, national employment growth resumed briefly before falling 3% during the 1981-82 recession. Over the entire length of both recessions, the pace of job decline in the Seventh District was more than five times that of the nation.

The dismal experience of having no post-recession recovery is one that the state of Michigan is now experiencing. The chart below indexes payroll job decline and growth circa the 2001 recessionary period. From its second quarter peak in year 2000, Michigan’s employment has fallen by over 10% (green line). The remaining states of the Seventh District—Indiana, Illinois, Wisconsin, and Iowa—have fared somewhat better, but in the aggregate the four-state region only recently regained its previous peak. In contrast, national employment had regained its previous peak by the end of 2004.

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The final charts (below) display the employment experiences of each Seventh District state for the three aforementioned periods. In each state, the 1980s look worse than the current recession. This is even true for Michigan, which underwent a 15% job decline from its peak in the second quarter of 1979 to the fourth quarter of 1982. However, Michigan and its troubled automotive industry enjoyed a big bounce in 1982 when U.S. consumers returned to auto showrooms and began to buy cars at a rapid pace as gasoline prices eased. This time around, Michigan and much of the surrounding Midwest automotive belt hope for a repeat performance. However, Michigan’s current automotive challenges are surely more structural and deeply rooted. It will take more than an upturn in national automotive sales to pull along the state’s employment and income.

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[1]The nation also experienced less serious downturns, during 1969-70, 1990-91, and 2001. See http://www.nber.org/cycles.html. (Return to text)

[2]Payroll employment numbers are subject to revision in March of every year. See http://www.bls.gov/sae/790over.htm#employ. (Return to text)

Seventh District Labor Markets at Year-end

by Bill Testa and Vanessa Haleco-Meyer

Government agencies regularly report statistics that reflect state and local labor market conditions. These measures are far from perfect in their accuracy, and they often seem to conflict. Yet, these measures currently agree to a negative view of the labor markets in the Seventh Federal Reserve District.

State unemployment rates, using a household sample survey, measure those people of working age who are actively looking for work as a fraction of the work force (both employed and unemployed). Since it is sample based, the measure is imprecise, especially readings for a single given month. The chart below shows that the unemployment rates for the nation and the Seventh District began to move up moderately off of their cyclical lows throughout 2007. During 2008, the unemployment rates accelerated primarily because of net job destruction. The gap between the Seventh District’s higher unemployment rate and that of the nation remained fairly steady in recent years, even as unemployment rates were climbing in each of the District’s states and in the nation as a whole.

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Not all states of the District maintained a higher-than-average unemployment rate over the past few years. As measured in the fourth quarter of 2006 (chart below), Michigan’s high unemployment rate accounted for the bulk of the gap between the District’s rate and the nation’s. By the fourth quarter of 2008, Illinois’ unemployment rate had climbed above that of the nation, and Indiana’s unemployment rate also topped the national average. In contrast, Iowa’s and Wisconsin’s rates of unemployment in 2008 were seemingly lower than those of the overall District and the nation.

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Federal and state government agencies also track and report payroll employment. These data, released on a monthly basis, are drawn from a sample survey of firms that provide information on their employees; and so, unlike the unemployment figures, the data are not counting those in the work force who are self-employed. Since it is only sample-based, the payroll survey, too, contains measurement error. These errors tend to be more pronounced during times of sharp turns in economic direction (such as the present). During economic downturns, some firms may drop out of the sample as they cease operations. This has tended to understate net job declines, since the sampling methods cannot distinguish between a failed firm and one that is simply late or negligent in reporting. State payroll figures are adjusted for such biases during the first quarter, but even with such adjustments, revised figures do not cover the recent months, but are rather “re-benchmarked” up to a point early in the previous year.

The chart below displays the change in total payroll jobs in the fourth quarter of 2008 relative to fourth quarter in 2006. All states except Iowa lost jobs on net. Over much of this two-year period, Iowa continued to enjoy a boom in farm commodity prices and strong production and sales of related equipment. In the chart, job losses in Michigan and Indiana are especially prominent, reflecting their troubles with their automotive sectors. Using this measure, Wisconsin’s job losses seem to be more severe than what its unemployment rate may have suggested.

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Labor market indicators often conflict both because of inherent measurement error and because they measure different features of the labor market.[1] Accordingly, it is often best to gather an array of indicators in assessing labor market conditions. Reported figures from each state’s unemployment insurance (UI) system are also followed. Each state’s UI system records weekly data on new applications or claims for insurance by those who have recently lost their jobs. (Data also report the number of people who have lost jobs and continue to receive unemployment benefits.) These data do not comprehensively reflect labor market conditions. That is because layoffs or other job separation events are only part of the process of net job gain or loss. In particular, job hires or emerging self-employment may be taking place in a state at the same time that job separations are on the rise. The chart below displays changes in initial claims for UI in the fourth quarter of 2008 relative to the fourth quarter of 2006. As compared with the final quarter of 2006, layoffs and other involuntary unemployment events were emerging much more rapidly in late 2008. This is so in the nation and in each of the District’s states. Indiana’s job separations were running especially high late in 2008 as compared with the fourth quarter of 2006—well in excess of the increase experienced nationally. And separations in Iowa have also begun to rise sharply in the fourth quarter.

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The severity and speed with which labor markets deteriorated during the final three months of 2008 has been especially disconcerting. In the District, jobs declined at a 5.1% pace. Nationally, payroll jobs declined at a 3.7% annualized rate during the fourth quarter of 2008 (1.3 million). Since 1960, payroll job decline in the nation has exceeded this pace in only one quarter, that being the first quarter of 1975 (-6.1%). And currently, most forecasts predict economic output to bottom out no sooner than the second half of this year.

Such concerns are especially acute because job markets recovered slowly in the aftermath of the past two national recessions. Slowly recovering job markets often reflect structural imbalances that have preceded and accompanied recessionary periods. The 2001 recession partly reflected the fallout from overspending on technology-oriented enterprises, such as telecommunications, and other capital equipment. Workers displaced from these sectors might have found it difficult to find jobs in new industries, or the impacted sectors themselves were slow to recover and begin hiring anew. This time around, sharp structural imbalances in housing construction and financial services are underway.

Imbalances that can emerge among different multistate regions in the U.S. can also play a role in achieving “full employment.”[2] An industry shock to a particular sector that is highly concentrated in one region may displace workers whose job opportunities may be emerging in another region. Past Midwest experiences are a case in point. The region suffered inordinately through the double-dip national recessions of 1980 and 1981–82. The chart below compares the District’s unemployment rates with those of the nation from two periods: the 1980s and the current decade. By the end of 1982, the nation’s unemployment rate approached 11%, while the District’s unemployment exceeded 13%.

This wide gap of the early 1980s came about from underlying currents having distinct geographical accents. In particular, high oil and natural gas prices were buoying energy exploration activities in many parts of the West and Southwest; rapidly expanding federal spending to rebuild national defense stocks were lifting many regions of the South and West; and the rapidly rising value of the U.S. dollar contributed to moribund exports of farm products and manufactured goods from the Midwest (as well as to stiff import competition).

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In contrast, the recession of 2001 and its immediate economic aftermath had fewer inter-regional differences. As seen above, unemployment rates between the District and the nation were very similar. As the remainder of the decade unfolded, however, the profound structural changes going on in the automotive industry did begin to negatively affect District labor markets; the District’s unemployment rate began to rise higher relative to the national average. The Detroit Three automakers (Chrysler LLC, Ford Motor Co., and General Motors Corp.) and their suppliers experienced significant losses to foreign-domiciled auto plants located in other regions and to imported automotive products as well. While (post-2001) job levels largely recovered in the District, Michigan experienced continuous year-over-year job losses.

Now, amid a sharp regional downturn, employment statistics will be keenly watched to help guide our decisions regarding job search, education and training, local investment, home sales, and migration.

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[1]Note: Unemployment rates do not necessarily reflect job trends because working age people can drop out of the work force in response to a lack of job opportunities, thereby lowering the unemployment rate, even though payroll jobs and job vacancies are falling. A worker who drops out of the labor force no longer reports as being “unemployed” in the survey. The reverse can also take place by the same reasoning: Even with a rising number of jobs and employed persons, there can be rising unemployment. (Return to text)

[2]Note: Comparing levels of unemployment between periods can be somewhat difficult. The “natural rate of unemployment,” or normal benchmark for a “full employment economy,” is thought to have been higher in the 1980s than today—by about 1 to 1.5 percentage points. The natural rate depends on demographics of the population, such as age and education (affecting labor force participation rates by age). For a discussion, see study by David Brauer, among others. (Return to text)

Supply-side efforts at building skilled workforce

By Britton Lombardi, Associate Economist

Wage growth continues to grow more sharply for educated workers, but how can states and cities build their work force in this direction?

For one, a “grow your own” approach to enhancing the local supply of educated workers may be helpful. States tend to have some advantage in retaining individuals who grew up and went to college within the state. A study found that 54% of students that were both residents of the state and attended college in-state were working in the state 15 years later. The number falls to 35% if the student residents attended college in another state. The percentage drops to 11% for non-residents who attended college in the state. A recent policy report for the Milwaukee area suggests that a potential way for states to make use of this home state advantage would be to increase their high school graduation rate and better prepare their students for college. Even if these students do not attend college, the policy report notes that a rise in the high school graduation rate would raise average incomes and would help fill jobs being left open by retiring baby boomers. Nonetheless, states and cities will see the greatest returns to education if these high school graduates do obtain a college education and either stay in-state or return home after college.

How are states doing in “grow your own” initiatives? The chart below plots state college enrollment versus educational attainment of the workforce. The state’s college enrollment rate is weighted by the state’s average high school freshman graduation rate, which reflects a state’s tendency to graduate its high school students. Therefore, the x-axis number is the interaction between the percentage of high school graduates that go to college and the percentage of students that completed all four years of high school. On the vertical axis, we measure educational attainment of the state’s workforce as the weighted average of years of schooling per worker. The horizontal and vertical lines in the graph (in blue) are the U.S. averages.

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The states positioned in the top right quadrant of the chart have an above average educational attainment per worker and are sending a higher proportion of students to college than the U.S. average. Four of the five Seventh District states (Illinois, Iowa, Michigan, and Wisconsin) reside in this quadrant. Although Indiana (bottom right quadrant) has lower than average years of schooling, the state seems successful in preparing and sending its students to college as seen from its above average enrollment rate. It appears as though the District states, which tend to be high-income states, have been successful in educating their own and sending them to college. There is some slippage in this measurement since a large and variable share of those who enroll in college go on to complete their degree.

Educating a state’s own individuals does not guarantee the young professionals’ retention or return to the state after college. Therefore, states should also focus on the migration of these young professionals into and out of their state, especially as the young, college-educated professional cohort is the most mobile of any cohort in the U.S. A special Census Report calculated that 75% of young and single and 72% of young and married college-educated professionals between the ages of 25 and 39 relocated between 1995 and 2000. Therefore, a part of a state’s future economic success is tied to attracting these young professionals from other states. In the next chart, states are plotted based on their 3 year average net migration rate of young professionals versus the state’s weighted average years of schooling. For the Seventh District, Illinois and Wisconsin (top right quadrant) have average years of schooling above that of the U.S. average and are importers of young educated professionals as seen through their positive net migration rates. Iowa, Michigan, (top left quadrant) and Indiana (bottom left) have negative net migration rates. These states seem to be exporters of young college-educated professionals.

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For the two charts above, the educational attainment of the existing work force was put on the vertical axis for two reasons. The educational attainment level reflects the past success of the state’s educational system in producing an educated work force. In addition, educational attainment will vary with the industry mix of the state economies since industries tend to have varying workforce skill demands. In turn, a state’s industry mix is determined by a host of historical developments in the state’s development process. Indiana, for example, ranks among the top 3 states in manufacturing concentration, a sector which historically has not required a post-secondary education (though this is changing to some degree).

As states compete for these young professionals, they may need to offer unique opportunities to set themselves apart. From an economic development standpoint, cities can be an integral part of a state’s effort to increase their level of human capital since cities can be the gravitational force that brings young professionals to the state. Based on the table below, 17 of the 20 largest metropolitan areas had a positive in-migration of young well-educated professionals between 1995 and 2000, including two Seventh District metropolitan areas: Chicago and Minneapolis-St. Paul. Cities have the ability to attract young well-educated residents because they still offer powerful benefits to their inhabitants.Cities eliminate the distance between people and ideas by allowing ideas to be shared in both formal and informal settings, thereby increasing the opportunities for innovation. As such, cities have become centers of learning for young college-educated professionals just starting their careers. As studied by Ed Glaeser, professionals come to cities to take advantage of the knowledge externalities provided by interactions with other well-educated and successful individuals to enhance their own productivity. Glaeser found that workers tend to learn faster in cities and enjoy higher wage growth. The density of educated individuals living in a city creates informational spillovers, thick labor markets, and division of labor leading to specialization. Cities also reap the benefits of these individuals through their overall increased productivity and innovation.

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Since cities can play an important role in regional economic development, the Milwaukee area policy report suggests a combination of two ways for cities to enhance their efforts to increase their pool of human capital through migration. First, the city should try to enhance the available job opportunities to young professionals that match their career and personal goals, as these individuals want to learn, network, and develop professionally. The report recommends that local businesses and civic organizations join forces to share resources and ideas to spur innovation and growth to create or improve jobs. Secondly, the American city has been transforming into a cultural and entertainment center. Young, college-educated professionals place special emphasis on amenities offered by a city. They expect high-quality and unique recreational opportunities such as restaurants, sporting events, live music, and nightlife venues. Therefore, cities might need to augment or diversify their recreational offerings to retain and attract these young professionals and provide a vibrant and livable city.

These days, states and cities must select from a wide and complex array of economic growth and development policies to find the strategies that are most appropriate for their situation and circumstances. Increasingly, they are favoring policies related to skilled work force availability.

Educated (young) workers and regional growth

By Britton Lombardi, Associate Economist

As the U.S. continues to grow into a knowledge-based economy, human capital and ideas earn a higher premium. Therefore, competition for future economic growth and vitality leaves states and large metropolitan areas vying to attract and retain the young, well-educated population within the U.S., commonly defined as 25- to 39-year-olds with at least a bachelor’s degree. These young and educated adults have certain characteristics that make them particularly appealing to metropolitan areas, such as their especially high mobility and entrepreneurial tendencies.

Among a number of interested parties, policymakers, businesses, and researchers question what attracts these young professionals to certain areas over others. Some of the allure could come from characteristics that are specific to the individual, such as a job offer or personal relationships. However, Yolanda Kodrzycki of the Federal Reserve Bank of Boston, finds that these young professionals also exhibit certain general preferences. They gravitate toward areas that have high job growth, high average pay, and an array of employment opportunities where they feel possibilities and opportunities abound. At this point in their lives, they are the most flexible, and many may still be trying to choose a career path; therefore, a region that will allow them to explore many options is more attractive to these individuals. The payoff to successful “job matching” can be especially high for younger people because payoffs may accrue over a lifetime career supplemented with further learning and development. This implies that certain industry clusters may help attract specialized human capital to a location. A current trend going back two decades has been that cities with a strong technology industry have appealed to a disproportionate number of these young professionals. However, cities that have focused on other knowledge-intensive industries like finance and real estate have done well too. Metropolitan areas that value human capital and maintain a strong regional economy draw in these young and educated individuals.

Besides the direct advantages of high-wage jobs, the clustering of young professionals in an economy provides spillover benefits of knowledge and innovation through networks among firms and workers. Places such as the San Jose area are legendary for frequent job-hopping among workers, who thereby spread innovation more broadly. Such innovations typically involve tacit knowledge and know-how. Looking at patent data, Jerry Carlino has demonstrated how a higher density of skilled workers leads to a higher level of intellectual property.

Aside from economic opportunity, amenities offered by populous urban areas are also thought to attract young professionals. They often prefer to live in lively neighborhood areas within a few miles of the city center and take into account the affordability of this type of housing. Other amenities that appeal to this population include parks or other areas for walking and outdoor recreation, reliable public services including transportation, vibrant neighborhoods, and a dynamic commercial district. However, the extent to which these amenities matter remains the subject of debate and further study.

Warmer climate has been a magnet for the general U.S. population over recent decades. However, cold-weather cities can seemingly compensate with a combination of vibrant economic opportunities and/or big-city recreational and cultural features. The table below, for example, examines working age college-educated migrants from 1995-2000. Although the metropolitan areas that had the five highest net in-migration rates were located in the South and West, both the Minneapolis-St. Paul and Chicago areas posted relatively high net in-migration rates. Indeed, Minneapolis-St. Paul ranked among the top ten highest for that period.

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A recent discussion paper issued by the New England Public Policy Center further explores the regional concentration of young professionals using data from the 1980, 1990, and 2000 Censuses and the 2005 American Community Survey (ACS).

The concentration of young, educated workers in any one region depends on the extent that its young residents achieve college education and the region’s ability to retain them, as well as attracting others from around the U.S. and abroad. As of 2005, New England had the highest concentration of young, educated individuals in the nation, with 38.6% of its 25- to 39-year-olds holding at least a bachelor’s degree compared with 30.1% for the U.S. (see table below). However, overall educational attainment in the U.S. increased between 1980 and 2005, especially between 1990 and 2005 when the number of college educated, 25- to 39-year-olds soared by 22%. The Middle Atlantic, East North Central, and South Atlantic regions outpaced New England’s rise, although they began with lower percentages.

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The discussion paper further calculates a net migration rate from 2004 to 2005. The rate takes the difference between the gross inflow and outflow of domestic young professionals in relation to the base population of that age group. Migration rates are calculated as described but multiplied by 1000 to make it a rate per 1,000 residents. Using this measure, only the Mountain, South Atlantic, and Pacific regions have positive net migration rates of 20.4, 10.9, and 1.0, respectively. The two Midwest regions, East North Central and West North Central, had the two most negative net migration rates of -9.5 and -12.5, respectively, raising concerns about a Midwest “brain drain.” New England ranked third from the bottom with a -6.8 net outflow.

Movements of workers to and from abroad have recently become a more integral part of regional work force composition. Using a similar calculation as above, but only accounting for international inflows due to data limitations, New England comes in second highest with international inflows of 14.4 behind only the Pacific with 17.4. The East South Central region reported the lowest inflow of these individuals with 5.1; West North Central comes in second to last with 7.9. The East North Central barely outpaces West South Central as the fourth and third from the bottom with 11.6 and 11.4, respectively. Again, the Midwest appears near the bottom of the rankings, heightening concerns about not only maintaining or attracting domestic young professionals but gaining international ones. In New England’s case, the net inflow of international young professionals seems to offset the region’s domestic losses, but this does not hold true for some of the other regions, including the Midwest.

Although emphasis has been placed on young professionals, the growth in older workers, those aged 55 and above, will be the largest of any working-age group over the next ten years. The older labor force is projected to grow by 46.7% from 2006 to 2016 — more than five times the projected annual growth rate of the overall labor force of 0.8%. This large projected growth rate results from the aging of the baby boom generation into their “golden years” and still participating in the labor force. Older workers may continue to work due to the removal of the earnings test from Social Security, the increased retirement age for receiving Social Security benefits to 67, decreased employer-provided retiree health benefits, and the improved health status of older individuals.

Another reason for employers and regions to focus on older workers stems from the diminishing education attainment gap between young entering workers and older workers. Dan Aaronson and Dan Sullivan document the dramatic overall rise in educational attainment of the U.S. workforce since the 1970s. Educational attainment has been climbing as younger (more educated) cohorts have been displacing older (less educated) cohorts as they retire. Today, younger workers are only as educated, on average, as those that they displace at the older end of the workforce, and their lesser work force experience may put them at a disadvantage in some respects. All the more reason for employers to turn somewhat to older cohorts for tomorrow’s needed work force skills.

As the number of older workers continues to increase, will firms and policymakers shift some of their attention to retaining or enticing these workers by giving them incentives to extend their careers or possibly return to the work force? Older workers offer benefits to businesses that might not be available from young professionals, such as leadership, experience, and specialized skills gained over their lifetime that can increase productivity and output. On the other hand, these older workers have characteristics quite different from those of young professionals. They tend to prefer more flexible work schedules to balance work and family and to be less mobile geographically. Therefore, they may require a slightly different and possibly more demanding set of economic incentives and living amenities.

Automotive wages in flux

As the “Detroit 3” automotive companies have experienced shrinking profits and market share, many midwestern communities have experienced falling jobs, income, tax revenues and public services—to say nothing of the households and families working in the industry. This summer, automotive workers and communities are watching closely as the terms of automotive employment—especially wages—are being renegotiated. On July 20, for example, the UAW labor union opens contract negotiations with Ford and Chrysler (July 23 for General Motors) for contracts that will run for 4 years. And earlier this month, auto parts maker Delphi announced settlement terms with its workers as it undergoes operational restructuring. Only four Delphi production plants will remain in operation in the U.S. as its customers will source parts from its overseas operations or from alternative suppliers. Remaining Delphi production workers will be on the receiving end of cuts to health care benefits, employment security, retirement and wages. Wages for production workers will be reduced from $27 per hour to a maximum of $18, $14 for new hires.

How should we view the wage settlements as they are announced in coming months? One perspective is to compare them to average wages for production workers in U.S. manufacturing. Production workers are typically those who have few or no supervisory roles in manufacturing plants; in other words, most assembly line workers would fall into this category. The chart below displays average wages for production workers back to 1967. These wages represent the average in compensation for overtime and regular time. The wages are expressed in current dollars, adjusted over time for changing prices by the Consumer Price Index.

The bottom line shows that, across all manufacturing industries, average wages have remained largely flat since 1967, ranging between $17 and $20 per hour. Wages were rising until 1980. With several deviations, the average wage settled at $ 18.59 in 2005, which is the latest available data from this particular source.

In the same graph, we can see that that production workers in motor vehicle parts industries (blue line) have fared somewhat better over time, but that their wages have been converging with the remainder of manufacturing workers since the 1980s.

Workers in the automotive assembly industry (green line) are smaller in number than those in parts production. In the U.S., there are approximately three workers in parts production for every worker in an assembly plant. Unlike their brethren in parts production, assembly workers’ wages have been generally rising since 1967. By 2005, the U.S. Census Bureau reported an average production wage of $35.84.

The second graph below plots the premiums in wages for automotive workers. This premium is expressed as the percent by which wages exceed the average of all U.S. production workers across all industries. As of year 2005, the average wages of automotive assembly workers topped their counterparts by 50 percent. For motor vehicle parts workers, the wage premium has fallen below 20 percent from a peak of 31 percent in 1980. Approximately one-third of workers in the parts industry are represented by labor unions versus three-fourths of domestic assembly workers.

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Declining employment has accompanied softening wages in many instances. From a geographic perspective, declining automotive jobs is nothing new for many midwestern states and communities. The industry was highly concentrated in the Midwest throughout the first half of the twentieth century but afterward began to disperse—first to other U.S. states and later around the globe. Considering domestic employment in automotive parts and assembly combined, the next graph shows that the states of Ohio, Michigan and Indiana accounted for over three-fourths of automotive employment through World War II. By 2005, their employment share had fallen under one-half.

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During the current decade, the automotive job decline has been precipitous. The final graphic (below) indicates that the three-state decline in automotive jobs has fallen by almost one-third since year 2000, from 576,000 to 383,000 over the first half of 2007.

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The reasons for these employment declines are several.

 As always, productivity gains are reducing the labor content in automotive production. Labor hours per vehicle assembled by the “Detroit 3” car makers, for example, declined from 24–28 hours in 2002 to 22–23 hours in 2006. Beyond assembly, estimates by Martin Baily of the McKinsey Institute and the Institute for International Economics report that labor hours to produce an auto in North America, including parts, are decreasing at an annual average of 1.7 percent annually since 1987, and are now approaching 100 hours total.

 Globalization of production has resulted in both off-shore operations and competitive pressures on domestic producers. Since 1996, the import share of light vehicle sales has increased from 12 percent of sales to 20 percent, year to date. Approximately one-quarter of domestically used automotive parts are now sourced abroad.

 Despite some periods of re-concentration over the past 2 decades and the siting of many new plants in various Midwest communities in recent decades, the overall industry continues to disperse to other states, especially in the South.

Note: Thomas Klier contributed to this entry.

Michigan Labor Market–Still Awaiting Recovery

Following the 2001 national recession, the labor market remained somewhat slack and slow-growing until mid-2003. Subsequently, the national economy accelerated, pulling along labor demand and employment growth. The year 2006 marks the third consecutive year of strong year-over-year employment growth (and falling unemployment) nationally.

Meanwhile, the Seventh District, which includes the state of Iowa and most of Michigan, Indiana, Illinois, and Wisconsin, also experienced an employment recovery. However, the pace of job growth in the Seventh District has fallen somewhat short of the nation over most of the post-recession period. From the fourth quarter of 2001 until the fourth quarter of 2006, payroll job growth is currently reported to have risen by 3.9 percent in the nation, versus 0.7 in the Seventh District states overall.

Much of the Seventh District weakness is confined to Michigan, and recent indications show little sign that the Michigan labor market performance is turning around. As illustrated below by a 3-month moving average of monthly unemployment rates, the U.S. and the rest of the Seventh District states (excluding Michigan) have reported a falling rate of unemployment over much of the past 3 years. Currently, the region’s unemployment rate lies very close to the nation at around 4.5 percent. In contrast, Michigan’s current unemployment rate, after improving in 2005, is now back where it was in 2004.

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Unemployment rates are not fool-proof indicators of labor market performance because they are conducted by household surveys which are subject to sampling bias. However, other independent indicators tend to corroborate these survey indicators. Among the other indicators, the survey of payroll employment at business establishments is reported for states by the Bureau of Labor Statistics. It too is based on a survey, and it is revised later as more information becomes available.

Below, year-over-year growth in payroll employment is shown for Michigan versus the District and the U.S. The payroll survey suggests that Seventh District job growth, though slower than the U.S., has shown steady growth over the past three years. Michigan’s year-over-year job growth has continued to decline—at an accelerating pace.

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So too, reported information on initial claims for unemployment insurance by laid off (or otherwise severed) workers exhibits the same pattern: deterioration at an accelerated pace over the past three years in Michigan, and improvement outside the state.

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In past decades, weak automotive-related performance in Michigan has sometimes been appraised as temporary or cyclical. However, this time around, as indicated by labor market performance in surrounding states, weak economic performance in Michigan appears to reflect structural problems for auto makers and automotive supply companies. Since early 2004, Michigan has lost 17.6 thousand net jobs at auto assembly establishments (a 24 percent decline) and 27.5 thousand jobs in motor vehicle parts production (a 15.8 percent decline).

Overall domestic automotive production is being eroded by imports and by enhanced production and sales of transplant automotive companies who largely produce outside the state of Michigan. Recent employee buyout programs at Ford, General Motors, and Delphi will result in a head count reduction of nearly 100,000 across the U.S. Approximately one-third of those jobs are situated in Michigan.

At least for the near future, the Michigan labor market situations does not yet look to be improving. The Michigan-domiciled auto assembly companies foresee or have announced continued employment reductions and facilities closings in both production and in administrative/R&D employees. Longer term, the Michigan economy’s sharp automotive concentration means that the labor market will continued to be driven by developments in the industry.

Michigan automotive and white collar jobs

Loss of market share from the traditional Big Three automakers to global competitors has impacted Michigan’s economy, leading to some deep concerns about its future. To date, most attention to this issue has focussed on job loss related to automotive production activity. Auto assembly and parts production continues at a strong (though eroding) clip in the United States, but it is rapidly shifting away from Michigan. So far, the “new domestic” carmakers have avoided siting new production plants in Michigan, preferring to site them in the South, as well as in Ohio and Indiana, such as Honda’s recent announcement to build a plant in Greensburg, Indiana. However, another important employment component for Michigan also relates to the health and sales market share of the Big Three—that is, the nonproduction activities of these auto assembly companies. These activities include research and development (R&D), sales, finance, and management operations, which form an outsized economic engine for the state. In what ways does the survival (and growth) of Big Three companies go hand in hand with the nonproduction jobs located in Michigan?

Nonproduction employment of auto assembly companies typically amounts to a surprising 35%–45% of total employment and an even larger share of payroll. While Michigan is highly concentrated in automotive production—with 15 auto assembly plants—it is also the domicile of the Big Three’s headquarters along with significant company R&D and other operations. For this reason, it is not surprising in Michigan to find that nonproduction automotive employment is more concentrated than elsewhere. In counting Big Three nonproduction employment at their production plants, headquarters, R&D centers, and other auxiliary facilities in Michigan, nonproduction employment likely outnumbers production employment, making up a minimum of 55%–60% of total Big Three jobs in the state.

Moreover, additional Michigan personal income and jobs are generated from local services purchased by headquarters-type operations. As Chicago Fed economist Yukako Ono has found in recent studies, headquarters operations often purchase key services for the entire company network. These purchases may include financial services, R&D, information technology (IT) products and services, strategic management consulting, and many more. From the regional economy’s standpoint, these purchases are often sourced locally to a large extent. In fact, Ono discusses the possibility that the choice of location by headquarters may be influenced by the cost and availability of such business services.

Similar behavior of automotive headquarters makes Detroit and its surrounding environs much more than just a factory economy. Specifically, much of the value of Big Three automobiles derives from product development and design, and most of that R&D activity is conducted in Michigan. As derived demand from the domestic automotive industry, key business services are largely produced in Detroit. My blog entry from August 16 shows that the Detroit metropolitan area far and away tops other midwestern metropolitan areas in its concentration of professional and technical services employment. Among Detroit’s top sectors are engineering services (employment at 51,594 jobs in 2002) and scientific research and development (18,126 jobs in 2002).

Nationally, much R&D is funded and performed by automotive companies and their affiliates. According to the most recent survey of industry funds for research and development, which is conducted by the National Science Foundation, the automotive industry accounts for $14–$15 billion in annual R&D funding in the U.S. To be sure, in recent years, as auto assemblers have increasingly relied on their first-tier suppliers for entire components and automotive modules, some significant R&D responsibilities have been shifting away from assembly companies and toward automotive parts companies. Still, today, the lion’s share of this R&D is performed in-house, that is, largely by auto assembly companies themselves.

These practices have kept Ford, General Motors (GM), and Daimler-Chrysler among the largest R&D performers in the U.S., with Michigan at the hub of such activity. For this reason, Michigan ranks second only to California in funds for industrial R&D. And for 2003 as the figure below shows, the motor vehicle assembly and parts industries in Michigan accounted for $10.7 billion of the $15.2 billion industry-performed R&D in the state. The ties between these expenditures and local employment is apparent. According to a parallel survey by the National Science Foundation, the Detroit metropolitan area employed 102,500 research scientists and engineers in 2003—a concentration of 5.2% of the work force as compared to 3.9% nationally.

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Would Michigan retain this important function in the event that Big Three sales shares continued to decline? On the positive side, there are some indications that the Detroit area’s role in automotive research is in the process of growing beyond its historic roots. For example, the “new domestic” automakers have all sited research, development, and design facilities in the Detroit region, such as Toyota’s recently announced $150 million R&D center investment in Ann Arbor. Others, such as Hyundai and Nissan, have also recently expanded their facilities or announced plans for similar expansions.

So, too, Detroit’s attractiveness to automotive company headquarters operations displays some sparks of growth. Major automotive parts producer Borg Warner moved its headquarters from Chicago to the Detroit area last year. More generally, Chicago Fed economist Thomas Klier has documented an upswing in auto parts company headquarters moving to Michigan. The presence and growth of automotive parts headquarters in Michigan probably bodes well for company-sponsored R&D activity as well.

Still, competitive challenges are at play both here and abroad. Domestically, figures from the U.S. Bureau of Economic Analysis show that the annual R&D funding in the U.S. by Asia-domiciled automotive companies, at $125 million, makes up a very small share of automotive R&D in the U.S., amounting to less than 2 percent. And while the Detroit metropolitan area has so far attracted many of these transplant R&D activities, historically, it is not uncommon to find that attendant service activities eventually follow production in manufacturing. In this direction, the movement of U.S. automotive production from the Midwest toward the South is drawing the attention of those seeking R&D activities as well. For example, Clemson University in South Carolina has launched a research program and industrial park to foster technology development and transfer in cooperation with companies such as BMW and others.

And so, Michigan has several important economic activities at stake amidst the current upheaval among automotive companies.

Where is automotive employment in the Seventh District?

Perhaps the most notable economic development taking place in the Seventh District is the market shift away from the traditional “Big 3” domestic auto makers–General Motors, Ford, and (Daimler)-Chrysler–and their parts suppliers. Lost sales are shifting toward the “new domestics” such as Toyota and Nissan and their parts suppliers. The sales gainers tend to be located outside of the Midwest to a greater degree than the Big 3. This shift is documented and analyzed in a recent Economic Perspectives article by Thomas Klier and Dan McMillen. This market upheaval is tending to idle and displace workers in many Midwest communities. Per Klier and McMillen, Michigan automotive employment is down almost one-third since 1979 while southern states such as Kentucky, Tennessee, Alabama, and the Carolinas have experienced a tripling of jobs.

But despite these shifts, Detroit and much of the Midwest continues to be the center of the production. Which particular communities remain most sensitive to future swings in automotive fortunes? The data below attribute automotive employment to particular metropolitan areas in the Seventh District. Those metropolitan areas with green shading had an employment concentration in automotive that exceeded the nation; those shaded in red had a lesser concentration. Looking across metropolitan areas in the entire Seventh District region, an east-west split in auto employment concentration becomes very apparent. The Michigan-Indiana corridor contains most of the metropolitan areas having an above-average concentration. Darkly-shaded metropolitan areas in southeast Michigan are exceptionally concentrated in automotive. So too, an east-west band of metropolitan areas across north central Indiana is steeped in automotive employment.

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A numerical listing of automotive employment below shows just how concentrated some communities can be. Metropolitan areas including Detroit/Livonia/Deaborn, Flint, Holland, Saginaw, Battle Creek, and Lansing/East Lansing in Michigan all reported concentrations over 5 times the national average, as did the Kokomo and Lafayette metro areas in Indiana.

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The final table below further illustrates the sharp geographic rift in employment fortunes over the 1990-2005 period. As a whole, the state of Michigan lost over 64,000 jobs in automotive, on net accounting for all job losses nationally. Largely due to the Michigan experience, the Seventh District states experienced an 18 percent decline in automotive jobs since 1990 while the remainder of the U.S. experienced a 3 percent gain in similar employment.

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Midwest labor markets: Not as bad as we thought?

By now, it is common knowledge that the Midwest labor market is softer, on average, than the rest of the nation. In our Seventh District states of Illinois, Indiana, Iowa, Michigan, and Wisconsin, the unemployment rate has been running one half percentage point higher than the nation for the past two years. Reported payroll job growth has been running poorly as well—at approximately one-half the national rate. The Midwest’s manufacturing sector has also been weak, dragged down by ongoing restructuring among domestic car makers and parts suppliers.

This March, a glimmer of better news was delivered by the U.S. Bureau of Labor Statistics, who rebenchmarked revised monthly state payroll job numbers back from December 2005 to January 2004. The BLS rebenchmarks the employment data each year to take into account more comprehensive data that becomes available on the number of jobs in each state.

Recent revisions boosted the two-year growth of total employment for the Seventh District, while the U.S. was revised downward slightly. The chart below displays revisions by state from the fourth quarter 2005 back two years to the fourth quarter of 2003. After revising District jobs upward by 78,000 for the fourth quarter of 2005, job growth was found to be 1.5% versus 1.0% prior to revision. U.S. payroll jobs were revised downward slightly (by 158,000). Even after this convergence, the pace of reported job growth for the District lies at one-half the national pace!

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On the beleaguered manufacturing side, favorable revisions were repeated. District manufacturing jobs were revised upward by 13,000 for the fourth quarter of 2005, which raised the pace of decline from a 1.2% decline to a 0.7% decline. For the U.S., revisions eliminated 54,000 jobs, and lowered the pace of growth from –0.3% to a 0.7% decline, thereby matching the District pace over the two-year period.

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In may seem incongruous that pace of the the District’s manufacturing sector matched that of the U.S., while the District’s total employment growth was only one-half of the U.S. This results from the fact that manufacturing jobs are much more concentrated in the District—by about 43%. A falloff in District manufacturing activity is also keenly felt across service sectors such as transportation and distribution.

Considerable statistical noise remains in these numbers. Next year, the payroll numbers will be revised once again, and these revisions will include the fourth quarter of 2005. This means that the payroll job performance reported here will also be revised. Stay tuned.