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April 26, 2011

Job Recovery in the Seventh District

by Bill Testa and Max Lichtenstein

The resumption of growth in the U.S. economy, beginning in mid-2009, has been welcome news. However, the pace of recovery has been disappointing, relative to the severity of the recession. Following a period in which U.S. output shrank 4.1 percent from the fourth quarter of 2007 to the second quarter of 2009, the economy did not regain its former size until the fourth quarter of 2010. The deep recession and relatively slow recovery have left behind startling numbers of unemployed working age adults. According to the Household Survey of employed and unemployed, 13.7 million people reported they were unemployed during the first quarter of 2011, double the number reported during the fourth quarter of 2006.

Growth in employment has resumed, especially in recent months. Outside of the government sector, payroll jobs have grown an average of 138,000 per month over the past year, and 188,000 per month over January, February, and March of this year. We can characterize this performance as a mildly encouraging start toward repairing a very large deficit in employment.

To see the extent of recovery so far, the chart below indexes payroll employment back to the first quarter of 2007, near the peak of employment in the Seventh District states. From that time, payroll jobs declined 7.2 percent in the Seventh District and 6.2 percent in the U.S. From its low point, the U.S. has regained 0.9 percent in payroll employment. The Seventh District states have recovered more strongly, regaining 1.4 percent from the trough.

As of the first quarter of this year, Michigan, which had the largest decline in employment in the District since the start of the recession, now ranks first in the District and fifth in the nation in household employment growth on a year-over-year basis. Illinois, Wisconsin, Indiana, and Iowa rank 15th, 28th, 31st, and 33rd, in the nation, respectively.

The District’s relatively strong recovery is partly explained by its relatively steep descent. Our region’s economy is tilted toward durable goods manufacturing— including autos and machinery, which fall precipitously during U.S. economic downturns. However, on the upside, manufacturing tends to bounce back more rapidly. It has done so again over the recent recovery as retailers and wholesale establishments began rebuilding their inventories in response to revived expectations of sales. Exports of manufactured goods abroad also contributed, as the world economy pulled out ahead of the U.S. recovery. This influence of durable goods can be seen in the chart below; U.S. manufacturing payroll jobs declined steeply during the recession, but have been rising at a healthy clip during the recovery.

Job growth has made a down payment toward lowering unemployment in the Seventh District. Per the chart below, both U.S. and Seventh District unemployment rates have been falling throughout 2010 and into the early part of 2011. Seventh District unemployment has fallen more steeply; it has now converged on the U.S. level, following several years of above-average rates.

Unemployment rates have fallen in all five District states (below), with broad variation among them. Although the automotive sector’s recovery has exerted significant downward pressure on Michigan’s unemployment rate, it remains the highest in the District (10.3 percent). With 6.1 percent unemployment, Iowa’s rate is the lowest in the District, owing to its concentrations in production agriculture, food processing, and export-oriented agricultural machinery.

As a group, the District states of Wisconsin, Illinois, Michigan, and Indiana have experienced steeply declining unemployment rates over the past year (map below). Gains in manufacturing activity, along with related services and transportation, have led employment gains here and eastward throughout the Midwest industrial belt.

Declining unemployment rates are a positive development. However, while “job destruction” levels appear to have abated, “job creation” levels have yet to rebound significantly. Chicago Fed Economist Lisa Barrow finds that the largest factor in recent national unemployment rate declines has been a reduction in the number of workers transitioning from employment to unemployment, rather than job growth. The Chicago Fed Letter reports that, from November 2010 to March 2011, the pace at which employed workers became unemployed slowed markedly. In the Seventh District, this trend is similarly evident from data reporting workers who file initial claims for unemployment insurance—another measure of “job destruction.” As illustrated below, in recent months initial claims for unemployment insurance have been running below year-ago levels and far below the worst months of the recession in 2009.

Despite the labor market progress to date, there is ample room for growth in employment among persons of working age. We can see this if we compare the proportion of the working age population (16 years of age and older) who are currently employed with the 2000 level (see the table below). The employed status of the population lies well below normal. In the first quarter of 2011, fewer than 6 in 10 of those of working age counted themselves as employed.

Labor market indicators suggest that, as economic recovery continues to unfold, employers will increasingly shift toward net hiring. Many employers are reaching the limit of the sales and production gains they can achieve using their existing work forces. In particular, measures of the average hourly workweek continue to tighten in both the District and in the nation so that, barring rapid growth in productivity, employers will need to hire in order to meet heightened demand for goods and services.[1] Data that more closely reflect actual hiring decisions also portend a potential hiring upswing. The national survey of job openings and labor market turnover (JOLTS) reports a strong growth in job openings—nearly 3 million since the trough of the recession.[2]

[1] These data are reported by the Bureau of Labor Statistics (BLS) covering nonproduction nonsupervisory workers in the private nonfarm sector. See http://www.bls.gov/news.release/empsit.nr0.htm. (Return to text)
[2] See BLS, www.bls.gov/web/jolts/jlt_labstatgraphs.pdf. (Return to text)

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Posted by Testa at 1:12 AM | Comments (0)

April 12, 2011

Net Migration and Regional Adjustment

By Britton Lombardi and Bill Testa

How do regions adapt following economic calamities that displace large numbers of workers? In the best case scenario, they reinvent themselves. For example, economist Ed Glaeser documents the several times that Boston rose from the ashes following collapse of its shipping and old line manufacturing industries. In a similar vein, Detroit hopes to rebuild as an economy based on logistics, energy, and high-tech manufacturing—especially next generation automotive technology and production.

However, in many more instances, rather than a quick turnaround, cities and regions undergo a painful adjustment period that leaves them smaller than in their heyday. In the process of adjustment, economists have shown that, following an economic shock, unemployment rises for several years before returning to more normal levels. Using the steel- and auto- related job losses in the early 1980s as an example, a paper discusses the long-run effects of massive job losses. The authors found that after an initial spike in the unemployment rate in the impacted local economies, the rate converged back to the national average after five or six years. However, high out-migration (and low in-migration) led to this reduction in unemployment, rather than an increase in new jobs. Similarly, a landmark study found that those U.S. multi-state regions that experienced downward employment shocks returned to a more normal path of employment growth within five to ten years. However, the lost jobs were never recovered.[1]

One lesson from such studies is that the ability to migrate from distressed areas can be helpful in restoring the lives and livelihoods of households that undergo economic displacement. Recently, there has been concern that the migration mechanism is broken or impaired. William Frey and others have documented a fall in interstate migration during the recent recession, along with a longer-term decline over recent decades. Nonetheless, much of the long-term decline is gradual and mobility in the U.S. remains high relative to other nations and continents.[2]

In the current environment of high unemployment and a weak housing market, some analysts have attributed dampened mobility of the labor force to falling house prices and “negative equity” or underwater households—that is, homeowners who owe more on their existing home mortgage than their home is worth on the market. Some economists posit that negative equity in a home may hamper the ability of the homeowner to move to a new labor market because they are “locked-in” to their existing house by their inability to raise funds to pay off their mortgage. A staff report from the New York Fed found that negative equity does reduce the probability of moving. However, in a rebuttal paper using the same data but differing coding of movers, the author concludes that negative equity does not make homeowners less mobile. If anything, a homeowner with extremely negative equity is actually slightly more likely to move than an individual with smaller negative equity. Using statistical analysis, the author finds that negative equity actually increases the probability of moving by 1 to 3 percentage points; this represents an increase of 10 to 18 percent of the overall probability of moving. Dan Aaronson, has conducted some preliminary research that finds that differences in migration rates of homeowners and renters barely changed during the recession and early parts of the recovery. Since renters should not suffer “house lock,” this evidence suggests that the migration process has not been hampered by falling home prices to a large degree. Similarly, Mark Partridge et al find that the migration falloff in the recent decade may fundamentally reflect heightened risk aversion of U.S. households.


So, how does this all play out in the Seventh District? Despite some impairments to mobility, interstate migration appears to be well underway in the region, especially in those states, such as Michigan, that have experienced the most damaging employment shocks. Michigan has been an outlier in its high unemployment rate, which has been well above those of the rest of the District states since 2004.

Click to enlarge.

As seen below, Michigan started experiencing net out-migration during the recession in the early 2000s. However, the out-migration rate picked up speed around 2004/2005 as Michigan’s unemployment rate started to drift higher than those of the other Seventh District states. Net out-migration from Michigan remained relatively high, at around 8 per 1,000 people, from 2007 through 2009.

Click to enlarge.

To check more recent trends, we turn to data released from United Van Lines and Atlas Van lines as they track interstate movements of U.S. households around the country. They have been tracking this data for a long time and so provide some historical data. In the chart below, we combine both companies’ data to try to produce comprehensive results and remove any anomalies that one company may experience in their sales.[3] We plot the outbound migration gap, or the extent to which the number moving out of the state exceeds those moving in. In the early 2000s, Michigan’s gap is in line with the rest of the Seventh District but, again, starting around 2004/5, Michigan’s gap greatly widened compared with the other states’ gaps, consistent with the unemployment observations above. The gap continued to grow during the recent recession; it recently began to trend back down, but still remains at higher than the rest of the District states’.

Click to enlarge.

Net out-migration is not a preferred solution to economic shocks for many reasons. Moving can be costly in terms of out-of-pocket expenses, and households can suffer from the severing of social ties as well as difficulties in learning how to negotiate daily living in new communities. Nonetheless, mobility can be a helpful part of the adjustment process when it allows workers and households to improve their standard of living and well being following a negative shock to local employment. For this reason, and in response to today's difficult employment situation, researchers are asking whether public policy should intervene to assist those unemployed workers who would benefit from re-location, but who lack the funds to re-locate in search of jobs. One recent idea has been explored by Jens Ludwig and Steven Raphael. They "propose the creation of a "mobility bank" that would help finance the residential moves of U.S. workers relocating either to take or search for work....in depressed areas of the country." These loans would be "amortized over a fairly long period (10 years), and repayment terms be contingent on the borrower's post-move employment and income." The paper suggests that the program costs would compare favorably to alternative federal programs designed to achieved re-employment.

[1]In contrast, Timothy J. Bartik finds persistent effects of shocks on unemployment rates and labor force participation; See here(Return to text)
[2]See here (Return to text)
[3]There may be some sample bias of individuals that actually use movers versus those that rent a truck and move themselves. (Return to text)

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Posted by Testa at 10:38 AM | Comments (0)