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.
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. In both the nation and the region, recent growth in labor compensation continues to fall short of that in the pre-recessionary period.
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. 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.
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.
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.
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.
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)
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)
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. 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.
 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)
 See BLS, www.bls.gov/web/jolts/jlt_labstatgraphs.pdf. (Return to text)
March 22, 2010
Job Revisions Downward
Over the past few years, the drop in employment has been steep and painful. A recent reassessment of the job count shows that even steeper declines have taken place than initially thought—both across the U.S. as a whole and in the Seventh Federal Reserve District, which covers all of Iowa and most of Illinois, Indiana, Michigan, and Wisconsin.
The U.S. Bureau of Labor Statistics (BLS) releases much awaited monthly estimates of payroll jobs for the nation. These estimates, which exclude self-employed individuals, are derived from a sample of reporting firms. Once each year, these monthly estimates of payroll employment levels are revised in a major way by the BLS. The BLS revisions are reported during the first quarter of each year to reflect an almost complete count of nonfarm payroll jobs that becomes available for the month of March of the previous year. In a separate release , state payroll job estimates are similarly revised.
This year’s BLS revisions were unfavorable to both the U.S and to Seventh District states. On an average monthly basis for the year 2009 in its entirety, the revisions indicated further job decline in the U.S., by more than 1 million payroll jobs, or approximately 0.8 percent (table below). All five Seventh District states also reported downward revisions. Only Indiana’s downward revision of 1.2 percent exceeded the nation’s. Revisions for the states of Wisconsin and Michigan were relatively minor.
These downward revisions constitute more bad news because the original estimates already indicated rather sharp job declines (chart below). In the chart below, yearly decline is measured by the 12-month percent change from December 2008 to December 2009 (red bars). In examining the annual rates of decline before the revisions, payroll job counts for the Seventh District region were off 4.1 percent. Prior to the revisions, the U.S. as a whole showed a net decline of 3.1 percent of total payroll employment over the same period. The revisions to these data widen the U.S.–Seventh District gap, from 1 percentage point to 1.3 percentage points.
Among individual states, Illinois and Indiana have the sharpest revisions—both at 0.9 percentage points. And the revisions for Wisconsin and Iowa are just behind, at 0.8 percentage points and 0.7 percentage points, respectively. After the revisions, Michigan was actually 0.1 percentage point higher than before—a small bit of good news for a state that lost 840,000 nonfarm payroll jobs since mid-year 2000, an 18 percent decline; by comparison, the U.S. experienced a 1.7 percent decline since that time.
Note: Chenfei Lu and Christian Delgado de Jesús assisted with this essay.
These BLS counts are not of workers but of jobs. A worker may hold one or more jobs. Data in the chart are seasonally adjusted. (Return to text)
The region reported covers the full state boundaries of those states. As mentioned before, the Seventh Federal Reserve District covers only the parts of Illinois, Indiana, Michigan, and Winsconsin. (Return to text)
September 29, 2009
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.
March 12, 2009
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, 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. 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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The nation also experienced less serious downturns, during 1969-70, 1990-91, and 2001. See http://www.nber.org/cycles.html. (Return to text)
Payroll employment numbers are subject to revision in March of every year. See http://www.bls.gov/sae/790over.htm#employ. (Return to text)
February 3, 2009
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. 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.” 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.
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)
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)
September 24, 2008
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.
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.
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.
February 20, 2008
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.
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.
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
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.
July 18, 2007
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.
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.
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.
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.
February 5, 2007
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.
Click to enlarge.
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.
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.
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.
September 28, 2006
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.
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.
September 13, 2006
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.
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.
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.
March 30, 2006
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!
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.
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.
January 30, 2006
Midwest payroll job growth—Turning but weak
Sample-based estimates of payroll employment are among the most prominent and timely indicators of regional economic performance. Recent trends in reported payroll data indicate lagging economic performance in the Seventh Federal Reserve District, which comprises all of Iowa and major parts of Illinois, Indiana, Michigan , and Wisconsin . Payroll job growth over the past year varies among these states, with losses in Michigan pulling down the District’s job growth average.
The District’s payroll job performance during the period following the 1990 national recession compared much more favorably to that of recent times. Have the region’s fortunes temporarily turned for the worse? Or is this lagging performance an indication of a structural worsening in the region’s growth path?
Payroll job estimates for December 2005 were released by the Bureau of Labor Statistics on January 24, 2006. While these figures seemingly complete the calendar year 2005, they have not been finalized yet. When the January figures are released (every March), monthly data are revised back for the previous 18 months. Because current data are based on reports from a sample of establishments, the data are later revised or benchmarked to a so-called universe of establishments that report their employment covered by the Unemployment Insurance tax system. The revisions can sometimes be significant and we will examine them during the week of March 6.
Over the past year, this preliminary data suggest that payroll job growth is trending up in all District states except Michigan. However, job growth continues to lag the nation in all District states except Iowa.
Looking back over the past five years to one quarter prior to the onset of the last national recession, there have also been steep job losses. The table below indicates that Michigan’s monthly average payroll jobs declined 6.7% from the fourth quarter of 2000 (prior to the onset of the national recession) to the fourth quarter of 2005. Reviewing payroll jobs data over this same five-year period for other Distict states and the rest of the nation, we can see that there was a 2.8% loss in jobs for the average of all five District states and a 2.2% gain for the remainder of the U.S.
Such performance is in sharp contrast to results from the previous national recession of 1990–91 and its aftermath. During that five-year period, starting from the national peak quarter, 1990:Q3, District employment expanded by 7.8 percent versus 7.0 percent for the rest of the U.S. At that time, stronger than average payroll job growth emerged in Indiana, Iowa, Michigan, and Wisconsin.
Is the region experiencing a structural change, that is, a performance indicating deep-seated conditions that cannot be expected to reverse themselves? During the early 1990s, several transitory events and conditions were playing to advantages of the Midwest, as well as to the disadvantages of other regions. Among these were the savings and loan crisis and subsequent restructuring that affected parts of the South, the Northeast, and the West, but largely bypassed the Midwest. In addition, the build-down in national defense procurement, along with base closings, diminished income in jobs in some parts of these other regions. So, too, exports were growing and import competition was abating nationwide, following the easing of the dollar’s exchange rate during the late 1980s. In this regard, the high concentration of manufacturing in the Midwest was especially favored by a improving balance of trade.
Manufacturing employment performance generally appears to have been a key factor. In both the nation and in the Midwest, manufacturing employment remained generally buoyant during the 1990s. Since manufacturing was (and remains) so much more concentrated in the Midwest than throughout the rest of the U.S., this sector’s impacts on overall growth were magnified in Seventh District. Moreover, job expansion in District manufacturing actually surpassed the nation. The table below reveals that manufacturing jobs grew over 3% in the Seventh District from the third quarter of 1990 to the third quarter of 1995, whereas it declined by 4% in the nation over these five years.
In the more recent period, 2000–05, manufacturing jobs have declined steeply in both the Seventh District and the rest of the nation; both are experiencing manufacturing job declines at a pace of 17% to 18% during this recent five-year period.
Have structural changes taken place recently in the Midwest involving manufacturing? We cannot say with certainty. Our examination of the manufacturing sector in 2004 established that manufacturing’s job share displays a long-term and sustained decline in the U.S. so that the region’s recent weakness is not necessarily a permanent turn for the worse (link).However, it is also clear that the automotive industry is undergoing some profound geographic shifts, which do not favor the Midwest (link), and that import competition also looms as a possible contributor to domestic automotive parts travails (link).
There is much that we do not know yet. Still, as the Seventh District crosses the mid-decade mark, with its lagging performance showing little sign of abatement, it is time to raise questions and to analyze the extent to which the region’s growth path has changed.
January 13, 2006
Bullish on the Chicago Metropolitan Economy
So far this decade, the Chicago metropolitan area's economic performance has been disappointing. As in the surrounding Midwest, job declines during the recent recession were worse here than in the nation as a whole, and this area’s job growth during the expansion has since been lagging. With this lackluster performance, there has been a special disappointment for Chicagoans; the metropolitan region’s economy led the nation and most of the surrounding Midwest during the 1990s. During that time, there was a sense that Chicago’s economy had evolved beyond its role as regional business capital into one as national and global business center.
What is Chicago’s outlook for 2006? I am optimistic, although there are some defensible reasons for caution. For one, goods producing industries in the surrounding region may continue to pull down Chicago’s service sectors. Chicago’s outsized business and professional service sector continues to serve the Midwest, as do its travel, distribution, and business meeting services. But looking ahead, the Midwest economic outlook is clouded by the prospects for its automotive industry. Nationally, automotive sales growth is not expected to be robust this coming year, especially for the Big Three automakers and their suppliers that populate the eastern part of the Midwest region as well as northern Illinois and southern Wisconsin. Accordingly, this segment of the Midwest cannot be expected to propel Chicago’s service economy in 2006.
There is a second reason to be cautious: National economic growth is expected to moderate modestly in 2006 (link). Since Chicago and the Midwest generally follow national trends—perhaps even follow them in a magnified fashion—there is some doubt that the metropolitan economy’s performance will gain momentum as the national economy moderates.
Still, despite these trends, and with a great deal of uncertainty, I offer some reasons for optimism for those of us who are inclined to be bullish about Chicago.
Not all of the surrounding Midwest manufacturing activity is moribund. The region’s capital goods industries, such as the machinery and equipment industry, are expanding. Looking forward, as national and global economic growth continues, U.S. and world demand for “new tools” and added production capacity tend to lift capital goods sectors. In turn, employment in manufacturing sectors, along with physical expansion of factories, tend to take place with a lag as excess capacity becomes squeezed.
More generally, recently reported data indicate that improvement in Chicago’s labor markets is already underway. During the autumn, Chicago's year-over-year payroll job growth exceeded 1 percent for the first time since the year 2000, while the unemployment rates were down in the fourth quarter (according to preliminary reports).
Chicago’s vaunted business and professional services industry is once more reporting strong employment growth. Though it has much catching up to do from its poor performance in recent years, Chicago’s year-over-year job growth in this sector is exceeding the nation’s.
In the travel and meeting arena, passenger arrivals to the Chicago area and hotel demand continue to recover. Plans for local conventions have edged up for 2006, as have planned developments of new hotel space.
Chicago’s financial exchanges also form a bright spot. Chicago’s importance as a financial center is defined by its exchanges and associated dealers and brokers. The Chicago exchanges can claim close to two-thirds of the volume of exchange-traded contracts in the U.S., and they once dominated global trading as well (link). However, in the 1990s, competing exchanges in Europe and Asia made strong gains in global market share, depressing the metropolitan area’s income and employment. But recently, Chicago’s two major exchanges, the Chicago Mercantile Exchange and the Chicago Board of Trade, have rebounded strongly. Not only are contract volumes up markedly, but both exchanges have gained market share on their global competitors over the past two years.
Chicago’s central area remains head and shoulders above all mid-continental contenders as a magnet for attracting younger skilled workers. Such workers are now greatly coveted for regional growth and development. A recent study of the 40 major U.S. metropolitan areas reported that Chicago’s downtown ranks sixth in the share of 25–34 year-olds, and Chicago experienced the third greatest percentage gains in this group (up 28%) during the last decade. Chicago’s downtown has the second highest share of residents with bachelor’s and advanced degrees with 67.6%, only behind Midtown Manhattan (link).
The Chicago area manufacturing sector was hit hard in the early years of the decade, especially in its own high tech hallmarks of IT and telecommunications manufacturers, such as Tellabs and the much larger Motorola. Thankfully, the region’s machinery and equipment sectors have bottomed out because national investment spending has recovered, growing at double-digit rates in 2004 and 2005. Such strong national demand for equipment and software is expected to continue into 2006.
In the high tech start-up arena, a flurry of activity took place in the Chicago area at the end of the last decade. Chicago’s timing was very unfortunate in this regard, coming in at the national peak of activity such that the Chicago region suffered greatly through the subsequent collapse. Now, however, the region’s technology businesses appear to be gathering steam once again for another push at realizing the metropolitan area’s full potential for technology start-ups. Positive developments include the Technology Development Fund of the Illinois Science and Technology Innovation Campus in Skokie, Illinois, and the research park expansion planned by the Illinois Institute of Technology. Tech commercialization policy initiatives are also moving forward. To name but a few of many, the Chicago Biomedical Consortium will be sharing new medical research equipment among Chicago area institutions, and the Midwest Research University Network will be cooperatively fostering start-ups out of Midwest universities and research labs.
The Chicago area economy has not been fortunate in recent years. Its economy is driven by its business service and headquarters functions; its role as distribution hub of the Midwest’s goods and materials; and its business travel/meeting activity. These sectors have been buffeted by weakness in the surrounding regional economy and, more globally, by weakness in manufacturing and business travel/meeting activity. Recent trends portend that Chicago’s performance will catch up with the nation’s somewhat in 2006.
December 1, 2005
Great Lakes: Economy and water
The Council of Great Lakes Governors convenes December 13, 2005, in Milwaukee. At that time, the governors will discuss progress on region-wide procedures to regulate, protect, and control diversions of the waters of the Great Lakes basin, the largest single body of surface water in the world. Such actions are laudable for their foresight in sustaining the health of the Lakes ecosystem. Interstate cooperation in fashioning public policy is difficult and rare. Inspired by such achievements in the environmental arena, should the region’s leaders aspire to broader cooperation to spur economic growth and development?
The Council of Great Lakes Governors, formed in 1983, is a non-partisan partnership of the eight states that border the Lakes—Illinois, Indiana, Michigan, Minnesota, New York, Ohio, Pennsylvania, and Wisconsin—along with the Premiers of Ontario and Quebec. The council's goals are both environmental and economic.
Next week’s agreements to address water diversions are but one of several initiatives that the governors are engaged in to improve the health of the Great Lakes ecosystem. Through the Great Lakes Governors’ Priorities Initiative, the council has established a list of nine priorities to guide the restoration and protection of the largest single source of freshwater in the world, the Great Lakes. Most of these priorities are being addressed more broadly in the U.S. by the Great Lakes Regional Collaboration, which was created by executive order in 2004. The collaboration includes the EPA-led federal agency task force, the Great Lakes states, local communities, Native American tribes, non-governmental organizations and other interests in the Great Lakes region. The first goal of the Collaboration is to create a workable strategy to restore and protect the Great Lakes ecosystem. Past abuses of the Lakes include the introduction of invasive species, destruction of sensitive shoreline habitat, and the introduction of persistent toxins and pollutants. Today’s threats include increased demands for consumptive uses of Great Lakes water; pollutants from land, sea, and air; erosion of coastal habitat through onshore development; and imminent introduction of invasive species such as the Asian carp.
Should similar interstate cooperative efforts be marshalled for economic growth and development? Some limited efforts are being taken already. Through the Council of Great Lakes Governors, a group of five of the Great Lakes states maintain a non-competitive partnership in international trade initiatives. Five states share overseas trade offices that offer responsive and comprehensive services to small and medium sized companies seeking to expand product and service sales.
In addition, one might argue that proper stewardship of the watershed itself is highly important to the economy. Regionwide organizations such as the Great Lakes Commission address the use of the waters for maritime transportation and tourism-related activities. A Council of Great Lakes Industries tries to preserve the region’s industrial activity and balance the needs of industry with those of the environment.
The Lakes ecosystem is also important to what the region's economy is becoming. Quality of life, especially human health and outdoor recreational amenities, are increasingly important in attracting the highly skilled and highly mobile knowledge workers of “the information economy.” As family income and educational attainment grow in the U.S., demands for environmental quality grow more than proportionately. Primary residences adjacent to scenery and open waters are in ever greater demand. More people are buying second and even third homes for vacation and retirement. A small but growing subset of households follows the seasons residence by residence suggesting that, over time, the Great Lakes attractiveness as a site of seasonal homes is likely to expand.
Still, as we stand at mid-decade, the Great Lakes economy appears to have lost some steam from ten years ago (chart and table below). At that time, the region was celebrating a return to prosperity from the tougher times of the 1980s (see Assessing the Midwest Economy project of Fed). Labor markets in the mid-1990s were tighter in the region than the nation, with concerns of work force shortages about to emerge.
Since 1995, the region's payroll employment has grown by one-half of that of the rest of the U.S., and the region’s unemployment rate is higher than the nation. Over the past five years, payroll job growth has declined.
The region may yet flex its economic muscles during this decade. But concerns are growing that the region's economy may again be undergoing some long-term structural declines. As they meet in Milwaukee, some of the governors may rightly wonder if additional interstate efforts to boost the region’s economy might be worthwhile.
Aside from the waterways, the region’s economy is highly integrated in commerce and in shared assets, among them interstate flows of materials and intermediate parts over a common transportation network (see Hewings CFL). The region’s economy also draws from a common labor market for its work force skills. And its built assets include a university system that is arguably among the finest of any region in the world.
While it is highly important to protect our natural assets, other opportunities for the Governors may lie in developing and promoting additional assets.
November 22, 2005
Driving Indiana’s and Michigan’s Economic Performance
The Midwest economy is lagging the U.S., but some states are doing better than others. These differences may help us understand the reasons for the region’s lagging economy.
Last week in Indiana, I presented some evidence that the entire region is growing more slowly than the nation. Payroll job growth in our Seventh Federal Reserve District is up only 0.6% for September from one year earlier, versus 1.6% in the nation. In some respects, this performance is not surprising since, nationally, manufacturing jobs are still declining (down 1% year over year through September), and the Midwest’s economy is steeped in manufacturing. In addition, the region’s economy is bogged down by the structural change taking place in the automotive industry. Foreign nameplates continue to gain market share from the domestic automakers (previous blog). Since the foreign nameplate companies and their parts suppliers tend to locate in the South, jobs and income are seeping away from the Midwest.
In this regard, comparing the performance between Indiana and Michigan is telling. Though both states rank among the top 3 nationally in manufacturing concentration, the unemployment rate in Michigan stands at 6.1% in Michigan (Oct.) versus 5.4% in Indiana. Year over year, manufacturing payroll job growth is virtually flat in Indiana, but down over 3% in Michigan.
The economies of both states are automotive intensive, but Michigan to an even greater degree. Indiana’s automotive share dominates manufacturing inside the state, at 16%. But Michigan’s automotive sector accounts for 35% of its manufacturing employment. A weakening automotive sector, then, would be felt more sharply in Michigan.
On top this, the auto sector’s performance in Michigan has been worse. From 2001 to date, automotive jobs have fallen 24% in Michigan, compared to 8% in Indiana.
Indiana’s automotive performance is buffered by having a larger share of foreign auto parts and auto assembly plants than Michigan. According to senior economist Thomas Klier, 29% of automotive parts plants in Indiana are foreign owned, as are 2 of its 3 auto assembly plants.
Auto parts makers tend to locate close to their customers. In Indiana, the foreign-owned parts plants are more likely to supply parts to those automakers who are gaining market share—the foreign nameplates.
Michigan’s automakers are only 17% foreign owned; its only foreign owned assembly plant is the Mazda plant, versus its 15 domestic auto assembly plants.
If the current shifts in market share among automakers continue, it will be imperative for Michigan’s economy to attract investments from the successful auto suppliers and auto assembly companies.
Other performance differences between Indiana and Michigan are intriguing, though one cannot draw any hard conclusions. The chart below illustrates the population growth of the largest metropolitan areas in each state—Indianapolis and the Detroit MSA. Indianapolis’ population growth has exceeded the surrounding areas, and far exceeded that of the Detroit metro area.
In searching for explanations, manufacturing concentration again comes to mind. As recently as 1969, only 26% of Indianapolis’ overall employment was manufacturing, versus Detroit’s 35%. Generally speaking, “factory towns” have had the roughest road in restructuring. As manufacturing employment shrinks, such cities must re-employ larger shares of their work force in new industries and activities. Otherwise, workers move from the area and create a different set of challenges to the town governments. That is, how to efficiently use and maintain their current roads and buildings for a less populous (and sometimes less wealthy) population.
Governance structures may also explain some of the challenges. Central city Detroit has been buffeted by job, population, and income flight, with concentrated poverty left in the wake. Detroit city leaders have been unable or unwilling to climb above the city’s fiscal problems to re-build its economy. To what extent has this failure come about because the central city was isolated from the rest of the metropolitan area (and state), and left to solve profound problems with its own (meager) resources?
Indianapolis and other cities have taken some modest steps in consolidating local governance to a closer fit with their metropolitan-wide economies. In the late 1960s, Indianapolis moved toward a “Unigov” structure. As Rick Mattoon discusses (working paper), the city’s boundary was expanded from 82 square miles to 402 square miles, with a legislative body responsible for governing the city. Though there remain many independent governments, taxing authorities, and school districts within the city, the consolidated city has six administrative departments below the mayor’s office.
Other Midwest cities with elements of regional governance include Minneapolis–St. Paul, which has a metropolitan sharing of property tax base. Columbus, Ohio, has not consolidated, yet its central city government has been aggressive in annexing land outward toward its interstate beltway. Both metropolitan economies have outgrown the broader Midwest.