Minnesota’s “official” unemployment rate remains at 4 percent, a full point below the national rate. That is on a “seasonally adjusted” basis that smooths out such one-off factors as students working in summer or seasonal retail temps in the weeks before Christmas.
The “not-seasonally-adjusted rate” is 3.2 percent. St. Paul is at that rate with Minneapolis a bit lower. Many suburban municipalities are even lower, with Woodbury at 2.5 percent for example.
Folks, you have to realize that, from the point of view of society as a whole, this is about as good as it gets.
I know that assertion will draw angry emails about how the economy is still in terrible shape, that the unemployment numbers are cooked in several ways. Some people with good memories will note that we hit substantially lower rates in the late 1990s. And a few aggrieved employers will complain this is not good news because there are crying shortages of good workers. These are not new observations, and they tend to be given over a wide ranges of key labor market numbers.
Start with the question of a labor shortage said to be crippling businesses, especially those for which large numbers of relatively low-skill workers make up a big part of costs. Yes, it is now harder for such employers to get the people they desire at a wage rate they want to pay than it was even a year ago. It is much harder in comparison to conditions prevailing over the last nine years.
Economists, however, bridle when they hear the word “shortage” in relation to relatively efficient markets, such as those for labor. Their reaction is “are you sure the market won’t clear at some higher wage rate?” In other words, is there really a shortage of workers? Or just at the wage rates complaining employers are willing to pay? At a higher wage, would they get more workers?
Note that this phenomenon is not limited to dish washers and hot dog sellers, as noted in a recent Pioneer Press article. One periodically hears that there are current or looming shortages of nurses or teachers. Both these professions are ones for which there are large numbers of people who have the requisite training and experience, but who are not currently working in that field. For some, leaving their field was a recognition of a poor career choice. But surveys indicate that many would go back to work in nursing or teaching if the pay was higher. So, as with low-skilled workers, an economist’s first reaction to any employer complaining of a labor shortage is: “Pay more and you will get workers!”
That admittedly isn’t easy in many cases. Food service is very competitive on price. If the owner of hot dog or taco cart has to pay a much higher base wage and must raise prices as a result, she may lose business to food trucks or skyway eateries. A school district may have to get a higher levy on the ballot to up its pay scale — which often is determined in long-term union contracts. And any business that faces import competition always has to compare its labor costs with those of competitors in other countries.
Individual employers often think, “I cannot pay higher wages and make a profit.” But as long as an entire sector faces higher market wages, every comparable business is in the same boat. Food sellers of all types have faced this in the past and prices to consumers have risen to balance higher wage bills without total numbers of businesses dropping.
So economists’ advice to frustrated employers would be: If market wages are rising, pay them or do without the workers you want. And they would note that while inflation-adjusted wages now are rising, they have been nearly flat for several years.
Stepping back from concerns of individual workers and employers, there is the question of why market wages are rising. Is it a matter of supply: the numbers of people willing to work at each of a series of different wage rates? Or is it demand: the numbers of workers employers willing to hire at each pay level over the same range? Does Minnesota have more entities, public and private, trying to hire more people? Or has the number of people looking for work — the so-called labor market participation ratio — dropped?
British economist Alfred Marshall famously said that these questions can be like asking whether it is the top blade or the bottom blade of a pair of scissors that is cutting the cloth. In all cases, both supply and demand are in play. But when there is a change in equilibrium wages and the number of potential employees overall, one can look at causal factors.
There obviously is an increase in demand. National output is growing at the fastest rate in years and Minnesota’s economy is expanding better than those of many other states. So companies are looking for more workers and the number of people with jobs is increasing.
However, there also clearly are things happening on the supply side. Since early spring, Minnesota’s labor force has shrunk. This statistically is the number of people who have jobs or are actively looking for jobs. Take this number of people over age 16 divided by the total population of the same age and you get the aforementioned “labor force participation ratio.” Minnesota long had one of the highest participation ratios in the nation and that remains true, nearly 70 percent compared with the low 50 percent range for Alabama and Arkansas. But the rate here has been dropping from levels that prevailed for several decades. Why?
As with the whole nation, the retirement of baby boomers is part of the equation. The most common reasons for being “out of the labor force” are retirement or staying at home caring for children. But aging baby boomers explain only a part of the lower rates. If one looks at “age-specific” rates for successive brackets from age 16 to 65, there are declines in these groups, too, especially for males. And there is no clear reason why this is happening. It is more pronounced at the beginning and end points of typical working lives, i.e., ages 16-25 and 55-64 than in the middle years.
Are there more of these younger potential workers of independent means than in previous generations? Are these people living in their parents’ basements, playing video games? Are more simply lazy and willing to get by sponging off friends and family? Are fewer high school and college students also working?
Whatever the cause, people dropping out of the labor force has been pronounced over the last half year. One state labor market researcher commented, “We have lost 85,000 workers since April and nobody really knows why.”
People who don’t have jobs and get tired in a fruitless search for work — so-called “discouraged workers” — are not counted as “unemployed” if they did not take active steps to get employment in a specific period. They are “out of the labor force.” They don’t show up in the “U3 unemployment rate,” the one most commonly cited by officialdom. But they do show up in a broader “U6 rate” that is also tabulated each month. Such discouraged workers tend to become more common when the economy is declining or when unemployment rates are high. But they tend to decline as job markets pick up and the gap between the U3 and U6 rates narrows. Yet the opposite has been happening this year, even as economic output and overall employment has been rising and unemployment rates have been falling.
This is an immediate concern in Minnesota, but changing patterns in labor force participation are a deeper and longer-term issue for our nation as a whole. So next week’s column will explore longer-term trends in these patterns, including why they rose so much decades ago and how our economy will be affected if current lower levels persist.