The State of the U.S. Labor Market

Office of Economic PolicyFebruary 3, 2015

Dr. Jennifer HuntDeputy Assistant Secretary, Microeconomic

Analysis

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Unemployment rate fell surprisingly fast in 2014 (5.6%)

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Much of the decline was in long term unemployment

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But broad unemployment anomalously high (11.2%)

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Employment rate rose in 2014, but growth anemic…

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… due to stagnation of labor force participation

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Unemployed leaving labor force falling but still high

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Still particular concern for long term unemployed

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Real hourly wage growth is near zero

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In fact, real wages adjusted for worker quality falling

Mean hourly wage (2000 = 100)

All observables held constant

Education held constant

Unadjusted

96

98

100

102

104

106

2000 2002 2004 2006 2008 2010 2012 2014

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Consider remaining weaknesses in labor market

Why is part-time work for economic reasons so high?– Don’t know

Why is labor force participation falling?

What explains the types of jobs created in the recovery?

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Why is labor force participation falling?

About half decline since 2007 is due to baby boomers retiring

Some reflects fact that there is always a decline in the recession– Stronger GDP growth in 2014 helped slow decline

Some is unexplained – This component was growing through 2013, as GDP recovered but

participation did not– Preliminary calculations suggest no longer growing

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Decomposition of change in participation rate

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Alternative scenarios for the participation rate (CEA)

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Future depends on future behavior of current youth

Participation rate of youth 16-24 has been falling– Mainly because participation of students has fallen– Though also because enrollment has risen

So will the current youth increase their participation in their mid-20s?– Or will they have low participation their whole life?

The preliminary answer seems to be different for men/women

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Male youths’ participation stays low as age

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Female youths’ participation bounces back as age

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What is the significance of falling participation?

Potential GDP is lower– Matters for business: customers consume less– Matters for government: geo-political implications– Less clear matters for individuals: rather, GDP per capita and its

distribution are what matters

Whether matters for individuals depends on the causes– Retirements are presumably choice of individual: leisure is good– Are there barriers to women’s work e.g. tax system?– Are men discouraged by falling wages?

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What policies can help…

Reduce number of workers working part-time for economic reasons– Unclear; hope continued GDP growth will help

Reduce obstacles to labor force participation

Raise wages, especially at the bottom

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Reducing obstacles to participation: Admin proposals

Tax credit for second earner in family– Joint income taxation implies high tax rate for secondary earner– Compared to countries with individual taxation, US is missing part-

time workers, explaining low prime-age female participation

$3000 tax credit per young child

Partnering with states to adopt paid leave

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Raising wages: Administration proposals

With immediate effect– Raise minimum wage– Expand Earned Income Tax Credit to childless workers– Extend the coverage of the overtime premium to more workers

Longer run investments– Partnering with business: more on-the-job training, apprenticeships– Making two years of community college free– Simplified but more generous tax break for college– Universal access to high quality preschool for 4-year olds

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Other important Administration proposals

Invest in infrastructure

Immigration reform

Thank you!