Arnold Kling  

Meltzer on the Labor Market

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In an earlier post, I asked,


What is the likelihood that some of the weak job growth and strong productivity growth of the past two years is in part a statistical mirage?

Allan Meltzer says that the likelihood is high.

What many companies have done is outsource some services previously performed in house. For example, cafeterias become independent enterprises. Often the same people report to work at the same places, but they now work for a different employer, perhaps a start-up. They may receive fewer benefits and perhaps lower wages. The company is able to reduce costs without reducing services. It now has fewer employees and the same output of manufactured goods, so it reports that labor productivity -- output per person employed -- has increased, in some cases dramatically. The official statistics record the change.

Just remember--you heard it here first!

UPDATE: Someone named Larry left a comment with a link to a helpful analysis.

For Discussion. If Meltzer is correct that the problem is a lag in the statistical reporting of payroll employment, then will employment growth in the payroll survey tend to be overstated in future months?


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CATEGORIES: Macroeconomics



COMMENTS (38 to date)
David Thomson writes:

The news reporting by the “mainstream” media has little to do about objective “statistical reporting of payroll employment.” On the contrary, these folks are committed to the proposition that George W. Bush is a *^%$# scum bag who must be driven out of office. Whatever might help the current President must be buried in the back pages. We should not delude ourselves into believing anything to the contrary.

Lawrance George Lux writes:

The mainstream media is actually understating Employment losses from the Bush policy, though most here would probably disagree. Careful study should be made of Underemployment as well as Unemployment. The Unemployment stats will not turn around inside a time-frame of the current administration, as rehires will be defrayed by elimination of Underemployment--this means an additional five hours per average workweek, Workweek stats overreport actual hours worked: claiming in excess of 43 hours, when there is a actual Workweek of only about 37 hours. Business actually allows the 'Relax' time for the Employees they have not 'downsized'. This means long lunch hours, long coffee breaks, and early breaks from Production before end of day. This is done simply because of the lack of call for Product. lgl

Bob Dobalina writes:

Surely _someone_ high up in the Bush administration realizes this.

Which leads me to believe that they will be very happy to take the overstated payroll growth number at face value when it comes out in a few months.

I would imagine that good news a few months before the election is much more powerful than good news a year before the election.

David Thomson writes:

“The mainstream media is actually understating Employment losses from the Bush policy”

Please explain how the "Bush policy" is responsible for our current economic situation? Also, perhaps even more importantly---what would a Democrat administration do to ameliorate the situation?

David Thomson writes:

Underemployment is a most interesting topic. Salon.com just posted an article By Barbara Card Atkinson complaining about her family’s financial woes:

http://www.salon.com/mwt/feature/2003/09/26/underemployment/index.html

Please note where the Atkinson family lives. They reside in MIDDLESEX COUNTY, Mass. Hello, it’s time for a reality check! This married couple are competing for work in an area of the country where high taxes have severely hurt the economy. I would strongly suggest that the Atkinsons consider moving to Texas. Did George W. Bush tell the citizens of Massachusetts to jack up their taxes to the point of utter absurdity? I don't think so.

David Thomson writes:

"This married couple are competing..."

Opps! Let's change this to "This married couple is competing..."

Mcwop writes:

Dave T, haven't you been listening to the Democratic primary debates? Their proposals to ameliorate the economic situation are to repeal the tax breaks for the wealthy (translation: raise taxes on people/households earning $55,000+), try to sink NAFTA, and nationalize health care (translation: expand the budget busting Medicare program).

Larry writes:

Interesting report on the same subject: http://jec.senate.gov/studies/TwoSurveys.pdf

"What many companies have done is outsource some services previously performed in house" - Meltzer

Q) Has this outsourcing acclerated in the last few years? If not, why was this not apparent earlier?

Q) How much of this outsourcing that Meltzer refers to goes overseas?

My guess is that it's fairly small -- at least in the services space, and measured as a proportion of total market. For instance, the total exports of IT services & other white-collar services from India to the US is less than $7 billion this year, which works out to 0.7% of the total market of over $1 trillion (IT & other white-collar services)

However, the backlas continues unhindered by facts.. check this out.

http://www.chronwatch.com/featured/contentDisplay.asp?aid=4354

Lawrance George Lux writes:

David,
A Democratic administration would be no better than the Bush administration, in that they would continue to spend. I have succesively written Deficit spending by Government, at all three levels of Government, places Government in direct competition with the Consumer and private industry; without paying the economic cost for that competition. This not only incites and maintains inflationary levels, it lessens Consumer Demand through insufficient income. Every Deficit Dollar spend by Government probably costs the loss of Consumption Dollars much higher than a Tax to eliminate the Deficit. lgl

Matt Young writes:

In California, we are experiencing a rapid growth in the underground economy, although this is personal observation.

In the breakfast restaurant business, the chains are leaving, and in their place are the cash only private family oriented businesses. Dennys has been driven out of the area.

The same is happening with much of the small coststruction. This is helped by the protective policy of local communities toward the day labor market.

Even software is seeing underground growth, generally masquerading as open source with significant cash payments.

I think it will be years, if ever, that this underground labor will surface and be reported.

Mcwop writes:

LGL writes: "Every Deficit Dollar spend by Government probably costs the loss of Consumption Dollars much higher than a Tax to eliminate the Deficit."

Unfortunately, higher taxes don't tend to eliminate or reduce deficits. Two examples, Bush I taxx hikes, and the Reagan tax hikes (yes he raised taxes - payroll and increased tax base with 1986 reform.).

You might ask what about the Clinton years? During the Clinton years two things happened. One is spending was growing more slowly than the economy, and tax revenue growth. Two, the additional tax revenue growth was mainly from income produced by massive stock market gains (Krugman even admits as much in an article).

I will caveat this with one tax hike that probably did produce steady long-term tax revenues, and that was the elimination on the cap on income subject to medicare taxes. That means gross wages are hit with a 2.9% tax. Those wages are top line on the 1099 - not subject to any deductions or other credits.

Lawrance George Lux writes:

Mcwop,
Did you hear me call for higher Taxes? I advocate a draconian position of reducing Government spending to 14% of GDP, through reduction of Government services and mandated limits to Government Service Providers and Suppliers. I do not even favor removal of forms of Tax credits, simple limitation of their magnitude to credits for Middle-Income Investor and Business usage. The Rich, and the Giants among Corporations, do not need multi-billion dollar Tax credits. lgl

Mcwop writes:

LGL, sorry, I thought in your post you were arguing that higher taxes to eliminate the deficit cost sonsumption less than deficit spending. I would say that is true only if spending were restrained.

pat odonnell writes:

David Thompson asks....

Please explain how the "Bush policy" is responsible for our current economic situation? Also, perhaps even more importantly---what would a Democrat administration do to ameliorate the situation?

On the negative side, Bush
- increased and extended the farm subsidy
- installed a terrible policy wrt steel
- put in a tax policy that, although has substantial cuts, he gave most of the cuts to the upper class who wasn't going to spend it(I am not a fan of trickle down theory), instead of to the lower and middle class(who in my view would have spent it, helping to revive the economy).
- got us in to an expensive war we didn't have to be in. He also didn't bother getting international support, now is begging for help, of which the rest of the world(or at least germany, france, russia) are politely declining(money or troops).
- has taken us from +2.5% of gdp to -4.5%(or whatever latest numbers are)
- Has reduced the importants of the U.N. and the kyoto without having another alternatives.

what would democrats do? I dunno, but Clinton did more to substantially change, and decrease welfare payouts, decrease the deficit(and thereby reducing the long bond rate) and decreasing what we spent on defense... all I consider pretty good steps.
o.k.... maybe I am biased :-)

Eric Krieg writes:

By what measure can you even say that the economy is "bad"?

GDP growth is the second quarter was very strong. The stock market was going gangbusters until last week, but has eased off a bit. Inflation is still nonexistant. Even mortgage rates are off of their recent highs.

I may not be Prince, but I think we ought to be partying like it's 1999. Those of us with jobs, anyway.

Larry writes:

Is it at all possible for you people to stay on topic? Geez.

David Thomson writes:

“On the negative side, Bush
- increased and extended the farm subsidy
- installed a terrible policy wrt steel”

I totally agree with you--and I also criticize President Bush for these stupid actions. And yet, which Democrat presidential candidate is a paragon of free trade values?

“- put in a tax policy that, although has substantial cuts, he gave most of the cuts to the upper class who wasn't going to spend it(I am not a fan of trickle down theory), instead of to the lower and middle class(who in my view would have spent it, helping to revive the economy). “

I want as much money as possible in the private sector. The very wealthy will likely far better direct their funds to useful purposes than government bureaucrats.

“- got us in to an expensive war we didn't have to be in. He also didn't bother getting international support, now is begging for help, of which the rest of the world(or at least germany, france, russia) are politely declining(money or troops).”

Getting rid of Saddam Hussein will greatly encourage the Mid East to embrace secular democratic reforms. There is no doubt in my mind whatsoever that our country is now safer. International support? Most of the rest of the world is selfish, vile, and utterly disgusting. The French (as Tom Friedman has finally realized) are our enemy. The United states with all its faults---is still the most virtuous nation on this planet.

“- Has reduced the importants of the U.N. and the kyoto without having another alternatives. “

The United Nations is a cowardly and disgraceful organization devoted to anti-Americanism (and is also anti-Israel). It is responsible for refusing to enforce its own resolutions concerning Iraq. Lastly, the Kyoto resolutions were devised by anti-American, Luddite junk scientists who don’t deserve our respect.

“...but Clinton did more to substantially change, and decrease welfare payouts,”

I have often praised Bill Clinton for his welfare reforms. He also earned my respect for NAFTA and our military actions in the Balkans.

“...and decreasing what we spent on defense... “

President Clinton unwittingly harmed us greatly by cutting back on the military. His pacifist inclination served our nation poorly.

Matt Young writes:

Economic growth under Bush?

He raised federal spending something like 27%, and federal spending accounts for nearly 20% of the economy. So, my rough calculation has federal government growth producing about 5% of economic growth over 3 years, which is nearly all of it.

So, beg my pardon, but Bush's economic miracle is communism. Dunno what goes through the heads of Bush's conservative supporters, but George Will is wrong about one thing, the sine qua non of a conservative is smaller government.

David Thomson writes:

"So, beg my pardon, but Bush's economic miracle is communism."

Politics is often about choosing the lesser of evils. Are you saying that any of the Democrat presidential hopefuls are even slightly interested in lowering government spending?

Matt Young writes:

Dave Thompson,

I am saying that Bush is a god-damned communist, especially when supported by a mob of god-damned Republican big government communist idiots in Congress.

If I could choose the best capitalist government, I would put Gingrich as head of Congress, and if Bill Clinton could not run, I would put any of the following in the White House, in descending order:

Dean - A tightwad, stubborn idiot who would lock up government and bring prosperity.

Edwards - Smart enough to allow compromise with Gingrich on smaller government.

Clark - A republican anyway, but worry about a gazillion wasted on defense.

Under no circumstances would I ever put another big government cummunist Republican in the White House after 8 years of Reagan big government, and now 8 years of Bushy big government. We should have learned our lesson about big government, big subsidy, Communist Republicanism after Abe Lincoln.

Lawrance George Lux writes:

Reality often get lost in debate. Iraq is a totally irrevelant issue to Economics, though with commentary the Baa'th Party in Iraq and Syria was the only counterbalance to Islamic fundamentalism in the Arab world. Saddam was bad, and it was sad the only major force for modernization in the Arab world developed totalitarianism; but pray do not say the invasion of Iraq stabilized the Arab world.

Bush Tax Cuts probably eroded at least 35% of the Federal revenue base, and likely almost 50%; all due to the remission of Business taxes. This was done within a vast increase in Federal spending: every year of Bush spending probably increased Federal spending to a greater degree than the entire increase of the Clinton administration, precise data not being forthcoming from the current administration.

NAFTA and Koyoto were both bad. So have been the Bush response to both. Economic data would not suggest that NAFTA has been beneficial to the American economy, while committing the American economy to maintaining the inferior economies to the South. I would give both Democratic and Republican administration a D- on foreign trade issues.

I have not been, not will I ever be a Keynesian. Deficit Government spending will not spur the Economy, nor will excess Government provision of Services. A further cavet would state Business tax credits are as dangerous a form of Government deficit spending as exists.
lgl

David Thomson writes:

“Dean - A tightwad, stubborn idiot who would lock up government and bring prosperity.

Edwards - Smart enough to allow compromise with Gingrich on smaller government.

Clark - A republican anyway, but worry about a gazillion wasted on defense.”

Do you really think that the Democrat Party is going to select anyone who wishes to cut back the size of the federal government? If so, are you aware that I am selling stock ownership of the Brooklyn Bridge? They cost $100,000 per share. How many do you wish to purchase?

I’ve often also taken to task the shenanigans of the military -industrial complex (Yes, President Eisenhower’s warning was right on target). It is utter madness to witness the numerous retired military officers joining the large companies selling military equipment. Still, we need a powerful military. Where do you suggest we start cutting the defense budget?

Matt Young writes:

"Still, we need a powerful military. Where do you suggest we start cutting the defense budget?"

You kidding right? I would start there, but continue on with entitlements, NASA, the 300 billion in other discretion spending, and not run out of cuts for the 8 years I was in office, including my own salary.

I'll give you some clues about defense spending from 12 years in the business.

B-1 bomber, $60 billion, fired about 50 bombs, now being reduced by a third and on the way out.

Two WW2 battleships re-furbished for a few billion because no one told Reagan that WW2 was over. Fired a few rounds into a Beirut suburb, now retired.

SDI, 150 billion gone, 10 billion per year ongoing expenses. Where was Rumsfeld for eight months? Convincing Europe that we need SDI to protect the twin towers from a rogue missile. The system cost 10 billion a year to attempt mid-course interception; and cost the enemy 20 million a year to defeat it with decoys. Each million spend on decoys cost taxpayers 10 billion in additional defense. An absolute path to victory by our worse enemies courtesy of Bush and Reagan. And no, the Russian's were not afraid of SDI. After an evaluation by Russian scientists, there major concern was that it would drain the American treasury and reduce the amount of fund available for Russion economic assistance.


NASA? Spent 5 billion in paper designs of follow on to Shuttle. Now our best approach is to buy Russian or Chinese equipment, which is better and a tenth the cost.

Advanced fighter?

The current F-16 can be bought for $20 million, the new fighter will cost over $100 million. The new fighter could have been working yesterday if we took the Russian advanced Sukhoi SU-29 body, added engines and avionics, at 1/3 the cost of the advanced fighter which will be cut from the budget because of excessive spending by Republican Pork Barreling, Communist idiots.

I could go on, including steel tariffs, which everyone expect the dunce in the White House knew would fail, timber tariffs, industry subsidies, and pork at all levels.

Even the neocons, many of whom are ex-communists, claim that big government conservativism is ok because conservatives know how to use government!! Right out of the Communist Manifesto for christ sakes.

Who do you think invented big government intervention in the economy? The GOP. The party was constructed to support state planning, subsidies and oligarchy capitalism. Lincoln was the first big government Stalinist, and Reagan was not much better. But the Bush wing simply dropped the pretense and adopted the Das Kapital openly and brazenly.

If you want smaller government, then call yourself a conservative and vote for split government.

Eric Krieg writes:

>>god-damned Republican big government communist idiots

That's me. Republicommie.

Hey man, we did Newt. That gig went down in flames in 1995. In case you didn't notice, not only is he NOT the majority leader, he isn't even a Congressman.

Not that I don't love the man. But he's done. We need to move on.

I'm with David, as usual. Bush is the lesser of all evils. No possible alternative would have spent less: not Gore, not McCain, certainly not ANY of the 10 dwarves, and especially not Hillary.

Larry writes:

Will somebody please tell me what any of this has to do with our employment surveys?

Eric Krieg writes:

>>Will somebody please tell me what any of this has to do with our employment surveys?

Well, how can you trust something put out by a Republi-commie administration?

Correct me if I'm wrong, but an outsourced employee is a cost. So that employee detracts from the numerator on productivity, even if he or she is not factored into the denominator.

I don't think that outsourcing is a statistical trick used to Enronize the productivity numbers.

Larry writes:

Ok so none of your claptrap has anything to do with Dr. Kling's original post. Thanks.

All

Can we stick to comments on what Meltzer and Kling have to say?

This ain't Hyde Park

The Letters to the Editor section of the Sep 30 Wall Street Journal has some responses to Meltzer's article.

Check it out here (subscription required).

http://online.wsj.com/page/0,,2_0048,00.html

For those who don't have a subscription, here's a sample

Mr. Meltzer wonders how "a company [that reduced] its work force by 1,000 or 3,000" could have previously survived with "so many redundant employees." Based on this reasoning, those "alleged facts are . . . wrong or greatly exaggerated" and "didn't really happen."

Apparently he is unaware that in one of many examples, 3Com Corp. did recently lay off 3,000 workers and outsourced all of its manufacturing work, now destined to be produced in the Far East.

I find his example that people such as cafeteria workers whose jobs have been merely transferred to independent companies account for "the massive reported loss of manufacturing jobs" hard to accept without solid statistical data.

Fred Plemenos
Lexington, Mass.

Eric Krieg writes:

>>Ok so none of your claptrap has anything to do with Dr. Kling's original post.

Um, yes it did.

>>Correct me if I'm wrong, but an outsourced employee is a cost. So that employee detracts from the numerator on productivity, even if he or she is not factored into the denominator.

In another words, outsourcing suppresses output, since employee costs turn into expenses subtracted from the numerator of the productivity calculation.

Eric Krieg writes:

Also correct me if I'm worng, but hasn't service productivity led manufacturing productivity since, I think, 1995?

The work done by outsourced employees shows up somewhere. The outsourcing company has output, right?

Larry writes:

No, the fact that you hate Bush has absolutely nothing to do with the two employment surveys and the differences between them.

David Thomson writes:

"No, the fact that you hate Bush has absolutely nothing to do with the two employment surveys and the differences between them."

Baloney. It's all anout what the media choose to emphasize. The media make a point to downplay the economic decline which occurred while Bill Clinton was still in office. Lastly, this Bush hating crowd conveneintly ignores the inevitable creative destructive aspects of the new economy. Job hopping is the new reality if we desire a wealthier economy.

triticale writes:

Outsourcing doesn't effect productivity, except to the extent that it reduces cost. What it effects is employment numbers. Independent contractors, freelancers, and at least the smallest of staffing firms are all overlooked in the payroll survey. An employee of a chain such as CostCutters has a job whereas a stylist who rents a booth at the new generation of beauty business may well be better off, but is counted among the unemployed.

David Thomson writes:

"Outsourcing doesn't effect productivity, except to the extent that it reduces cost."

You need to rethink your position. Reducing cost always improves productivity. Outsourcing inevitably brings down the price to the buying public.

Once again, we must not forget that what's good in a macroeconomic sense---is not necessarily a benefit to specific individuals.

Bernard Yomtov writes:

My understandung of Meltzer's point is this: Once a company outsources what was previously an internal function, productivity goes up because something that was previously simply an expense becomes another firm's output.

That wasn't very clear. Sorry. Take the cafeteria example. When the cafeteria is an internal operation the firm records the various expenses associated with operating the cafeteria and that's that. But when it outsources, these same expenses become another company's output, even if nothing has really changed in terms of total output of the two companies.

Same number of workers. More measured output Productivity seems to rise.

Is that right?

Arnold Kling writes:

Bernard,
I was thinking that for Meltzer's argument to work the employees have to shift to a company that is not in the payroll survey. That way, the employees do not get counted as employed in the payroll survey, so it looks like the economy is producing the same output with fewer employees.

I think that your story also could explain higher reported productivity--it's sort of like if I stop cooking meals at home but instead go to work at a restaurant and my family eats at that restaurant, then all of a sudden my labor counts as GDP.

But your story would not explain the difference in the two labor market surveys.

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