Income Inequality, Labor Market Weakness Explored

By Joseph Coombs Oct 2, 2014
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CHICAGO—Some of the U.S. labor market’s biggest problems, particularly income inequality and a lack of employment opportunities, are long-standing issues—not issues created by the Great Recession, according to experts gathered here for the annual meeting of the National Association for Business Economics (NABE).

Economists, academics and other speakers addressed the challenges facing the unemployed, underemployed and other people struggling to make a living. NABE is a nonprofit trade group based in Washington, D.C.

Former Federal Reserve Chair Ben Bernanke suggested that the economy is sending mixed signals at the moment: Gross domestic product is expanding, but median income is not growing substantially, he explained.

“Fundamentally, these are longer-term problems and things that can’t be fixed quickly,” he said during an interview with National Public Radio’s “Marketplace” host Kai Ryssdal. “The problems of income inequality have actually been around for at least 40 years. They’re due to a number of factors, including technological change, globalization and educational deficiencies.”

Bernanke also attended the meeting to accept NABE's highest honor, the Adam Smith Award, which recognizes recipients’ leadership in the profession and the application of economic principles and knowledge in the workplace and policy arena.

Labor Participation Rates

University of Chicago economics professor Erik Hurst argued that the manufacturing and construction industries have had a “significant effect” on the country’s labor participation rates over the past 15 years in his presentation, “The Anemic U.S. Labor Market.”

As part of his research, he has studied men and women in the “prime working age” category of 21 to 55 years old. For men, Hurst found that 16 percent of those with less than a college degree did not work in the time leading up to the Great Recession; unemployment for this group is now 25 percent. He found similar patterns for women without college degrees.

Hurst traced these lower participation rates to massive losses in the manufacturing industry, which lost more than 6 million jobs between 1980 and the recession years of 2007-09.

In addition, he said, a booming housing sector in the early 2000s provided only temporary employment opportunities for those displaced low-skilled workers. So when the housing market fell hard during the recession, millions of low-skilled workers were left with few options for work, and many have not been able to return to the labor force.

“Basically, the housing boom briefly lifted the employment of many people, but it masked the structural decline in manufacturing,” Hurst said. “When manufacturing jobs go away, wages go down overall and people leave the labor force.”

The effects of this trend will be long-lasting, Hurst said. Many low-skilled workers who took on temporary careers during the real estate boom—either as construction workers, mortgage brokers or real estate agents—put off going to college or pursuing a related form of secondary education.

“Now they’re in their thirties, they’re starting to have families, and are less likely to go back to college or obtain the skills needed for other sectors of the economy,” he said. “They have permanently lowered human capital.”

Labor Market Fluidity

In a separate research project, University of Chicago professor of international business and applied economics Steven Davis examined “labor market fluidity,” loosely translated as the flow of workers between jobs, and employment churn. He said the current, decidedly less-fluid U.S. labor market will prevent “a return to sustained high employment,” and that fluidity has declined in all 50 states and in every major industry within the past five years.

This has occurred, Davis said, because of several factors, including the aging of the workforce (younger workers are typically more mobile).

The upside to limited fluidity is when workers stay longer with their companies, Davis said, “that means [fewer] people are losing their jobs.” But the current limited fluidity spells trouble for the future of the U.S. labor market, and more movement in the workforce would create better opportunities for more job seekers, Davis said.

“Fluid labor markets provide more opportunities for people to ‘find the right job’ and move up the ladder,” he said. “They facilitate job mobility, wage growth and career advancement, and that ultimately promotes high employment.”

Socioeconomics’ Impact on Upward Mobility

Other speakers said upward economic mobility can improve if efforts are made to help people at an earlier age. Raj Chetty, professor of economics at Harvard University, studied income mobility in urban and rural regions across the country and found that, generally, there were lower levels of upward mobility in urban areas compared with rural areas. He told attendees that the probability that a child born in the bottom fifth of the U.S. income distribution will reach the top fifth as an adult is just 7.5 percent.

Chetty said these outcomes are based more on the factors that affect children as they grow up than they are on the jobs that are available to them once they reach adulthood.

Some of the strongest correlates for income mobility are tied to:

  • Segregation. Children who are segregated racially and economically have a reduced chance of moving upward.
  • School quality. Higher student expenditures and test scores tend to promote increased mobility.
  • Family structure. Areas that have higher ratios of single parents generally produce children with a lower chance for upward mobility.

“There are a number of policy lessons here,” Chetty said. “We need to improve the quality of primary education. That can have substantial returns. It’s not just about spending more money, but focusing on attracting and retaining high-quality teachers. You hear a lot today about the importance of pre-K education, and it is important. But childhood environment matters at all ages.”

Joseph Coombs is a senior analyst for workforce trends at SHRM.

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