Aug 21, 2017

Betsey Stevenson on Challenges in the U.S. Labor Market

In order to stem the present slowdown in labor force growth and productivity, adult men will have to adapt to the evolving job market.
David Beckworth Senior Research Fellow , Betsey Stevenson

Hosted by David Beckworth of the Mercatus Center, Macro Musings is a new podcast which pulls back the curtain on the important macroeconomic issues of the past, present, and future.

Betsey Stevenson is an associate professor of public policy at the University of Michigan and previously served as the chief economist at the U.S. Labor Department. Betsey joins Macro Musings to discuss her experience working at the Labor Department at a time of high unemployment as well as her more recent research on challenges in the U.S. labor market. Specifically, she talks about the problem of decreased male labor force participation and why “manly men need to do more girly jobs.”

Read the full episode transcript:

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to macromusings@mercatus.gmu.edu.

David Beckworth: Betsey, welcome to the show.

Betsey Stevenson: It's good to talk to you.

Beckworth: It's a real treat to get you on. We have followed your work and it's always great to talk to researchers and get their perspective on what they're doing, what they're writing. I want to begin as I do with all my guests and ask how did you get into economics?

Stevenson: That is a great question and for me, I always joke that I was born an economist. By that I mean that really, ever since I was little I thought about how incentives shape people's behavior and I questioned whether the incentives that we were setting were the right ones. I think I fused my parents, who have no background or interest in economics because when I was 16 and I got my first job I said, "Look at this social security payroll taxes." My parents said, "Oh yeah, they're important. They pay for social security." I said, "Yeah for you but for kids, these aren't going to be one of my highest earning years. This isn't going to contribute at all to my social security payments." I had this recognition of both the details of how the system worked but also that it actually mattered. It mattered whether you were getting that benefit that was tied to the payment or not getting a benefit. I think that these kinds of questions and how we should structure society to create the right set of incentives and how people respond to those incentives is something just I've been curious about my whole life.

Stevenson: When I got to college and started actually taking economics classes I felt like I had finally found my home and people who thought like me who thought about the world the way I did. It grew from there.

Beckworth: You found your tribe in economics. You're naturally wired to be one. That's great. Now you went to Harvard, is that correct?

Stevenson: For my PhD, yeah.

Beckworth: Yes, yes, okay. Then from there you went to academia and then at some point in your career you become the chief economist at the Department of Labor. Tell us what was that job like? What did you do there? What were some of the issues you faced?

Stevenson: Well you know first of all I actually do just have to tell you something-

Beckworth: Sure.

Stevenson: -Very rare as an economist. I finished my PhD and went to the private sector.

Beckworth: Okay.

Stevenson: I got to the private sector and I liked my job. I worked with big data, I gave companies advice coming out of interpreting the data about strategic investments and what they should be doing moving forward. I thought, "This is really boring. It's not as exciting as economic research." So I actually went back and reapplied to academic jobs and I went back to academia. I'm sure there's a whole bunch of my advisors who are cringing right now and they're like, "You're not supposed to tell people that that worked."

Beckworth: Right.

Stevenson: It did work. There was nothing better than actually stepping away and learning what my true passion was to make me a very happy academic. Then you were asking what was it like going to the Department of Labor as the chief economist. The only way to answer that question is to really put it in the context of the situation we were in which was this very massive increase in unemployment and becoming the chief economist in the Department of Labor at a time when 9-10% of the public, of the workforce, was unemployed. That was what I thought about from the moment I woke up to the moment my head hit the pillow and probably also what I dreamed about because that's an enormous hardship for people and there's an expectation that the government needs to do everything they can to reduce the pain of that hardship, to get the economy back to the right place and to reduce the permanent effect on people as much as possible.

Stevenson: It was a difficult time to be chief economist but it was also a really important and meaningful time to be chief economist at the Department of Labor.

Beckworth: I imagine there were a lot of exciting things going on during that time. I have to ask you as the former chief economist at the Department of Labor, what is your favorite labor market metric? So it's been a lot of criticisms of the unemployment rates and it's kind of like the headline measure, everyone looks at it. Also the employment number is also a popular one. A lot of discuss, as you know, about other metrics, better measures of slack in the labor market. If you had to pick one or two, what would be your preferred measure of the labor market?

Labor Market Measurement and the Full Employment Debate

Stevenson: Well I understand a lot of the criticisms of the unemployment rate but I think that people need to think about what it would've been like to be entering the Great Depression when we didn't actually measure unemployment.

Beckworth: Hmm, good point.

Stevenson: I'm grateful that we measure unemployment and we measure in the consistent way. It may not be perfect, nothing's going to be perfect, but it's consistent and that's going to give us a really important glimpse into what's going on in the economy. I always feel really, sort of, I feel terrible when people are bashing the unemployment rate because it does so much for us and the people who conceived of it did think really hard about what it is we were measuring and how to measure something consistently over time. I also think that it's important that you look at a range of ... You know, you said, "What's my favorite piece of data?" My favorite thing is to put together a large amount of data and say, "Is it all telling me the same story?"

Beckworth: Okay.

Stevenson: Do I look at what's happening with participation? Do I look at what's happening with hiring? Do we look at what's happening with GDP? Is it all telling us the same story? But I did want to highlight to you, I do have a favorite statistic that people don't pay as much attention to and that's the quits rate. I really like to look when the JOLTS numbers come out on the job openings and labor turnover survey, the first thing I look at is how many people quit last month? It might sound like a depressing statistic but it's not. It's a really optimistic statistic because people only quit jobs when they either have a better opportunity or they're confident that they can find a better opportunity or they can find another job. In September 2009 the number of people quitting in a given month or in the month of September dropped to 1.6 million and just this past May 3.2 million people quit jobs. It's doubled. Twice as many people are willing to quit and that's a really good sign of the strengthening economy because it means people feel like either they already have a better opportunity in hand or they say, "I got something else I need to do. I need to leave this job but I am confident I'm going to be able to get another one."

Stevenson: That's a really good metric that helps us understand how do workers really feel about the labor market they're in?

Beckworth: Okay so Betsey, here's my new favorite metric. I've really latched onto the prime age employment to population ratio, or what Jordan Weissmann at Slate calls ... I like the way he frames it. He calls it the, "Working age employment rate." That one kind of accounts for demographics so you can't say, "Well you're looking at old people or young people." It's the working age employment rate. It's the percent of the population in that group that's actually employed. Prior to the Great Recession it was about 80% then it fell down to about 75% and it's near 78 now. It's almost back to where it was, not quite. When I look at a measure like that I see a continually, a steady improvement all the way from the bottom of the recession in 2009 and that tells me there's a lot of progress made but maybe there's still some more that could be made. It leads me to this question. Do you think we have truly reached full employment? Or is there any more slack left in the labor market?

Stevenson: The question of how much slack there is in the labor markets obviously been a really big one for a long time. I really felt that there has, for the last two years, I thought there was room for more people to come into the labor force and in my last year at CEA in 2015 I was a strong proponent that there was a lot of slack left in the labor market. I think I can say that the last two years have shown that to be true. Businesses have done an incredible amount of hiring with unemployment rates that, in 2013 people talked about it's sort of a full employment rate of 5.4, 5.2% and we've seen that we've been able to sustain something much lower than that.

Stevenson: I think it's still possible that there's some slack left in the labor market. For one thing, if you look at unemployment rates by education they're not as low as we've seen in the past. The unemployment rate for college graduates is 2.4%, which sounds low, but in previous peaks we've seen unemployment rates for college graduates drop to 1.6%. If you look at that it does still look like there's some movement for the unemployment rate itself to come down by education. There's certainly some room to pull people back into the labor market. What we've learned the last two years is that the stronger economics are necessary to pull the sort of hardest to employ workers back into the economy. Or the most reluctant workers back into the economy. This last year we've made a lot of progress not employing our most skilled, most likely to work people but pulling in people with less skill and people who've had weaker attachments to the labor force.

Stevenson: Having long recoveries is really important to get those folks back into the labor force and I think another year of us, continuing strong economy to pull more people back in. Now that said, we're still trying to figure out why it is that the prime age participation rate has fallen and what it is that we could do to stop that. There's sort of two things going on that are really separate between men and women. Male participation's been on a downward trend for 50 years or more, actually, since the 1950s. At some point we'd like to see that downward trend stop. Then for female employment we saw a peak in women's labor force participation at the end of the 1990s and what we haven't ... It's not that this is necessarily an explanation for this but what we've seen is that it hasn't peaked in other countries and other countries have done more to support combining work and families over the last 20 years.

Stevenson: Australia's added paid parental leave programs, other countries have changed their policies in ways that have tried to reduce discrimination against women during pregnancy, that have made childcare more affordable and available and higher quality childcare. These are a bunch of changes that have been happening elsewhere and we haven't been doing those. The counterfactual is pretty clear that if we had done more to support working families we'd have higher labor force participation today. That still doesn't necessarily explain why it peaked and has been dropping and how much it will recover without us adopting those kind of policies.

Beckworth: There's definitely still progress to be made but it's interesting you bring up Australia as kind of a counterfactual. I often bring that up as a counterfactual for the Great Recession, what could have been. Australia did not experience a Great Recession like we did. In fact, it didn't even really have a recession but it also did have a housing boom, credit boom, all the things that we had in the US and it weathered the 2008-2009 period relatively well. I attribute that in part to maybe some luck but also to the Central Bank in Australia doing a better job. They never hit the zero lower bound. They tolerated a little higher inflation. I also just point to them as things could've been done differently maybe, maybe better, and you've worked at the Council of Economic Advisors, you've been in a policy world, you've written a textbook. If you could sit back, take everything you know now, sit back and play economic dictator, go back in time, you could call the shots, anything you would've done differently policy wise 2008-2009 and the years following that?

Great Recession Policy Counterfactuals

Stevenson: Yeah so I think it's not necessarily Australia because Australia has a very commodities based economy and they have the benefit of the commodities that really helped them. I wouldn't wish that on the US because a diverse economy is a good one.

Beckworth: Sure.

Stevenson: There are some things I would've done differently. In hindsight we needed a bigger stimulus. It's a great example of the lags in economic data. We have to make real-time decisions about how to respond to a recession and what we were seeing at the time was that, gee, there's a lot of people losing their jobs for not as big a contraction in GDP. I remember people talking about the puzzle and just how many people were losing jobs given the contraction. Then it turned out well no, actually the problem was the contraction it was just, it's measured and it was much bigger than we thought. The stimulus wasn't big enough given that contraction but I think it's not just ... The question isn't just, "How big was the stimulus?"

Beckworth: Mm-hmm (affirmative).

Stevenson: We had a time where we had an enormous amount of slack resources and that's a time where we had workers who don't have jobs, we have capital that's not being used and that's a time where I want to see my government doing all the investment that it needs to do in public infrastructure. That is the cheapest time. I like to get bang for my buck when it comes to my tax dollars and that's really the most efficient time for the government to invest in infrastructure. I think it was a real loss that we didn't do enough of that and that we're still talking about a need for infrastructure investment at a time where unemployment has fallen to 4.3% and we're seeing a lot of businesses operating at capacity so we don't see the same kind of available resources. I think that was a real mistake. I'd like to see our government do a better job of being able to manage both borrowing during a recession in order to make investments and then paying some of that debt back during booms in order to have fiscal discipline.

Beckworth: Yeah well they definitely missed the opportunity for great financing terms. Although long-term yields still have been kept relatively low but they, as you said, investment spending would've been a great bargain when you had all these unemployed resources during that time. Infrastructure spending could've taken place. I've even heard some people on the right mention that if infrastructure spending is what you need then do it when it's best priced. What about the monetary policy? I'm more of a monetary macro kind of guy and one of the criticisms I've had has been the Fed not hitting its inflation target. It was set at 2% in 2012 but there's been papers and there's been evidence that suggests that it was implicitly falling well before then. Since June 2009 it's only once really crossed 2%. For most of the time it’s been below that. It's averaged about 1.5%. Do you think that was a drag on the recovery?

Stevenson: I mean, I would agree with you. Now I've said that I think they should treat it like a target not a ceiling. It looked like there was a lot of treating it like a ceiling. "As long as we don't go over it, it's good." It's like, "No, no, the goal of an inflation target is you're trying to average that. You're trying to hit 2% on average. Not 1.5 on average." I think the challenge for the Fed is that they were at a time where they needed to use a lot of unconventional policy tools. It's easy for us in hindsight to look back and say they should've done more. I can easily look back to that and say, "Look they didn't hit the inflation target. We could've recovered faster if they had done more." But I'm also cognizant of the political reality that the Fed is, well the Fed has independence and needs to be cautious when it takes actions that are going to rattle policy makers. Given their need to use such unconventional monetary policy tools I think that there was some realistic caution and making sure that they sort of stayed on the cautious side of using those tools.

Stevenson: Again, in hindsight I wish they had used them more aggressively but you know if that had resulted in, say, a loss of independence for the Fed due to political pressure and Congress getting upset about it then I don't think it would've been worth that cost. I don't know if that sort of makes sense but I agree with you that I wish they'd had done more. Their not doing more did hold the recovery back but at the same time there are political risks, not just economic risks when they take action. I think that they are correctly weighing those political risks as well as the economic risks.

Beckworth: Yeah, there's no doubt that political pressures played a role in the response that they had. I mean, we all recall Ben Bernanke's grilling around QE2. Even within the Fed there was pushback from certain regional Fed presidents about doing the programs. There's undoubtedly political pressure that they had to guard themselves against and kind of walk through the minefield but at the same time they did something very radical, QE, right? QE2 was very unpopular, QE3. I just, again this is Monday morning quarterbacking. Like you said, it's going back in hindsight but all the political capital they spent on those programs, had they'd spent that up front on a program, had they done QE3 up front, had they done something more aggressive up front that would've allowed them to hit their inflation target and not, in my view, slow the recovery. I probably take a strong view on this. I think there's this work by Paul Krugman's '98 paper, Scotty Jorgensen, Michael Woodford, they talk about how QE, if it's temporary which it seems ultimately to be, it's not going to pack as much of a punch as it otherwise could. I guess my point here is I wish they had spent their political capital up front on something much more aggressive that would've allowed them to have hit their 2% inflation target.

Stevenson: Yeah, I don't disagree with that but I also understand how hard what they were doing is. We're still in a place where I think we've learned a lot about monetary policy and the Fed has been trying to update their tools and figure out what they're going to do going forward. They still face a lot of political pressure for reasons that frankly baffle me. They've somehow in the last few years become a more political entity than they want to be, than is good for the economy for them to be and we need to get them back in the shadows in some sense. This is work that should be done without ... I mean the whole reason we have independent, we have central bank independence is so that they can take a long run perspective and do what's best for the country in the long run without short run political pressures. They seem to be facing more short run political pressures than I think they were facing prior to this recession.

Beckworth: Yep. With all these changes said you've just written a textbook and as you mentioned to me earlier that you finished your section on macroeconomics. The book won't come out until next year, I think you said. In writing this section I wonder what it was like. You have this past decade almost of crisis response, new programs, political pressures, all the things we've talked about. What was it like writing that macroeconomics section?

Stevenson: As a principles of micro and macro textbook and principles haven't changed. The basic things we all learned when we took our first economics course thinking about opportunity cost, how we need to think at the margin, how incentives are shaped by people weighing costs and benefits, how our choices are linked to one another and impact one another. These sort of basic ideas of economics are true and weren't at all challenged, I think, by the recession but there was something important we learned which is that economists have not paid enough attention to the role of the financial sector. I do think it's important for students even in their first principles of economics macro course to learn more about the role of the financial sector. That's also important to us because our goal is to write a book that helps students learn the tools of economics in a way that helps them become better decision makers in their own life and in order to be a good decision maker in your own life you need to understand the financial sector so that you can adequately prepare for retirement, make savings and borrowing decisions.

Stevenson: There I think that increased dedication to thinking about investment in the financial sector is a place that's good for students and is a reflection of the reality of the real world. The place where the biggest changes had to happen were, though, in the monetary policy cap because monetary policy is different. You and I went to school and we learned that the Fed sets the federal funds rate by buying and selling treasury securities. They don't do that. That's not how they set the Feds funds rate anymore. It was funny because I've looked at a lot of books and even books that have recently updated and they still describe these open market operations of buying and selling treasury securities and in reality, the important thing the Fed does to set the Fed funds rate is they pay interest on reserves and they borrow money from banks paying an interest rate to them through their overnight reverse repurchase agreements. It's all actually a bit simpler. The Fed pays an interest rate that sets a floor on interest rates and then they also lend to people through the discount window so they effectively sandwich in rates.

Beckworth: Mm-hmm (affirmative).

Stevenson: It is a completely different chapter than other intro chapters because that's not what the Fed used to do. Of course we also have to talk about inflation targeting and the zero lower bound and all the issues that are associated with modern monetary policy. Sorry that has a proper noun. I shouldn't have used that word but all the things that are associated with monetary policy in the modern era. Those things, I think they're important because I don't think they're changing. It's not like the zero lower bound is going to go away any time soon.

Beckworth: Okay so it sounds like you are incorporating some of the new developments. You mentioned the corridor system for the interest on reserves and a discount rate. Those are the things that have emerged since the crisis that are, I think, important that these undergrads see. Now tell us again when the book comes out exactly?

Stevenson: Oh so it's actually not out this coming academic year and not even out the next Fall. It's a 2019 book.

Beckworth: Okay well any of the teachers who may be listening should consider this book. Co-authored by you and Justin Wolfers. That's another option to consider. Well let's move on to a topic that we've had on this show quite a bit we discuss and that's the slowdown in potential GDP. There's been many stories given for it. There's a productivity slowdown and that seems to turn the data despite all the innovation out there. There's also, as you've alluded to earlier, a slowdown in the labor force growth, there's demographics, there's older generations retiring but also maybe it's a small part of the story but there is this part of the story that prime age working individuals, and you mentioned this earlier as well, are not participating as much as they were before. Some attribute that to cyclical reasons, others attribute that to more structural, long-term reasons. I've compiled a list of different explanations, some of them coming from you and I want to work through them with you and get your take on them. I want to begin with a really fun article that you had in Bloomberg Review and the title of it was "Manly Men Need to do More Girly Jobs." Speak to us about that. What is it about manly men and masculinity that may be putting a damper on our growth?

How are ‘Manly Men’ Hindering Economic Growth?

Stevenson: Well you know you hear a lot of people complaining about a loss of jobs.

Beckworth: Mm-hmm (affirmative).

Stevenson: What we really have going on is a lot of jobs being created and a lot of jobs being destroyed. That's the way the economy works. Actually a dynamic economy should destroy lots and lots of jobs and should create lots and lots of jobs but right now what we have is a set of sectoral shifts going on. Again, we have always had sectoral shifts, you know? A classic example, people used to make buggy whips and they used to make horse drawn carriages and they don't make those anymore and that's okay. We have these sectoral shifts but right now our sectoral shifts are very gender specific in the sense that we have a lot of jobs being lost in occupations that used to be extremely male dominated. Occupations where like 80% or more of the workers being male. Where we see a lot of the growth is in occupations where more than 50% of the workers are women. That is creating some challenges. It's not that there's not enough jobs it's that the jobs that are being created are not the jobs that all people want to take.

Stevenson: For decades I've heard economists talk about how the goods producing sector has been in decline for decades and so for decades I've heard economists say, "Men just need to go into service sector jobs like women. They need to become nurses." They're not doing that. It caused me to stop and think, "Why aren't they doing it?" And to realize that there's an identity issue that we're going to have to confront as we reconceive these jobs because we can't ask men to go into stereotypically female jobs without addressing the fact that that's a challenge to their masculinity. I think one of the things that really struck me was when women started going into the workforce there was a real effort put by everyone to try to preserve their female identity and I jokingly talk about there was a commercial where they would sing a song about how you could go to work and you could bring home the bacon but you could still fry it up in the pan and you could wear the perfume and your husband would never forget that you're a woman.

Stevenson: There was this direct recognition that, "Don't worry, going to work isn't going to ruin your identity as a woman." How do we get men to go into the types of jobs that are being created and tell them, "Hey, don't worry, you're still a guy. This is not a threat to your masculinity." There was this really beautiful piece that was done on PBS after my column where they interviewed me but they found a guy who teaches preschool and they showed him out with the kids and they were doing a woodworking activity, he was playing with them, playing sports with them. I'm not saying, "Oh the only way to be masculine is for the preschool teacher to do woodworking and to play sports" but it was nice that they showed that not every aspect of being a preschool teacher is helping change a kids diaper or clean up after an accident in the bathroom or reading to them in a circle. These jobs are rich and there's a lot of different ways to think about them and there's a lot of ways to make them your own depending on what your own personal identity is and who you want to be.

Stevenson: That created, for me, just opened up the way we're going to need to think about this if we want to make sure that we don't see these big drops in less educated men participating in the labor force because that's where the drops have been biggest is men who don't have a college degree aren't working as much. There's lots and lots of reasons for that. This isn't the only one but this is one where we keep pushing in one direction and maybe we need to start thinking about how to push it in a different direction.

Beckworth: This is particularly painful for men without college degrees but a lot of education, right? They're probably the most affected by this development?

Stevenson: I think that's right. It's partially because they haven't had examples of masculinity that have shown, in their lives, that have shown more nurturing and caregiving. They have sort of more traditional notions of masculinity and then their skillset, the types of jobs being created for people without a college degree are increasingly in the service sector and increasingly involve caring for others.

Beckworth: Yep. This reminds me, and I think it's tied into the work of David Autor's on job polarization where several articles he points out that there's really a segmenting of the labor market where there's growth in really high skilled jobs and low skilled jobs and not much in the middle. For these men who don't have the college education high skillsets, they're not going to get those jobs at the high end so they're going to be getting the ones on the low end, which are like she said, service jobs, a lot of interaction with people and they may have a hard time contending with that. It is where the job market is going so for better, for worse, men are going to have to adapt.

Stevenson: Some of it is definitely that. There's a hallowing out of middle skilled jobs but I don't think that the only issue is around pay. You do see that in some of these service sector jobs or caring jobs the pay starts lower than their entry might've been in, say, a manufacturing job but the growth, the wage trajectory, is much steeper in these caring jobs than in the manufacturing jobs. Again, this is an anecdote, but the guy they interviewed on this PBS show he said that he made $50,000 a year, which is pretty much a job in the middle. He pointed out how he was able to take side work during the summers, as well. Salary wasn't a thing holding him back. His thought was that many people had misconceptions. As that polarization is happening we are also seeing some of these jobs like childcare workers, there's some who are well compensated and some who aren't. That's also related to skill. Well compensated childcare professionals tend to be more professional and have more skills and then there are less compensated ones who are working in a less professional setting that requires fewer skills.

Beckworth: All right so that's the first explanation going back to my original observation that there's been this decline in prime age working men. This first point is that men need to adapt, be willing to do more girly jobs as you framed it. Another explanation that has come out is a recent one by Erik Hurst and some co-authors, a recent 2017 paper, though he's made his argument before. The paper is titled "Leisure, Luxury and the Labor Supply of Men" and I'm going to read an excerpt from an article describing their work. The general thrust of it is that men are playing more video games. They've gotten so great they've actually pulled us out of the labor force. I'm not sure of the causality is really established in this article, it's that because I don't have a job I find the game more enticing or the game is so enticing that I leave the labor force. It's fascinating, I'll read some of the statistics here. The rise of gaming accounts for 23 to 46% of the decline in market work for younger men during the 2000s. For men ages 21 to 30 hours worked fell by 12% between 2000-2015 compared with the decline of 8% in hours worked for men 31 to 55.

Beckworth: Quoting from the article, "Our estimates suggest that technology growth for computer and gaming leisure can explain as much as three quarters of the 4% of greater decline for younger men." Do you buy this? Is this a reasonable explanation or are we kind of pushing on a really small finding here?

Stevenson: Well let me start by saying that I think this raises really interesting questions about why do we want GDP growth in the first place and is GDP growth always a good thing? I think one of the biggest puzzles of our era is why do we work so much when we're so rich? Keynes thought we would all work less and enjoy less stuff and it'd take more of our increased wealth in the form of increased leisure. If everybody in the United States decided that we should each take two weeks more vacation our GDP would decline but I wouldn't necessarily think that would be a bad thing. He's sort of saying people are working less because they're just having so much darn fun that it's not worth it to them to work. I guess we have … on the question is are they making a mistake or is this a good thing? The rise of behavioral economics does indicate is there an issue in which it's sort of addictive or they're doing short run thinking instead of long run thinking? Their myopia is taking over. Is there a problem? Or is this a legitimate choice like staying home to take care of your children?

Stevenson: I'm sure that just offended like a million people but-

Beckworth: That's all right.

Stevenson: That's how they frame this is that video games have gotten so awesome that you want to spend more time doing it. If that's the case then it raises a real question as to whether there's a problem. I'm not sure I quite buy it. I think that it's really hard to know which caused which, you know? Once you can't find work you've got to fill your time with something. If they're filling their time with video games because they can't find work instead of whatever it is people used to do to fill their time before that's just a switch in sort of leisure activities. I think it can be really hard for us to measure sort of what's leisure and what's not. I think the nice thing about video games is we're all pretty confident that that's leisure and nothing else. I find it hard to believe that we just had a shock to leisure that's so great that we finally convinced a generation of people to consume a whole heck of a lot more of it. That seems to be the claim that's being made but I think we need a lot more evidence before we think that's true.

Beckworth: It just occurred to me this would be, if it's true, this would be some kind of evidence for real business cycle theory, right? Kind of a great vacation all these men are taking. I know this piece has gotten a lot of pushback, too, from different people and I know Smith wrote a piece in Bloomberg Review. He didn't buy it. It's still interesting and it's true video games have gotten great but have they really gotten that great? We've looked at men adapting to the new types of jobs, we've been looking at are men taking more leisure. Another potential explanation, this comes from your work, is the decline of trust. You have an article in Bloomberg Review yourself and it's titled "Want to Help the Economy? Learn to Trust." I'm going to read an excerpt from this.

Beckworth: You write, "Five years ago, Justin Wolfers and I examined data showing that trust in institutions of Congress, banks and big business had plummeted during the recession, hitting an all-time low. Historically trust had fallen as unemployment rose, we argue that it would increase as unemployment declined. We were wrong. Despite all the progress the economy has made, measures of trust remain stuck at historically low levels. Worse, people are losing faith in one another. One long running survey shows that only 30% of Americans believe most people can be trusted. Down from 46% in 1972. Young people are the most disillusioned. Only one in five millennials believe that most people can be trusted."

Beckworth: That was very sobering. Last part here, "Trust is essential to the economy," you write, "Without it people have a harder time figuring out with whom they can trade or work or even go on a date. As a result, they're more likely to miss beneficial opportunities. Research has shown in the aggregate, less trust leads to lower growth domestic product." Do you see a decline in trust being an important part of the story?

Declining Trust in the Economy

Stevenson: Yeah so I worry a lot about the decline in trust. I think that it makes it harder for people to find jobs. I gave a talk a few years ago where I was talking about how hard it was for workers who were long-term unemployed to find work and that I thought that part of this was that there's so little trust right now that everybody needs a validator to be able to get their foot in the door. I had a woman come up to me who was just in tears afterwards who said that she was looking for a job and she had many other previous experiences of unemployment in her life and she had never had such a hard time getting people to consider her without her knowing somebody inside the company who could speak up for her. The question is, I mean, we see that jobs have relied on personal referrals for a long time but it's almost like they're even ... What we currently see is that there are really big declines in trust and it makes it so that you only want to do business with people in your community, you only want to do business with people where somebody can vouch for them and then there's an increase in people needing to take security steps.

Stevenson: They use more contracts, more lawyers, they're more likely to jump to contract-like talk or legal battle-like talk. This lack of communication is a problem for us as a civil society but I think it's also a problem for us in terms of economic growth. We grow by coming up with new ideas. A lot of innovation is about coming up with a new idea. You come up with new ideas when you are willing to take risks and in order to take risks you have to have some broad level of trust. I think the decline in trust is something that's tied to reductions in growth and will continue to present problems.

Beckworth:  Yeah I find that a very compelling argument. I actually want to come back to your original article where you made this, not the Bloomberg but the actual paper and it was titled, "Trust in Public Institutions Over the Business Cycle." I'm looking at the chart and you do see this sharp decline if you look in the time series, the sharp decline in trust in the different entities. You look at banks, Supreme Court, newspapers, Congress, big business and I wonder if this decline, because it begins at around 2008, right? The time of the recession? It's not, to me, a coincidence that it happens to go down then. What you point out in Bloomberg Review article it hasn't gone back up but I wonder if that's a reasonable thing because the recovery has been so weak? I mean going back to, we talked about earlier, have we really measured slack properly? The decline in potential GDP, I mean, there's just a sense of lack of dynamism in the economy, recovery hasn't been where it normally would be. Maybe the counterfactual here is what if we had had a robust recovery? One more in line with other ones? Would trust have picked up more?

Beckworth: You look at Europe where there's been populism and the US has been populism. Both these places had really severe recessions with slow anemic recoveries. Maybe it's just the way it is given the state of the economy. Any thoughts on that?

Weak Recession Recovery: Impact on Trust and Populism?

Stevenson: I think it's really hard to know whether this is the state of the economy didn't help facilitate restoration of trust or whether the sharp decline of trust held back the economic recovery. I agree that potential GDP's not back where it should be. There's still evidence that we could continue to see further employment growth and we'd like to see more GDP growth but the unemployment rate came down much faster than forecasters expected. Some of the decline in the GDP growth is due to the fact that the population is aging and we're going to have fewer ... A lot of the decline in the labor force participation rate is due to the aging of the population. If we adjust growth based on the working age population it's not quite as anemic as it otherwise would be.

Stevenson: I don't know, I'd like to be optimistic that if the economy continues on the same path for the next two years that trust will start to rebound but I don't see any evidence that we're headed in that direction. We seem to be headed in the opposite direction. More polarization, less trust. We've lost a sense of what's facts and what's not facts and whether facts even matter. I have students who come to me, they're getting their Masters in public policy and I tell them, "You have to know what you're saying. You have to say things that are true and you have to get your facts right" and they're now coming to me and being like, "Do I? Do I really? Does anybody actually care?" That stuff really scares me and it signals to me that when it comes to trust the rate of change, or the direction of change is pointed still in the wrong direction. I would believe your story more if it was a slow recovery of trust but at least we were going in the right direction very anemically. I see us continuing to go in the wrong direction. I don't see any signs that people trust Congress more today than they did six months ago or a year ago or two years ago.

Stevenson: I don't see signs that they trusting each other more. Those things seem to be going in the wrong direction and I think it's not just about our politics, which have become particularly vitriolic, but I want people to realize that that's bad for just everyday life. That's bad for being able to trust a guy to fix your car. It's bad for being able to hire someone to come mow your lawn. It's bad to be able to have just the sort of every day transactions and one of the things that helps with economic growth is if we can cut out transaction costs. What's happening with the decrease in trust is we're increasing transaction costs.

Beckworth: That's a nice way of framing it. I like that. Transaction costs have gone up with the decline in trust. You know, I guess going back to the point I was trying to make earlier is that I wonder if we had gone back in time and looked around the Great Depression, was there kind of a slow recovery in trust coming out of that? In other words, are we susceptible to these declines in trust when the recessions are really deep and sharp? I guess we probably don't have data to answer that question. Or do we?

Stevenson: I don't think we have data but I do think it's a good question but I don't think we know the answer.

Beckworth: Yeah I think, this is anecdotal but one thing comes to mind for example, so we go into the Great Recession, which itself is a big shock. Lots of people are losing their jobs, a very painful experience. Then you see what seems to be for most people very radical things being done by government. Big fiscal stimulus, big things by QE, big radical things done by the Fed and you know what I'm talking about, the kind of response people are getting. President Obama was, I think, vilified to an unfair extent because he just happened to be president during the time where we had this really sharp, deep recession and then we tried policies that normally aren't tried, it seems different, it seems strange, it's new. You mentioned how political we've become, we seem to live in silos. I just wonder if some of that isn't the byproduct of how severe the Great Recession is. On the other hand I had Tyler Cowen on here recently and we discussed his book, "The Complacent Class" and he points out in some ways we're becoming more segregated in our society than ever by income, by sorting. As you've written about this as well in terms of marriage and stuff where we're sorting by likes and we're getting better at it, it's rational on an individual level but collectively it may have a cost.

Beckworth: Maybe we don't get outside our bubbles. We don't trust people outside our bubbles. Nonetheless, this trust is an important point you bring up. Just to kind of recap we've gone through the changing nature of jobs for men, which is a tough adjustment. Maybe some men are engaged in leisure. There's a decline in trust. I want to bring up another possibility here and I recently had David Schleicher from Yale Law School on and he's written a paper that kind of looks at and summarizes all the work that's been done on the decline on interstate migration in terms of labor. He shows, he's not original here but he kind of puts it all together for me anyhow, that there's been this decline in interstate migration since about 1980 and moreover specific groups have been less mobile than others. The ones that need to move are not moving. The famous David Author paper with his co-authors, and China shock's a good example of this. Kind of the headline from those papers were that the China shock was bigger than we thought it was originally but kind of I think the deeper, more interesting point it makes is that these people didn't move out of these communities that were hit by the China shock. Labor mobility has declined. I wonder if you have any thoughts on that? The decline in labor mobility across regions within the US, is that a part of the story?

Does Labor Mobility Fit Into the Equation?

Stevenson: I worry a lot about the decline in dynamism and that involves a bunch of different things. Some of it is the fact that there's less interstate migration among workers. What that means is like a state-specific shock, you know? If a state has something bad happen to it like you just gave the example of like the China workers, it's going to take longer for that state to adjust to that shock even though all the states around it are doing better. It should be that if something bad happens in Connecticut it should clear out very quickly as workers quickly adjust to the surrounding states and so it gets absorbed into the whole US economy. That's happening at a much slower rate. You also see growth in establishment size, you see declines in the rate at which businesses are created and destroyed, we see declines in the rates in which people are changing jobs and changing robs is a really important source of wage growth.

Stevenson: In short, what we want ... When I was growing up as a young college student in the early 90s learning about economics people would say, "Oh, you know, the US has such a dynamic labor market. People move, people change jobs, get raises and that's why we're so much better than Europe because Europe is just a much more static labor market. If you find yourself without a job you could be unemployed for a long time. It's hard for you to move to a better job but the US, we just are constantly reallocating workers to their most productive use." That's just not as true anymore and if we're not reallocating workers to their most productive use then that's going to mean slower growth. That's like mechanical. Then the question is does the decline in interstate migration and other forms of mobility mean that we're not reallocating people as well as we used to? Or is it that there's no need to reallocate people as much as there used to be? I think that's the big outstanding question and that's the question that answers how much this is hurting growth. I don't know anyone whose really been able to nail down the answer to that question.

Beckworth: Yeah when I had this discussion with Tyler and with David Schleicher, there is some of this that is a rational well for improving development from people who might live in a city, they don't want people to move into their neighborhood, the land use regulations, they're protecting themselves. I guess my-

Stevenson: Yeah but that's bad for everybody and that's-

Beckworth: No, absolutely. Collectively it's a drain, right?

Stevenson: Yes.

Beckworth: But individually it makes sense. I know there's disagreement on what the prescription that falls out of this is but land use regulation, occupational licensing, no compete clauses, the lack of business dynamism you mentioned. I know you guys worked on this at the CEA when you were there. I find that to be very sobering. To me, I look at that and it seems to me, at least, to be a development that is weighing down growth in the US.

Stevenson: Well to the extent that those are all the reasons, those would all be things that would weigh down growth for sure. There is another explanation which is maybe we're doing a better job of finding good job matches today and we don't need to cycle through as many jobs in order to find the right match for us. That's the positive story. I'm not saying that is what's happening but if you thought that people were doing a better job, companies and workers are doing a better job of forming matches then you would see a decline in reallocation that would be because we need to do less reallocation and it would mean that we sort of had gotten some of our growth in the past by getting that matching process better today. We don't want to undo that but we're not going to get further growth from reallocating people because they're already sort of at their most productive use. Many of the things you brought up are things I'm very worried about and certainly the case that some of that is holding back growth.

Stevenson: We know non-compete clauses are ... That's business anti-competitive behavior and we just shouldn't allow it because if workers can't move to jobs where they can make a higher salary then they have less of an incentive to invest in building the skills that will allow them to get that promotion at the next company. There may not be enough growth within their one firm for everybody to get those kind of promotions so we want people to be striving and to be climbing and these non-compete clauses really, really limit that and they're really anti-competitive. Occupational licensing is very anti-competitive. Who thinks it's a good idea to let people who are in an occupation prevent a bunch of other people from entering it, right?

Beckworth: Right.

Stevenson: We did work on a lot of those issues at CEA because I think labor mobility is a really important part of workers having bargaining power and being able to move into what they want to do and things that limit worker's mobility limits their ability to get higher wages. Sometimes it benefits other workers like with the occupational licensing and sometimes it benefits shareholders when it comes to businesses earning higher profits because they can get away with paying workers less.

Beckworth: Yeah. One of the takeaways I got from the discussion earlier about this is the US may becoming less of an optimal currency area, right? You have the one size fits all monetary policy and it's kind of premised on, you know, there's fiscal transfers but also labor mobility between regions. Now, to the extent that this is a good development like you mentioned, maybe people are finding the jobs easier, they don't need to move around as much so maybe it's not a big deal but to the extent that the decline in labor mobility reflects these more adverse developments it poses problems for the Federal Reserve down the road as well as the economic growth.

Stevenson: Yeah I think that's a funny question. It always puzzles me that people are willing to question whether a single monetary union makes sense for Europe and then they look at you like you've grown three heads if you say, "Does it make sense for the United States?" It is the same question. I think what it does for us is we have completely free trade across the states. Again, people have questioned internal trade. They never question trade between Ohio and Michigan. One of the reasons we have so much scope to question international trade as a society is because we have so much trade within our own borders because we have so many different states. If you were Rhode Island and you couldn't trade with any of the states around you, you would really, really want international trade. One of the reasons why it's so important that we have a single currency is that also helps facilitate trade. You don't have to worry about what's the value of a San Francisco dollar versus a New York dollar?

Beckworth: Yeah, absolutely. As you said earlier, this lower transaction costs. I mean, the key idea here is transaction cost.

Stevenson: Exactly.

Beckworth: The single currency definitely lowers transaction costs and I'll be very clear, I don't think we are a non-optimal currency area I just think we might be moving gradually away from being one on the margin if, in fact, all these adverse developments are the reason for the decline in labor mobility. Well our time is up, unfortunately. It’s been a fun conversation today with Betsey Stevenson. Betsey, thank you so much for coming on the show.

Stevenson: It was my pleasure. It's lots of fun to talk with you.

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