Brett Romero

Data Inspired Insights

Category: Economy (page 1 of 2)

The argument for taxing capital gains at the full rate

Politicians, both in Australia and the US, when asked how they will find the money to fund various policy proposals, often resort to the magic pudding of funding sources that is “closing the loop holes in the tax code”. After all, who can argue with stopping tax dodgers rorting the system? But as Megan McArdle recently pointed out, raising any significant revenue from closing loop holes requires denying deductions for things that a lot of middle and lower class people also benefit from. This includes, among other things, deductions for mortgage interest, employee sponsored health insurance, lower (or no) tax on money set aside for pensions and no tax on capital gains when the family house is sold.[1]

Broadly, I agree with McArdle’s point. The public, in general, are far too easily convinced by simplistic arguments about changes to taxation – as if after decades of tax policy changes there are still simple ways to increase revenues without anyone suffering. Any changes made at this point are going to cause winners and losers, and often, the people intended to be the losers (usually the rich) are less affected than some other group that also happened to be taking advantage of a particular deduction.

That said, there is one point, addressed breifly in McArdle’s article, that I thought deserved greater attention – the concessional taxation of capital gains. In the list provided in the article, it was the second most expensive tax deduction in the US at $85 billion a year[2]. You see, for a while now I have been somewhat of a closet skeptic of the need for lower tax rates on capital income (i.e. capital gains and dividends). The reason for my skepticism is two fold:

  1. Everyone seems to be in agreement that concessional rates for capital income are absolutely necessary, but no one seems to really understand why.
  2. Capital income makes up a much larger percentage of income for the wealthy than for the lower or middle class. When you hear that story about billionaire Warren Buffet paying a lower rate of tax than his secretary, it is because of the low rate of tax on capital income.

So, now that I am finally voicing my skepticism, this article is going to look at what arguments are made for lower tax rates on capital income (focusing on capital gains for individuals) and whether those arguments hold water.

Why are capital gains taxed at a lower rate?

Once you start digging, you quickly find there is a range of arguments (of variable quality) being made for why capital gains should be taxed at a lower rate. These arguments can largely be grouped into the following broad categories:

  1. Inflation
  2. Lock-In
  3. Double Taxation
  4. Capital is Mobile
  5. The Consumption – Savings tradeoff

Inflation

Taxing capital gains implies taxing the asset holder for any increases in the price of that asset. In an economy where inflation exists (i.e. every economy) this means you are taxing increases in the price of the asset due to inflation, as well as any increase in the value of the asset itself. Essentially, even if you had an asset which had only increased in value at the exact same rate as inflation (i.e. the asset was tradable for the same amount of goods as when you bought it), you would still have to pay capital gains tax.

The inflation argument although legitimate, is relatively easy to legislate around by allowing asset holders to adjust up the cost base of their assets by the inflation rate each year.

Lock In

‘Lock-in’ is the idea that investors, to avoid paying capital gains tax, will stop selling their assets. An investor holding onto assets to avoid tax implies they are being incentivized, through the tax system, to invest suboptimally – something economists really dislike. However, as far as ‘lock-in’ would occur, it cannot be considered anything other than an irrational reaction. Holding onto assets does not avoid tax, it only delays it, and given inflation is factored into the asset price (as discussed above), there is not even the benefit of time reducing the tax burden. The bottom line is this – to pay more capital gains tax, there must be larger capital gains. That is, even if the capital gains tax rate was 99%, an investor would still be better off making larger capital gains than smaller ones.

The other point to remember when it comes to ‘lock-in’ is that in both the US and Australia, the lower rate of capital gains tax only applies to assets held for more than a year. That means if ‘lock-in’ exists, it is already a major problem. Because asset holders can access a lower rate of tax by holding an asset for a year, they are already strongly incentivized to hold onto their underperforming assets longer than is optimal to access the concessional tax rate. In fact, increasing the long-term capital gains tax rate to the same level as the short-term rate should actually reduce lock-in by removing this incentive.

Double Taxation

The double taxation argument is a genuine concern for economists. The double tax situation arises because companies already pay tax on their profits. Taxing those profits in the hands of investors again, either as capital gains (on that company’s stock) or dividends, implies some high marginal tax rates on investment. This is one of the main reasons capital income is taxed at low rates in most countries.

Ideally, to avoid this situation, the tax code would be simplified by removing company tax altogether, as McArdle herself has argued in the past. However, we should probably both accept that, at best, the removal of corporate tax is a long way away. Nevertheless, this idea can form the basis for policies that achieve similar goals without the political issue of trying to sell the removal of corporate tax.

For dividends, for example, double taxation can be avoided by providing companies with a deduction for the value of dividends paid out to investors. Investors would then pay their full marginal tax rate on the dividends, more than replacing the lost company tax revenues.

Preventing double taxation of capital gains is a little more complicated, but the answer may lie in setting up a quarantined investment pool that companies can move profits into. Profits moved into this pool would not be subject to tax and, once in the pool, the money could only be used for certain legitimate investment activities. This would effectively remove taxation on profits going toward genuine reinvestment, as opposed to fattening bonus checks.

The overall point here is not that I have the perfect policy to avoid double taxation of company profits, but that there are other worthwhile avenues worth exploring that are not simply giving huge tax breaks to wealthy investors.

Capital is Mobile

This is one of the two arguments McArdle briefly mentions in her article. The ‘capital is mobile argument’ is the argument that if we tax wealthy investors too much, they will do a John Galt, take their money and go to another country that won’t be so “mean” to them.

When it comes to moving money offshore, obviously, not everyone is in a position to make the move. Pension funds and some investment vehicles cannot simply move country. Companies and some other investment vehicles do not receive a capital gains tax discount currently, meaning raising tax rates for capital gains for individuals would not impact them at all. Finally, even for investors that would be affected and do have the means, a hike in the capital gains rate does not automatically move all their investments below the required rate of return.

This argument also overlooks the vast array of complications in moving money offshore and the risks involved with that action. Moving assets offshore exposes investors to new risks such as exchange rate risk[3] and sovereign risk[4]. It also significantly complicates the administrative, compliance and legal burden the investor has to manage.

However, even if we concede that yes, some money would move offshore as a result of higher taxes on capital gains, let’s look at the long term picture. What is the logical end point for a world where each country employs a policy of attracting wealthy investors by lowering taxes on capital? A world where no country taxes capital!

Of course, there are alternatives. Countries (and developed countries in particular should take the lead on this) can stop chasing the money through tax policy and focus on other ways of competing for investment capital. Education, productivity, infrastructure, network effects, low administrative and compliance costs are all important factors in the assessment of how attractive a location is for investors. California, for example, is not the home of Silicon Valley because it has low taxes on capital. Pulling the ‘lower taxes to attract investment’ lever is essentially the lazy option.

Consumption vs. Savings

The second point raised by McArdle is the argument that if you reduce the returns from investing (by raising tax rates), people will substitute away from saving and investing (future consumption) and instead spend the money now (immediate consumption).

The way to think of this is not of someone cashing in all their assets and going on a spending spree because the capital gains tax rate increased. That is extremely unlikely to happen and would actually make no sense. The change will come on the margin – because the returns on investment have decreased slightly (for certain asset types), there will be slightly less incentive to save and invest. As a result, over time, less money ends up being invested and is instead consumed.

But let’s consider who would be affected. If we think about the vast majority of people, their only exposure to capital gains is through their pension fund and the property they live in, neither of which would be affected by increasing the individual capital gains tax rate. Day traders, high frequency traders and anyone holding stocks for less than a year on average would also be unaffected. Most investors in start-ups do so through investment vehicles that are, again, not subject to individual capital gains tax[5]. That leaves two main groups of investors impacted by an increase in the capital gains tax rate for individuals:

  1. Property investors
  2. High net worth individual investors

Given property investing is not what most people are thinking about when concerns about capital gains tax rates reducing investment are raised, let’s focus on high wealth investors.

The key issue when considering how these investors would be affected by an increase in the capital gains tax rate is identifying what drives them to invest in the first place. Many of them literally have more money than they could ever spend, which means their investment decisions cannot be driven by a desire for future consumption. Many of their kids will never want for anything either, so even ensuring the financial security of their kids is not an issue. The only real motivation that can be left is simply status, power and prestige. Or as the tech industry has helpfully rebadged it – ‘making the world a better place.’

If that is the motivation though, does a rise in the capital gains tax rate change that motivation?

To my mind, the answer to that question is ‘No’. These people are already consuming everything they want, or in economic parlance, their desire for goods and services has been satiated. They will gain no additional pleasure (‘utility’) from diverting savings to consumption, so there is no incentive to do so even when the gains from investing are reduced.

Of course, there are exceptions, and it is quite possible (even likely) that there are high net worth individuals who live somewhat frugally and as a result of this policy change would really start splashing out. The question is how significant is this amount of lost investment, and does the loss of that investment capital outweigh the cost to society more widely of a deduction that flows almost entirely to the wealthy.

The Research

Putting this piece together, I have studiously attempted to avoid confirmation bias.[6] Despite the fact that I would benefit personally from lower tax rates on capital gains (well, at least I would if my portfolio would increase in value for a change), I definitely want to believe that aligning capital gains tax rates with the tax rates on normal income would raise significant amounts of tax, mostly from wealthy individuals, with few negative consequences.

In my attempts to avoid confirmation bias, I have deliberately searched for articles and research papers that provide empirical evidence that lower capital gains tax rates were found to lead to higher rates of savings, investment and/or economic growth. I have not been able to find any. There were some papers that claimed to show that decreasing capital gains tax rates actually increased tax revenue, but reading the Australian section of this paper (about which I have some knowledge), it quickly became clear this conclusion had been reached using a combination of cherry picking dates[7] and leaving out important details.[8]

I did also find some papers that, through theoretical models, concluded higher taxes on capital income would cause a range of negative impacts. But the problem with papers that rely on theoretical models is that for every paper based on a theoretical model that concludes “… a capital income tax… reduces the number of entrepreneurs…” there is another paper based on a theoretical model that concludes “… higher capital income taxes lead to faster growth…

Leaving research aside, there were a number of articles supporting the lowering or removing of capital income taxes. The problem is they all recite the same old arguments (“it will cause lock-in!”) and tend to come from a very specific type of institution. Without going too much into what type of institution, let me just list where almost all the material I located was coming from (directly or indirectly):

Even when I found an article from a less partisan source (Forbes), it turned out to be written by a senior fellow at the Cato Institute, and was rebutted by another article in the same publication.

Of course we should not ignore what people say because they work for a certain type of institution – just because they have an agenda does not mean they are wrong. In fact, it stands to reason that organizations interested in reducing taxation and limiting government would research this particular topic. The problem is that if there are genuine arguments being made, they are being lost amongst the misleading and the nonsensical.

Take this argument for lower taxes on capital as an example. First there is a chart taken from this textbook:

Capital per Worker vs. Income per Worker

The article then uses this as evidence to suggest more capital equals more income for workers. As straightforward as this seems, what this conclusion misleadingly skips over is:

  • income per worker is not equivalent to income for workers, and
  • almost all the countries towards the top right hand corner of this chart (i.e. the rich ones) got to their highly capital intensive states despite having high taxes on capital.

A Change in Attitude?

The timing of this article seems to have conveniently coincided with the announcement by Hilary Clinton of a new policy proposal – a ‘Fair Share Surcharge’. In short, the surcharge would be a 4% tax on all income above $5 million, regardless of the source. Matt Yglesias has done a good job of outlining the details in this article if you are interested.

The interesting aspect of this policy is, given the lower rate of tax typically applied to dividends and capital gains, it is a larger percentage increase in taxes on capital income than wage income. Of course, unless something major changes, this policy is very unlikely to make it past Congress and so may simply be academic, but at least it shows one side of politics may be starting to question the idea that taxes on capital should always be lower.

The Data

Finally, I want to finish up with a few charts. The charts below show how various economic indicators changed as various changes were made to the rate of capital gains tax, historically and across countries. Please note, these charts should not be taken as conclusive evidence one way or the other. The curse of economics is the inability to know (except in rare circumstances) what would have happened if a tax rate had not been raised, or if an interest rate rise had been postponed. The same applies with changes to the capital gains tax rate. Without knowing what would have happened if the capital gains tax rate had not been changed, we cannot draw firm conclusions as to what the result of that change was.

However, what we can see is that the indicators shown below do not seem to be significantly affected by changes in the capital gains tax rate, one way or the other – the effects appear to be drowned out by larger changes in the economy. That could be considered a conclusion in itself.

Chart1 – Maximum Long Term CGT Rate vs. Personal Savings rate, US 1959 to 2014

Chart 2 – Maximum Long Term CGT Rate vs. Annual GDP Growth, US 1961 to 2014

Chart 3 – Maximum Long Term CGT Rate vs. Gross Savings, Multiple Countries, 2011-2015 Average

Gross savings are calculated as gross national income less total consumption, plus net transfers. This amount is then divided by GDP (the overall size of the economy to normalize the value across countries.

Chart 4 – Maximum Long Term CGT Rate vs. Gross Fixed Capital Formation, Multiple Countries, 2011-2015 Average

Gross fixed capital formation is money invested in assets such as land, machinery, buildings or infrastructure. For the full definition, please see here. This amount is then divided by GDP (the overall size of the economy to normalize the value across countries.

Chart 5 – Maximum Long Term CGT Rate vs. Gini Index, 2011-2015 Average

The Gini index is a measure of income inequality within a country. A Gini index of 100 represents a country in which one person receives all of the income (i.e. total inequality). An index of 0 represents total equality.

 

[1] Interestingly, two of these four deductions (mortgage interest and employee sponsored health insurance) will be completely foreign to Australians.

[2] A similar policy (50% tax discount for capital gains) in Australia costs around AUD$6-7 billion per year.

[3] The risk that the exchange rate changes and has an adverse impact on the value of your investments.

[4] The risk that the government of the country you are investing in will change the rules in such a way to hurt your investments.

[5] Capital Gains Tax Policy Toward Entrepreneurship, James M. Poterba, National Tax Journal, Vol. 42, No. 3, Revenue Enhancement and Other Word Games: When is it a Tax? (September, 1989), pp. 375-389

[6] Confirmation basis is the tendency of people, consciously or subconsciously, to disregard or discount evidence that disagrees with their preconceived notions while perceiving evidence that confirms those notions as more authoritative.

[7] “After Australian CGT rates for individuals were cut by 50% in 1999 revenue from individuals grew strongly and the CGT share of tax revenue nearly doubled over the subsequent nine years.” Note the carefully selected time period includes the huge run up in asset prices from 2000 to 2007 and avoids the 2008 financial crisis, which caused huge declines in CGT revenues.

[8] “Individuals enjoyed a larger discount under the 1999 reforms than superannuation funds (50% versus 33%), yet yielded a larger increase in CGT payable.” This neglects to mention that even after the discounts were applied, the rate for of capital gains tax for almost all individuals was still higher than for superannuation funds.

Should the Wealthy be able to pay for Better Healthcare?

Commenting on an article on reddit.com, I recently got into an argument[1] with someone about healthcare and more specifically the role of private healthcare. The article was this NY times piece that talks about how US hospitals provide a range of benefits for wealthier ‘clients’ (at significant additional cost of course). These benefits can be anything from nicer rooms to gourmet food and access to business centers.

My first reaction to the piece was, what I expect, the desired response – indignation. In a country like the US where there are countless healthcare horror stories (the story of a carpenter having to choose which fingers to reattach as covered in Sicko is particularly famous), this seems outrageous. How can some people not afford access to healthcare at all, and yet others are paying huge sums to stay in private rooms and eat soft cheeses?

I believe in my case, this sense of indignation was particularly strong because I come from one of the many non-US developed countries in the world with a basic but functioning universal healthcare system. No one avoids going to hospital for fear of being bankrupted by the cost. No one has to make horrible decisions about which appendages to reattach. The only major drawback in most universal healthcare systems is procedures that are non-life threatening can have significant wait times.

A good example of this is getting surgery to repair an ACL. You can get it done through the public health system (Medicare in Australia), free of charge – or close to free. However, because you are not going to die from a ruptured ACL, you are likely to have to wait for 1-2 years to get that surgery done through Medicare. If, on the other hand, you have something like $5,000-$10,000 you can have it done next week[2].

As you may have observed from this example though, this sounds very close to what I was getting all indignant about in the first place – wealthy people buying access to better healthcare. In fact, in most universal healthcare systems, including Australia’s, the wealthy do have the option to pay more to receive access to better care and/or skip to the front of the queue. In reality, the NY Times article could easily have been talking about Australian hospitals. What is more, the ability of richer patients to pay for better service is often viewed as necessary for the system in Australia – the extra money paid by wealthy patients helps to fund the system for others. So why does it feel different?

After several days of mentally dissecting this issue I think I have come to a conclusion as to why the NY Times story got such a reaction out of me and yet I had a generally positive impression of the private health system in Australia. The key difference (at least in my mind) is the extent of the privatization of the healthcare system. In the US, healthcare has been privatized to such an extent that some people have been priced out of the market completely. When this is contrasted with the opposite end of the spectrum – private rooms, nicer robes, lobster stuffed with tacos – it highlights that the problem with the system is not an overall lack of resources, but that those resources are being allocated in such a way that some people do not get access.

Contrast this to the existence of private health systems in countries with universal healthcare. Even though some patients are able to access better facilities (and potentially doctors), everyone has access to a (generally) good level of healthcare, regardless of wealth or insurance policy. Because of this, the fact that some people can pay extra for nicer rooms seems much less important. The system has enough resources for everyone – so it is not perceived as resources being taken from poorer patients.

However, it is worth asking the question of whether this is right or simply a convenient piece of logic.

To assess the morality of the wealthy having the ability to purchase better healthcare services, we have to recognize the two main constraints on a healthcare system. The first constraint is the supply of personnel, equipment and medical supplies. The second constraint is the supply of money. These constraints are not unrelated. An endless supply of money will not help if there is a shortage in equipment/personnel at a given point in time. But money can help to increase the supply of these things in the future.

If we accept the premise that wealthy patients benefit healthcare systems by adding additional money into the system, going back to the constraints above, we can see that essentially this is a short term sacrifice for a longer term gain. Assuming that the demand for healthcare will always exceed supply, wealthy patients skipping to the front of the queue will take resources away from poorer patients in the present. They occupy beds, take time away from doctors and require access to equipment just like any other patient. However, they also pay money into the system that allows future patients to access treatment they might not otherwise have had access to.

Here is where it gets a bit murkier. If we are saying that payments from wealthy patients are needed for the system to function in the future, are we not then implying that the system is underfunded? Why can that money not come from other sources such as higher tax rates or lower spending in other areas of the budget? The problem with that line of thinking is that in any realistic government budget, there will always be room for additional healthcare funding. No government is ever likely to fund a healthcare system to the point that everyone gets the best possible treatment instantaneously[3]. So even in a much better funded public health system than currently exists in most countries, additional funds provided by wealthy patients will still allow for better treatment of other patients in the future.

All this does not mean we have to like the US model of healthcare where money plays far too big a role for the comfort of many. Denying patient access to healthcare (or bankrupting them for emergency care) in a modern developed country is a deplorable situation. But my overall conclusion is that it is best to focus your indignation on the real issues with the system – the excessive insurance premiums, the tying of affordable insurance to employment, the huge markups charged by many hospitals and the unnecessary expensive treatments added to patients bills.

As outrageous as it seems to picture wealthy patients receiving lavish treatment in private rooms while others are avoiding necessary treatment for fear of the cost, it is not the real issue. In fact it is probably providing a net benefit in a deeply flawed system.

 

[1] Those that know me will find this very unsurprising

[2] This cost, it should be noted, is still a fraction of the $55,000+ my health insurance company paid for that procedure in the US.

[3] If that was the case, you would also have idle resources for much of the year

Hours Worked Are Going Up – Here is the Evidence

A couple of weeks back, I posted a blog that seemed to tap a nerve. The blog addressed what many white-collar workers, particularly in the private sector, have been feeling for some time: pressure to put in longer hours at the office. This week, I wanted to look into the statistics to see if there is evidence to support the anecdotal stories of increasingly common 60-hour weeks.

To address this question, we are going to look at data from a range of sources, including Australia, the US, and the OECD.

The Picture in the US

Starting in the US, the Bureau of Labor Statistics (BLS) produces data on average weekly hours. This data has a lot of fine level detail on average weekly hours by sector and subsector, but unfortunately, only goes back to March 2006. Still, if there is a trend towards longer hours in recent times, it should be apparent.

Chart 1 – Average Weekly Hours by Industry

Chart 1 above shows the average weekly hours for the three main sectors for white-collar workers, Financial Services, Information, and Professional and Business Services. The first thing that stands out is there does appear to be an upwards trend in the average weekly hours for Financial Services workers and for Profession and Business Services workers. Both sectors look like they have added an extra hour on average over the past 9 years. Given the short time frame and the number of people involved in those sectors, that should be considered substantial. Multiplying extra hour by the number of employees in those sectors, (approximately 8 million and 19 million respectively), works out to an additional 3,375,000 working days (assuming 8 hours a day) every week – between those two sectors alone.

Drilling down into the detail, Chart 2 shows the Professional and Business Services sector broken down into its various subsectors.

Chart 2 – Average Weekly Hours – Professional and Business Services

At this level of detail, the data shows us that the increase in the sector as a whole is far from uniform:

  • Accounting, Tax Preparation, Bookkeeping and Payroll Services, Advertising and Related Services, and Other Professional Scientific and Technical Services have added around 2 hours per week
  • Legal Services and Management, Scientific and Technical Consulting Services have added approximately 1 hour a week
  • The remaining subsectors have remained flat, or even declined slightly.

Interestingly, data for the most infamous subsectors for long hours, Legal (Legal Services) and consulting (Management, Scientific and Technical Consulting Services) show employees averaging between 36 and 37 hours a week, which would seem to be very normal. This is probably indicative of two things:

  1. People in legal and consulting generally aren’t working as many hours as we assume (or they tell us).
  2. The people working long hours in these subsectors are limited to a few top tier firms. Their long hours are being drowned out by large numbers of people working normal hours.

There is also another thing to keep in mind when looking at this data. These statistics are based on surveys that are voluntary for people to respond to. As a result, there is likely to be some bias in the data towards lower hours due to people who do work long hours opting out of the survey altogether. This bias would impact all sectors and subsectors, but could be masking more dramatic increases in the averages.

What about Technology?

In Chart 1, the average weekly hours for the information sector (of which technology based industries are subsectors) barely moved over the last 9 years. However, as seen previously, looking at the information sector in aggregate can be deceiving. Chart 3 shows the information sector broken down into its various subsectors.

Chart 3 – Average Weekly Hours – Information Sector

Looking at this breakdown, the expected increase in average hours worked becomes more apparent. The Data Processing, Hosting and Related Services subsector has added close to 3 hours a week since 2006, while the Other Information Services subsector has added around 2 hours a week.

An interesting point to note is that for the Other Information Services subsector, the average weekly hours have been decreasing for the past 12-18 months. Looking at the period 2006-2013, it looked like this sector was on course to add 4 hours a week. However, after peaking at 36.4 hours a week in December 2013, the subsector has steadily lost hours to the point that for the first 6 months of 2015, the average was just 34.6 hours per a week. Whether this is the result of more work friendly policies, more competition for staff or some other factor remains to be seen.

Hard Working Aussies?

Moving on to Australian data from the Australian Bureau of Statistics (ABS), the dataset available is longer than what was available from the BLS, but it is lacking fine level detail. The ABS data goes back to 1978 and is split by different brackets of hours worked. For example, 1-15 hours, 16-29 hours, 60+ hours and so on. Chart 4 below shows the percentage of employed people in each bracket[1] (based on a 12-month moving average).

Chart 4 – Australian Employees by Average Weekly Hours

The most striking aspect of the chart is the decline in the number of people working between 30 and 40 hours a week – or what most people would consider a regular full time job. As late as January 1986, more than half of Australian workers were working between 30 and 40 hours a week. By the turn of the century, that percentage was closing in on 40%. From the data, most of the people who moved out of the 30-40 hours a week category appear to have moved into the ‘less than 30 hours a week’ category. This substitution of full time jobs for part time and/or casual employees is sometimes referred to as ‘casualization’.

In Australia, the ‘casualization’ of the workforce has been a much-discussed topic. Some argue that it is the natural result of more modern, flexible working arrangements. Others see negatives in reduced job security and reduced benefits (casual employees do not get access to paid leave for example). One thing that is for certain is the number of people affected continues to increase.

Moving on to the other end of the spectrum, those working 50+ hours a week, there are two distinct phases. The first phase, from 1979 through to the year 2000 shows a strong increase in the number of people working 50+ or more hours. The second phase, from 2000 onwards shows a decrease in the number of people in this category that almost completely unwinds the previous increase. Another interesting observation is that the decrease in people working 50+ hours from 2000 onwards is almost exactly mirrored by the gain in people working 30-40 hours a week over that period.

It is difficult to say what exactly is driving this change. Are employees leaving jobs that require longer hours for jobs with better work life balance? Are companies becoming more serious about looking after their employees? Has the recent mining boom, which has led to huge economic changes, caused a shift away from industries that have longer hours? All these questions are a topic for another blog post.

What can be said is that, at a high level, there is little to indicate that longer hours are becoming the norm for Australian workers. But, like the US example, without looking at the data at a sector and subsector level, this data tells us very little about what is happening in legal offices and tech startups in inner city Sydney and Melbourne.

The International Perspective

The OECD also provides statistics on average yearly hours across a range of countries. Looking at yearly hours worked is slightly different to weekly hours because of differing leave allowances and expectations between countries, but it does allow us to look at how things have changed over time within each country. Chart 5 shows the average yearly hours for a selection of countries.

Chart 5 – Average Annual Hours Worked – Selected Countries

Again, this data is at the highest level (all sectors, all employees), making it difficult to detect a small increase in average hours worked that is limited to some subsectors. However, this chart does provide some perspective on how much average hours worked a year has declined in pretty much all developed nations over the past 60 years. The decline in hours worked in France in particular is striking – falling from over 2,300 hours a year (almost 48 hours a week if 4 weeks of leave is assumed) to under 1,500 hours a week (just over 31 hours a week).

The other interesting point to note is the increase in hours in Sweden since the early 80s. Not having any knowledge of Swedish history outside of the recent Thor movies (which I assume are completely factually accurate), any explanation anyone could offer about what is happening here would be very welcome.

The Long Term Perspective

The final data source for comparison is a paper[2] released in 2007 by Michael Huberman and Chris Minns. The paper takes a look at the question of how hours worked have changed over time from a very long-term perspective. Chart 6 shows a summary of the main results from the paper.

Chart 6 – Huberman and Minns; Hours of work per week; 1870–2000

Similar to the OECD data, this data provides perspective on how far the average hours worked has fallen over time. The biggest gains were made in the interwar period as Henry Ford and other business owners realized lowering the hours of their employees actually ended up boosting output, and many countries adopted statutory hours.

We also see how cultural and policy differences in France has led to continued declines in hours worked post World War II, while the Anglo-Saxon nations have essentially had no real change.

Table 1 – Huberman and Minns; Hours of work per week; 1870–2000

  1900 1913 1929 1938 1950 1960 1970 1980 1990 2000
U.K. 56.0 56.0 47.0 48.6 45.7 44.7 42.0 40.0 42.4 40.5
France 65.9 62.0 48.0 39.0 44.8 45.9 44.8 40.7 39.9 35.8
Australia 48.1 44.7 45.5 45.0 39.6 39.6 39.6 39.2 40.1 40.6
U.S. 59.1 58.3 48.0 37.3 42.4 40.2 38.8 39.1 39.7 40.3

Another thing that is not so obvious from the chart, but is clearer in the underlying data (see Table 1), is that in Australia and the US, there has been an increase in hours worked from 1980 onwards. Although not significant when compared to hours worked by previous generations, this could be representative of more recent trends. One caveat on that is that this data series only runs to the year 2000, and, at least in the case of Australia, there were declines in the number of people working 50+ hours from 2000 onwards.

Wrapping Up

Overall, the evidence that people are working longer hours is mixed. When drilling down to specific subsectors in the BLS data from the US, the data indicates there has been an increase in average hours worked in most of the expected places. However, the gains appear small (1-3 hours a week) and no sector or subsector analyzed averaged over 40 hours a week.

The ABS data from Australia did show a significant increase in people working 50+ hours from the late 70s through to the turn of the century, but that trend then stopped and reversed. Meanwhile, the longer-term perspective provided by the OECD data and Huberman and Minns showed significant declines over the last 150 years, with little indication average hours worked were going back up in recent years.

Taking all this data into account, there are two main conclusions to be taken away:

  1. When looking at data aggregated across sectors, there is little indication that average hours worked are increasing. That doesn’t mean average hours worked are not increasing anywhere, but that it is not happening on a big enough scale to move the high level aggregate numbers.
  2. When drilling down into specific subsectors where anecdotal evidence suggests there should be increases, the data indicates that average hours worked have been increasing. Although the averages still seem low (i.e. less than 40 hours a week), when you take into account the spread of hours making up those averages, even a 1-2 hour average increase represents an increasingly large proportion of people in those subsector working very long hours.

 

[1] Note – I have aggregated some of the brackets to simply the picture.

[2] M. Huberman, C. Minns; The times they are not changin’: Days and hours of work in Old and New Worlds, 1870–2000; Explorations in Economic History 44 (2007) 538–567

Women in the Workplace – Where is Everyone?

Cross posted from OpenDataKosovo.org:

Continuing our series on Gender Inequality and Corruption in Kosovo, in Part IV we are going to build on Part III and use our understanding of the participation rate to compare the participation rate in Kosovo across a range of countries, as well as look at the reasons for non-participation (“inactivity”). If you don’t understand what a participation rate is (SPOILER: it is not the same as the unemployment rate), or just want to make sure you get the full picture, please go back and read Part III.

Click on the chart below to interact with the data!

sunburst_pic

Sunburst chart created by Festina Ismali

Comparing Participation Rates

Comparing participation rates across countries provides insight into broad demographic trends and the specific employment situation in a country relative to other countries. For most high income nations, the participation rate tends to be around 60%. That is, 6 out of every 10 people of working age are actively engaged in the employment market (whether they currently have a job or not). While that may sound low, this accounts for parents who stay home to raise children, students, retirees and discouraged workers[1].

Once we leave high income countries, there is a much larger range of participation rates. Many very poor low income nations in Asia and Africa have extremely high participation rates of well over 80%. This is driven by pure necessity as, in many cases, there is simply no option for one partner to stay home, retire, or even for young people to continue studying.

Conversely, we also see many countries with very low participation rates of just over 40%. In some cases, these countries are involved in ongoing conflicts or are post-conflict countries (Syria, Iraq and Afghanistan all had participation rates below 50% in 2013). But in other cases, the cause is harder to identify.

Unfortunately, Kosovo is one of these harder to understand cases. In 2013, Kosovo had the second lowest participation rate of any country in the World Bank database, at 40.5%. In 2014 that number picked up slightly to 41.6%, but that was still low enough to keep Kosovo in the bottom 10, based on 2013 figures. Notably, Kosovo’s low participation rate has actually decreased substantially over the past decade (see Chart 1). In 2002, the participation rate stood at 52.8%. If that participation rate applied today, there would be an extra 134,600 people in the labour force – an increase of 26.9%.

Chart 1 – Participation Rate in Kosovo 2002 to 2014

Looking at Chart 1, another data point that immediately stands out is the low participation rate for women. In fact, with a participation rate for women of 21.1% in 2013, Kosovo has one of the lowest participation rates for women in the world. In terms of the rankings, Kosovo places between Saudi Arabia (20.2%) and Lebanon (23.3%). Looking around the region, Kosovo is also a significantly outlier (see Chart 2).

Chart 2 – Female Participation Rate for Selected Countries 2002 to 2013

Methodology Matters

Previously, in Part III, we mentioned that there were some more detailed criteria for determining whether a person is considered ‘employed’ in Kosovo. Specifically, there is one particular criteria that may partially explain Kosovo’s notably lower participation compared to its neighbors (and everyone else).

In the 2014 Kosovo Labour Force Survey, a specific methodological difference with Albania is highlighted. In Kosovo, people who work on a family run farm are not considered employed if the produce of the farm is not considered an “important source of consumption” (let’s call these people ‘family farm workers’). In contrast, these same people in Albania are classified as employed. From the 2014 Kosovo Labour Force Survey Results paper (emphasis mine):

“It is important to note that when respondents answer code 5B[2], that they do some agricultural activity but it is not an important contribution, this is not counted as employed. In 2014 69% of this group were categorized as inactive and 31% as unemployed. An important contribution is a subjective term and could depend on overall household income.”

The key takeaway here is that there is a significant population of family farm workers that are currently being classified as inactive, when in fact they are working. This at least partially explains the low participation rate in Kosovo.

Unfortunately, the paper does not provide enough information to be able to determine how many people are  family farm workers. As such, we are unable to quantify exactly how much impact adding family farm workers back into the labour force would have on the headline participation rate.

Even if we could though, this would not be fully correct either (welcome to the surprisingly complex world of labour market statistics). Many family farm workers probably do not consider themselves employed – working 1 hour a week[3] on a family farm is a pretty low bar after all. The fact that 31% of them qualified as unemployed, meaning they actively sought other work, reveals that this is not homogenous group of full time farm workers being incorrectly classified.

Worrying Trends

Methodological anomalies aside, there is also a concerning trend in the data – the participation rate for women in Kosovo has been declining for much of the past decade[4]. Despite the improving economy and significant international development assistance, the participation rate for women fell from over 34.5% in 2002 to 21.4% in 2014. There is some good news – the fall appears to have bottomed out, with 2013 and 2014 both recording higher participation rates for women than the low point in 2012 (17.8%!).

This slight uptick in recent years could be the impact of numerous initiatives to get women into the workforce in Kosovo. These range from the prioritization of grants for projects that provide jobs for women, to supporting women in registering property in their own names to help provide collateral for loans. There has also been a push by Kosovo’s first and current female President to boost participation among women. Several more years of data will be required to determine whether this is the beginning of a more substantial trend or simply noise in the data.

In the meantime, let’s get a better understanding of the current labour market by looking at a break down (see Table 1), provided in the 2014 Kosovo Labour Force Survey, of the inactive population sorted by reason for not participating.

Table 1 – Inactive Persons by Category

(A) Men (B) Women (C) = (B) minus (A)
1,000s 1,000s  (C1) 1,000s (C2) % of total
Looking after children or incapacitated adults 0.1 14.3 14.2 5.8%
Own illness or disability 13.3 8.6 -4.7 -1.9%
Other personal or family responsibilities 13.5 233.4 219.9 90.2%
In education or training 104.7 97.3 -7.4 -3.0%
Retired 6.9 5 -1.9 -0.8%
Believes that no work is available 49.5 78.9 29.4 12.1%
Waiting to go back to work (laid-off people) 0.8 0.5 -0.3 -0.1%
Other reasons 20.7 16.2 -4.5 -1.8%
No reason given 1.9 3.4 1.5 0.6%
Total  229.2 473.0 243.8 100.0%

Looking at the breakdown, there is one category in particular in which there was a large discrepancy between the sexes – ‘Other personal or family responsibilities’. In this category, 233,400 were women, amounting to 38.8% of the total population of working age women. By contrast, only 13,500 were men, amounting to 2.2% of the total population of working age men. The table also shows the calculated difference between the number of inactive women and men (see column C1). Looking at these calculated differences, we see that for the total calculated difference across all categories (243,800 – see ‘Total’ row in column C1), 219,900, or over 90%, arose from this category. This breakdown is also shown in Chart 3 below.

Chart 3 – Inactive People by Category of Inactivity – 2014

Going back to the family farm workers discussed earlier, we expect that those classified as inactive would be included in the ‘Other personal or family responsibilities’ category. However, if a significant number of women in this category were family farm workers and this was a full time role, we would also expect to see large numbers of men in the same category. The fact that we do not suggests that many men who are family farm workers also have other more formal jobs and lends support to the decision to exclude family farm workers from the employed population.

The other category where we see a meaningful gap between the sexes is the ‘Believes that no work is available’ category. As mentioned earlier, these are the people that are considered discouraged workers (i.e. those that would take a job, but are no longer actively looking). Why would significantly more women be discouraged than men? Typically, discouraged workers are the end product of long and unsuccessful searches for employment. At times of high unemployment, it will often be the case that the number of discouraged workers will also increase. Seeing that women are more likely to be discouraged than men suggests they are having a more difficult time finding employment.

To confirm this hypothesis, we need to look at unemployment rates. This will be the focus of the next piece in this series – Part V.

 

[1] People who would like a job but who haven’t actively sought work in the past 4 weeks

[2] Code 5b text: “Worked (at least one hour) on a farm owned or rented by you or a member of your household (even unpaid) whether in cultivating crops or in other farm maintenance tasks, or you have cared for livestock belonging to you or a member of your household (if the whole production is only for own consumption and this production does not constitute an important contribution to the total consumption of the household.

[3] Employed are considered all the persons who have worked even for one hour with a respective salary or profit during the reference week.

[4] There is no mention of when the current methodology was implemented, but it is possible that the large drop in participation rate between 2009 and 2012 was due to a change.

Uber vs Taxi – The Uber Perspective

Inspired by a recent piece by Oliver Blanchard I was put onto by a friend[1] (warning: it is a very long piece and gets very ranty), I thought I would put together some thoughts on the “Sharing Economy”, and in particular Uber. As there is a bit of ground to cover, I’ll split this into two parts. This first part will look at how Uber has improved taxi services and why taxi services may never be able to close that gap. The second part will look at some of the unfair advantages Uber has and why those advantages probably won’t last.

Before we dive into it though, I first want to say the economist in me loves the idea behind Uber and similar services such as Airbnb. They take some of the most valuable assets that most people will own (e.g. houses and cars) and helps their owners to derive economic value from them when they would otherwise be sitting idle. From the perspective of the wider economy, this is undoubtedly a good thing. Cars in particular are something that we spend a lot of money purchasing and maintaining, yet, end up sitting in a garage or parking lot for close to 90% of their existence.

How Uber Changed the Market

Since its founding in March 2009, there has always been a lot of hype around Uber. From their official launch in San Francisco in early 2011, they rapidly expanded to numerous other cities around the US and made their first move internationally to Paris in December 2011. As of today, Uber is available in 58 countries worldwide, and at a recent capital raising the company was valued in the ballpark of $50 billion. If publicly listed at that value, Uber would be among the largest 100 companies in the S&P500. Charts 1 and 2 show some of the explosive growth in driver numbers from a recent Uber paper.

Chart 1 – Total Active Drivers

total_driver_numbers

Chart 2 – Active Drivers by City

drivers_by_city

Aside from the rapid growth, one of the more impressive things about Uber is the amount of good will there seems to be towards Uber. Despite ‘disrupting’ an industry that has been around for decades and taking an aggressive approach to protecting its drivers and business model, the only people who seem to have anything bad to say about Uber are taxi drivers. Outside that obviously vested interest, there seems to be the general consensus that Uber is improving the situation for everyone. The customer is happier because they are getting much better service than they were from a taxi, and the drivers are happier because they are making all this extra cash. To work out why that is, let’s take a look at some of the key ways Uber has improved the taxi experience.

1. Getting a ride is now easy

Having an app that allows people to request a car at the tap of a button and know exactly when it will turn up is a big improvement for customers. No more automated phones services forcing you to scream “OPERATOR!” into the phone. No waiting on the side of the road trying to flag down a cab. No waiting for 2 hours in line at the taxi rank at 2am on a Saturday night. And finally, no sitting in silence in your home waiting for the honk of the horn to make sure you don’t miss the taxi you ordered.

2. So is getting to your destination

The app also allows you to enter a destination, which is then used to determine the best route and guides the driver. This again is a big improvement over the taxi experience in most countries. No waiting for the driver to type the address into his circa-1996 dashboard GPS – if he has one at all. No missing the freeway exit because you weren’t paying attention. No more risk of been taken on ‘the scenic route’ because you are from out of town.

3. Bad drivers and passengers get penalized

As a customer, think about the things you dislike about taxis. Now consider how many of those things are as a result of taxi drivers having to deal with bad passengers. Clunky plastic screens separating drivers from passengers. Inability to sit in the front seat of the cab at all in some cases. Cars that haven’t been cleaned in the past 6 months. The overall surliness of drivers.

Having a system where drivers rate their passengers and have the ability to refuse rides to people with low ratings, creates a lot of positive incentives for both driver and passenger. Passengers can no longer act like douche bags towards the driver or trash the cab without affecting their ability to get a taxi in the future. Drivers can maintain nicer cabs knowing their passengers are likely to be well behaved.

On the flip side, passengers rating their drivers also creates positives incentives for drivers to be much more helpful to their customers. As a result, Uber drivers are generally much more pleasant, cheerful, helpful and generous towards their customers. In my own personal Uber experience we have had drivers provide free water bottles, chocolates and other goodies.

4. Surge pricing means you rarely have to wait long

This is a controversial one, but I firmly believe this is positive, and anyone who has spent hours waiting for a taxi should as well.

The reason you had to wait so long for a taxi is because there are spikes in demand for taxi services and little to no increase in supply to meet that demand. There are two main reasons for that:

  1. In almost all cities, the number of taxi licenses available is capped
  2. If there are any taxis currently off duty, there is no incentive for the driver/owner to clock back on

Uber avoids both these problems. By not capping the number of drivers in a given city, Uber ensures there are plenty of spare drivers around when needed. By significantly increasing the rates drivers can charge in periods of peak demand, Uber also provides a strong incentive for drivers to get in their cars and start picking up passengers at 2am on a cold morning.

Surge pricing has drawn criticism and negative press in some parts, but reading the details of some of these stories, it really is difficult to have too much sympathy. Some will argue surge pricing is taking advantage of desperate people, but they are misunderstanding the options. The two options available in that moment are not an expensive ride at surge prices and a normal priced ride. The two options are an expensive ride at surge prices or no ride at all.

Now, that said, there is an argument to be made for stopping surge prices in disaster situations. But the best way to do that is not to stop providing drivers with higher prices to pick up people in those situations, but to change who is paying for it. Whether this is the government, Uber or some third party is a separate discussion.

Playing Catchup

If we look at the four advantages that Uber has (as listed above), and add in the fact that in many cities Uber is significantly cheaper than the taxi services, it makes a pretty compelling case that taxi services are in big trouble. Following the news and seeing taxi driver strikes[2], taxi lobbyists pushing for cities to outlaw Uber and police spending significant resources pulling over and fining Uber drivers, it can look like the last desperate throws of the dice for a dying industry.

However, in the face of this threat to their business, there has been some positive outcomes for taxi owners. Apps (Hailo and myTaxi) are now available that put taxis on par with Uber for 3 of the 4 advantages listed above. You can now order a taxi easily from an app, provide a destination and have access to a ratings system.

It is also not difficult to picture a world where taxi services start using some form of surge pricing to encourage drivers to be on the road at peak hours. To some degree this is already in place with many services charging higher rates at different times and days. But the problem is surge pricing only really works if you have a bunch of drivers off duty at any given time that can be, through monetary incentive, convinced to clock on and start picking up passengers.

This gets us to the underlying problem facing taxi services – the capping of the number of available taxi licenses. Capping taxi licenses has led to a situation where each taxi license is extremely valuable because of the amount of cash it can generate. In New York City for example, the cost of a single license peaked at over $1 million in recent years. Because of the cost of a license, and its consistent appreciation in value over the past few decades, for many taxi owners, their taxi license represents their retirement savings. Now, due to competition from Uber, many cities (Sydney, Toronto and many others) are seeing the cost of taxi licenses falling. 

You could argue taxi owners should have been smarter and diversified their investment. However, the fact is they made an investment decision on the basis of the rules as they stood at the time, and have since been severely undermined. Besides, they would hardly be the first people to invest all their savings in one overpriced asset class

Leaving aside judgements on investment decisions though, it is difficult to see a scenario where taxi owners end up the winners in this battle. Now that people have experienced the higher level of service that can be provided by services like Uber, they will be very reluctant to go back to the old way of doing business. Taxi services can (and have) improved as a response to Uber, but unfortunately, as long as taxi services want to cling to the idea of a capped number of taxi licenses, customers will continue to be frustrated by a lack of availability at key times.

All that isn’t to say Uber has everything worked out or that shouldn’t be criticized for their own failings and dodgy practices. In fact Uber faces several large problems of its own. To find out more about those, tune in next week.

 

[1] Thank you Bek Chew

[2] Seriously, it’s like they want everyone to hate them

Greece Crisis – Update

Update #2 – July 14, 2015

  • After the comprehensive win for the ‘NO’ campaign in the Greek referendum, negotiations reopened between the Greek government and the institutions. One notable difference this time around was the distancing of the IMF from the process, as Greece has technically already defaulted on their IMF debt.
  • Despite a ‘NO’ vote being sold in Greece as strengthening their hand in negotiations, the people negotiating on behalf of the institutions were not buying this line. What quickly became clear was that even if Greece completely capitulated and accepted the terms of the reform package offered pre-referendum, that would no longer be enough for a deal. The most commonly cited reason for the hardened stance was that the institutions no longer trusted the Greek government to undertake the reforms it was signing up to.
  • During the week, it began to look increasingly likely that no deal would be made. At one point, every country in the shared currency zone except France and Cyprus was pushing for a Greek exit ahead of the final discussion to take place on Sunday night.
  • After marathon negotiations, on Monday morning (13 July 2015), it appeared a deal had been reached. This deal is more or less the reform package demanded before the election (raising the pension age, raising the rate of VAT and other changes), but with one key addition. Greece will now be forced to place 50 billion euros worth of state owned assets into a fund. The fund will be managed by KfW, a German government owned development bank where German Finance Minister Wolfgang Schäuble is Chairman of the Board. Despite the apparent conflicts of interest, this setup is designed to allow the creditors to sell off those assets to pay off debt.
  • The deal has been been met with dismay by most people in Greece (and many observers). Immediately after the deal was announced, the number one trending hashtag worldwide was #ThisIsACoup.
  • The final hurdle at this stage is Greek Prime Minister Alexis Tsipras passing the needed reforms through the Greek parliament. Many members of his own party have already vowed to vote against the reforms. However, it is expected that with assistance from the other major parties, passage should be possible.
  • New elections are expected after the complete capitulation by Tsipras. Despite the apparent failure, many Greeks are behind their government, arguing that they at least made an honest attempt to improve the situation. However, once the new austerity measures are passed, the harsh reality is sure to hurt Syriza’s popularity. The tragedy of the situation is that it was a thinly veiled intention of European leaders to remove Syriza from power by humiliating the Greek people, and they look likely to succeed.

One interesting revelation that has come out in recent days is in relation to German Finance Minister Wolfgang Schäuble. What has become clear is that he has favored the path of forcing Greece out of the Eurozone entirely since at least 2012. Revelations from the 2014 memoir of US Treasury Secretary Timothy Geithner, Stress Test, have recently surfaced about a meeting in 2012 with Schäuble (emphasis mine):

“A few days later, I flew to meet Wolfgang Schäuble for lunch during his vacation at a resort in Sylt, a North Sea island known as Germany’s Martha’s Vineyard. Schäuble was engaging, but I left Sylt feeling more worried than ever. He told me there were many in Europe who still thought kicking the Greeks out of the eurozone was a plausible — even desirable — strategy. The idea was that with Greece out, Germany would be more likely to provide the financial support the eurozone needed because the German people would no longer perceive aid to Europe as a bailout for the Greeks. At the same time, a Grexit would be traumatic enough that it would help scare the rest of Europe into giving up more sovereignty to a stronger banking and fiscal union. The argument was that letting Greece burn would make it easier to build a stronger Europe with a more credible firewall. I found the argument terrifying,”

This insight into Schäuble’s thinking reveals the core issue at the heart of the shared currency zone –  Germany’s economic dominance. The Euro is essentially the new Deutschmark and this has a lot of side effects. Southern European nations benefit from being able to borrow at cheaper rates than they have historically, allowing governments to upgrade infrastructure and provide a stronger social safety net for their people. As it has turned out though, they also spent a lot of borrowed money on things that made them less competitive economically, such as large public sector salaries and very generous pension schemes.

Germany on the other hand benefits from having the Euro weighed down by those nations, making German exports extremely competitive internationally. It also benefits from the increased wealth of those southern European nations (even though it turned out to be mostly debt financed) who could spend more money on artificially cheap German exports.

Everyone was happy with the arrangement when things were going well, but when the crisis hit, the underlying inequalities were exposed. And despite the complex nature of the monetary union, there are only two basic ways the underlying structural issues in the shared currency zone can be resolved:

  1. Germany agrees to permanent and ongoing wealth transfers to the less efficient European nations in the same way richer states in the US subsidize poorer ones.
  2. Germany forces the rest of Europe to become more like Germany.

It is obvious which option appeals more to German politicians – convincing Germans to hand over their taxes to what they largely see as their lazy, poorly run neighbors is basically a non-starter.

Option 2 is more or less what has been happening and the results are clear – it caused huge economic disruption in those countries, particularly as the reforms were implemented during times of economic turmoil. But there is a fundamental question of democracy at play here. Obviously Greece (and to a lesser extent the rest of southern Europe) was not doing a particularly good job of managing its own economy. The question is are we OK with a world where unelected figures can force economic reforms on a country – even if they are beneficial in the long run – directly against the will of the people?

I will leave the final quote to Arnulf Baring, a German author and historian (amongst other things), who was strongly opposed to the introduction of the Euro. In his 1997 book, Scheitert Deutschland? (Does Germany Fail?), he made the following amazingly accurate prediction about the future of the Eurozone:

“They [populistic media and politicians] will say that we are subsidizing scroungers, lazing on mediterranean beaches. Monetary union, in the end, will result in a giant blackmailing operation. When we Germans demand monetary discipline, other countries will blame their financial woes on that same discipline, and by extension, on us. More, they will perceive us as a kind of economic policeman. We risk again becoming the most hated people in Europe.”

 

Update #1 – July 4, 2015

  • The latest polling on the referendum is showing that it is too close to call. Both sides are polling approximately 43% with about 14% of Greeks undecided as to which way they will vote.
  • Friday saw rallies in Athens for both campaigns ahead of a campaign free day on Saturday. Both had huge attendances but as one observer described: “[The] ‘NO’ rally is pure passion trying to look formal. ‘YES’ rally is something formal trying to look passionate.”
  • The Greek finance minister Yanis Varoufakis has declared that he would rather cut his arm off than accept a further bailout. Varoufakis confirmed Syriza would agree to the conditions of the bailout, should the ‘Yes’ campaign prevail, but also pledged to step down if this occurred.
  • The IMF on Thursday released a review of Greece’s debt, which many in the ‘No’ campaign are taking as a big win, given that the report includes an admission that Greece’s current debt is unsustainable. The report also revealed the ongoing disagreement between the IMF and Brussels regarding the best way forward for Greece. In apparent confirmation of the damage these revelations could cause, Eurozone countries are reported to have attempted to halt the release of the document before the referendum.

Original Piece – July 2, 2015

The debt crisis in Greece has been evolving quickly over the past few days, with several interesting developments. If this is the first you have heard about it or you haven’t been following the issue closely, I strongly recommend going back and starting here. For those that are up to date, here are the key updates so far this week:

  1. The European Central Bank (ECB) has not cut off emergency funding to banks in Greece as it was feared it might, but has decided against raising the amount of funding it will provide. The main story here is the banking sector in Greece avoids an immediate collapse and Greece will be able to survive until the referendum this weekend. But, by not raising the amount of funding, they have put Greek banks in a position where, if they ran in business-as-usual mode, they would not be able to keep up with the demand for Euro’s and would run out of cash.
  2. As a result, the Greek government has imposed capital controls and declared a bank holiday for this week. Banks will not open (with an exception for pensioners on Thursday) and people will only be able to take out 60 euros a day from ATMs. This is to ensure banks in Greece can stay viable until the referendum.
  3. In terms of the referendum, the expected result is unclear at this point. The latest polling is showing the ‘No’ (OXI) vote is ahead with 55% planning to vote ‘No’ to accepting the bailout under the current conditions, with only 33% planning to vote ‘Yes’ (NAI). But the gap has been closing as the situation has deteriorated. This picture contrasts with betting markets (yep, you can pretty much bet on anything) currently indicating a 66% chance of a ‘Yes’ vote.
  4. In the meantime, the Greek Prime Minister Alexis Tsipras has been campaigning strongly for a ‘No’ vote in the referendum. Tsipras is not out there on his own though. Two Nobel Laureates in Economics in Paul Krugman and Joseph Stiglitz have expressed their support for Syria’s decision and a ‘No’ vote, also adding a good helping of criticism for the role the creditors have played in getting to this point.
  5. However, in the meantime Syriza have still been attempting to continue negotiations with the creditors and yesterday (Wednesday) made further concessions in order to try to secure a deal.  The concessions made were agreeing to certain cuts to pensions (despite what you might have heard, the creditors are demanding further cuts) but on a delayed schedule, and agreeing to most of the VAT increases but maintaining an exemption for the islands. It should be noted that any deal reached at this point would not cancel the referendum, but would cause Syriza to reverse their current course and start campaigning for a ‘Yes’ vote.
  6. The creditors have basically slammed the door on further negotiations though, indicating that no further negotiations are possible before the referendum. This move is widely perceived as Europe calling Syriza’s bluff, but there is probably more to it than that. There have been further claims that no new deal is possible at all while Syriza remains in power. Indications are that regardless of the outcome of the referendum, the Eurozone will continue attempts to force new elections in Greece. Of course, this overlooks the fact that the only reason a marginal party like Syriza got into power in the first place was due to the extreme austerity forced upon Greece, but whatever. For outside observers, no matter what you think about who is to blame for this crisis, the completely undisguised attempts by Europe to destroy a democratically elected government because they don’t like their politics should make you very angry.
  7. Finally, based on the reaction from bond and equity markets this week, the financial contagion from a collapse in the Greek economy would appear to be limited. That said, the political contagion could live on for a long time. The behavior (see point above) of the institutions (and the people heading them) that are supposed to be run for the benefit of all Europeans has revealed how politicized they have become. Even in the scenario where Greece somehow stays in the Eurozone, significant damage has been done to the European project and to the goodwill that existed for it. If you haven’t already, I highly recommend reading Alexis Andreou’s fantastic insight into how a lot of young Europeans are likely to be feeling.

The situation is changing fairly rapidly at the moment, so I will continue to add updates here as things change.

Piketty Takes A Swing at Germany

Thomas Piketty, a French economist who found fame through his book Capital in the Twenty-First Century, recently conducted an interview with German magazine Die Zeit. After being translated, the transcript of the interview went viral with quotes showing up in the front pages of news sites all over the world. And for good reason, Piketty pulls no punches in his view of the crisis and the stupidity of ignoring the lessons of the past… again. This should be mandatory reading for anyone commenting on the crisis.

This version of the interview, which was originally in German, was translated by Gavin Schalliol. He has now taken down the translation while he sorts out copyright issues. Here is the full text:

DIE ZEIT: Should we Germans be happy that even the French government is aligned with the German dogma of austerity?

Thomas Piketty: Absolutely not. This is neither a reason for France, nor Germany, and especially not for Europe, to be happy. I am much more afraid that the conservatives, especially in Germany, are about to destroy Europe and the European idea, all because of their shocking ignorance of history.

ZEIT: But we Germans have already reckoned with our own history.

Piketty: But not when it comes to repaying debts! Germany’s past, in this respect, should be of great significance to today’s Germans. Look at the history of national debt: Great Britain, Germany, and France were all once in the situation of today’s Greece, and in fact had been far more indebted. The first lesson that we can take from the history of government debt is that we are not facing a brand new problem. There have been many ways to repay debts, and not just one, which is what Berlin and Paris would have the Greeks believe.

ZEIT: But shouldn’t they repay their debts?

Piketty: My book recounts the history of income and wealth, including that of nations. What struck me while I was writing is that Germany is really the single best example of a country that, throughout its history, has never repaid its external debt. Neither after the First nor the Second World War. However, it has frequently made other nations pay up, such as after the Franco-Prussian War of 1870, when it demanded massive reparations from France and indeed received them. The French state suffered for decades under this debt. The history of public debt is full of irony. It rarely follows our ideas of order and justice.

ZEIT: But surely we can’t draw the conclusion that we can do no better today?

Piketty: When I hear the Germans say that they maintain a very moral stance about debt and strongly believe that debts must be repaid, then I think: what a huge joke! Germany is the country that has never repaid its debts. It has no standing to lecture other nations.

ZEIT: Are you trying to depict states that don’t pay back their debts as winners?

Piketty: Germany is just such a state. But wait: history shows us two ways for an indebted state to leave delinquency. One was demonstrated by the British Empire in the 19th century after its expensive wars with Napoleon. It is the slow method that is now being recommended to Greece. The Empire repaid its debts through strict budgetary discipline. This worked, but it took an extremely long time. For over 100 years, the British gave up two to three percent of their economy to repay its debts, which was more than they spent on schools and education. That didn’t have to happen, and it shouldn’t happen today. The second method is much faster. Germany proved it in the 20th century. Essentially, it consists of three components: inflation, a special tax on private wealth, and debt relief.

ZEIT: So you’re telling us that the German Wirtschaftswunder [“economic miracle”] was based on the same kind of debt relief that we deny Greece today?

Piketty: Exactly. After the war ended in 1945, Germany’s debt amounted to over 200% of its GDP. Ten years later, little of that remained: public debt was less than 20% of GDP. Around the same time, France managed a similarly artful turnaround. We never would have managed this unbelievably fast reduction in debt through the fiscal discipline that we today recommend to Greece. Instead, both of our states employed the second method with the three components that I mentioned, including debt relief. Think about the London Debt Agreement of 1953, where 60% of German foreign debt was cancelled and its internal debts were restructured.

ZEIT: That happened because people recognized that the high reparations demanded of Germany after World War I were one of the causes of the Second World War. People wanted to forgive Germany’s sins this time!

Piketty: Nonsense! This had nothing to do with moral clarity; it was a rational political and economic decision. They correctly recognized that, after large crises that created huge debt loads, at some point people need to look toward the future. We cannot demand that new generations must pay for decades for the mistakes of their parents. The Greeks have, without a doubt, made big mistakes. Until 2009, the government in Athens forged its books. But despite this, the younger generation of Greeks carries no more responsibility for the mistakes of its elders than the younger generation of Germans did in the 1950s and 1960s. We need to look ahead. Europe was founded on debt forgiveness and investment in the future. Not on the idea of endless penance. We need to remember this.

ZEIT: The end of the Second World War was a breakdown of civilization. Europe was a killing field. Today is different.

Piketty: To deny the historical parallels to the postwar period would be wrong. Let’s think about the financial crisis of 2008/2009. This wasn’t just any crisis. It was the biggest financial crisis since 1929. So the comparison is quite valid. This is equally true for the Greek economy: between 2009 and 2015, its GDP has fallen by 25%. This is comparable to the recessions in Germany and France between 1929 and 1935.

ZEIT: Many Germans believe that the Greeks still have not recognized their mistakes and want to continue their free-spending ways.

Piketty: If we had told you Germans in the 1950s that you have not properly recognized your failures, you would still be repaying your debts. Luckily, we were more intelligent than that.

ZEIT: The German Minister of Finance, on the other hand, seems to believe that a Greek exit from the Eurozone could foster greater unity within Europe.

Piketty: If we start kicking states out, then the crisis of confidence in which the Eurozone finds itself today will only worsen. Financial markets will immediately turn on the next country. This would be the beginning of a long, drawn-out period of agony, in whose grasp we risk sacrificing Europe’s social model, its democracy, indeed its civilization on the altar of a conservative, irrational austerity policy.

ZEIT: Do you believe that we Germans aren’t generous enough?

Piketty: What are you talking about? Generous? Currently, Germany is profiting from Greece as it extends loans at comparatively high interest rates.

ZEIT: What solution would you suggest for this crisis?

Piketty: We need a conference on all of Europe’s debts, just like after World War II. A restructuring of all debt, not just in Greece but in several European countries, is inevitable. Just now, we’ve lost six months in the completely intransparent negotiations with Athens. The Eurogroup’s notion that Greece will reach a budgetary surplus of 4% of GDP and will pay back its debts within 30 to 40 years is still on the table. Allegedly, they will reach one percent surplus in 2015, then two percent in 2016, and three and a half percent in 2017. Completely ridiculous! This will never happen. Yet we keep postponing the necessary debate until the cows come home.

ZEIT: And what would happen after the major debt cuts?

Piketty: A new European institution would be required to determine the maximum allowable budget deficit in order to prevent the regrowth of debt. For example, this could be a commmittee in the European Parliament consisting of legislators from national parliaments. Budgetary decisions should not be off-limits to legislatures. To undermine European democracy, which is what Germany is doing today by insisting that states remain in penury under mechanisms that Berlin itself is muscling through, is a grievous mistake.

ZEIT: Your president, François Hollande, recently failed to criticize the fiscal pact.

Piketty: This does not improve anything. If, in past years, decisions in Europe had been reached in more democratic ways, the current austerity policy in Europe would be less strict.

ZEIT: But no political party in France is participating. National sovereignty is considered holy.

Piketty: Indeed, in Germany many more people are entertaining thoughts of reestablishing European democracy, in contrast to France with its countless believers in sovereignty. What’s more, our president still portrays himself as a prisoner of the failed 2005 referendum on a European Constitution, which failed in France. François Hollande does not understand that a lot has changed because of the financial crisis. We have to overcome our own national egoism.

ZEIT: What sort of national egoism do you see in Germany?

Piketty: I think that Germany was greatly shaped by its reunification. It was long feared that it would lead to economic stagnation. But then reunification turned out to be a great success thanks to a functioning social safety net and an intact industrial sector. Meanwhile, Germany has become so proud of its success that it dispenses lectures to all other countries. This is a little infantile. Of course, I understand how important the successful reunification was to the personal history of Chancellor Angela Merkel. But now Germany has to rethink things. Otherwise, its position on the debt crisis will be a grave danger to Europe.

ZEIT: What advice do you have for the Chancellor?

Piketty: Those who want to chase Greece out of the Eurozone today will end up on the trash heap of history. If the Chancellor wants to secure her place in the history books, just like [Helmut] Kohl did during reunification, then she must forge a solution to the Greek question, including a debt conference where we can start with a clean slate. But with renewed, much stronger fiscal discipline.

Greece Says ‘OXI’!

And how! With over a third of the vote counted, it looks like ‘Oxi’ (‘No’ to accepting the conditions of the creditors latest offer) will win in somewhat of a landslide. Current numbers are showing over 60% of Greeks voted ‘No’. No matter whether you think this is the right choice or not, you have to admire the bravery of the Greek people choosing what is almost certainly the high risk option. So what happens next?

Next Steps

This is the part no one is sure about. Within Greece, Syriza has been campaigning for the ‘No’ vote on the basis that it will not result in a Greek exit from the Eurozone, but that it will strengthen the hand of the Greek government in negotiations with the creditors. While it certainly provides them with a strong mandate to turn down the current offer, getting a better deal depends on the creditors.

Outside Greece, popular opinion is that the creditors have too much to lose from making concessions to Greece. The fear is that if concessions are made this would encourage other countries, primarily Spain, Portugal and Ireland, to elect anti-austerity parties, similar to Syriza, and also request concessions.

This doesn’t mean further negotiations are pointless, there could be a middle ground. The bargaining positions of the two parties before the referendum were already very close, with Syriza then making further concessions after calling the referendum. It would seem conceivable that the creditors could quietly agree to the final offer from Syriza (or something close to it), lose a little bit of face, but still basically get their way. Will Merkel, Junker, Schäuble et al be able to stomach making any concessions at this point? That remains to be seen. If no deal is reached though, a Greek exit could be on the cards in the very near future.

What About Europe?

Regardless of what happens economically, the impact of this referendum appears certain to have ongoing political fallout. The level of excitement and the joyous reconnection with the democratic process that occurred in Greece, in addition to the result, is sure to resonate with people across Europe. In countries that have also been struggling with high unemployment and poor economic performance, largely as a result of austerity policies, people are sure to be taking particular notice. Although the economies of these countries are now performing significantly better than the Greek economy, and have more manageable debt burdens, the improved conditions are yet to be felt by the majority of people. In Spain, a country that has itself undergone high levels of very unpopular austerity, the economy has been growing strongly over the past year, but unemployment still sits above 20%. 

For this reason, the governments in these countries (particularly Mariano Rajoy in Spain) were often the ones arguing the hardest for no concessions to be given to Greece. In what appears to be a purely political calculation, this stance was taken not with any thought for the suffering of people in Greece or their own countries, but to short circuit popular support for anti-austerity parties domestically. Those leaders will surely have some tough weeks (and probably years) ahead.

Greek Debt Crisis Enters Final Stage

The never-ending saga of the Greek debt crisis appears to be finally entering its final phase this week. After 5 months of negotiations, Greece’s creditors, led by the IMF, have made a final offer to the Greek government, and it is an offer of more of the same – i.e. austerity. For its part, the Greek government needs to make a decision before Tuesday next week when it is expected to run out of cash.

Background

For those that have seen the headlines, but have not had the time to dig into what is actually happening in Greece, first a little background.

As early as 2010, it became clear that the Greek government was in trouble financially. It was running large deficits and was quickly accumulating a debt that bond markets increasingly believed were unlikely to be repaid. As a result, the yields on Greek Government bonds (the rate of interest that the Greek government has to pay to borrow money) began to spike, further increasing the risk that Greece would be unable to repay its debt.

To avert a crisis, the IMF, the European Commission and the European Central Bank (“the Troika”) provided loans to the Greek government to help pay off their existing debt. By doing this, these organizations essentially took the majority of Greek government debt off the books of a range of mostly German and French banks, and put it on their own books.

However, in exchange for the provision of these loans, the Troika insisted that the Greek government implement a series of measures to improve the budgetary situation. These measures mainly consisted of cuts to the public service and pensions, but also tax increases, and other measures. Generally these measures are referred to as “austerity measures”. Despite the warnings of many prominent economists that cutting government spending in a recession would cause further damage to the Greek economy, the measures were pushed through – as they were in a range of other countries.

Sadly, the warnings provided proved accurate. By January 2015, the Greek economy was suffering from 25%+ unemployment and GDP had fallen 25%, far more than had been forecasted by the Troika at the outset of austerity. As the economy shrunk, so did government revenues and so further cuts were required to try meet the surplus target.

In January this year, the Greek people tired of years of crushing austerity, elected what has been called a ‘far-left’ government[1]. Syriza, a party that for most of the recent past had been attracting less than 10% of the vote, was all of a sudden front and center, and with a clear mandate to renegotiate and bring an end to austerity – but also to keep Greece in the Eurozone.

What is Happening Now?

After 5 months of increasingly bitter negotiations between the Syriza government and the Troika, and with the deadline approaching (Tuesday next week), there were two final offers made.

For their part, the Greek government proposed a range of austerity measures that more or less met the Troika’s demands in terms of net budgetary impact. The difference was that they proposed smaller cuts to pensions with the gap being made up with a range of tax increases. Hilariously, the proposed measures were rebuffed over concerns it would hurt the growth of the Greek economy.

The Troika then made their final offer to Greece. Even after all the evidence of how destructive and counterproductive austerity, the offer was basically the same as the original demand. Many took this as a sign that the Troika are aiming to force Syriza out of government, or Greece out of the Eurozone.

What happened next appears to have caught most observers by surprise. On Friday night, the Greek Prime Minister Alex Tsipras announced he would take the final offer to a referendum to be held on July 5th. Although this is sure to further aggravate the Troika (if that is even possible), this would actually appear to be a very clever move on the part of Syriza.

The biggest issue for Syriza since their election has been how they would manage to maintain their two key promises – to stay in the Eurozone and bring an end to austerity. After 5 months of failed negotiations, they have almost certainly proved beyond doubt that the Troika are not going to give any ground on austerity. By calling a referendum, they force the Greek people to choose what they want more – Eurozone membership or the freedom to run their own economy. Either the Greek people willingly accept further austerity in exchange for staying the Eurozone, or they accept exiting and take their chances on their own.

For their part, Syriza have made it clear they believe going on their own is the better option. As part of his announcement to the Greek people, Tsipras took the chance to lambast the institutions making up the Troika (translated from Greek):

“These proposals -– which directly violate the European social acquis and the fundamental rights to work, equality and dignity — prove that certain partners and members of the institutions are not interested in reaching a viable and beneficial agreement for all parties, but rather the humiliation of the Greek people.”

“Greek citizens, I call on you to decide –- with sovereignty and dignity as Greek history demands — whether we should accept the extortionate ultimatum that calls for strict and humiliating austerity without end, and without the prospect of ever standing on our own two feet, socially and financially.”

What Happens if the Greeks Choose to Exit?

No one knows for sure – but it won’t be pretty. Essentially, a chain of events will mean Greece will need to revert back to their own currency (essentially a new Drachma), which in itself leads to further impacts. The first and most serious of which is that the Greek government would need to impose capital controls – basically stopping people from moving their money out of Greece.

In anticipation of this measure, Greeks have been pulling Euros out of Greek banks at a record pace the last few weeks and either moving it offshore, or effectively stuffing their mattresses. After the announcement of the referendum, the pace further quickened with pictures flooding into Twitter of lines at ATMs on Saturday morning and reports that many ATMs had already run out of cash.

Looking further forward, after the change to a new currency, there is an expectation that it would depreciate very quickly against the Euro. As a result, vital imports like oil and medical supplies would suddenly become hugely more expensive causing problems in the health sector as well as for business in general. On the flip side, this depreciation should provide a boost to Greek exports (primarily tourism and agriculture). However, it is questionable how much benefit this can provide given the large internal devaluation that has already occurred.

The only possibly good news is that the Greek government is already running a primary budget surplus (surplus before the costs of borrowing are included). By defaulting on its existing debt, it would not need to issue new debt to meet payment obligations in the short run (although a depreciating currency could impact that). Longer term, by most measures, the Greek budget is actually in a strong structural surplus (i.e. if the economy wasn’t hugely depressed, the budget would be in a much better position than it currently is). If the Greeks could manage even a small amount of growth after leaving the Euro, they could find they are quickly running large surpluses.

For the Eurozone, a Greek exit is no longer the risk to financial stability that it once was, but it could be a risk to political stability. If Greece does exit the Eurozone, there will be several countries monitoring the situation very closely. Spain, Portugal and Ireland (not to mention Italy) have all undergone differing levels of austerity over the past 4-5 years, and all have seen very high levels of unemployment and significant falls in GDP as a result. If (and it is a big if) Greece exits the Eurozone AND manages to keep the country from falling apart completely, these other countries may be tempted to do something similar.

From there, the Eurozone project could completely unravel. And make no mistake; this would also be disastrous for the northern European economies, including Germany. Without the relatively unproductive southern European countries in the shared currency zone, the Euro would be expected to appreciate strongly, doing serious damage to Germany’s export driven economy and even more so to less efficient countries like France and Italy.

This scenario has led to some speculation that the Europeans will try to make any Greek exit as difficult as possible – to deter other countries from exiting. But this strategy has its own political ramifications. Essentially the European Union would start to look like a union held together by the threat of economic ruin rather than goodwill and mutual benefit. At that point, the question becomes what kind of union does Europe really have?

What Happens Next

Even though the Greeks have declared their intention to hold a referendum to decide on whether they will accept the bailout conditions, they don’t actually have enough cash to survive until the referendum date. As such, they are asking the creditors to provide an extension for a few days to get to the referendum.

Early indications are that they will be refused even this small extension (the creditors are really pissed off…). To do this would appear to be a dumb move politically and with very little gained financially, but it took a lot of dumb moves to get to this point, so nothing can be ruled out. If they do hold the line and deny Greece the extension, essentially everything gets moved forward. On Tuesday, assuming the European Central Bank stops providing liquidity (cash) to Greece’s banks, the Greek government would be forced to step in with a new currency and we will officially have the first example of a country leaving the Eurozone.

The Greeks have put the gun to their collective heads and shown they are ready to pull the trigger. The only question left is will Europe stop them, or hand them a bigger gun?

Further Reading

For further details of why a Greek exit from the Eurozone will not be a panacea to the countries woes, Greek finance minister Yanis Varoufakis actually provides one of the best explanations I have seen here. In fact, Varoufakis, who has a master’s degree in Mathematical Science and a PhD in Economics, has been very active on Twitter and his blog throughout the negotiation process, often taking to the public to deny claims of insults and walkouts. To my mind he has remained the perfect professional throughout this process.

For Australians, there is also a personal connection to Varoufakis, who was senior lecturer in the Economics department at Sydney University for 11 years from 1989 to 2000. He also regularly provided commentary on the crisis (before being elected) on Late Night Live – a radio program hosted by Phillip Adams (is there anyone with a better voice for radio?). I highly recommending listening to an interview conducted just after Varoufakis was elected to get a sense of the man – and that most Australian of traits, self-deprecation.

 

[1] If anyone can point me to a policy that could reasonably be called far-left, I’d love to see it.

US Labor Market Update – The Grind Continues

On June 5, the Federal Reserve released its latest Employment Situation Summary. The results were slightly better than expected – 280,000 jobs added in the month of May compared to an expected 226,000. There were also small upward revisions to the previously released numbers for March and April.

In terms of the long-term trends in the participation rate identified previously (see here), this update didn’t really change much. The participation rate has more or less stopped falling over the past 12 months, currently sitting at just under 63% (see Chart 1). The percentage of the civilian non-institutional population[1] that is employed continues to climb slowly back towards to 60%, but is still well below the peak of over 63% reached in 2007.

Chart 1 – Participation Rate vs. Employed as Percentage of Civilian Population

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The benchmark unemployment rate for May was 5.5%, a slight increase from 5.4% in April and was matched by a slight increase in the number of people unemployed, up to 8.7 million. Even though this goes against the general downwards trend in unemployment since 2010, Chart 2 shows how this slight uptick doesn’t really impact on the broader trend.

Chart 2 – Unemployment Rate

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Unemployed Breakdown

Looking at the breakdown of the unemployed (see Chart 3), the average period of unemployment continuing to normalize, with the number of people unemployed for 5-14 weeks now below the number unemployed for less than 5 weeks. The group of people unemployed for 15 weeks or more, although still large by historical standards, also continues to fall in both percentage and absolute terms. To provide some indication of just how far the size of this group has fallen, in mid-2010 there were over 9 million people who had been unemployed for 15 weeks or more. That number is now less than 4 million, a decrease of over 55%.

Chart 3 – Unemployed Persons by Length of Unemployment

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The improving situation for the unemployed is also evident in the average weeks people spend unemployed (see Chart 4).

Chart 4 – Average Period of Unemployment

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Industry Breakdown

In Part 4 of this series, we looked at what was happening to the number of people employed in various industries in the US economy. Chart 5 provides an update for some of the more interesting stories from that piece.

Chart 5 – Employment by Various Industries

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By and large we see long standing trends continuing. Manufacturing continues to undergo a renaissance, bucking a long downwards trend. Nearly 1 million jobs have been added since the low point in early 2010. Education and health services, and professional and business services continue to grow strongly, while the government sector is basically still going nowhere.

Previously, we also looked in some detail at the Information sector, in particular the technology related subsectors. Chart 6 shows the breakdown of the information sector and its various subsectors.

Chart 6 – Employment in the Information Sector

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What Chart 6 reveals is that the ‘Other information services’ subsector is clearly adding jobs at a fast pace, with data processing, hosting and related services also increasing employment. Chart 7 shows the employment growth rate in these two subsectors combined since 2006.

Chart 7 – Tech Subsectors Employment Growth

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Since 2011, these sectors have been adding jobs at an annualized rate of between 6% and 8%. In total this has led to a 35% increase in jobs in these sectors since the start of 2011 – which is fantastic growth. But these subsectors are starting from a very low base –a 35% increase only translates into an additional 139,000 jobs. By way of comparison, over that same period, professional and business services added over 2.6 million jobs, education and health services added 1.9 million and even manufacturing added 700,000 jobs.

One thing to keep in mind though is that the tech boom is causing jobs to be created in other fields that service the technology sector. Lawyers, accountants, talent recruiters and HR personnel, among others, all provide support to the technology sector. Most of these roles are likely to sit in the professional and business services, which we just saw has added a lot of jobs. A big part of that story could be the tech boom.

 

[1] Persons 16 years of age and older residing in the 50 states and the District of Columbia, who are not inmates of institutions (e.g., penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces.

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