Fall 2019

1. Fall 2019 Macroeconomics Note: Lectures cannot be reprinted or distributed without express written consent of Erik Hurst.

2. Question: How Healthy is the Current US Labor Market?

3. Unemployment Rate: 1970M1 – 2019M7 Note: Throughout class – shaded years on similar graphs are recessions

4. Unemployment Duration: 1970M1 – 2019M7

5. How is Unemployment Measured? • Standardized Definition of the Unemployment Rate: Unemployed = jobless but looking for a job Labor Force = #Employed + #Unemployed Unemployment Rate = (# Unemployed) / (Labor Force) This is the definition used in most countries, including the U.S. U.S. data: http://stats.bls.gov/eag.table.html U.S. measurement details: http://stats.bls.gov/cps_htgm.htm Issues: Discouraged Workers, Underemployed, Measurement Issues

6. Components of Unemployment • Flow of people into the unemployment pool o Flow into unemployment from employment (job loss) o Flow into unemployment from out of labor force (stop being discouraged) • Flow of people out of the unemployment pool o Flow out of unemployment into employment (job finding) o Flow out of unemployment out of labor force (discouraged workers)

7. A Few More Definitions • Labor Force Participation Rate o Labor Force/ Population (age 16+) • Employment Rate o Employed / Population (age 16+) o Employment rate defined out of total population as opposed to labor force. o Also referred to as employment to population rate (EPOP).

8. Labor Force Participation Rate

9. Employment to Population Rate: Men

10. Employment to Population Rate: Men 25-54

11. Employment to Population Rate: Men 25-54 89.0% in 2000Q1

12. Employment to Population Rate: Men 25-54 86.1% in 2019Q3 89.1% in 2000Q1

13. Employment to Population Rate: Men 25-54 86.1% in 2019Q3 89.1% in 2000Q1 About 1.5 million men aged 25-54 are not working in 2019 relative to 2000!

15. Employment to Population Ratio, Women 25-541978Q1 – 2019Q1

16. Employment to Population Ratio, Women 25-541978Q1 – 2019Q1 0.8 Decline Since 2000 (74.0% vs. 73.2%) About 400,000 prime age women are not working in 2019 relative to 2000

17. Change in Employment to Population Ratio 2000-2018, By Age and Group Note: For 21-30 year old, include those enrolled in schooling as being employed

18. Change in Employment to Population Ratio 2000-2018, By Age and Group Note: For 21-30 year old, include those enrolled in schooling as being employed

19. Change in Employment to Population Ratio 2000-2018, By Age and Group Note: For 21-30 year old, include those enrolled in schooling as being employed

20. Very little wage growth since 2000. • Congressional Research Service Report (2019)

21. Take Away 1 • Unemployment rate is giving a misleading statistic of the US labor market • Unemployment rate is low by historical standards (and back to early 2000 levels). • Employment rate for prime age workers is still WELL below 2000 levels. o Declines are particularly pronounced for less educated individuals. o Very sluggish wage growth particularly for less educated workers. • Some workers left the labor force and are no longer looking for jobs. • While the labor market is improving, its “health” is still quite a bit below early 2000s levels.

22. Types of Unemployment • Frictional Unemployment: Result of Matching Behavior between Firms and Workers. • Structural Unemployment: Result of Mismatch of Skills and Employer Needs • Cyclical Unemployment: Result of output being below full-employment. Individuals have the desire to work and the skills to work, yet cannot find a job. • Is Zero Unemployment a Reasonable Policy Goal? • No! Frictional and Structural Unemployment may be desirable (unavoidable).

23. Why is the Distinction Important? • How much of the current unemployment is structural vs. cyclical? • This is a current debate among policy makers (and a question I am trying to answer in my own research) • Why could there be structural unemployment? o Some industries have been in secular decline during the 2000s (manufacturing). The jobs being created now are not in those industries. o Former workers in manufacturing need to be reallocated to other sectors.

24. Structural Forces in the Labor Market: An Exploration

25. Bring Some Research into the Classroom • A large amount of my current work has been trying to understand the declining employment rates of prime age workers. • We will talk about much of my current work – as well as frontier research from other top academic economists – as the course progresses. • Today: Talk about the role of declining manufacturing sector in contributing to low employment rates of prime age workers. • Highlight that automation – not trade – has been a key driver of the declining manufacturing sector. • Show how the decline in the manufacturing sector is associated with many other social phenomenon.

26. Question:Did Automation in Manufacturing Reduce Aggregate Employment Rates?

27. U.S. Manufacturing Employment, BLS 2010 1980 2000 1990 ~ -6.0 million ~ -1.7 million ~ -0.3 million ~ + 1.0 million

28. U.S. Manufacturing Output, Index 1980 = 100 1980 1990 2000 2007 + 25% + 60% + 10% + 0%

29. U.S. Manufacturing Output, Index 1980 = 100 1980 1990 2000 2007 + 25% + 60% + 10% + 0% • From 2000 to 2007, manufacturing employment fell by 4 million workers and • manufacturing production increased by 10 percent!

30. What Explains Decline in Manufacturing Post 2000-ish? • Trade • o Popular narrative • o Some truth with respect to explaining initial decline in U.S. manufacturing. • o Cannot be the whole story: U.S. manufacturing output increased post 2000 despite declining employment. • Automation • o U.S. manufacturers are producing more output with less labor input. • o Foreign competition may have accelerated automation. • o Automation also changed the skill mix of manufacturing jobs.

31. “Labor Share” in Manufacturing (Relative to Year 1987) • Labor share = Value of wage bill divided by value of output • (define formally next week in class)

33. Question:Can Cross-Region Variation Be Used to Learn About Manufacturing’s Importance in Driving Employment Rate Decline?

34. Distribution of Manufacturing Activity in US in 2000 • Share of individuals 21-55 working in manufacturing (commuting zone) • Commuting zone: area where most who live in that area work in that area. • Darker red means more manufacturing in 2000

35. Change in Manufacturing Share vs Change in Employment Rate, Prime Age Men • Each circle is a commuting zone • Size of circle is population size of commuting zone. • Commuting zone with larger decline in manufacturing had larger decline in male employment to population ratio (2000-2015)

36. Change in Manufacturing Share vs Change in Employment Rate, Prime Age Women • Each circle is a commuting zone • Size of circle is population size of commuting zone. • Commuting zone with larger decline in manufacturing had larger decline in male employment to population ratio (2000-2015)

37. Question:Is Manufacturing Decline Related to Recent Political Shifts

38. Shift towards Republican Presidential Voting 2016 Vote Share Republican 2016 – Vote Share Republican 2012 (by county)

39. Question:Is Manufacturing Decline Related to Increased Opioid Use

40. Change in Manufacturing Share (State Level) vs Change in Per Capita Opioid Overdose Deaths (State Level)

41. Quick Summary • Technology has transformed the manufacturing sector • Manufacturing is important because: • o It was a very large share of employment for less educated workers • o It is very spatially concentrated • The technology revolution in manufacturing has reduced employment rates for primarily less educated workers (displacing workers). • The skill intensity of manufacturing is increasing. • Policies to promote the manufacturing sector WILL NOT substantively increase the employment rate for less educated workers. • We will talk more about these issues as course progresses……

42. Back to the Course…

43. Questions We Will Address In This Course • What causes recessions? What causes unemployment? • What caused the Great Recession? Is another recession on the horizon? • What is the link between the banking sector and “real” economic activity? • Should we be concerned with inflation? What about deflation? • What causes inflation/deflation? • How can policy makers (Fed/Congress/President) influence economic activity in the short run (fight inflation and recessions) and in the long run (promote economic growth)? • What are the pitfalls of government intervention? • What makes economies grow in the LONG RUN? • How worried should we be about long run government deficits? What are the costs/benefits of altering the nature of the Federal Reserve? • What is the influence of China and India on the U.S. economy? • What are costs/benefits of altered immigration policy or changes in minimum wage laws? • Brexit? Trade Wars? Bitcoin?

44. Caveat #1 • My course takes the perspective of analyzing any large macroeconomy (with respect to the models we build). • The examples will come primarily from the U.S. (because that is what I study) • However, the insights apply equally well to all large developed economies including: • The European Union • Japan • Canada, Australia, etc. • The models you will learn in this class also explain consumer, business, and government behavior for all economies (China, India, etc.).

45. Caveat #2 • The course takes time to build. • Our goal is to construct and analyze the economy as a whole. • To do that, we separately build the parts. • After we build the parts, we put them together to see how they interact. • At certain points in the class, you may feel that we are losing sight of the big picture and you may feel lost. That is common. • But, I promise, by week 7 or 8 everything will come together (it always does).

46. TOPIC 1 A Introduction to Macro Data

47. Goals of the Lecture What is Gross Domestic Product(GDP)? Why do we care about it? How do we measure standard of living over time? What are the definitions of the major economic expenditure components? What are the trends in these components over time? What is the difference between ‘Real’ and ‘Nominal’ variables? How is Inflation measured? Why do we care about Inflation? What have been the predominant relationships between Inflation and GDP over the last four decades? NOTE: This lecture will likely go into next week. This is by design. It does not mean we will be short-changed on other material later in the class.

48. Part A: Measuring GDP (Production)

49. Gross Domestic Product (GDP) • GDP is a measure of output. • Why Do We Care? • Because output is highly correlated (at certain times) with other things we care about (standard of living, wages, unemployment, inflation, budget and trade deficits, value of currency, etc…) • Formal Definition: • GDP is the MarketValue of all FinalGoods and Services Newly Produced on DomesticSoil During a Given TimePeriod (different than GNP) • Difficulty in measuring GDP: Readings 16-19

50. “Production” Equals “Expenditure” • GDP is a measure of Market Production! • GDP = Expenditure = Income = Y (the symbol we will use) (in macroeconomic equilibrium) • What is produced in the market has to show up as being purchased or held by some economic agent. • Who are the economic agents we will consider on the expenditure side? • Consumers (refer to expenditure of consumers as “consumption”) • Businesses (refer to expenditure of firms as “investment”) • Governments (refer to expenditures of governments as “government spending”) • Foreign Sector (refer to expenditures of foreign sector as “exports”)