Jobs, Growth, and the State of the U.S. Economy

A Conversation with Steven Davis and Kevin Murphy

January 6, 2015

5:45pm 8:30pm

International Monetary Fund in Washington, DC

The Becker Friedman Institute, the University of Chicago Booth School of Business, and the Chicago Economics Society hosted two distinguished UChicago researchers for a discussion about jobs, growth, and the state of the U.S. economy. 

Steven Davis and Kevin Murphy shared their outlook for 2015, with a special emphasis on labor markets, monetary policy and overall macroeconomic context. The pair shared complementary evidence-based explanations for the slow-growing US economy and struggling labor markets.

Davis began by pointing out that behind the sharp rise in unemployment during the fiscal crisis is a less obvious, long-term decline in labor market performance. Employment rates have been dropping for US men of most ages and education groups for quite some time, his data showed. The decline in employment for women is similar, but started more recently.

“This has been going on long before the great recession. It says we had serous problems in the labor market,” said Davis, William H. Abbott Professor of International Business and Economics at the University of Chicago Booth School of Business.

Another indicator is a decline in labor market fluidity, measured by the pace at which people move across jobs, or positions move across employers. The latter, known as reallocation, has been in decline since 1980s; job changing (or churn) has declined since 2000.

Both show a bit more than 25 percent drop in fluidity, and the pattern is seen in all 50 states, all industries, and all firms, for every age, education group, and gender.

Davis said some of this decline in fluidity is structural; shifts in firm size, firm age, and industry distribution account for about 15 percent of the drop in job reallocation. An aging workforce accounts for another 10 percent.

“That leaves most of the phenomenon unexplained,” Davis said, and offered some possible causes he has not yet quantified. These include erosion of the employment at will doctrine, more protected classes of employees, and a dramatic increase in occupational licensing. Each offers more protection for the employee, but less turnover, making it harder for others to get a foot in the door.

Is this a cause for concern? Lower job reallocation rates means fewer people losing jobs because their job disappeared, fewer unemployment claims, and less friction. But for Davis, the downsides outweigh these upsides.

“If you do lose your job, or have a job and aren’t satisfied, it’s harder to find a new path. Co-locating with a spouse, or moving along a career path are harder. If you can’t move along career path and gain asalary increase that goes with it, it’s harder to build human capital.”

“Evidence suggested declines in fluidity are reducing employment rates, particularly among younger and less educated. They are the ones for whom fluidity is likely to be most important.”

Wage Inequality: A Supply and Demand Story

Complementing Davis’s data, Murphy shared evidence on the salary picture for the younger and less educated, and offered a simple supply-and-demand explanation for wage inequality, unemployment, and declining growth.

He showed that the wage differential between college and high school graduates has skyrocketed since the late 1970s. College graduates today earn 60 percent more—compared to a 20 percent college wage premium in 1963.

Looking at the change of real wages over time by income percentile “tells us that there was an expansion of inequality throughout the distribution; each percentile did significantly better than the last,” said Murphy the George J. Stigler Distinguished Service Professor in Economics.  

“Over time there was a fundamental widening of the wage distribution and a rise in the educational differentials. It’s not the old story of the underclass, where everyone doing ok except the poorest.

“There are a couple of ways to think about that: wow, that’s a big rise in equality, or, that’s a big return on investment. It’s an opportunity,” Murphy noted.

People recognized that opportunity before economists did and sought higher education and the rewards it brought. For most of the 20th century, supply of skilled labor met demand. But for the last 30 years, demand for skilled workers exceeded supply, driving up the price or wages for graduates.

The demand for skilled labor arises from the same interrelated forces that drive economic growth: improvements in technology, investment in physical capital, and human capital that drives innovation.

Demand continues to outpace supply because too many students coming out of struggling secondary school systems and are poorly prepared for college. While college entrance rates are strong, completion rates have declined since the 1990s. And those who don’t go to college or drop out of high school have few job opportunities and minimal wage growth.

“People are trying to respond to labor market demand, but they are not very able to. They are poorly prepared for higher ed,” Murphy said. “Education is largely a public endeavor; we have to do what we can to respond to the challenge of preparing a work force trained for a growing economy.”

The talk was sponsored by the Chicago Economic Society, an alumni group in Washington, and moderated by Wall Street Journal reporter Pedro da Costa.

January 6, 2015 - 5:45pm 8:30pm