As Jobs Reports Show Growth, Economists Present Divergent Visions of the Recovery's Future; Is Washington Listening?

A job fair at Rutgers University.
A job fair at Rutgers University. Reuters

The U.S. labor market, poised to create more than 200,000 jobs a month into the foreseeable future, is getting stronger. That fact, most economists agree on.

Everything else, not so much.

Take, for example, two recent white papers on U.S. employment that are making the rounds of Wall Street research desks lately. Produced by the giant investment banks Barclays Capital and Goldman Sachs, these reports examined the same data on recent job growth, used similar assumptions, and even based their predictive models on identical academic underpinnings. But the conclusions could hardly have been any more different.

In Barclays' view, young people hit worst by the economic downturn -- those hundreds of thousands of twenty-somethings who have been living in their parents' basements, unemployed or working dead-end part-time jobs -- finally get to start a career. On the flip side, the laid-off 50-plussers may never work again and have to downsize their notion of what retirement holds. In this scenario, two years hence, the unemployment rate will fall as low as 7 percent.

By contrast, Goldman Sachs portrays the economic recovery as demographically more spread out: beneficial to older people but not as helpful to younger job seekers, the Boomerang Generation that some sociologists have said is essentially still in financial pre-adulthood. Under this story line, unemployment won't go below 8.2 percent by 2014.

Is Anybody Listening?

These disparate outcomes say a lot about economists; they disagree, often, about many things. But the implication of this goes far deeper than merely a curious intradisciplinary squabble. Rather than looking at the big questions and the insights that this research addresses, policymakers in today's hyperpartisan political environment tend to merely pick and choose the results of economic research that support their view, while ignoring the valuable analysis, data and thought processes behind these conclusions.

For example, Democrats are likely to argue that Barclays is right and that their policies will continue to put a dent in the unemployment rate. Meanwhile, Republicans would counter that Goldman's hypothesis is closer to the truth. But neither will give much, if any, weight to the gems of intelligence found inside these reports. These analyses approach the subject in a more fine-grain manner than the way anyone in the Congress thinks about jobs, said Gary Burtless, a labor economist at Brookings Institution. Unfortunately, politicians pay more attention to the unemployment rate solely than almost any other information.

In other words, experts say, economic policy is made in a vacuum that repels even the consideration of opposing ideas or how they are arrived at. The result: Many ideas that could dictate the conditional nuances of economic policy - the decision trees that could move policy in one direction or another depending on how different facets of the economy are faring - are neglected because politicians have preconceived notions that they are loath to change. There's just no political will to do anything of scale, said Heidi Shierholz, an economist with the liberal-leaning Economic Policy Institute.

Upending the Standard

Yet there is a vast amount of valuable economic ideas to be gleaned and pored over from Goldman's and Barclays' research, even if their ultimate forecasts are not in agreement. At the heart of their differences is the critical question of where the U.S. labor force participation rate is headed. Up until a few weeks ago, that wonky statistic -- the ratio of people actively in the labor force divided by the total population -- was consigned to Commerce Department press releases and grad school symposiums.

But recently this ratio has found an audience because it has fallen near 29-year lows -- to 63.9 from 67.3 in 2000 -- and could bedevil the downward momentum on the unemployment rate if it starts going back up again.

The conventional logic on the topic states that the drop in labor force participation is the result of unemployed people who have given up looking for jobs - the so-called discouraged workers. But as the economy improves, so the argument goes, those people will begin to look for work again and the unemployment rate will rise even as jobs are being created.

If the labor force participation rate had remained where it was when [President Obama] took office, said Rep. Marsha Blackburn, R -Tenn., after a January government report announcing a dramatic drop in the unemployment rate, the unemployment rate would have been 11 percent rather than 8.3 percent.

An Urban Legend

Not quite, says the economics team at Barclays. A graying population, not an exodus of workers from the payrolls, is what's really behind the drop in the labor force participation rate. Barclays' self-consciously contrarian white paper, Dispelling an Urban Legend, points to the fact that two-thirds of the people who have exited the labor force tell the government they would not take a job if one became available. Of the other third, more than half are over 54 years old, an age at which people are no longer considered to be in their prime working years.

Moreover, historically, people dropping out and then re-entering the labor force have played, at best, an inconsequential role in the size of the labor market, Barclays claims. The phenomenon captured by the conventional view that the unemployment rate drop will be stopped by re-entrants has never actually occurred, the researchers wrote in early March.

Dean Maki, the head of U.S. economic research at Barclays Capital, adds that since at least the 1960s, the labor force participation rate has been distorted upward by the huge Baby Boomer generation, which was well positioned to pour into the many jobs created by economic expansions.

Those bubble era participation rates are not something that would be sustainable now, said Maki.

Demographic Factors, Secular Trends

Goldman's researchers don't disagree with Barclays about the tenuous connection between bubble-based jobs and labor rates going forward, but they say that critical secular trends must be included in the simulation -- such things as the increase in the number of young adults going for more advanced degrees than their parents did and of older people who are delaying retirement.

Consequently, in its February report Goldman predicted that 0.4 percentage points would be added to the participation rate as the economy improves, a flood of nearly a million workers coming back into the labor force this year. That would take a healthy bite of the 2.4 million jobs the firm is assuming could be created in the U.S. during the same period.

Goldman admits that our modeling of the secular trends is very crude. Still the firm sees unemployment falling only slightly, to 8.2 percent later this year, and then remaining at that level well into the fourth quarter of 2013. Those predictions align closely to the consensus view of most bank economists, including U.S. central bankers, and were somewhat validated by the latest release of employment data by the Commerce Department, which came out Friday.

Though they reached such divergent conclusions, the Barclays and Goldman researchers alike refer to the same paper as the intellectual grounding for their models: a 2006 study by Federal Reserve Board senior economist Stephanie R. Aaronson and other central bank economists.

Marriage, Career and Retirement

Perhaps what's most striking about the way the two research teams arrive at their conclusions is their general rejection of the idea that labor force participation will increase substantially as the economy rebounds, driving unemployment rates ever higher. That aspect of these reports has gone virtually unnoticed as, on the one hand, Republican politicians have relied solely on the conventional wisdom in claiming that the falling unemployment numbers are precursors to much worse figures ahead.

Says Brookings' Burtless: After the January government jobs report, Republicans made bizarre arguments that looked at good news and said it was bad news. Yet, for their side, the Democrats have made little attempt to debunk this dubious argument with real facts.

Meanwhile, that kernel aside, the world that the research papers envision could at least provide an underpinning for beginning to think about industrial jobs and safety net policies.

The Barclays model, for example, notes those retiring, either voluntarily or forced, might not have achieved the level of wealth they had anticipated they would have, especially with the losses they may have taken in the stock market and in the value of their homes a few years ago. Clearly, some households are likely not living as well in retirement as they would have if asset prices had continued to make new highs every year or the labor market had not weakened, the paper noted.

Given this, policymakers may have to consider developing legislation and rules to shore up foreclosure and mortgage safeguards for years to come and encouraging financial institutions to focus on wealth protection products.

Goldman's research, for its part, suggests the opposite dynamic in the generational divide will occur, with younger people not enjoying the bulk benefits of the recovery. Instead, more immigrants and some older people will want to come back into the workforce as the economy improves while falling marriage rates among the young...may be changing social norms about when adulthood begins, and delaying the formation of new households, Goldman researchers said in yet another recent paper that used their baseline model.

Under that scenario, policymakers would want to consider targeted industrial training programs and subsidies to encourage businesses to hire people who found themselves out of the workforce recently and who might need to learn how to do new tasks.

If the labor recovery leaves out a particular cohort, whether older or younger, this might suggest a role for more focused training programs, said Phillip Swagel, a professor at the University of Maryland School of Public Policy.

Clearly, there is analytical space between the Goldman and Barclays research, in which groups with differing political philosophies can argue over the economic policies that should be championed based on the intellectual underpinnings of each jobs scenario. That would be a welcome outcome.

Less desirable is what actually occurs: Analysis and insight are ignored and just the friendly data are embraced. Which brings up a troubling question: Should Goldman and Barclays even waste their breath next time?

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