Another Case for Immigration Reform

James Pethokoukis as some thoughts on human population decline at AEIdeas.  The thrust of his piece is a study that indicates that the human population on Earth will begin to decline in absolute numbers around 2055, just a scant 40-ish years from now—two generations—our grandchildren’s generation or thereabouts.  He quotes Demographer Sanjeev Sanyal of Deutsche Bank:

We forecast that world population will peak around 2055 at 8.7 billion and will then decline to 8.0 billion by 2100.  In other words, our forecasts suggest that world population will peak at least half a century sooner than the UN expects and that by 2100, and that level will be 2.8 billion below the UN’s prediction.  This is obviously a radically different view of the world.

He then quoted Sanyal at greater length:

1. Aging societies will have to adjust soon to the fact that it is not possible for economies to sustain a retirement age in the early sixties.  With people routinely living well into their eighties, it will soon be common for people to extend their working life into their mid-seventies….  Societies that cannot make the socio-political adjustment to this new reality will struggle in the 21st century and will unduly burden the shrinking base of young people entering the workforce.

These young people, unable to get work due to that extended work life of the aging, also will be harmed in their ability to gain experience and skills that would be useful to their employers and to their countries.  A longer work life, if an economy can make the needed adjustments to continue to incorporate the young at today’s “early” age (i.e., late teens to early 20s), will be able to innovate faster from that deepening experience base.

Unfortunately, the current labor politics makes it difficult to impossible for nations like the US and France even to contemplate extending the age of “full retirement” even for the sake of their respective social security pension plans, much less concern themselves with that waste of a potential for growth in skills from a lengthened work life.

And the problem leaves wholly untouched the shrinking numbers of workers—or any age—to pay into those national social security pension plans.

2. An aging does not imply a boom in retirement homes and an ever expanding medical sector.  Yes, there will be more people in their sixties and seventies, but they will largely be fit and working.  While there will be some increase in the medical support needed to keep this cohort going, it should not be blindly extrapolated from the past.  Meanwhile, as anyone with children will know, falling birth rates will reduce demand for medical care from a high maintenance segment of the population.  This implies a change in the mix of medical care rather than a spiraling increase in per capita medical support.

Thus, the main impact of aging will be the extension of active, working adulthood rather than a situation where large portions of the population are living in a prolonged geriatric twilight.  In turn, this will impact consumption patterns, urban real estate and even the education system.  For instance, university systems will have to be reoriented to deal with middle-aged workers who need to update their skills over a 50-year career or perhaps want to completely change their profession.  In contrast, the intake of younger cohorts will ease off due to the shrinking pipeline coming out of secondary schools.  This implies a big change in the way education systems are set up.

3. The global demographic shift is not a developed country issue since the shift has been faster for many emerging markets.  Russia already has a shrinking workforce and many Latin American countries, contrary to popular belief, have TFRs [Total Fertility Rates, the rate at which child bearing age women actually have children] that are at or below the replacement rate.  …  The rapid shrinking of China’s workforce from 2020, which is now unavoidable, will have a major impact on the dynamics of the world economy (even allowing for some older workers working longer).  As argued in an earlier report in this series, China will transform itself from being the “factory to the world” to becoming the “investor to the world.”  This will create opportunities for younger emerging markets like Indonesia, Philippines and, most importantly, India to enter market segments being vacated by China.  In turn, they will be followed by even younger countries like Nigeria.  Nonetheless, it should be emphasized that demographics alone is not sufficient to generate growth and cannot substitute for sensible policy leadership.

4. Some developed countries may do surprisingly well.  The one developed country that stands out in our model is the United States.  Even though our population growth projections are more moderate than those of the UN, the US can be expected to continue to enjoy an expanding working-age population till the 2050s (i.e., longer than many emerging economies).  Germany’s low birth rate implies a declining population but we feel that it will be much more successful in absorbing immigrants than anticipated by the UN.  Thus, its demographic trajectory may not be quite as dire as generally believed.

Crass as it may sound, all the nations will, wit in the lifetimes of our grandchildren, be competing for immigrants for their economic welfare, for their very national security.  We’d better lay the groundwork now for encouraging immigration into the US, for making immigration a whole lot easier than it is now.  That doesn’t mean we need to compromise our principles—it’s those principles that have acted as such a powerful magnet these past 200 and more years.  It’s the mechanics that want, desperately, improvement, not the purpose.

Minimum Wage

…and costs to the consumer as well as the worker….

California is about to raise its minimum wage to $10/hr.  Washington (the state, not the capital, so far), has a current minimum wage of $9.19/hr, and that’s tied to inflation.

However, neither labor nor the wage paid for it occur in a vacuum.  Labor is required to produce the good or service being sold, and the wage paid the laborer—whether CxO or line worker—has a direct impact on the minimum price the producer must charge for that good or service in order to stay in business.

Labor costs amount to about 10% of the cost of a car sold to you at the dealership.  Not many cars are produced in California—or Washington—though, so minimum wage increases in these two states won’t impact the prices Californians or Washingtonians must pay for their cars.  Labor costs in the restaurant industry, though, run to 25%-30% of the cost of the meals sold, with the high end coming in sit-down restaurants, the low end in fast food restaurants.

Labor costs as a per cent of the cost of the the end product or service being sold vary widely across industries (vis., auto vs restaurant); I’m going to focus on the restaurant industry for illustration.

California’s rise in its minimum wage, a 25% increase over its existing $8/hr minimum, will have a commensurate impact on the cost of meals bought in these places.  In a sit-down restaurant, that increase in cost can amount to meal price increase of 7.5%.  Factoring in the impact on the business’ payroll taxes for Social Security and Medicare/Medicaid (and eliding the payroll tax that California charges), we get an additional labor cost increase through those taxes (7.65%) of 1.9%, for a total labor cost increase in the price of a meal of 9.4%.  That’s what consumers can look forward to in the inflation of their price for a relaxing dinner out.

Here’s where the tie to inflation comes in: Washington’s tying minimum wage increases to its inflation guarantees that that state’s inflation will be higher than it otherwise would: by that state’s labor cost impact on the prices of goods and services sold there.  This feeds back into its mandated inflation-driven rising minimum wage.  And the vicious circle is up and running.

Of course there are other ways California restaurants can deal with a 25% increase in labor costs.  In order to hold down the total cost of their labor force and thereby keep their meal price increase down to something more marketable, they can either eschew hiring the additional labor with whom they were considering expanding (and not expand), or they can lay off existing workers, or both.  Either way, the restaurants end up using fewer workers to do the same amount of, or more, work.

It’s important to note at this point that food service companies can function very well with low-skill—minimum wage—labor, while other industries (vis., auto assembly) need skilled labor, pay commensurately higher wages, and so are little impacted by minimum wage requirements.  It’s the low-skill, low-wage worker that’s hurt by minimum wage laws, yet it’s these guys who need to get that first job so they can start accruing the experience and training and skills necessary to get better jobs.  Or that need this second job so they can save a little, put a little by for their kids’ college, and so on.

Government-mandated minimum wage increases are job killers.  And they kill the jobs with the greatest marginal value for a nation’s economy and for the individual worker: the low-skilled worker on the cusp of having a job at all.

Immigration Limits

I’ve written elsewhere about the folly of limiting the numbers of immigrants we allow in.

Here are a couple of interesting facts offered by Steve Case in a recent Wall Street Journal op-ed:

Canada got its new startup visa program running this summer, explicitly seeking to lure talented entrepreneurs away from Silicon Valley. Our Canadian friends even erected a billboard near San Francisco…urging foreign-born innovators to consider leaving Silicon Valley and move north.

And

Australia—despite having an economy 14 times smaller than America’s—will, as of Sept 1, offer as many employment-based green cards as the US.

Hmm….

The Recovery that Isn’t

In a recent piece in The Wall Street Journal about post-Panic borrowing increases, James Sterngold and Matt Wirz had an interesting graphic showing the evolution of the US economy from just prior to that Panic to today.  Excerpted below is the part of that graphic indicating the jobs market evolution.

The graph is hard to read; here are some highlights:

  • More than 21 million Americans wanting a job at the 2010 peak, over 18 million still in that strait today.
  • Just under 16 million Americans out of work for at least 27 weeks (over 6 months), still nearly 12 million in that strait today.
  • Dropping out of the market due to discouragement in finding work—of any sort—peaking at over 1 million per year and still nearly that today.
  • Labor force participation rate near a 35 year low.

And there’s this, which takes a longer look at that last bullet:

Notice that bit on the right: after the Panic’s official end, participation rate continued to plummet.

As the WSJ points out,

If the participation rate merely returned to what it was at the end of the recession, nearly four million more Americans would be collecting a paycheck.

Had our recovery progressed as a normal one does, we’d be here:

A normal recovery coming out of a downturn as deep and steep as the Panic of 2009 typically sees growth rates of 5%-6% per year, or more.  This Obama recovery has been 6.7% over the entirety of his term in office—nearly five years.  Had we seen a normal recovery (and using a pessimistic 5%/year growth rate), we would have reached today’s unemployment rate after a bit over one year—late 2010—and we would have been back to full employment (in the range of 4.8%-5.5%) in just under 2 years—two years ago.

Had our recovery progressed as President Barack Obama promised it would when he was stumping for and signing the massive 2009 Stimulus Bill, we’d be here:

He promised in 2009 a 5.5% unemployment rate by a couple of years ago.  How many new jobs would have been created had we actually reached his promised number?  In December 2009 (some six months after the nominal end of the Panic of 2009), the civilian labor force was 153 million, of which 137.8 million Americans were employed, a 10% unemployment rate, according to BLS statistics, and using round numbers.

In August 2013, again using BLS numbers, the civilian labor force was larger, at 155.5 million (and it had a smaller participation rate than in 2009, but we’ll gloss over that for now).  There were some 144.2 million Americans actually employed.

However, a 5.5% unemployment rate corresponds, if my 1st grade arithmetic serves me well, to 94.5% of the civilian labor force actually employed: 146.5 million Americans.  Again consulting my 1st grade arithmetic book, there are some 2.3 million Americans that should be employed but aren’t—because Obama’s proudly proclaimed policies have come up short, and we aren’t anywhere near 5.5% unemployment.

Finally, there’s this:

Current population: 313.9 million
Current civilian labor force: 155.5 million
Current labor force participation rate: 63.2
Current unemployment rate: 7.3%
Employed Americans: 144.2 million
Unemployed Americans: 11.3 million of those looking for work

2007 population: 301.1 million
2007 civilian labor force (last full year before the Panic): 153.1 million
2007 labor force participation rate: 65.8%
2007 unemployment rate: 4.6%
2007 Employed Americans: 146 million
2007 unemployed Americans: 7.1 million

Over the last six years, our population grew by 4.3%; our labor force population grew less than that, at 1.6%; our employed population shrank by 1.2%; and our unemployed population grew, a lot.  We’re not even keeping up.

Yet despite these obvious failures of Progressive policies, Obama and his Senate counterparts threaten to shut down our government and blow up our national credit rating and with it our economy, if he’s not allowed to have more spending increases, yet higher taxes, and a yet higher debt ceiling so he can borrow to pay for his spending (because he knows higher taxes won’t cover it; he just wants the higher taxes because…well, just because).

Some Employment Numbers

Here are some graphs of our nearby employment history, from Express Employment Professionals, a 30-year-old provider of professionals for temporary employment.

This first graph shows the labor force participation rate since its peak in 2007.

This second graph shows the unemployment rate over the same time period.

There are two items of interest in these two graphs.  The first is that although participation rate was starting to drift down from its early 2007 peak, it didn’t get going in earnest until late summer 2008—with the unemployment rate peaking just a few months later.

The other takeaway is that the unemployment rate began drifting back down from that peak, and fairly steadily so, in concert with the labor participation rate drop-off.  While the unemployment rate has fallen by roughly 2.5 per centage points, the labor force participation rate (the denominator of the unemployment fraction) has also fallen by almost 2.5 per centage points.

Folks just aren’t able to get back to work.  More than 4 million Americans have been out of work for more than 6 months, and that number hasn’t shrunk much over these last 4, and more, years.

What kinds of jobs are being had?  Americans working part-time workers for economic reasons (they would work full-time if they could, but full-time work isn’t available) numbered some 8.2 million as recently as last July.  That’s “only” some 5.5% of those employed that month, but so far this year, there have been nearly 4.5 part-time jobs created for every full-time job.  Last year, that ratio was reversed: 0.2 part-time jobs were created for every full-time job.

We have to think about whether this is a structural change to our work environment and our labor force composition, or whether this is “just” an aspect of the continuing failed economic recovery.