Don’t worry mom I haven’t been fired (yet)!

We are just making a few changes to our blog which is the last element of Keystone Research Center web infrastructure to be modernized by our super cool Philadelphia based web developer Zivtech.  In addition to the Zivtech tune up, we will have more frequent posts from the full complement of wonks at the Keystone Research Center as well as the Pennsylvania Budget and Policy Center.  And thus we have decided on a new name Third and State: A progressive take on public policy in Pennsylvania. The Pennsylvania Policy Blog will remain here as an archive but starting February 1st all new content will be at the www.thirdandstate.org so update your favorites and tell your friends.

The party has moved to www.thirdandstate.org!

P.S. Be patient I’m told that internet can be slow to register new websites so there is a chance that www.thirdandstate.org may not be up by the time you read this.

You really only ever need one.  Steve Horwitz a professor of economics at St. Lawrence University managed to get an op-ed published in the Philadelphia Inquirer on Wednesday where he repeats the following statistic:

“According to U.S. Treasury data, a whopping 86 percent of households in the bottom fifth in 1979 had climbed out of poverty by 1988.”

In June the Treasury’s Office of Tax Analysis, under the direction of Glen Hubbard, an economist on leave from Columbia, released a report claiming that there is actually huge upward mobility in the U.S. In particular, it claimed that 86 percent of individuals who started in the bottom quintile in 1979 had moved out by 1988, and indeed that an individual who started in the bottom quintile was more likely to end up in the top quintile than to stay where he was.

But this report was based on what we may charitably call a strange procedure. Here’s what Hubbard’s report did: it tracked a group of individuals who paid income taxes in all ten years from 1979 to 1988, and compared their incomes not with each other but with those of the population at large. The restriction to individuals who paid taxes in all years immediately introduced a strong bias toward including only the economically successful; only about half of families paid income taxes in all ten years. This bias toward the successful was apparent in the fact that by the end of the sample period the group contained very few poor people and a lot of affluent ones: indeed, only 7 percent of the sample were in the bottom quintile by the sample’s end, while 28 percent were in the top quintile. More important, by comparing the sample with the population at large rather than with each other, the report essentially treated the normal tendency of earnings to rise with age as representing social mobility. The median age of those whom the study classified as being in the bottom quintile in 1979 was only twenty-two.

Kevin Murphy, a labor economist at the University of Chicago, neatly summed up what the Treasury study had found: “This isn’t your classic income mobility. This is the guy who works in the college bookstore and has a real job by his early thirties.”

In his op-ed Horwitz is trying to claim that work by the Economic Policy Institute is flawed because it fails to examine how the income of individual households changes over time (intragenertional mobility).  It is no surprise that a guy who quotes an old and bogus study also hasn’t actually ever read the State of Working America.  The 2008/2009 edition has a careful review of the literature on income mobility.  The following appears on Page 100 under the heading Switching places..or not: Intragenerational mobility:

“A central question of mobility research is: How far do families move up or down across the income scale over their life span.  Of those families who start out at the bottom, middle or top of the income scale, what sahre is still there years later?… Table 2.1 [see above] presents this type of analysis for two 10-year periods: 1984-94 and 1994-2004 (two-year averages are used to control for transitory income fluctuations).  The number at the top of the left column (“Lowest”) shows that 55.6% of persons who were in the bottom fifth in 1984 were still there 10 years later.  Only 3.3% (the top number in the right column labeled “Highest”) made the long upward trek from the bottom to the top fifth over these years.  Summing the first two cells in the first row, (55.6% plus 24.1%) about 80% of the sample started in the bottom fifth in 1984 and ended in the bottom 40% 10 years later.  The percent of “stayers” (those who did not move out of the fifth they started out in) are on the diagonal, shown in bold.

Most persons end up close to where they started. In the latter period, for example, of those that started in the fourth fifth in 1994, more than 80% ended up in that same quintile or one quintile higher or lower 10 years later.  In both periods, about half stay in the highest fifth.

In fact, and this an important finding from this work, the rate of mobility was remarkably constant over these two time periods.  Comparing the fifths between the two panels, a statistically significant difference occurs in only one case: the share that jumped from the bottom fifth to the top fifth was smaller in the second period compared to the first (i.e. 3.3% dow to 0.9%). Comparing overall mobility-the share of persons who made a quintile transition over the decade-is particularly revealing of how static the rate of mobility was between these two periods.  In the first period, this share is 60.0%; in the latter period, it is 59.6%.

These data solidly belie any claim that increased mobility has offset rising inequality.  Income classes are further apart now than in the past, and families are no more likely to traverse that greater distance.“

The rest of Horwitz’s op-ed attempts to explain that inequality is not a problem because being poor, working or middle class means having a living standard that only kings enjoyed a mere hundred years ago.  Once again the Economic Policy Institute:

“Absolute gains in real family income of the type discussed above…matter too, since higher real incomes enable famillies to raise their living standards.  But inequality researchers have found that relative positions mean a lot to people.  Our well-being, along with our sense of accomplishment, is not simply a matter of what we can afford to buy given our income levels.  It is also a matter of how we are faring relative to others from our same generation.  Research shows that if they pass us by–if we are downwardly mobile relative to others in our cohort–we expereince economic stress, even if our buying power is up.”

P.S. What is an Austrian economist? They are the intellectual core of the Tea Party movement.  Sorry that was mean (but truthful).   This link should give you an idea.

Capitolwire reports (paywall)

“House Majority Leader Mike Turzai, R-Allegheny, said there are ways to reform unemployment compensation… Turzai said: “Without a doubt, we have to look at enrollment. … We have to look at what the array of benefits are and how they compare to competing jurisdictions.” He also said he favored a “strong work-search requirement” for unemployment, echoing one of the major points made by Corbett and business organizations.”

Hundreds of thousands of working and middle class Pennsylvanian’s lost a job in the last three years for reasons beyond their control.  The chart below shows that Pennsylvania workers that had to use their unemployment insurance in 2009 worked most of the time from 2001 to 2007.  This clearly demonstrates that most working and middle class Pennsylvanian’s prefer work to being idle.

An excellent marker of extremism on an issue are reform proposals based on ideology rather than facts on the ground.  The work-search requirement referenced in the Capitolwire story was dumped years ago at the insistence of employers because it was too costly to report to the state when a job applicant had inquired about an opening.  It is very odd that Harrisburg’s business lobbyists are now seeking to re-impose this costly regulation on the Commonwealth’s employers.  Of course maybe they are responding to data that illustrates clearly that the time people in Pennsylvania spend unemployed  far exceeds that of other states?

Maybe not.

The next figure plots the median duration of unemployment measured in weeks in 2009 against the unemployment rate in 2009 for all 50 states.  What you see here is a very strong correlation between the duration of unemployment and the level of unemployment.  The more people that are out of work in a state the longer it takes to find a job and thus the longer the period that people remain unemployed. This is why I stress time and time again that the chief challenge in the economy right now is the scarcity of job openings relative to job seekers.  Concerns over whether unemployment insurance is a disincentive to find work are just not relevant when their are 4 people competing for each job opening. Instead of focusing on these facts, far too many conservative politicians are instead attempting to demonize unemployed working and middle class people who through no fault of their own have been laid off.  These people want work first because the vast majority of them value work and second because unemployment insurance replaces barely half of their lost income.  Anyone claiming that most workers can live comfortably after taking nearly a 50% pay cut probably doesn’t manage their own family finances or earned their money they old fashioned way by inheriting it.

And what about before the recession began, was their a problem of too many Pennsylvania workers remaining unemployed for too long? No!  As the next figure illustrates even in good times Pennsylvania does not have a problem with too many people remaining unemployed for long periods of time.

Pennsylvania’s unemployment insurance system preformed pretty well over the last two decades but the Great Recession was just too much for the system to handle and thus we have run short of revenue.  Sharon Dietrich of Community Legal Services has outlined (PDF) a reasonable set of reforms to help strengthen the program.  Below is her discussion of what to do about the revenue base:

In early 2009, the UC Trust Fund ran out of money, because of high benefit costs as a result of the recession and inadequate revenue. UC benefit costs increased from $2.8 billion in 2008 to a record high $4.8 billion in 2009, a 71% increase. Revenues were not up to this extraordinary demand, especially because the taxable wage base that is the bread and butter of UC financing has not increased from $8,000 since 1984.

Consequently, the state has borrowed more than $3 billion from the federal government to date to continue payment of benefits to the unemployed. Having to borrow money from the federal government to pay UC benefits has consequences. Most notably, beginning in 2011, Pennsylvania employers will have to pay interest on the federal loan, which is anticipated to total $446 million between 2010 and 2012. In addition, they will begin to lose increasing amounts of their FUTA tax credit every year that the federal loan remains unpaid. Finally, employers and employees are paying additional taxes, and unemployment benefits are being reduced, as a result of the triggering of solvency measures in place in the UC Law.

Pennsylvania will have to grapple with determining the solution to the broken financing system for the UC program. The possibilities appear to be tax increases and benefit cuts. Enormous benefit cuts would be needed even to stop federal borrowing, much less to repay the $3 billion debt. UC benefits already replace only 50% of wages at most, so a significant benefit cut would reduce them to a small percentage of lost income – not nearly enough for unemployed families to keep their heads above water.

Moreover, federal extended UC benefits are based on state payments. With the recent announcement of a deal to extend the federal program for an additional 13 months, if Pennsylvania were to cut state benefits, our long-term unemployed would experience a comparable loss of extended benefits paid entirely by the federal government during those 13 months.

Instead, the taxable wage base – the amount of wages on which UC taxes are paid – must be significantly increased. It has not increased from its current level of $8,000 in 26 years. If it had kept pace with statewide wage increases, it would currently be $20,000. Pennsylvania’s $8,000 taxable wage base compares poorly to the other states around the country, where the national average is $12,214. 39 states have a higher taxable wage base, including 14 states that have taxable wage bases over $20,000 (the highest taxable wage base being $36,800, in Washington State). Pennsylvania must come into the mainstream on the level of its taxable wage base to resolve its solvency problems.

Jay Ostrich’s  op-ed on the shooting in Tucson is a sad commentary on the state of personal responsibility in the commonwealth.  The grim facts are these: a mentally ill young man committed a heinous act of political violence that lead to the death and severe injury of innocent people.  An important lesson of this tragedy is that we all have a personal responsibility to not promote violence when engaging the public about our political views.   This is a lesson that Ostrich’s own Commonwealth Foundation recently learned when it canceled a fundraiser where donors were to fire rounds into a General Motors car decorated with the signs like “Obamacare”.  Such a fundraiser is not illegal nor should it be but it was in bad taste even before the shooting in Tucson.  Inexplicably Ostrich misses this lesson and instead attempts to make the tragedy in Tucson about the legitimacy of his political goals.  Even in the wake of the tragedy in Tucson no one questions Ostrich’s right to express his views.  But we all bear a personal responsibility to not use our freedom to incite and encourage violence.  In a healthy society we settle our disagreements at the ballot box and in the courts not with bullets.  This Monday we celebrate the memory of Dr. Martin Luther King Jr who in the face of violence and real oppression advocated for non-violent resistance as a means of advancing the cause of freedom.     We all bear a weighty responsibility to live up to King’s example.

–Mark Price

Jon Geeting of the Lehigh Valley Independent has an atrocious post up on public servants:

“Throughout American history, civil service has been viewed as a low-prestige occupation and Americans have typically viewed the idea of a well-paid professionalized public sector with populist suspicion. That is why we do not have one.”

Ok.  Since the end of the Civil War legislation aimed at improving the conditions of work such as limitations on hours of work were first applied to the federal workforce.  So there is in fact a long tradition in this country of people expecting the public sector (federal, state and local)  to set a good example in the manner in which it conducts its business both in its employment practices and its contracting.   From the eight hour working day to equal employment opportunity for women and minorities to the living wage the people generally expect their taxpayer dollars to be used in a humane manner.  How do you square these facts with Jon’s armchair interpretation of history?  You don’t.

And now onto that last sentence claiming that we don’t have a professionalized public sector. That is a whopper which is impossible to defend.  How do you define and systematically measure professionalism?  I suspect Jon’s primary evidence is anecdotal.  He had a bad experience once.  I have had literally hundreds of interactions with federal, state and local public workers and never once would I characterize any of those people as unprofessional.  I have attended presentations at academic conferences where the research presented was as good as anything produced in Academia.  I have collaborated with public sector workers on research projects and found them to be no different than those in the private sector I have worked with.   But my experiences are like Jon’s anecdotal.  Does Jon have an international comparison at hand or really any systematic evidence?  He doesn’t.  He is the blogging equivalent of the angry man writing to the local paper complaining about all those other peoples kids he has to pay for in the public school.

In my experience when people make sweeping claims about any issue they tend to suffer from what I would consider a lack of professionalism -  a marked tendency to be unaware of the limits of their own knowledge.  Unfortunately Jon is just getting started:

“In the private sector, the market determines pay; in the public sector, politics does.”

Ok.  The public sector draws on the same labor market that the private sector does when it competes for workers.  Pay too little and you have too few applicants and or too much costly turnover.  Pay more and you get more applicants and less turnover.   It is true to a point that politics shapes the overall size of the public sector as well as whether compensation keeps pace with inflation.  But Jon’s claim that the market is present in one instance and not in the other is just wrong.

Jon goes on to claim that the public sector lacks a human resource function like that in the private sector.  I imagine you can find some smaller local governments where this is true but in general it is not. To give just one example. The State of Pennsylvania introduced a new occupation title – Economist.  The Civil Service Commission interviewed the departments asking for the new occupation, determined the qualifications and starting salary, developed a four hour written test to screen the applicants, posted the job opening, administered and graded the test and sent the scores for the applicants to the agency where final job interviews were conducted.  This is a hiring process that is substantially more rigorous than the process that colleges use to hire new faculty and substantially more rigorous than typical of most private sector firms.  So here again Jon’s opinion far outpaces his actual grasp of the facts.  But it does in fact get worse :

“On the other hand, the difficulty of firing unproductive workers or rewarding exceptional talent in the public sector should be deeply disturbing to anyone who wants to see more and better public services. There’s nothing progressive about keeping in place workers who perform badly. “

Painful reading.  Broadly speaking we have two employment regimes in the United States.  Employment at will where with some important exceptions for protected classes of workers (the handicapped, women and minorities) employers are free to fire workers for pretty much any reason under the sun.  You ugly, you fired!  The other regime is where there is a union and thus where dismissal is regulated by a contract signed by the union and the employer.  In general such contracts require employers to have a mutually agreed upon reason for firing a worker.  So if a manager thinks you are ugly and wants to fire you they can only do so if they have already negotiated with the union that workers who are ugly and can be demonstrated to be ugly can be fired.  The U.S. Chamber of Congress would like you to believe that this means you can’t fire unproductive workers which is in fact completely false.  A contract only prevents the dismissal of workers for arbitrary and unsubstantiated reasons.

And in the public sector like in the private sectors workers are in fact terminated for cause.  Jon’s claim is extreme and all the more embarrassing that he feels qualified to lecture his audience on what is progressive.  To know what is and isn’t progressive you must first fully grasp the limits of your own knowledge and experience.

More than 4,300 Pennsylvanians delivered a message to Governor-elect Tom Corbett today outside his gubernatorial transition office in Harrisburg: Don’t let adultBasic die!

That’s how many people signed on to a petition delivered to the Corbett Transition Team Friday at 11:30 a.m. calling on him to preserve this critical lifeline for so many working Pennsylvanians. At the same, advocates for adultBasic delivered copies of the petition to the offices of Independence Blue Cross in Philadelphia and Highmark in Pittsburgh.

This week, Corbett’s transition team voiced support for a plan to resolve a funding shortfall by ending adultBasic on Feb. 28 and, with it, affordable health insurance for thousands of working Pennsylvanians.

For the past six years, the state’s Blue Cross plans have contributed funding toward adultBasic as part of their charitable mission, but that funding agreement has ended. Still, the nonprofit Blues are sitting on ample surpluses. From 2002 to 2009, the cumulative surpluses of the four Blues plans increased from $3.5 billion to $5.6 billion.

Noting this, PHAN regional director Antoinette Kraus said the Blues could fully fund adultBasic using less than 3% of their combined surpluses – fulfilling their charitable mission.

Under the Corbett transition plan, those who lose their insurance would be given the option of enrolling in “Special Care,” a more expensive health plan with more limited benefits operated by the state’s Blue Cross plans. Premiums, however, are as much as 400% higher than adultBasic premiums, while benefits are much more limited. For instance, Special Care only covers catastrophic hospital care, provides limited coverage for outpatient care and limits patients to four doctor visits per year.

At the Harrisburg petition rally, a group of about 25 advocates – bearing signs that read “If adultBasic dies, more Pennsylvanians will die,” and “We can’t afford another 46,000 uninsured!” – addressed the importance of this critical program.

Gayle Anzolut, a waitress and adultBasic participant for about eight years. was one of those who gathered outside the office. She told the Pittsburgh Tribune-Review that she really can’t afford Special Care but will have to find a way. “I don’t even earn minimum wage,” said Anzolut, who makes her money from tips. “You got to have (insurance).”

My twitter feed today is burning up with commentary on Christopher Beam’s article The Trouble With Liberty, a brutal profile of modern libertarian thought.

The article was fun to read but the following paragraph in particular caught my attention:

“The financial crisis was not an indictment of their worldview, libertarians argue, but a vindication of it. Letting the banks fail would have been painful. But the pain would have been less than it will be now that the government is propping up the housing, banking, and automobile industries. Plus, the economy would have recovered by now. “You’ve probably never heard of the depression of 1920,” says French. “You haven’t heard of it because it came and went in one year, because the government didn’t do anything to prop up failed businesses.””

If you are a loyal reader of this blog (yes there is one, thanks mom!) you have seen me post the same graph a few times in response to the nonsense which Beam calls a compelling story. It is only compelling if you are completely unconnected from actual economic history.

As you can see from the graph below recessions in the era of active monetary and fiscal policy (post WWII) are shorter and less frequent than when no effort was made to manage the business cycle i.e. the era prior to the Great Depression (hat tip to Calculated Risk for first posting a version of this graph).

Update: If you click on the figure above it will take you to a old post where I catch the local libertarian think tank the Commonwealth Foundation attempting to make the same plainly absurd point.  Zombie ideas it seems never die.

Update 2: Brad Delong makes a similar point although in reference to significantly less zombie like argument.

“It is difficult to get a man to understand something, when his salary depends upon his not understanding it!” -Upton Sinclair

The following quote comes from The Commonwealth Foundation’s Matthew Brouillette midway in an explanation why the rich already pay more than their “fair” share of taxes.

“If someone makes five times as much income as someone else, should they pay five times more in taxes? While it is doubtful that the higher income earners get five times the benefits from government, let’s just say that it’s “fair” for them to pay five times more in taxes. “

And here is economist Simon Johnson this morning over at economix.

“For 2008, nearly 5,000 bonus payments in excess of $1 million were made at “the largest U.S. banks that accepted Treasury aid,” The Wall Street Journal reported.”

I wonder is there any money to be made in having the back of Paris Hilton, Richard Mellon Scaife and Wall Street bankers?

I will have more to say about the rest of Brouillette’s argument later but in the mean time I will leave you with some context.

First here are top marginal tax rates and the payroll tax since 1960 courtesy of Marilyn Watkins at the Economic Opportunity Institute in Seattle.

And here is a familiar figure showing trends in the share of pretax income held by the top 1% since 1914. This figure is taken from a new report by James Parrott at the Fiscal Policy Institute in New York which you are all encouraged to read (pdf) .

So lets see if I have this straight, top marginal tax rates are near historic lows, the bulk of pretax income growth since the early 70s has accrued to the top 1% of earners and they do indeed seem to disproportionately benefit from government intervention in the economy.

Interesting.

Next year, Governor-elect Tom Corbett and Pennsylvania’s incoming legislature should do what seven other states will be doing on January 1 — increasing the minimum wage to keep pace with inflation.

The planned increases — automatic inflation-based adjustments ranging from 9 to 12 cents — will modestly boost the incomes of approximately 647,000 minimum-wage workers in Arizona, Colorado, Montana, Ohio, Oregon, Vermont and Washington. The indexed increases came about through ballot initiatives in six states and 2005 legislation in the state of Vermont.

Today, the Keystone Research Center (KRC) and the National Employment Law Center (NELP) hailed the upcoming minimum-wage increases as essential to helping working families keep up with rising costs of living. The increases will also help drive the economic recovery by boosting consumer spending at local businesses.

Regular increases in the minimum wage are critical during tough economic times. These small increases mean that thousands of minimum-wage earners like health aides, child care workers, restaurant workers and retail clerks will be better able to put food on the table, provide for their children, and keep a roof over their head.

Regular increases in the minimum wage also give low-wage earners parity with state lawmakers, whose incomes are already indexed to inflation in Pennsylvania.

As a result of the January 1 increases, 17 states and the District of Columbia will have minimum wages above the federal level. Pennsylvania increased its minimum wage above the federal level in 2007, but the federal minimum wage caught up when the U.S. Congress raised it to $7.25 per hour in 2009. The federal minimum wage currently pays a full-time minimum-wage earner just over $15,000 per year. Three-quarters of minimum-wage earners are adults 20 or over, and in many cases their earnings provide a vital contribution to family income.

Read the full press release here

Listen to labor economist Arindrajit Dube discuss his research on the impact of the minimum wage on employment.

More at The Real News

Mark Blyth, professor of International Political Economy at Brown University and faculty fellow at its Watson Institute for International Studies explains why public debt is the not same as private debt.

Governor-elect Tom Corbett has been known to say that Pennsylvania has a spending problem, not a revenue problem. That doesn’t quite gel with a recent assessment of state finances from the Nelson A. Rockefeller Institute of Government, at the University of Albany. Examining tax collection figures for all 50 states, researchers found that, much like the rest of the nation, Pennsylvania’s tax revenue plummeted as the recession dragged on.

Most states, like Pennsylvania, rely on sales taxes as a major revenue source. Immediately after the “official” end of the Great Recession in June 2009, sales tax collections continued to dip, but have since began to bounce back. Compared to the U.S. average, Pennsylvania experienced a longer, somewhat less severe downturn in sales tax revenue due to the recession, and in the current year, the state’s coffers have been buoyed by stronger than expected sales tax receipts. Surprisingly, much of this year’s sales tax surplus comes from vehicle sales.

Personal income taxes — the biggest revenue producer for Pennsylvania and many other states — hit their lowest point at the end of 2009-10. Since then, income tax collections have made noticeable improvements, although they are still less than they were before the recession. While Pennsylvania did not experience income tax declines as deep as the national average, it is unlikely to see gains as big as the rest of the nation can expect. This will make it more difficult for Pennsylvania to generate enough revenue to offset the loss of federal recovery funds in the next budget — funds that helped the states bridge the fiscal abyss from 2008-09 to the current year.

Clearly, Pennsylvania’s fiscal woes are not driven by overspending, but the Governor-elect is still promising a recipe of deep budget cuts in 2011-12. He and the incoming Legislature would be wise to take a more balanced approach to these challenges — one that includes new revenue as well as budget savings.

State investments in job training, education, quality health care, a well-maintained infrastructure and public safety is what Pennsylvania needs to be competitive in a global marketplace. A balanced approach — as opposed to a policy of deep cuts — will put the state in a better position when the economy recovers, preserve our long-term financial stability, and allow us to invest in our children, care for our parents and grandparents, and build strong local communities.

Omar Shute the CEO of the Cumberland Area Economic Development Corporation (CAEDC) has a blog post up where he tells the story of two hypothetical counties:

“County X has a labor force of 100,000 and a population of 250,000. That means 40 percent of the population is in the workforce. The remaining 60 percent of the population are retired, children, unwilling or unable to work, students, etc. County X has a solid economy with a wide range of industries. County X has low taxes and its government is in OK fiscal shape. However, of the 100,000 members of its workforce, 10,000 are currently unemployed putting County X at a very high 10 percent unemployment rate.

County Y has a labor force of 60,000 and a population of 200,000. That means 30 percent of the population is in the workforce. The remaining 70 percent of the population are retired, children, unwilling or unable to work, students, etc. County Y has a fledgling economy with a limited range of industries. County Y has high taxes and its government is not in the best fiscal shape. Of the 60,000 members of its workforce, 4,800 are currently unemployed yielding an unemployment rate of 8 percent…

…I don’t know about you, but County X looks better to me. The unemployment rate can be a deceiving statistical measurement and should always be put in context when judging an economy. Don’t let politicians or pundits scare you with unemployment numbers.”

Okaay.

To be frank nobody would want to live in either of Shute’s hypothetical counties since both are plagued by high unemployment and a painfully low labor force participation rate of 40% or less (on average in Pennsylvania the labor force participation rate is 64% and in Cumberland county it is 65.5%).

Taking up Shute’s main point it has long been understood by labor economists that the unemployment rate is a conservative measurement of the underutilization of labor because it only counts workers as unemployed if they have searched for work in the previous four weeks. Particularly during recessions some workers give up looking for work when they perceive there to be no available openings.  In this way the unemployment rate can understate the weakness of the local labor market by not counting as unemployed people who would like work but who are not actively looking for work because they believe none is available. Another limitation of the unemployment rate is that it does not capture people who have had their hours cut back, something again that is common during recessions.  To address these concerns the Bureau of Labor Statistics introduced alternative measures of the underutilization of labor.  The broadest such measure sometimes called the underemployment rate (see U-6 here) captures the unemployed, workers who have given up looking for work but are available for work and those working part-time because they can’t find full time work.  In 2009 the official unemployment rate in Pennsylvania was 8% while the underemployment rate was 14%.

With those limitations in mind it is incorrect to suggest as Shute does that the unemployment rate does not reflect the state of the economy.  This is best seen in the following figures which plot the ratio of employment to population against the unemployment rate for the 39 largest counties in Pennsylvania in 2007 (before the recession) and in 2009 (all this data comes from the American Community Survey).  You can think of the ratio of employment to population as a measurement of the extent to which the productive capacity of the economy is being utilized.  The more people that work as a share of the working age population the more wealth that is being generated in a region all else held constant.  While there is some variation across counties in general the less employment relative to the population the higher the unemployment rate.   As an economy dips into recession the employment to population ratio falls and the unemployment rate rises.  When the unemployment rate has increased in your region relative to what it was in years past that is an indicator that the local economy is in trouble.

Shute goes on to sing the virtues of high unemployment:

“Finally, a low unemployment rate can also mean that an area has a shortage of workers which is not good to existing industries there as it limits their ability to hire quality workers or forces them to pay more as demand exceeds supply. In addition, efforts to attract new businesses to the area would suffer because no business will move to an area that does not have workers.”

This is best put into proper context by examining unemployment in Cumberland county from 1970 to 2010 (see the figure below).  Following Shute’s reasoning because unemployment in Cumberland county is low relative to the state average employers would prefer to locate elsewhere?

Seriously?

It is true that employers when making a decision to locate in a region will consider whether the local labor force has workers that possess the skills they require.

But can you get that information from the overall unemployment rate? The answer is no.

In reality employers choose to locate in a region for strategic reasons that have nothing to do with the overall unemployment. For instance a biotech firm is more likely to locate itself in a region with lots of other biotech firms.  A trucking company might consider opening a facility in Cumberland county because of the existence of several major highways that provide easy access to millions of people on the eastern seaboard. Communities hoping to grow their economy have to focus on developing those qualities that create strategic advantage for businesses.  More often than not those strategic advantages come from investing in the skills of the local workforce and facilitating the growth of locally created businesses.

To read more about good economic development practice which does not include advocating for high unemployment and low wages see the Keystone Research Center report Good Jobs, Strong Industries, A Better Pennsylvania: Towards a 21st-Century State Economic Development Policy.

Also you can find a summary of some of Keystone’s work on economic development recently published in Site Selection magazine.

BECAUSE THEIR CUSTOMERS DON’T HAVE JOBS!!!!!!

Employment to population ratio back at its low of December 2009

Hat tip to Brad Delong.

Here is your weekend reading assignment. There will be a test!

• Brad Delong explains depression economics.

• While profits are surging, weak labor markets create leverage that employers are using to reduce wages.

• Bob Herbert notes America is in trouble.

• Mark Thoma reacts negatively to the Simpson-Bowles deficit commission.

• The Economic Policy Institute previews another part of the latest edition of the State of Working America. Click on the image below to read up on the minimum wage.

Matt Brouillette points us to an opinion piece by Barbara Hollingsworth:

Migration from high-tax states to states with lower taxes and less government spending will dramatically alter the composition of future Congresses…Eight states are projected to gain at least one congressional seat under reapportionment following the 2010 Census: Texas (four seats), Florida (two seats), Arizona, Georgia, Nevada, South Carolina, Utah and Washington (one seat each). Their average top state personal income tax rate: 2.8 percent.

By contrast, New York and Ohio are likely to lose two seats each, while Illinois, Iowa, Louisiana, Massachusetts, Michigan, Missouri, New Jersey, and Pennsylvania will be down one apiece. The average top state personal income tax rate in these loser states: 6.05 percent…Imagine that: Americans are fleeing high tax, union-dominated states and settling in states with lower taxes, right-to-work laws and lower government spending. Nothing sends a message like voting with your feet.

I expect we will be hearing and seeing this argument repeated a lot over the next year as the Chamber of Business and Industry, the Commonwealth Foundation and the National Federation of Independent Businesses attempt to push their respective agendas through the new Pennsylvania legislature. So lets take a look at Hollingsworth’s claims.

Table 1 below presents the mean temperature in January as well as the share that state and local taxes represent of personal income in each of the states Hollingsworth identifies. The first thing you will note is that actual disparities in taxes are much smaller when you look at the totality of taxes not just the income tax. And of course as we are all painfully aware this week there are huge differences in temperatures.

There is an econometric literature that attempts to sort out what has been driving shifts in populations. This paper by Edward Glaeser and Jesse Shapiro which focuses on cities finds that the factors that matter most in determining migration patterns are weather, low population density, and places with a high concentration of human capital.

Research demonstrates that weather is a disadvantage for Pennsylvania but it is not destiny. In terms of human development Pennsylvania ranks well.

Table 3 and 4 dig down into differences in outcomes in the educational system of these states and show Pennsylvania (Table 4) with substantial advantages over states that business lobbyists like Brouillette often point to as “model” states (Table 3). Reducing spending on education and other critical services in order to perform as badly as these states will not reverse population flows in fact it would likely accelerate them as Pennsylvania would give up the advantages imparted by its existing high level of human development. In a globalized economy Pennsylvania faces less competition for high skill high wage employment than it does for low wage low skill employment. The path to continued prosperity in the Commonwealth is to find ways to outcompete other high skill high wage economies not to join South Carolina or Texas in their competition with China for low wage low skill jobs.

And what do these “model” states have to offer in terms of death rates, foreclosures, child mortality, teenage pregnancy, health insurance coverage and crime (Table 5)? From the perspective of Pennsylvania these “model” states have nothing to teach us (Table 6).

Table 7 presents rates for suicide, rape, incarceration, voter turnout, unemployment and bankruptcies for Brouillette’s “model” states. Table 8 has the same data for Pennsylvania and like the previous two tables compared to Pennsylvania the utopia that Brouillette imagines Pennsylvania should become is pretty nasty and brutish.

Enjoy.

Workers who lose a job in mass layoffs never fully recover their lost pay levels.

To learn more about the cost of job loss see A Profile of Pennsylvania’s Unemployed People.