United States: Recent Economic Developments

This paper reviews economic developments in the United States during 1992–96. The paper briefly describes improvements in the national income and product accounts (NIPA) and some of their implications for the analysis of long-term trends in U.S. investment and saving. The paper highlights that the effect of the 1990–92 recession on employment was considerably less severe than the effect of the 1981–82 recession. During the 1990–92 recession, employment fell by 1½ percent, compared with a drop of 3 percent during the 1981–82 recession.

Abstract

This paper reviews economic developments in the United States during 1992–96. The paper briefly describes improvements in the national income and product accounts (NIPA) and some of their implications for the analysis of long-term trends in U.S. investment and saving. The paper highlights that the effect of the 1990–92 recession on employment was considerably less severe than the effect of the 1981–82 recession. During the 1990–92 recession, employment fell by 1½ percent, compared with a drop of 3 percent during the 1981–82 recession.

II. Employment Trends

1. Introduction

This paper compares labor market developments over the past two cycles, focuses on the extent to which job security has changed, and examines whether employment growth has taken place in high-wage or low-wage industries. Although the current cycle has been less severe than the previous cycle, the duration of unemployment remained fairly high and displacement rates for older workers rose considerably. Employment gains have been concentrated in low-wage industries over both cycles, although since 1994 employment gains in high- and low-wage industries have been comparable.

2. Labor market developments

The effect on employment of the 1990-92 recession was considerably less severe than the effect of the 1981-82 recession, but the decline in employment was considerably more protracted. During the 1990-92 recession, employment fell by 1 ½ percent, compared to a drop of 3 percent during the 1981-82 recession (Chart 1). However, it took employment much longer to reach its previous peak during the most recent expansion partly because, in the early stages of the expansion, firms increased labor inputs by lengthening the workweek rather than by hiring more workers (Chart 2). Since 1993, employment growth has been robust, at over 2 percent per annum. In the first quarter of 1996, employment growth picked up further to 4.4 percent (annual rate).

CHART 1
CHART 1

UNITED STATES: LABOR FORCE, EMPLOYMENT, AND UNEMPLOYMENT

(In percent)

Citation: IMF Staff Country Reports 1996, 093; 10.5089/9781451839487.002.A002

Source: Bureau of Labor Statistics, U.S. Deportment of Labor.1/ Civilian noninstitutional population 16 years and over. The data after 1993 are not directly comparable to the earlier data because of a change in survey methodology.
CHART 2
CHART 2

UNITED STATES: EMPLOYMENT 1/

Citation: IMF Staff Country Reports 1996, 093; 10.5089/9781451839487.002.A002

Source: Bureau of Labor Statistics, U.S. Department of Labor.1/ The troughs correspond to the definition of the National Bureau of Economic Research. In the most recent cycle, employment continued to fall for 4 quarters following the official definition of the trough.

Movements in the unemployment rate generally mirrored the pattern of employment over the two recessionary periods. In particular, during the 1981-82 recession, the unemployment rate rose from 7.3 percent in the second quarter of 1981 to 10.7 percent in the fourth quarter of 1982. It fell rapidly to 7 percent in the mid-1980s, and dropped further to 5.5 percent in 1988 and 1989 at the end of the expansion (see Chart 1). In contrast, during the most recent recession, the unemployment rate rose from 5.2 percent in the first quarter of 1990 to 7.5 percent in the second quarter of 1992. However, it remained near 7 percent through the second quarter of 1993. Since mid-1994, the unemployment rate has fluctuated within a range of about 5.5 to 6 percent.

The share of unemployment attributable to permanent dismissals appears to have increased during the most recent cycle. Farber (1995), using various mobility supplements to the Current Population Survey, notes that workers with little education are less likely to be in jobs of long duration today than they were 20 years ago. However, he finds that no aggregate systematic change has occurred in job duration over the last two decades. In a recent analysis of the Displaced Worker Survey by the Council of Economic Advisers, it is found that displacement rates for older workers were considerably lower in 1981-82 than in 1991-92, even though the recession over the former period was considerably deeper. Thus, older workers appear to have experienced more permanent job losses over the most recent business cycle than during the previous one.

Evidence of lower job security also is apparent from data on the mean duration of unemployment. Chart 1 indicates that in the most recent recession, the median duration of unemployment rose to a level close to its peak during the previous recession. However, the median duration of employment remained at a high level for three years into the economic expansion and only began to decline in early 1995, in contrast to the previous cycle, when it fell rapidly during the expansion.

One factor that has contributed to greater labor market insecurity is the severe downsizing in the defense industry since the mid-1980s. After reaching a peak in 1987, real defense spending fell at an annual rate of 3 percent during the following six years, resulting, in the loss of 1.6 million defense-related jobs (1.3 percent of the labor force). 1/ Downsizing in the defense industry also caused regional unemployment rates to diverge in the late 1980s and early 1990s. In particular, between 1988 and 1992, unemployment rates in Connecticut, Virginia, Massachusetts, and California (four states where defense-related employment was above 5 percent of total employment) rose sharply relative to the national average (Chart 3). 2/ For example, in 1988 the unemployment rate in Massachusetts was 3 percentage points below the national average, whereas in 1991 it was nearly 3 percentage points above the national average. In California, the unemployment rate continued to rise into 1993, well after the peak in the national rate in mid-1992.

CHART 3
CHART 3

UNITED STATES: REGIONAL UNEMPLOYMENT RATE LESS THE TOTAL UNEMPLOYMENT RATE

(In percent)

Citation: IMF Staff Country Reports 1996, 093; 10.5089/9781451839487.002.A002

Source: Bureau of Labor Statistics, U.S. Deportment of Labor.

In 1995, unemployment rates in Connecticut, Massachusetts, and California remained higher relative to the levels experienced during the early 1980s. This suggests lingering difficulties in adjusting to the downsizing in the defense industry. Moreover, the absorption of displaced defense workers appears to have occurred at the cost of lower pay. A survey of Job Training Partnership Act offices found that sixty percent of defense workers participating in a government re-employment program took a pay cut in their new jobs. 3/

3. Wage differentials and the sources of job gains

A number of commentators have noted that countries with higher wage inequality exhibit higher job creation rates. In particular, during the period 1979-93 employment grew by over 20 percent in the United States (a country characterized by a high standard deviation of wages); whereas, employment growth in Europe (characterized by a low standard deviation) was barely positive. 4/ This has led some to argue that wage flexibility in the United States has helped to generate the relatively rapid growth in employment. For example, Krugman (1994) suggests that technological change has reduced the relative demand for unskilled workers, but that this effect has been moderated in the United States by the greater flexibility of wages. 1/

In order to assess whether wage differentials have remained stable over time in the United States, and to examine the extent to which employment gains have occurred in low-wage versus high-wage industries over the past 20 years, data for 1980, 1984, and 1994 are examined. Table 1 shows the level of wages within industry groupings compared to the economy-wide average. The data indicate that above-average wages have been paid in the durable goods, transportation, wholesale trade, and finance sectors. 2/ In contrast, wages in the retail and other service sectors tend to be below average, although wages in the other services sector have improved over time relative to the average.

Table 1.

UNITED STATES: Employment and Wage Developments Across One-Digit Industries

article image

The compensation premium is defined as the percentage difference in the wage in the particular industry over the employment weighted average wage across all industries.

The employment changes are based on 1972 SIC codes, and therefore, some categories that were set up following the 1987 SIC code change are excluded from this calculation. These categories include deposit and nondeposit institutions, motion pictures, assusement and recreation services, and engineering and management services.

There are a number of exceptions to this general observation. For example, wages in the tobacco, paper, chemicals, and petroleum industries are considerably higher than the average wage in nondurable industries, and wages for legal and other business services are considerably higher than the average wage in the service sector (Table 2). 3/ In contrast, wages in the local passenger transit sector are considerably lower than both the economy-wide and service-sector average. Inter-industry wage differentials appear to have remained stable over time, which is consistent with the findings of a number of authors who have found stable inter-industry wage differentials over time and across countries (see, for example Krueger and Summers (1986) and Gera and Grenier (1992)).

Table 2.

UNITED STATES: Employment and Wage Developments Across Two-Digit Industries

article image

The compensation premium is defined as the percentage difference in the wage in the particular industry over the employment weighted average wage across all industries.

The data is only available from 1987 onwards following the revision to the SIC code.

Other services include museums, botanical, and zoological gardens, and engineering and management services.

Social services include child day-care and residential-care services.

Table 1 also shows the change in employment for the same industry groupings over the 1980-95 period. 4/ The table shows that employment growth in high-wage industries has been relatively modest over the period, but that employment gains in low-wage industries were considerable. Over the 1980-95 period, employment in durable goods industries (which generally offer relatively high wages) fell by approximately 1.6 million whereas employment in financial services industries (which also offer relatively high wages) rose by 1.8 million. The major employment gains over this period were in the relatively low-wage retail trade and other services sector which created 5.8 million and 14.9 million jobs, respectively. 1/ In aggregate, employment rose by 5 million in industries offering above median wages, but it rose by 15 million in industries offering below median wages.

To consider whether the pattern of employment gains has changed over time, the gains were calculated over two sub-periods 1980-90 and 1990-95, roughly corresponding to the two most recent business cycles. Employment in higher wage industries grew by 4 million (1.2 percent per year) over the 1980-90 period, and they rose by 1 ½ million (1 percent per year) over the period 1990-95. 2/ Employment in lower wage industries expanded more rapidly in both periods, increasing by 10 million over the 1980-90 period (2.2 percent per year) and by slightly less than 5 million (1.6 percent per year) over the 1990-95 period. However, in 1995, employment grew at roughly comparable rates in high-and low-wage industries; it rose by 2.3 percent in industries offering above median wages and by 2.7 percent in industries offering below-median wages. 3/ Moreover, most of the recent job gains have occurred in full-time employment. Chart 4 indicates that the ratio of part-time to full-time employment has fallen gradually since early 1994.

CHART 4
CHART 4

UNITED STATES: FULL-TIME AND PART-TIME EMPLOYMENT GROWTH

(In Percent)

Citation: IMF Staff Country Reports 1996, 093; 10.5089/9781451839487.002.A002

Source: Bureau of Labor Statistics, U.S. Department of Labor.

4. Productivity and costs

The recent revision to the national income and product accounts (NIPA) has had a significant effect on estimates of labor productivity and unit labor costs. Chart 5 indicates that the revision raised the estimate of labor productivity growth over the period before 1987 but lowered it over the post-1987 period. In the pre-revision data, labor productivity growth averaged 0.8 percent per annum during 1974-86; in the new data, productivity growth was 1.2 percent per year. Correspondingly, labor productivity growth was lowered from 1.2 percent per annum to 0.8 percent over the 1987-95 period (except for the period 1988-89 when labor productivity growth was more rapid in the revised data).

CHART 5
CHART 5

UNITED STATES: PRODUCTIVITY AND UNIT LABOR COSTS IN THE NONFARM BUSINESS SECTOR

(Percent change over four quarters)

Citation: IMF Staff Country Reports 1996, 093; 10.5089/9781451839487.002.A002

Sources: Bureau of Labor Statistics, U.S. Department of Labor; and staff estimates.

The effect of the NIPA revisions on unit labor costs was similar, because compensation per hour was not affected by the revision. The growth in unit labor costs was revised downward prior to 1987, from 6.5 percent per annum to 6.3 percent, and it was revised upward subsequently, from 2.7 percent per annum to 3 percent (with the exception of the 1988-89 period as noted above). During 1995, the growth in unit labor costs measured by the new methodology rose above 3 percent, although it moderated slightly to 2 ¼ percent in the first quarter of 1996 (annual rate). In contrast, unit labor costs in manufacturing have declined since early 1994, helping to moderate aggregate wage pressures.

References

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  • Buckberg, E. and A. Thomas,Wage Dispersion and Job Growth in the United States,Finance and Development (Washington: International Monetary Fund, June 1995).

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  • Farber, H.,Are Lifetime Jobs Disappearing? Job Duration in the United States: 1973-1993,NBER Working Paper No. 5014 (February 1995).

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  • Gera, S. and G. Grenier,Interindustry Wage Differentials and Efficiency Wages: Some Canadian Evidence,Canadian Journal of Economics (February 1994).

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  • Krueger, A. and L. Summers,Reflections on the Inter-Industry Wage Structure,NBER Working Paper No. 1252 (July 1986).

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  • Saunders, N.,U.S. Defense Related Employment Retrenches,Issues in Labor Statistics, U.S. Bureau of Labor Statistics (May 1995).

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3/

See U.S. Congressional Budget Office (1993).

4/

See SM/94/106 (1994) and Buckberg and Thomas (1995).

1/

This hypothesis has been recently criticized by Nickell and Ball (1996) who find that the difference in unemployment between high educated and low educated workers is similar in the United States and in Europe over the 1971-93 period.

2/

Wages are examined for all one- and two-digit industries, except for agriculture, mining, and government. The data for 1980 and 1994 were obtained from payroll records analyzed by the Bureau of Economic Analysis, whereas the data for 1984 were obtained from Krueger and Summers’ analysis of the Current Population Survey (see Krueger and Summers (1986)).

3/

The rise in the wage for legal and other services has contributed to the improvement in the relative wage in the service sector noted above.

4/

The employment data come from the establishment survey. Establishment survey data, rather than household survey data, are used because a modification was introduced into the household survey data in early 1994 that makes comparisons to earlier data extremely difficult. The establishment survey, however, does not distinguish between full-time and part-time work.

1/

Although the wages in the services sector have risen relative to the economy-wide average on account of the large rise in the wage differential in legal and other services, most of the employment gains in the services sector have occurred in relatively low-wage service industries (see Table 2).

2/

The employment totals for 1980-90 and 1990-95 are not strictly comparable because the SIC code change in 1987 introduced new two-digit industry categories for deposit and nondeposit institutions, motion pictures, amusement and recreation services, and engineering and management services. These categories are included in the calculation of employment gains over the 1990-95 period but are not included in the calculation for the 1980-90 period.

3/

This is consistent with a recent report by the Council of Economic Advisers that the majority of employment gains over the most recent period were in high wage industries. In particular, the report notes that 68 percent of the net growth in full-time employment between February 1994 and February 1996 was found in job categories paying above-median wages.

United States: Recent Economic Developments
Author: International Monetary Fund
  • View in gallery

    UNITED STATES: LABOR FORCE, EMPLOYMENT, AND UNEMPLOYMENT

    (In percent)

  • View in gallery

    UNITED STATES: EMPLOYMENT 1/

  • View in gallery

    UNITED STATES: REGIONAL UNEMPLOYMENT RATE LESS THE TOTAL UNEMPLOYMENT RATE

    (In percent)

  • View in gallery

    UNITED STATES: FULL-TIME AND PART-TIME EMPLOYMENT GROWTH

    (In Percent)

  • View in gallery

    UNITED STATES: PRODUCTIVITY AND UNIT LABOR COSTS IN THE NONFARM BUSINESS SECTOR

    (Percent change over four quarters)