Tag Archives: employment

How small business are dealing with Obamacare

One of the biggest detractors opponents of Obamacare would bring up when arguing against it was how small businesses would react to the mandate.  The argument that was brought up more often than not was that it would cause small businesses more costs which would hurt employment.  To give small businesses time to figure out their best policy, Obama gave them a break from the mandate until 2015 and for some 2016.  While over 8 million people have registered for Obamacare, small businesses are still trying to figure out the most cost efficient way for them to abide by the new health care law.  Business have two options when it comes to Obamacare.  They can either provide health insurance for all of their workers, or face a penalty of $2,000 per worker.  These added costs have them trying to figure out how to accept these costs without it effecting their bottom line.

Even though many of these businesses have until 2015 to figure it out, many don’t want to wait until then.  Business owners don’t want their customers see a drastic raise in prices to cover these costs which is what would happen if they waited until 2015. Unfortunately, this has had an effect on small business hiring practices.  45% of small businesses polled have said that they have reduced their hiring practices while 23% have said they have had to let workers go to account for these added costs.  The coverage isn’t the only cost that these business have to account for.  Many also face increased taxes and having to pay higher premiums.  The Wall Street Journal released a case study of two different small business and how it would effect their employees.  One of the most interesting interviews that they did of an employee is how he reacts to the new individual mandate.  He says that he is generally a healthy person and doesn’t visit the doctor because he never needed to.  A federal report released said that 65% companies with 50 employees or fewer, who are exempt from the mandatory health care law but offer health care anyway, will see their premiums increase.

While on an individual level, forcing everyone to have health care, even the healthy employees, makes sense because it keeps the premium down because insurance companies can distribute costs among more people.  Due to the 8 million people subscribed to the new health care, it seems almost impossible that the health care law will be repealed.  Unfortunately, the goal of federal health care was to reduce costs for the average American.  While it has reduced premiums in general, insurance companies are still predicted to raise premiums next year across the board due to the higher consumer spending on Health Care.  Instead of lessening the cost of health care, as Obama was hoping, there is now higher demand which will allow doctors to charge higher prices since the majority of these costs will be faced by the insurers.  This will lead to the higher premiums that analysts expect to see from insurers over the next few years.  I for one do believe that access to health care for everyone should be a definition for a developed country, but the US has some of the highest consumer spending on cost of health care and costs of practice.  The costs of providing health care should have been the focus of Obamacare instead of the cost of insurance and premiums.  The costs have just been shifted to insurers and dispersed among more people.  Obamacare feels like a band-aid instead of a systematic change in how health care is practiced.  One of the main reasons that health care costs are so high is due to the insurance that doctors have in case of malpractice suits.  The US has some of the highest malpractice suits in the world and the high costs of these suits are why many specialized visits are so expensive.  It seems that this may be an option that the federal government can look into instead of trying to reduce costs by dispersing them among more people.

Retail: Affecting More Than One Part of the U.S. Economy

The polar vortex has been caused one of the most brutal winters that most people have seen. Temperatures were far below average and snowfall was much higher than average. One of the tolls of this unusual winter has been its affect on the economy. Now that it is nearing its end, the economy is on the upswing.

An article in the Wall Street Journal, explores this. The article focuses on retail sales. Now that the winter is winding down, retail sales have already increased by .3%. Obviously, some retail items are intended for winter, and their sales would increase. An example would be winter coats and boots. Those both saw increased sales due to the weather, which is what would be expected. According to the article, sales of swimsuits are also rising at a healthy rate. I guess people are ready for the warmer weather to come.

While the retail industry has been positively affecting the economy on the consumption side, the employment side has been suffering. The article in the New York Times has graphs that depict employment and industries that have recovered and not recovered. As one can see, retail  trade and manufacturing have both suffered during the months of January and February in the year 2014. Interestingly enough, there is a twist. According to the Washington Post, producer prices have decreased, and one reason is that shipping costs have gone down. This is for the month of February 2014.

After digesting all of this information, I realized that it makes sense. A harsh winter can have adverse effects on the retail industry, especially for seasonal products, such as swimsuits. Obviously sales for winter clothes would increase. Now that the weather is changing, people are more eager to make purchases for summer clothes. With decreased retail sales in January and February, firms would not be making enough money to keep all of their jobs in the sales and manufacturing sides. This is why employment in those industries declines. These firms simply could not afford to keep all of these employees. With the decreases in shipping costs, firms have lowered their expenses. This means that they will be able to meet the increasing demand for their retail products.

I think that it is safe to say that the end of the polar vortex is very good for the economy. First of all, the retail industry is recovering. In another blog post, I mentioned that consumption is very important to the recovery of the economy. With more people consuming retail goods and shipping costs going down, firms have more money to play with. This means that they will turn better profits and be able to hire more people, thus helping fight unemployment in the economy. Spring could be the light at the end of the tunnel. All we can do now is play the waiting game


February: A Month in Review

It has been reported by multiple newspapers that the United States added 175,000 jobs in the month of February 2014. This happened despite the brutal winter. Along with this, the unemployment rate grew from 6.6% to 6.7%. At first glance, this would cause pessimism in the current employment situation. The reason why the unemployment rate rose is because more people joined the workforce. February saw more employment than the previous two months. The Wall Street Journal, New York Times and Washington Post all delve into this topic. These figures are grounds for optimism as spring arrives.

It is important to be cautiously optimistic about the recent employment figures. Yes, more jobs were created in the month of February than in the months of January and December. This was also with harsh winter conditions from the polar vortex. If the weather played a large role in unemployment, then we could expect an even better month in March. The other side is that the unemployment rate rose. It is true that this was caused by an increase in the workforce. If more jobs are created at a faster rate than the labor force grows, then the unemployment rate will decrease. If not, the unemployment rate could continue to climb.

As a student of economics, I would say that trends are of the most important interest right now. If the weather was indeed a cause of decreased employment, then spring coming will help increase the creation of jobs. If each month in the warmer part of the year, spring and summer, sees more jobs added than the previous month, then the American labor market will be raised out of its current slump. Another trend of great interest is the population of the labor force. Whether it continues to grow is not the main focus. What is more important is the rate at which it grows compared to rate of jobs added to the economy. It is obvious that if jobs are added at a higher rate than people entering the labor force, then unemployment will decrease. If the number of people entering the work force increases at a faster rate, then the current employment slump will continue. This explains why the unemployment rate rose in February. More people joined the work force than there were jobs added.

Hopefully, this is the beginning of the end for both the polar vortex and the employment slump. This nation has been enduring both for a long time. Obviously the length of the polar vortex is insignificant compared to the length of the unemployment crisis. However, the end of the polar vortex could help the end of the United States’ employment woes. It could be the beginning of the country getting out of the great recession.

Wages, Benefits and Unemployment.

When the recession hit in 2008, the job market was hit very hard. Job security became a prime concern for many people. According to an article in the Wall Street Journal, the Federal Reserve Bank of Atlanta’s research said that extended jobless benefits raises unemployment by half of a percent. This makes a lot of sense because more benefits means that people will relax more about seeking employment. This causes them to be more patient as well. Finding a job that provides better benefits than the government becomes a little less common. These people under unemployment benefits would not want to accept a job with worse benefits. I understand that the point of these government benefits is to prevent these people from hitting rock-bottom and losing everything. However, it is very easy to abuse them, and this can cause people to look for jobs less actively than if they had no benefits coming in.

In other news, President Obama is looking to raise the minimum wage to $10.10. According to the New York Times, many people travel across state lines to work for a better wage than their home states. By raising the minimum wage to $10.10, this would be less likely to happen. While raising the minimum wage can help some people, it hurts employment. We all know that the minimum wage is a price floor in the labor market, so a higher minimum wage would mean higher unemployment. Another New York Times article discusses how their have been fewer hirings lately. If the minimum wage rises to $10.10, then this will simply be worse. Minimum wages create more unemployment.

These three stories can easily be tied together. They all help explain why there has been so much unemployment in the United States. Extended benefits causing people to stay unemployed longer than normal is a large contributor. Raising the minimum wage would help worsen the employment situation. When you combine these two factors you make these more passive job-seeking people more expensive to hire. When this is the case, they are less likely to find a job. Employers look for the best workers at the lowest prices. To them, it is all about turning profits. Expensive employees hurt their profits, so they would not be ideal to hire. Due to inflation costs of living have increased, which is what could possibly call for a higher minimum wage. However, the answer is not necessarily to raise the wage, but to reduce benefits. I know that finding a job can take some time, but reducing benefits lights a fire under these people trying to find new jobs, thus employment would rise.

College education and employment.

As a senior in University of Michigan as well as a student studying economics, “employment” is a topic that constantly evolve in my head. Every day, news articles talk about the severity of unemployment and many “soon to be college graduates” are feeling insecure about it. With unstable economy, unemployment is surely a big issue for younger generations.

According to Wall Street Journal article (Skipping College Is Getting More Expensive), people with a college degree earn more, have higher employment rates, and report greater job satisfaction than who do not have college degree. In terms of median annual earnings, college-educated full time workers rose by nearly $7000 – to $45,500 between 1965 and 2013 (adjusted to inflation), while workers with only high school education lost more than $3000, falling to $28,800 on same time period. Although many college students complain about enormous amount of tuition they need to pay for college degree, Millennials (people born in early 1980s) feel that college education has already paid off, as eighty six percent of people with loans (from paying tuition) say that the degree has been worth it.

Recently in Korea, there was a big controversy regarding recruiting of Samsung. Until now, Samsung had been adhering to “open-recruitment,” meaning any college graduate could apply to Samsung and get a chance to take Samsung’s own standardized test, which is “Samsung Aptitude Test (SSAT).” Each year, about 400,000 college students graduate in Korea; among those, 200,000 students apply for a job at Samsung which is recruiting about 9000 new employees every year (meaning only 4.5% of them are hired by Samsung). Accommodating 200,000 students to take Samsung’s standardized tests is not easy, and it also caused social problem, as students’ preparation for SSAT became too intense (there are multiple institutes which get paid for SSAT preparation in Korea).

In order to resolve the problem, Samsung announced a new recruiting system according to article from Chosun Ilbo (Samsung Under Fire Over University Quota) which actually caused more controversy. Samsung chose to give quota to each college in Korea under the name of “dean’s recommendations,” and those students recommended by college dean are allowed to take SSAT, thus able to control the number of SSAT participants. But, as each college was given with different quota, it became controversial. People criticized Samsung’s decision as it is conglomerate’s rude way of insisting its own yardstick for ranking universities. For instance, Korean universities with strong science and engineering programs were given higher quota compared to other universities. Therefore, women’s universities were allocated to fewer numbers. Some people argue it is gender discrimination as well. After huge controversy, Samsung decided to take back their new recruitment system.

I felt uneasy about this controversy. First, I was amazed by the fact that so many Koreans were arguing about Samsung’s new recruitment policy. It is company’s own, legitimate decision to recruit new employees, and personally I could not understand why people had to argue so much about Samsung’s decision. Secondly, it is totally understandable that Samsung wants to higher students from science/engineering field as Samsung Electronics, Engineering, Construction and Heavy Industries are Samsung’s major companies and giving more quota to colleges with stronger science/engineering fields is logical to me, at least.

Two news articles, one regarding the survey from Pew Research Center and the other talking about controversy in Korea, were very intriguing. College education is essential in career path, and that’s why I am paying enormous amount of out-of-state University of Michigan tuition fee. However, I feel that college education should not be limited to be a “preparation” or “stepping stone” before actual career begins. College should be a place where young students can earn true knowledge from professors, and work with other colleagues who have similar academic interests. Although college education and employment is very strongly tied, college shouldn’t be limited to only employment. If students try to excel in their academics during their college life, “employment” would be a collateral benefit they would get, while trying their best during their college life.

Are we entering the age of the robot?

Technology has been improving drastically for many years now. Have we actually now reached the time when robots will take over many jobs from Americans and people around the world? It seems that we may be heading in that direction fairly soon. With the latest jobs report came an interesting puzzle of weak hiring, but solid growth. Obviously growth is a good thing. The question is, how are we having this period of solid growth without respectable hiring to go along with it? The answer may lie within the advancement of and investment in robotics.

DemeTech Corp., a Miami maker of surgical sutures and blades, is posting higher revenue but trimming payrolls. The firm is investing in technology that automates many functions, Chief Executive Luis Arguello said.

In the next two years, the firm will make as many of its products with machines “as robotics will allow,” Mr. Arguello said. After cutting 20 jobs over the past year, the company now has about 75 workers.

This is just one case of a firm moving towards robotics and better technology and away from some of the manual labor that they previously used to construct their products. And one would have to believe that if a company is able to manufacture the same product while employing and paying less people, they really don’t have any reason not to do this. Of course you need to invest in the technology and robotics, which costs money, but this can save money in the long run and in many cases the product can be produced more efficiently and effectively. Looking at the big picture, the fact that many firms have been able to enhance production at a higher rate than employment may certainly be supporting the growth of GDP regardless of a lower level of employment.

Some folks, like Lynn Stuart Parramore, do not believe that there will be a so-called ‘jobocalypse’ caused by the advancement of technology.

“If job decreases were really caused by waves of automation, the unemployment rate should have ticked up during the 1990s, when you probably started the decade with a typewriter and finished it with a laptop,” Parramore writes in her online article “Don’t buy the hype of a robot-driven ‘jobocalypse.’”

However, I don’t really buy into her argument. With some things, the past can tell you a lot about the future, but I am not so sure that applies in this scenario. According to Derek Thompson of The Atlantic, almost half of the jobs in this country could be replaced by robots within the next ten or twenty years. And while most of these are routine jobs, this is a frightening thought for many people because even if this revolution helps out the economy as a whole, the benefits will not be shared by everyone. In fact, it appears that half of the country will be sh*t out of luck if this hypothesis indeed comes to fruition. Furthermore, Bill Gates suggests that a rise of the minimum wage would also increase the likelihood that more low-end jobs would be replaced by robots as well. 

All of this taken into consideration, it seems that we are already headed into the direction of an increased robot takeover of at least some of the jobs in America. The current condition of our economy leads me to believe that more and more business owners and decision makers would like to pay as few people as possible while still being able to make their product and conduct growth. And certainly other policies that come into play over the next few months or years can have a large impact on this scenario as well. Taking this into account, I believe this should most definitely be considered an important piece to the debate over the minimum wage. While a small increase in the minimum wage would not cause some immediate disaster in terms of a robot ‘jobocalypse’, a big push could have some unintended repercussions.

More Obamacare Means More Unemployment

According to the Congressional Budget Office, the Affordable Care Act (aka Obamacare) will reduce the labor force by 2 million workers by 2017.  And it’s not because employers aren’t hiring.  The CBO explicitly states that the Affordable Care Act will “reduce the total number of hours worked, almost entirely because workers will choose to supply less labor – given the new taxes and other incentives they will face and the financial benefits some will receive.”  Interestingly, the same analysis performed by the CBO in 2011 showed a mere 800,000 person reduction in the labor force by 2017.  Why is this estimate so different now?

The reason is the newly implemented structure of Obamacare.  Under the Affordable Care Act, Americans are provided with a certain amount of free health care given the amount they work.  In the reverse fashion of our progressive tax system, as you work more (generating more income and contributing more hours), the amount of free coverage you receive declines.  According to CBO Director Douglas Elmendor, in this way Obamacare imposes an “implicit tax on additional work.”  In response to this implicit tax, the CBO estimates that significantly more workers will choose to work part time instead of full time, as doing so maximizes their level of free coverage.

Specifically, the law works as follows. First imagine an American supporting a 4 person family.  This American can choose between a part-time job paying $36,000 a year or a full-time job paying $42,000 a year.  If he chooses the part-time job, he will qualify for about $10,000 more of free coverage each year relative to the full-time job.  Assuming consumers treat health care coverage as a type of income/compensation (I feel safe making this assumption because health care coverage is now legally required.  If you’d like to challenge this assumption, please do so), the part-time job is clearly the better choice.

Now consider another American support a family of four.  He is choosing between a job paying $54,000 a year and a job paying $72,000 a year.  Given the reverse-progressive (regressive?) coverage rates of Obamacare, this individual would only lose out on $7,000 of free coverage by choosing the higher paying job.  As such, this American, who is in in a higher income range, will not distort his behavior based on Obamacare’s coverage rules.

What this example shows is that Obamacare does distort employment decisions, and that it does so on the low-end of the income spectrum.  The benefits for low-wage employees are so high, that Obamacare encourages them to remain low-wage employees.  For high-wage employees, while losing out on free coverage is certainly disappointing, the free coverage is not significant enough to alter indivdiual behavior.

At a time when income inequality and a lack of income mobility are such key issues in this country, it seems that Obamacare is fighting against our end goal: making the American Dream easier.  At least for the poorest Americans, Obamacare seems to encourage individuals to give up on the American Dream, because if the government will pay your expenses for you, why go out and get a higher paying job.  Personally, I think that in this way, the Affordable Care Act is hurting America.  And while I think health care is extrememly important, maybe Obamacare should focus more on helping businesses pay their full-time employees healthcare (which would likely encourage employment as it is a requirement for coverage) instead of bypassing businesses and going straight to consumers…

Author: Dimitry Slavin

With a burgeoning American stock market and the Fed’s announcement to start cutting back its bond-purchasing program, the field was set for bond prices to drop in the beginning of 2014. It seemed likely that investors, seeking higher returns, would shift their investments from bonds to equities. As a recent article in The Economist points out, however, this is not the case so far this year. Bond markets are actually doing surprisingly well.

Instead of rising since the end of 2013, yields on benchmark ten-year bonds, which are inversely related to prices, have fallen in America and Europe [see below]. Yields on US Treasuries have slipped from 3.01% to 2.88%; on British gilts from 3.03% to 2.86%; and on German bunds from 1.94% to 1.83%.

Comparison of Ten-Year Government-Bond Yields for Various Countries

Comparison of Ten-Year Government-Bond Yields for Various Countries

So far the story is pretty straightforward: yields on bonds are falling, causing bond prices to increase. Before we go any further I want to pause and ask a couple of questions in order to focus our analysis. (1) Why are bond prices and interest rates inversely related? (2) How are inflation, bond prices, and interest rates related? (3) Given we understand the answers to the previous two questions, why are bond prices rising in the wake of an apparent economic recovery? Shouldn’t demand for bonds fall as investors shift their money to the stock market?

(1) Why are bond prices and interest rates inversely related?

We answered this question in class today, but for the sake of clarity and my own learning I’ll summarize it again here. Purchasing a bond allows you to receive a stream of future cash payments from the borrower in the form interest payments (aka coupon payments) and the eventual repayment of the principal when the bond matures. Ignoring inflation expectations and credit risk, the bond price is calculated by summing the present value of each of these coupon payments plus the present value of the bond at maturity. To find the present value of each of these payments, their future value is discounted (aka divided) by the yield (aka the interest rate of the bond). Thus it is clear why a bond’s price and its corresponding interest rate are inversely related: as the interest rate rises, each coupon payment is discounted (aka divided) by a larger amount, causing the total bond price to decrease.

(2) How are inflation, interest rates, and bond prices related?

This is an important question that I don’t think we covered as much in class. I’m sure most people taking this class know the answer already, but it’s nice to get a quick refresher. Simply put, bonds hate inflation. High inflation and high-expected inflation cause future coupon payments to lose value. As a consequence, lenders demand higher yields (aka interest rates rise) and the price of the bond falls. This explanation, however, is a bit too simple. Inflation expectations affect short-term and long-term interest rates differently, so bonds with different terms to maturity will be affected differently. These effects are summarized quite nicely in a concept/graphic called the yield curve.

(3) Why are bond prices rising in the wake of an apparent economic recovery?

This question doesn’t have as much of a straightforward answer as the other two, but the main two reasons I’d like to discuss are low inflation expectations and poor job figures. As I’ve discussed in previous blog posts, inflation rates across the developed economies have remained low and show no signs of rapid growth:

In America the price index targeted by the Fed (which aims at 2% inflation) has been rising by less than 1%. In Britain consumer-price figures published on January 14th showed inflation hitting the Bank of England’s 2% target, after four years above it. The fillip to bond markets from low inflation is stronger still in the euro zone, where consumer prices rose by just 0.8% in the year to December and core inflation (stripping out volatile items like energy and food) fell to a record low of 0.7%.

These low inflation figures cause long-term interest rates to fall, which, in turn, cause bond prices to rise.

Another reason is the underwhelming jobs figures that were released on January 10th:

Economists had expected employers to add around 200,000 jobs in December; the actual number was a lowly 74,000.

Poor jobs figures may be a sign that the economic recovery is not as strong as investors thought, causing some investors to hesitate in investing in the stock market and buy up bonds instead.

The poor job figures should be especially troubling to the Fed because they may mean that it is too soon to cut back QE. The U.S. economy may not be out of the darkness of recession quite yet. Although arguments have been made that poor weather conditions played a role in the disappointing jobs figures, it is tough to believe that weather had enough to effect to more than halve expected figures.

Deceptive Employment Statistics

According to the United States Department of Labor and Justin Lahart of the Wall Street Journal, 74,000 jobs were added to the economy in the month of December 2013. This is the lowest in the past three years. Furthermore, this was much less than anticipated. A potential contributing factor to this is bad weather. The Federal Reserve is ignoring this statistic. The unemployment rate dropped from 7 percent to 6.7 percent. This is important because 6.5 percent is the target rate for policymakers. Labor force participation has been declining since 2007. Two contributing factors are the baby boomer generation reaching retirement age and people staying in school longer than they used to. The prime range of ages to be employed are between 25 and 54. Normally people in this age group’s participation is not affected as easily, but participation has fallen by roughly 3 percent.

Interestingly enough, women were the winners in the month of December 2013. According to Catherine Rampell of the New York Times. Rampell’s article: “All December Job Gains Went to Women” states that women gained 75,000 jobs, on net, while men lost 1,000 jobs, on net. She then states that women represented fifty-six percent of the net gain of jobs in the past year.

All of these facts about recent addition of jobs to the economy can leave one with mixed feelings. 74,000 jobs is sub par and unexpected. Jared Bernstein of the New York Times mentions that the expected number of jobs added was 200,000 in his article titled: “Underlining the Recovery’s Shortfall”. However, it did lower the unemployment rate closer to the target 6.5 percent. This could cause optimism because the unemployment rate is closer to what policymakers want it to be. The fact of the matter is that 6.5% is not a healthy rate of unemployment. Jared Bernstein continues to mention, in his article, that the Congressional Budget Office determines that full-employment has a rate of 5.5 percent unemployment. In my opinion, that is what the policymakers need to target. By targeting a rate of 6.5 percent, they are accepting less than what is best for the country. The job market has undoubtedly been a huge concern since 2007, and these concerns need to be put at ease. That will not be done by targeting an unemployment rate that is 1 percent higher than the natural.

it is also interesting that women have been receiving the bulk of the spoils of new jobs in the economy. Maybe this could be a step towards the glass ceiling being overcome. The statistics shared in Rampell’s article could put some feminists at ease.