Economic Trends
Edited by Peter Coy
Boomers: A Hard Act to Follow
Quality of labor is an important factor in U.S. productivity growth. According to a new study by Daniel Aaronson and Daniel G. Sullivan, senior economists at the Federal Reserve Bank of Chicago, the improvement in labor quality between 1987 and 1994 contributed nearly 0.4 percentage points a year to overall productivity. From 1995 through 2000, quality rose more slowly, and the authors predict it will slow even more this decade.
Aaronson and Sullivan used wages as an indicator of labor quality, assuming that in a competitive job market, people are paid what they're worth. While acknowledging that's not always the case, they say "an enormous number of empirical studies" have found it to be a useful approximation. To isolate the effect of labor quality on wages, they looked at how wages are correlated with education and work experience, using data from the Labor Dept.'s monthly Current Population Survey since 1964.
The Fed economists found that labor-quality patterns were influenced by the huge baby-boom generation. During the late 1970s and early '80s, labor quality began to rise as boomers entered the workforce. Although inexperienced, boomers were better educated than the workers they replaced. As the boomers gained experience, the improvement accelerated. Between 1987 and 1994, labor-quality growth averaged 0.6%.
The economists also confirmed the theory that labor quality gets worse when the economy is booming and better when there's a recession. That's because workers with less experience and education are pulled into the workforce in good times and they are the first to get pink slips when the economy falters. Improvements slowed during the boom years of the late 1990s and probably rose in the recession year of 2001, for which data are not yet available.
As boomers begin to move beyond their peak earning years, labor-quality growth will take a big hit. People in their early 50s earn the highest wages, so they are assumed to have the highest labor quality. By 2010, many boomers will be past that sweet spot, so their labor quality will presumably be lower. The Gen Xers who replace them in the prime years are fewer in number. Overall, Sullivan and Aaronson forecast labor-quality growth will drop to less than 0.1% by 2010. That means productivity and output could grow up to 0.2 percentage points a year more slowly than they would have if labor quality had continued to improve at its 1990s pace.
More Baskets to Put Eggs in
Investing in foreign stock markets is a good way to make the returns on your portfolio less risky--through diversification. But while globalization has made it easy to buy foreign stocks, it has also made major securities markets around the world more likely to move up and down together, reducing the benefits of such diversification. In 1940, you could eliminate roughly three-quarters of the volatility in your investment portfolio by splitting it evenly among British, French, German, and U.S. stocks, compared with investing it entirely in just one of those countries. Today, such action would reduce your portfolio's volatility by only about 30%, according to a recent study, Long-Term Global Market Correlations, by William N. Goetzmann and K. Geert Rouwenhorst, finance professors at Yale School of Management, and by Lingfeng Li, a PhD candidate in economics at Yale University.
Fortunately for investors, as the the world's major capital markets have become more tightly linked, fringe markets have cropped up, offering new opportunities for diversification. Since the 1960s, the number of stock markets open to global investors has expanded from around 30 to around 50. In 2000, a portfolio distributed equally among all available stock markets had 70% less volatility than one concentrated in a single market--a result nearly as good as investors could get from the four core markets in 1940.
Wiggle Room for Euro Bosses
Euro-zone countries are often criticized for laws that make it costly to hire and difficult to fire workers. Executives complain that they can't expand as quickly in good times or contract as swiftly in bad times as their U.S. competitors. So profits have been lower, and a smaller percentage of the working-age population has been employed. "That led to lower consumer spending and slower economic growth," says Carlo Monticelli, co-chief of euro-zone economics at Deutsche Bank in London.
Slowly, however, flexibility is creeping into European labor markets. Michael Saunders, chief European economist at Schroder Salomon Smith Barney in London, notes that the number of employees working part-time or on fixed-term contracts has risen sharply. In Germany, for instance, part-time jobs represented 17.6% of total employment in 2000, up from 13.4% in 1990, according to the Organization for Economic Cooperation & Development. Economists estimate that the proportion continued to rise last year (table). Because part-time and temporary staff can be laid off more easily than full-time workers, companies are more willing to hire them in the first place. Partly as a result, Saunders notes, the labor-force participation rate--the ratio of the total labor force to the working-age population--rose by more than two percentage points, to nearly 69%, in the five years to 2000.
To be sure, the big captains of industry would still like U.S.-style freedoms to hire and fire full-time employees. In the meantime, they are eagerly using the greater flexibility that has recently come their way.
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Copyright 2002 , by The McGraw-Hill Companies Inc. All rights reserved.
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