Macroblog

November 15, 2017

Labor Supply Constraints and Health Problems in Rural America

A recent research study by Alison Weingarden at the Federal Reserve's Board of Governors found that wages for relatively low-skilled workers in nonmetropolitan areas of the country have been growing more rapidly than those in metropolitan areas. In a talk yesterday in Montgomery, Alabama, Atlanta Fed President Raphael Bostic provided some evidence that differences in labor supply resulting from disability and illness may be behind this shrinking urban wage premium.

For prime-age workers (those between 25 and 54 years old), the dynamics of labor force participation (LFP) differ widely between metropolitan and nonmetropolitan areas. (These data define a metropolitan statistical area, or MSA). The LFP rate in MSAs declined by about 1.1 percentage points between 2007 and 2017 versus a 3.3 percentage point decline in non-MSA areas.

The disparity is also evident within education groups. For those without a college degree, the MSA LFP rate is down 2.6 percentage points, versus 5.0 percentage points in non-MSAs. For those with a college degree, the MSA LFP rate is down 0.7 percentage points, versus a decline of 2.5 percentage points for college graduates in non-MSAs. Moreover, although LFP rates in MSAs have shown signs of recovery in the last couple of years, this is not happening in non-MSAs.

A recent macroblog post by my colleague Ellyn Terry and the Atlanta Fed's updated Labor Force Dynamics web page have shown that the decline in prime-age LFP is partly a story of nonparticipation resulting from a rise in health and disability problems that limit the ability to work. This rise is occurring even as the population is gradually becoming more educated. (Better health outcomes generally accompany increased educational attainment.)

The following chart explores the role of disability/illness in explaining the relatively larger decline in non-MSA LFP. It breaks the cumulative change in the LFP rates since 2007 into the part attributable to demographic trends and the part attributable to behavioral or cyclical changes within demographic groups.

The demographic changes—and especially the increased share of the population with a college degree—has put mild upward pressure on the prime-age LFP rate for both the MSA and non-MSA population. Controlling for the contribution from these demographic trends, increased nonparticipation because of poor health and disability pulled down the LFP rate in MSAs by 0.8 percentage points and lowered the rate in non-MSAs by 2.0 percentage points over the past decade. For those without a college degree, disability/illness accounted for about 1.2 percentage points of the 2.6 percentage point decline in the MSA participation rate, and it accounted for 2.6 percentage points of the 5.0 percentage point decline in the non-MSA participation rate.

Taken together with evidence from business surveys and anecdotal reports about hiring difficulties, it appears that the non-MSA labor market is relatively tight. The greater inward shift of the rural supply of labor is showing through to wage costs, and especially for rural jobs that require less education.

Although the move to higher wages is welcome news for those with a job, it also raises troubling questions about why labor force nonparticipation because of disability and illness has increased so much in the first place—especially among those with less education living in nonmetropolitan areas of the country.

It is clear that the health problems for rural communities have been intensifying. Several interrelated factors have likely contributed to this worsening trend, including poverty, deeply rooted cultural and social norms, and the characteristics of rural jobs, as well as geographic barriers and shortages of healthcare providers that have limited access to care. This complex set of circumstances suggests that finding effective solutions could prove difficult.

John Robertson, a senior policy adviser in the Atlanta Fed's research department

• November 15, 2017 in
  • Health Care
  • Labor Markets
  • Unemployment
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August 30, 2017

Is Poor Health Hindering Economic Growth?

It is well known that poor health is bad for an individual's income, partially because it can lower the propensity to participate in the labor market. In fact, 5.4 percent of prime-age individuals (those 25–54 years old) reported being too sick or disabled to work in the second quarter of 2017. This is the most commonly cited reason prime-age men do not want a job, and for prime-age women, it is the second most often cited reason behind family responsibilities (see the chart). (Throughout this article, I use the measure "not wanting a job because of poor health or disability" as a proxy for serious health problems.)

In addition to being prevalent, the share of the prime-age population citing poor health or disability as the main reason for not wanting a job has increased significantly during the past two decades and tends to be higher among those with less education (see the chart).

Yet by some standards, the health of Americans is improving. For example, compared to two decades ago the average American is living two years longer, and the likelihood of dying from cancer or cardiovascular disease has fallen. These specific outcomes, however, may have more to do with improvements in the treatment of chronic disease (and the resulting reduction in mortality rates) than improvements in the incidence of health problems.

Another puzzle—which is perhaps also a clue—is the considerable variation across states in the rates of being too sick or disabled to work. For example, people living in Mississippi, Alabama, Kentucky, or West Virginia in 2016 were more than three times likelier to indicate being too sick or disabled to work than residents of Utah, North Dakota, Iowa, or Minnesota (see the maps below).

This cross-state variation is useful because it allows state-by-state comparisons of the prevalence of specific health problems. Among a list of more than 30 health indicators, the two factors that most correlate with the share of a state's population too sick or disabled to work were high blood pressure (a correlation of 0.86) and diabetes (a correlation of 0.83). Both of these conditions are associated with risk factors such as family history, race, inactivity, poor diet, and obesity. Both of these health issues have increased significantly on a national basis in recent years.

So how might poor health hinder economic growth? Health factors account for a significant part of the decline in labor force participation since at least the late 1990s. After controlling for demographic changes, the share of people too sick or disabled to work is about 1.6 percentage points higher today than it was two decades ago (see the interactive charts on our website). Other things equal, if this trend reversed itself during the next year, it could increase the workforce by up to 4 million people, and add around 2.6 percentage points to gross domestic product (calculated using our Labor Market Sliders).

Of course, such a sudden and large reversal in health is highly unlikely. Nonetheless, significant improvements to the health of the working-age population would help lessen the drag on growth of the labor supply coming from an aging population. Public policy efforts centered on both prevention and treatment of work-impeding health conditions could play an important role in bolstering the nation's workforce.

Ellyn Terry, an economic policy analysis specialist in the Atlanta Fed's research department

• August 30, 2017 in
  • Education
  • Health Care
  • Labor Markets
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May 16, 2013

Labor Costs, Inflation Expectations, and the Affordable Care Act: What Businesses Are Telling Us

The Atlanta Fed’s May survey of businesses showed little overall concern about near-term inflation. Year-ahead unit cost expectations averaged 2 percent, down a tenth from April and on par with business inflation expectations at this time last year.

OK, we’re going to guess this observation doesn’t exactly knock you off your chair. But here’s something we’ve been keeping an eye on that you might find interesting. When we ask firms about what role, if any, labor costs are likely to play in their prices over the next 12 months, an increasing proportion have been telling us they see a potential for upward price pressure coming from labor costs (see the chart).

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To investigate further, we posed a special question to our Business Inflation Expectations (BIE) panel regarding their expectations for compensation growth over the next 12 months: “Projecting ahead over the next 12 months, by roughly what percentage do you expect your firm’s average compensation per worker (including benefits) to change?”

We got a pretty large range of responses, but on average, firms told us they expect average compensation growth—including benefits—of 2.8 percent. That’s about a percent higher than the average over the past year (as estimated by either the index of compensation per hour or the employment cost index). But a 2.8 percent rise is also about a percentage point below average compensation growth before the recession. We’re included to read the survey as a confirmation that labor markets are improving and expected to improve further over the coming year. But we’re not inclined to interpret the survey data as an indication that the labor market is nearing full employment.

We’ve also been hearing more lately about the potential for the Affordable Care Act (ACA) to have a significant influence on labor costs and, presumably, to provide some upward price pressure. Indeed, several of our panelists commented on their concern about the influence of the ACA when they completed their May BIE survey. So can we tie any of this expected compensation growth to the ACA, a significant share of which is scheduled to go into effect eight months from now?

Because a disproportionate impact from the ACA will fall on firms that employ 50 or more workers, we separated our panel into firms with 50 or more employees, and those employing fewer than 50 workers. What we see is that average expected compensation growth is the same for the bigger employers and smaller employers. Moreover, the big firms in our sample report the same inflation expectation as the smaller firms.

But the data reveal that the bigger firms are a little more uncertain about their unit cost projections for the year ahead. OK, it’s not a big difference, but it is statistically significant. So while their cost and compensation expectations are not yet being affected by the prospect of the ACA, the act might be influencing their uncertainty about those potential costs.

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By Mike Bryan, vice president and senior economist,

Brent Meyer, economist, and

Nicholas Parker, senior economic research analyst, all in the Atlanta Fed’s research department

• May 16, 2013 in
  • Business Inflation Expectations
  • Health Care
  • Inflation Expectations
  • Labor Markets
  • macroeconomics
  • Pricing
  • Surveys
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February 12, 2007

Another Thought On The Edwards Health Care Plan

I find myself agreeing with Dean Baker's opinion that this is the most interesting part of presidential candidate John Edwards' health care plan:

The U.S. government will help states and groups of states create regional Health Markets, non-profit purchasing pools that offer a choice of competing insurance plans. At least one plan would be a public program based upon Medicare. All plans will include comprehensive benefits, including full mental health benefits. Families and businesses could choose to supplement their coverage with additional benefits. The markets will be available to everyone who does not get comparable insurance from their jobs or a public program and to employers that choose to join rather than offer their own insurance plans.

The one thing that worries me is the possibility that the endgame is domination by the public Medicare-like program, not because it is the best or most efficient means of providing insurance, but because state-run enterprises can stifle the competition by exploiting their access to taxpayer capital.

Fortunately, there is something of a model for markets in which government and private firms compete. That model comes in the form of the Monetary Control Act of 1980, which governs the behavior of the Federal Reserve when it participates in businesses for which there are actual or potential private-sector alternatives. (An example of such a business would be the collection and clearing of checks.)  In essence, the rules of the Act require that the Federal Reserve cover its economic costs, which include the return to capital that would be required by the owners of for-profit businesses.

Why is is it necessary to have the government producing services that private firms are able and willing to provide?  Whether you are talking about medical insurance or check-processing, it's a good question.  But arguably the provisions of the Monetary Control Act resulted in an efficiency-focused government supplier with some devotion to serving markets (community banks in particular) that might have been less desirable to private providers of those services.  And that doesn't sound like a bad outcome for a health care system.

• February 12, 2007 in
  • Health Care
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