Year-over-year look at the labor market

Here is another look at the labor market recovery, based on the year-over-year change in employment calculated monthly (inspired by a LinkedIin posting by Gad Levanon at The Burning Glass Institute). As you can see, tangible services took the biggest hit, especially the industries whose activities are in person such as food services. The first chart shows how anomalous the pandemic period was. The second chart shows the more recent trend – including the slow convergence of the various industries.

However, this overview hides a more worrisome fact. As I said about the October employment numbers, the increase was confined to the intangible-producing industries. The number of non-farm payrolls in tangible-producing services was flat and declined in goods-producing industries. Even more troubling is the fact that only two industries accounted for over 80% of the growth. Employment in Educational and Health Services (excluding tangible services) increased by 78,300. Payrolls in Government (excluding Postal Service) was up by 50,200. Thus, the health of the U.S. labor market rests upon a very narrow foundation.

I will update these charts, and all my other employment charts, next week when the November employment data is released.

US economy growth higher than previously reported, but R&D spending lower

This morning the BEA released its “second” estimate of GDP for the third quarter of 2023 showing the US economy grew by 5.2% rather than the 4.9% in the “advance” estimate. However, the revised data also shows R&D spending declining. The advance estimate had shown a slight increase. Offset that decline was a revision upward of investments in software. There was little change in the estimate of expenditures on information processing equipment, which was down from the second quarter of the year. As a result, the overall level of knowledge-related investment was revised slightly upward.

I’m not sure how much this changes the narrative on the state of the US economy. But, the decline on R&D expenditure should be a red flag about the prospects of long-term economic growth.

[Note: I define knowledge-related investment as the combination of investment in Information Processing Equipment, R&D, and Software. The first of these three categories is reported in the GDP data as a subcategory of Non-residential Fixed Investment: Equipment. The latter two are reported as subcategories of Non-residential Fixed Investment: Intellectual Property Products.]

OECD Rural Innovation Study

Last week, the OECD released a new report on Enhancing Rural Innovation in the United States. This is the latest in their Rural Studies series of reports on economic issues in rural areas. Other reports in the series that focus on innovation include Enhancing Rural Innovation in Scotland, United Kingdom, Unlocking Rural Innovation, and Enhancing Innovation in Rural Regions of Switzerland.

The report’s analysis reveals a picture of rural America different from what many may have.

“There is a pervasive urban bias in innovation studies, with presumptions that innovation is driven by proximity and connectivity of key agents. However, rural areas are also sites of innovation. Innovations that arise from rural areas include innovations in agriculture and manufacturing plus cross-sectoral innovations in food processing and tourism. These may be aimed at applications elsewhere, such as the food and consumption preferences of urban dwellers or be linked to global value chains. Additionally, other innovations (those that originate in metropolitan areas but target rural areas) are wide ranging and include research, science and technology investments that have widespread application in rural economic activities such as mining, manufacturing and agriculture. Finally, there are innovations that are universal in nature, but which strongly impact rural life—from cloud computing and the internet of things to distributed manufacturing.”

While still not as economically well-off as metropolitan countries, rural counties are improving and offer great potential.

“Between 2015 and 2020, rural counties saw labour productivity grow by 1.7% per annum, compared to only 1.2% in metropolitan areas. The majority, nearly two-thirds, of productivity gains in rural areas was due to more efficient use of resources, primarily associated with innovation adoption.

Moreover, even when seen through the traditional lens of research and development, this report shows that investing in innovation (R&D spending) delivers greater relative outcomes in rural counties than in metropolitan counties. A one percent increase in R&D spending increases patent intensity by 0.7 units (or close to one more patent per 1 000 individuals with relevant occupations) in non-metropolitan counties, while it is closer to zero in metropolitan counties. At the same time, investing in workforce skills is also more positively associated with increases in innovation outcomes, such as productivity, in rural counties than in metropolitan counties.”

The report discusses various policies and programs to help rural counties, many of which are already part of the national innovation policy. However, the report stresses the need to tailor such programs to address the distinctive circumstances of rural America.

“The United States has a strong ecosystem for innovation, with funding for technological development, involvement of higher education institutions and market support. However, policies and programmes for innovation in the country do not always consider the specific needs and challenges of rural areas – for example, that innovation may not be STI-related and that economies of agglomeration may not be present. As such, a strategy that adopts a broader based definition of innovation while working to overcome challenges of scale should be prioritized. By definition, the low density and in many cases, large distances, in rural places create a less optimum environment for benefiting from advantages that come with agglomeration including innovation and productivity spill-overs. Nevertheless, a strategy that takes into consideration a functional approach and builds scale for small cities and towns can, in part, overcome some of the challenges related to scale and networks.”

The report includes key recommendations in three areas:

• Improving policy design and implementation for rural innovation.
• Improving access to high-quality broadband, skills and education for entrepreneurship
• Better track and measure innovation relevant to rural areas

Especially important is the recommendation under policy design to “Promote a broader view of innovation policy for diverse rural areas that goes beyond a science and technology understanding of “innovation” and gives broader criteria for programme design and eligibility requirements such as process innovation, social innovation and public sector innovation.”

The conclusion of the OECD’s report is aligned with other studies. For example, a number of years ago I wrote a piece on how rural areas could thrive in the Intangible Economy. That article argued that all areas had intangible assets on which to build a vibrant economy. I specifically noted that “rural areas and smaller communities may be better suited to commercialization of new products (a specialized form of “innovation”) than to scientific and technical innovation.”

More recently (2020), the Kauffman Foundation published a report arguing that rural America has the underlying foundation for prosperity but that the strategy of enticing business to locate in rural areas (sometimes referred to a “smoke stack chasing”) is counterproductive [see earlier posting]. In fact, a study by Carlton & Coclanis on “The Roots of Southern Deindustrialization” points out that the common strategy in the Southern states of pursuing “footloose” companies has backfired as those companies moving on.

As noted above, the OECD report discusses a number of economic development programs and policies that can help rural areas chart a difference course. Many of these already exist. But the trick is to tailor those programs to meet the specific needs and circumstances of rural areas. The report clearly demonstrates how this can be done with concrete examples, such as simplifying eligibility criteria, building capacities of municipalities to apply for competitive federal grants, and creating online one-stop shops to facilitate access to resources.

All of these are worthwhile recommendation. And they all stem from one overriding principle: rural area have enormous innovative potential but are different from traditional science and technology driven innovation hot spots. Recognizing this difference and tailoring programs and policies to the particular circumstances of rural areas can greatly boost the economic fortunes of rural America.

Quote of the year: “We define 21st Century challenges in 20th Century terms and propose 19th Century solutions”

This quote comes from Tom Wheeler, former FCC Chair, made at a Brookings event about his book Techlash: Who Makes the Rules in the Digital Gilded Age?. As the book title indicates, Wheeler sees many parallels between today and the “Gilded Age” of the late 19th century. But he points out that we need to go beyond looking at the Gilded Age for specific answers to the issues of what he calls the “Digital Age.” As the quote emphasizes, the institutions and structures set up to regulate the industrial economy of the past are incapable of addressing today’s issues. Just as governments in Gilded Age adopted industrial organizational management techniques with a focus on top-down rule-based structures and processes, governmental responses to the issues of the digital age need to adopt digital age management techniques based on agile behavioral codes and risk management. [See also his interview in Vox.]

I have long argued a similar point [for example, see my essay Globalization: One world, Two versions]. As Alfred D. Chandler, Jr. described so well in The Visible Hand: The Managerial Revolution in American Business, the time of Gilded Age saw the corporate governance model evolve from individual/family capitalism to managerial capitalism. Similar to Wheeler, I argue that social governance in the industrial age closely mirrored that change. In the United States, the good-government movement coincided with the rise of the large corporation and the spread of professional management. This trend was accentuated as government moved from an activity of making the rules and dispensing justice to a provider of public services. Governance became management. Professionally trained civil servants replace political functionaries. It was (and is) the age of the bureaucrat and eventually the technocrat. It was also corporatist. Operating under such a system, the obvious solution to the rise of large, powerful corporations was the creation of countervailing powers in “big government” and “big labor” [as described by John Kenneth Galbraith in The New Industrial State]. 

Wheeler focuses on regulation of the players in digital economy, including the so-called “Big Tech” companies. I think his quote has a far more universal application. We are constantly confronted with cases of the Industrial Age mindset running aground when it meets the reality of operations in the Intangible Economy. For example:

We continue to treat the issue of the valuation of intangible assets as if they were the same as plant and equipment.

We treat workers as cogs in the machine who have to be physically at a desk where the boss can “supervise” them, rather than autonomous entities capable of working without direct supervision and from almost anywhere.

We continue to treat “manufacturing” and “services” as two separate and distinct parts of the economy, rather than as a complex network that delivers a range of tangible and intangible products [see earlier posting].

We continue to think of “technology” as a thing rather than a process for achieving some end.

We continue to make policy based on a linear model of technology development that treats innovation like a factory assemble line [see earlier posting].

As this list indicates, the challenges of governance, management, and regulation go well beyond and deeper than organizational operating models. Creating and adopting techniques based on agile behavioral codes and risk management will require breaking down the industrial era mindset. And changing the mindset will result from the adoption of these techniques. The two are interconnected in a mutually reinforcing process of change.

Just as the adoption of industrial era processes and thinking slowly emerged in the 19^th and 20^th Centuries, so too will be the path of our 21^st Century solutions. Let us hope that those solution come about soon enough to deal with today’s serious problems. On the bright side, we are well along in the development of one of the most important 21^st Century solutions: the recognition that we need to craft 21^st Century solutions. Succinct statements such as Wheeler’s are part of, and proof of, that progress.

US trade deficit grew in September; intangibles surplus little changed

Reversing the reversal of last month’s trend, the Bureau of Economic Analysis (BEA) reported this morning that the trade deficit grew by $2.9 billion from $58.7 billion in August (revised) to $61.5 billion in September. Exports were up $5.6 billion but imports jumped by $8.5 billion. The bad news included the intangible trade surplus which was essentially flat at $24.6 billion, down by $133 million. And the meager surplus in tangible services declined by $1.1 billion (roughly a third of the total deficit) due to a surge in imports in the two tangible services categories of transportation and travel.

The flatness of the intangibles’ trade surpluses across the board. The surplus in Financial Services declined by $50 billion. The deficit in Insurance Services improved by $25 million.  The surplus in Charges for the Use of Intellectual Property grew by $21 million. And the surpluses in Business Services declined by $32 million. Generally the level of exports and imports was only slightly changed from the previous month.

As I said about last month’s data, the slow but steady pace in the intangible’s surplus and the volatility of the trade in tangible services means there seems to be little reason to expect a major improvement in the U.S. trade deficit. As the chart below shows, the deficit in goods trade overwhelms any surplus in intangible services, even if combined with tangible services.

Management via “Face Time”

I recently came across this posting from 2005. Still relevant today, especially in light of the remote work v. return to office debate. And no, we are not talking about the social media app.

Our Industrial Age mentality

The original article by Liz Ryan can be found here (via the Wayback Machine) https://web.archive.org/web/20050422112123/http://www.businessweek.com/careers/content/apr2005/ca20050422_7217_ca004.htm

October job data not as good as it looks

On the surface, October was generally an okay month in terms of the labor market. According to the Bureau of Labor Statistics, total nonfarm payroll employment grew by 150,000 jobs—lower than in previous months but still a healthy number.

But the data contains two worrisome points. First, the increase was confined to the intangible-producing industries. The number of non-farm payrolls in tangible-producing services was flat and declined in goods-producing industries. Even more troubling is the fact that only two industries accounted for over 80% of the growth. Employment in Educational and Health Services (excluding tangible services) increased by 78,300. Payrolls in Government (excluding Postal Service) was up by 50,200. Thus, the health of the U.S. labor market rests upon a very narrow foundation.

Second, the data for August and September were revised significantly downward by a total of 101,000, down by 62,000 for August and 39,000 for September. In other words, the economy is not doing as well as we thought.

Yellow flags are flying. Maybe even red?