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Speaking of the Economy
Speaking of the Economy - Labor Market Decisions Over the Life Cycle
Speaking of the Economy
Feb. 23, 2022

Labor Market Decisions Over the Life Cycle

Audience: General Public

For the 50th episode of the podcast, hosts Jessie Romero, Charles Gerena and Tim Sablik use previous episodes to explore how labor markets are shaped by the economic choices we make throughout our lifetimes, from childhood to adulthood to old age.


Jessie Romero: Hi, I'm Jessie Romero, director of publications at the Richmond Fed. Thanks for listening to "Speaking of the Economy." You can find us and subscribe via your favorite podcast app, including Apple Podcasts, Amazon Music and Spotify. And if you like what you hear, please tell your friends and leave a review.

Today marks our 50th episode. We thought we'd mark the occasion by looking back at the ground we have covered together. I'll get some help from Charles Gerena, online editor in the Research Department and frequent podcast host.

Charles Gerena: Thanks, Jessie. I'm sure you'll agree that we have gotten a lot out of the conversations we've had with our guests over the last 49 episodes. I'm excited at the opportunity to mine a few nuggets from those conversations, as well as to re-introduce the podcast to those of you who have recently discovered us.

Romero: We're also joined today by Tim Sablik, a senior economics writer on our publication team. Tim is going to take over as the regular host of the podcast, so we thought we'd give him a chance to get a little more practice behind the mic today.

Tim Sablik: Hi, Jessie and Charles! Thanks for having me on, and for the opportunity to get some extra practice here. I'm looking forward to the conversations we have lined up for the future, and I'm excited talk about all the topics we've covered on the show so far.

Romero: We're excited, too.

When we looked back, one theme that emerged is the dynamics of the labor market over the course of a person's entire life. The Federal Reserve has an employment mandate, so we need to understand how labor markets work. And that's more than just adults going to their jobs, more than just adults in the workforce. Everyone is shaped by the economic opportunities and decisions that they face throughout their lives, from childhood to adulthood to old age.

Gerena: With that in mind, I think a good place to begin is at the beginning of the life cycle. In the Oct. 7, 2021 episode, Renee Haltom spoke to Angela Wells about her organization, Smart Beginnings Danville Pittsylvania. Angela shared her perspective on the value of early childhood education.

Angela Wells: We need to continue to educate on the connection between economic development and the investment in early childhood. If I reflect on research that I've read, research from numerous disciplines provide support for the importance of early childhood and economic development. All children must have access to high-quality early childhood education. A recent article from the First Five Years Fund, society gains up to $7.30 in economic return over the long term. In addition, it has showed that providing long-term benefits to children such as access to high-quality childcare increases parent participation in the workforce and contributes to economic productivity.

Gerena: Angela also reflected on how access to childcare impacts workforce participation in rural communities like Southside Virginia.

Wells: When I think about access for our communities specifically, it's not access meaning that there are spots available for children. The access is referring more to two working parents having to afford childcare without the support of benefits such as subsidy reimbursed childcare. Very often in our area, we have two working parents. And when we have two working parents, they often don't qualify for the benefits. So, what we foresee is that either one parent has to stay home and they're struggling to be able to pay their bills from month to month, or we have two parents working where they're unable to afford childcare without subsidy support.

Romero: Our director of research, Kartik Athreya, definitely agreed with Angela's concern about people having to decide between taking care of their kids and keeping their jobs. When I spoke with him for the Feb. 10, 2021 episode, he talked about what he learned about this issue as a member of the Back to Work Virginia Task Force. That's a group that was formed in April 2020 — just as the pandemic was hitting the United States really hard — to develop policies and practices to strengthen the state's childcare industry.

Kartik also talked about why the Richmond Fed would be a stakeholder in such a task force.

Kartik Athreya: Central bankers have to stay abreast of all the things that influence the potential of an economic system. Reserve Banks like the Richmond Fed are also asked to care about ensuring that communities reach their potential, very explicitly. But monetary policy, by itself, is a very limited tool to influence those kinds of goals, so we need to think carefully about forces that could be holding us back, especially those that could be holding some people back much more than others.

Access to high quality childcare is definitely one of them. The eminent economist Jim Heckman has stressed how "learning begets learning." This basically just says skills that you acquire or a child acquires early in life lay the foundation for them to acquire more advanced skills later in life. And it's tough to make up for what you miss early on. So some people's inability to find or afford good child care now likely sets their kids back in the longer run.

Access to childcare also affects people's ability to work and deliver maximum employment, as we as the Fed are asked to deliver. So, we want to understand the obstacles that are out there to that employment.

Gerena: The COVID-19 pandemic worsened issues with access to childcare, along with other cracks that had been developing in our economy for some time. Several episodes covered the pandemic from different angles. Tim, you interviewed Santiago Pinto, a senior economist and policy advisor at the Richmond Fed, about the pandemic's impact on K-12 education in the Nov. 4, 2020 episode.

Sablik: I did. Santiago talked to me about learning losses as the result of school closures in the early months of the pandemic and the sudden shift to online instruction afterwards. Based on data from past closures, economists know that such losses will likely negatively impact the future earnings of students.

But, as Santiago pointed out, the closures didn't affect all students equally.

Santiago Pinto: These school closures disproportionately hurt vulnerable and disadvantaged students, not only who rely on education but also who rely on schools for a range of other social services that include health and nutrition. Definitely this is something that likely intensifies future poverty and also increases future fiscal pressure for local governments down the line.

This sudden move from face-to-face to online instruction or virtual learning, this is another thing that contributes to increasing the discrepancies in education achievement among different groups of households or students. The research states that in general … online learning cannot fully replace face-to-face classroom instruction. This is probably more severe for students from disadvantaged backgrounds. Again, understanding that some of these discrepancies include, for instance, the amount of time parents can devote to teaching, what are the parents' skills, and the financial resources that households can allocate to support the learning process.

There's also a lot of research that explains some of the discrepancies in education achievement is the access to broadband and technology in general, right? It's well known as the digital divide. It looks like some work indicates that students that have access at home to internet, they tend to perform better in reading, math and science tests.

Sablik: The COVID-19 pandemic impacted colleges and universities as well. Community colleges that had already experienced declines in enrollment since 2011 saw even steeper declines in 2020 and 2021. Like K-12 schools, community colleges play an important role in skill development. Urvi Neelakantan, a senior policy analyst, discussed this in the Dec. 15, 2021 episode of the podcast, alongside regional economist Laura Ullrich.

Urvi Neelakantan: Laura has already talked about the role of community colleges in retooling people who are in the labor force but have lost their jobs during a recession. But community colleges also facilitate entry into the labor market in the first place. They do this in a number of ways and I'll talk about a few — a couple of direct things that they do and one that's more indirect.

First, community colleges offer a number of credentials and licenses. There isn't much research on this, but what I've seen suggests that those with a credential or a license earn more than those working in the same occupation without one.

In a recent paper economist Peter Blair … finds that these credentials and licenses serve as a job market signal to employers. One particularly interesting thing that he found is that credentials and licenses can reduce the wage gap for women and minorities because employers are using the credentials and licenses directly to determine whether the employee is the right fit for the job, rather than trying to make inferences based on age or race or gender or some other factors that are not directly related to the job at hand.

The other direct thing that community colleges do is that they are particularly good at keeping an eye out for occupations in demand and adapting their training to meet employers' needs so that the students that they train can be ready for the jobs of today and tomorrow.

The last thing I'll mention is more indirect, which is that community colleges can help students decide whether four-year college is for them and prepare them to transfer up to one if it is. Our colleague, Nico Trachter, describes community colleges as "stepping stones" for this reason and he has a published paper on the topic. And it's a more indirect role because they're facilitating entry into the labor market through the four-year college path. But it's well known that labor market outcomes are on average, very good for those who complete a four-year degree.

Romero: The returns to investing one's time and money in a college education are well documented. People are more likely to be employed, they tend to earn more money [and] they tend to have better health and live longer, to name just a few outcomes.

But basic supply and demand might lead one to ask, "Are those returns going to be diluted if more and more people go to college? I posed this question to Mark Bils, an economics professor at the University of Rochester who presented his work on labor substitutability during our December CORE Week. He was a guest for the Jan. 12, 2022 episode along with Niklas Engbom of New York University.

Mark Bils: If we consider policies that subsidize schooling – and schooling is one of the most subsidized things of our actions — one of the arguments for subsidizing schooling is in terms of inequality of earnings. As a practical matter, though, and when economists look at the effect on inequality of subsidizing schooling, very little of the impact comes from taking people who would have finished high school and then convince them or encourage them to get more years of schooling. In some sense, they're going to get higher wages, but they're going to get the wages later. There's still a trade-off for that person.

Most of the action is that more people go to college and the return on schooling falls and that's what leads to the greater equality. That's the argument which is often made. I mean, otherwise, you look at a lot of the college subsidies and they're really upper-middle-class transfers, to a large degree. That's often like a justification. But if the schooling is relatively good substitutes, then as more and more people go into schooling it won't really have such a big effect on the route of wages of people with more or less schooling.

Sablik: On the other hand, low-income workers may face disincentives going back to school to move up the career ladder because they would lose access to public assistance. Erika Bell on the Richmond Fed's community development team discussed this "benefits cliff" predicament in the Jan 13, 2021 episode.

Erika Bell: Imagine that you go to school to get the additional education required to move from a Certified Nursing Assistant position to being a licensed practical nurse. Upon this certification, you land a full-time job as an LPN and you receive a pay increase of, let's say, $10,000 a year. However, upon receiving this bump in salary, due to income limits you suddenly lose a portion of your childcare subsidy and a portion of your benefits from the Supplemental Nutrition Assistance Program or SNAP. These losses might amount to $12,000 a year. So, you would end up making less money even though you earned a promotion.

This demonstrates how climbing the career ladder may result in a net loss in income for recipients of public assistance in the short term and medium term, even though such progress will likely result in higher income over the long term. It's a challenge for those who are currently receiving public benefits but want to become self-sufficient.

Sablik: Other factors influence how much women decide to work. In the July 21, 2021 episode, Mariachristina De Nardi of the University of Minnesota talked about how the way that Social Security benefits work for married couples can reduce the cost of staying out of the workforce.

Mariachristina De Nardi: Social Security for a single person is a function of one's average lifetime earnings and the related Social Security contributions that the person paid on their own lifetime earnings. In contrast, for a married person there is a choice. The person can either claim Social Security under their own entitlement or can claim half of their spouse's entitlement while their spouse is alive and both are of retirement age. After one spouse dies, the surviving spouse can claim the highest between their own entitlement and the spousal entitlement.

Therefore, married couples have an additional level of choice when claiming Social Security benefits. This means that even if a married woman or a secondary earner never worked or had very low Social Security contributions, they can still obtain a sizeable amount of Social Security benefits after they retire just because they got married.

When married women work less, they don't necessarily obtain lower Social Security benefits. These additional benefits reduce the cost of not working by providing an income flow that is essentially unrelated to their own labor supply.

So, both provisions — a higher marginal tax rate that reduces the incentive to work and marital benefits coming from Social Security reduces the cost of not working — work together in terms of reducing the labor supply of the secondary earner.

Gerena: Both men and women have decided not to work during the pandemic, creating labor supply issues that have persisted into 2022. In the August 11, 2021 episode, I asked Renee Haltom and John O'Trakoun whether extensions of unemployment insurance had anything to do with it. Here's what Renee had to say.

Renee Haltom: For the duration of the pandemic, concern about unemployment insurance has been a consistent theme that we've heard about from businesses. The initial idea behind the supplemental benefits was to make it possible for people to stay home and socially distance. However, even early on in the pandemic at the initial shutdown phases, there were some sectors that still needed essential workers and the concern was that the more generous benefits would keep people home. That concern from businesses has only continued as they've tried to bring back furloughed workers or add new jobs to meet demand.

From my perspective as an economist, there certainly is some truth to the idea that unemployment insurance makes it easier for potential employees to stay home. But I do think the story is more complicated than that.

First and foremost, we're still very much in a pandemic. There are a heck of a lot of people who remain concerned about that, particularly in high-touch occupations. Second, child and dependent care remains a huge issue, with schools and other facilities closed or out of business.

I also think it's worth acknowledging that the pandemic has been stressful and none of us has had the comforts we're used to. At the same time, family and job responsibilities have risen for many people. Meanwhile, we have a vaccine and we can finally do some things in public again. So, I think there is a contingent of people simply choosing leisure over work now and are waiting until the fall to come back to the labor market. All that together is a bunch of reasons to stay home and fiscal policy and added unemployment benefits are making that a little more possible now.

This points to the idea we mentioned a few minutes ago that the reservation wage seems to have gone up. It seems like some workers are simply choosier, as John said, now about the jobs that they're willing to take and it would take a higher wage or potentially more desirable working conditions to come back.

Sablik: Well, we definitely covered a lot of ground in the last 49 episodes.

Romero: Yeah, you're going to have to invest in some running shoes to be the host for the future.

Gerena: Definitely.

Sablik: Will do.

Thanks again, Jessie and Charles, for the warm introduction and for passing the baton to me. I'm looking forward to the interesting topics we have lined up for future episodes, including rural housing markets, digital currency, and inflation. So, lots to look forward to.

Romero: Can't wait!

Gerena: Me too.