Posted by: Josh Lehner | October 20, 2021

Labor Income is Booming

It has been our office’s view that what matters most for labor supply is total household income. If you have the financial cushion to not work given *gestures at everything* then some individuals will choose not to do so. Initially federal aid kept households afloat financially during a global pandemic. One result of the federal aid was that households built up a tremendous amount of excess savings. Expectations were, and continue to be that as those savings are spent, more workers will return to the labor market as they need to pay the bills and put food on the table. I remain a labor supply optimist.

It felt like much of the economic discourse earlier this year focused almost solely on the UI benefits. While clearly those are a big piece to the puzzle, they are not the only piece as our office has noted previously. The good news is this broader look at incomes is now coming into focus a bit more. See this really good Twitter thread from the NYT’s Ben Casselman yesterday for example. While it’s good the conventional wisdom is catching up, it’s also important to note that the story continues to evolve further.

In particular, labor income is booming. Underlying wage growth is taking the lead from the expiring federal aid. However this growth is happening among a smaller pool of workers than before. They are working longer hours and at higher pay. As shown below employment in Oregon is 4% below pre-COVID peaks and 6% below trend. However labor income is 4% above peak, and nearly back to trend. Payrolls have fully recovered even if employment has not.

Why does this matter and what are the implications? Well, for starters it means household savings are not being drawn down as much as anticipated even a few months ago. This is especially the case for households where at least one adult is working. The implications are that a second adult may not have to return to the workforce as quickly as expected given the income gains from the one earner plus the savings built up during the pandemic. In fact if you look at the latest survey from Indeed it shows the main reason job seekers are not urgently looking for work has shifted in recent months from COVID fears to financial cushion to spousal employment.

It’s important to keep in mind that the overall economic outlook remains bright. Strong household finances mean consumer demand is robust. But while it is encouraging that the economic discussion has shifted to focusing on total household incomes, the actual story continues to evolve. This payroll piece is newer in the sense that in aggregate it’s really starting to move the needle. Withholdings here in Oregon remain very strong. It also means that the risks that labor supply will take a few more months to fully return have increased. Our office’s view continues to be that the labor market will improve. Workers will return given job opportunities are more-plentiful and better-paying than before the pandemic, and as savings are drawn down. Even so the labor market will remain tight for structural and cyclical reasons, it just won’t be acutely tight.

Note that nationally the data show both strong hourly wage gains and a longer workweek, while the Oregon numbers show a steady workweek but even stronger hourly wage gains. The data can be noisy and we may have to wait for future benchmarks or revisions, but either way aggregate payroll growth is very strong


Responses

  1. And? The improvements in HH Income are likely to do much, more to reduce the number of households that are truly “housing cost burdened” than the extreme, market-based deregulation of residential zoning now happening in major Oregon cities.

    IMHO, OEA has continued to neglect providing credible analysis on “housing affordability.” The essential questions are:

    1. What are the distribution and demographics of truly “housing cost burdened” households. The unadjusted “30%” criterion isn’t sufficient for making policy. The “residual income” criterion is ideal. However, if that’s not practicable, there need to be adjustments for college students and households living off assets, not income.

    2. What will be the impacts of extreme, market-based deregulation of residential zoning on truly “housing cost burdened”?

    • Hi Paul,

      As you note, there are two ways to improve housing affordability. Stronger income growth, and lower housing costs. Both matter. A tight labor market can help with the former, while better housing supply can help with the latter. New state policies like duplex legalization are expected to provide a modest boost to the long term supply of housing. It is not a silver bullet nor will the expected benefits accrue immediately. But, over time as lots get redeveloped as the existing structures age, we may see more townhomes built instead of just detached single family homes.

      Best,
      Josh

      • Josh,

        This will sound harsh, but repeating YIMBY propaganda is no substitute for real analysis.

        “New state policies like duplex legalization are expected to provide a modest boost to the long term supply of housing. It is not a silver bullet nor will the expected benefits accrue immediately. But, over time as lots get redeveloped as the existing structures age, we may see more townhomes built instead of just detached single family homes.”

        Fact: In Eugene, and many other cities, truly “housing cost burdened” households are almost entirely in the “Very Low Income” and “Extremely Low Income” HUD categories.

        Fact: Duplexes have been widely legal for many years.

        Fact: The Eugene Planning Division staff and Planning Commission are recommending adopt of amendments that will increase the allowable density in established neighborhoods (except those with CC&Rs) by FIVE TIMES — from 9.68 to 51.62 dwelling units per net acre. They have done NO analysis on impacts to displacement, infrastructure, services, transportation, or climate change.

        Fact: Extreme, free-market deregulation of lot size and number of allowable dwellings — with no provisions for affordability or protection agains displacement — will reduce the relative supply of lower-cost housing by demolitions and “filtering UP.”

        Fact: Keeping all other factors equal, up to a point, the COST (not price) of housing is lower when less land area is required per dwelling and dwellings can be attached.

        Fact: Investors act rationally. So they invest in what they perceive as the optimal combination of ROI and risk. Huge, loosely regulated, private equity firms curren strategy is securitized, higher-rent units. The more they can jam in an optimal location, the more likely to see demolitions and displacement (“gentrification by redevelopment.”

        I repeat: OEA is being negligent by not even providing a substantive, unbiased review of the available data and research.

        Folks can get a much better education on these at:
        Housing-Facts.org

      • It is my reading of available data and research that new attached units are at lower price points than new detached units.

        If you want to argue that demolitions destroy older, more affordable housing units and are replaced with new, more expensive housing, we agree there. But I’ve said before, that comparison misses the mark. The proper comparison is when something new is built, do you build one unit, or two or three units? If you build two or three townhomes, the price of each is less than the price of the single unit if it was built. That’s the improvement in relative affordability. It’s not new vs old, but smaller townhomes are more affordable than larger detached single family homes.

        And yes, on net the builder may make more money on 3 lower price units versus 1 higher price unit. If that’s the case Oregon is likely to see a modest supply boost over the longer term as lots get redeveloped. We know housing is long-lived capital and tends to be replaced slowly over time.

        Finally in terms of who needs the most immediate help with housing costs it absolutely is our lowest-income neighbors, family, and friends. Homelessness is predominantly about people who literally cannot afford to live in our housing units as they are too expensive. We need more subsidized units to meet the needs of lower-income Oregonians. But that need does not mean there is no need for better supply and production of market rate units as well.

      • Here is the glaring flaw in your rebuttal:

        “If you want to argue that demolitions destroy older, more affordable housing units and are replaced with new, more expensive housing, we agree there. But I’ve said before, that comparison misses the mark.”

        You then sideslip to argue (endlessly) that it’s “cheaper” to build more than one unit on a lot. Of course it is.

        And if you were analysing the most cost-effective way to build low-cost housing, the obvious answer is multi-unit apartments.

        The appropriate analysis is the market rate for the new housing when the city allows investors to decide what to build on a lot that is upzoned to allow (e.g., four units) versus one *and* to allow these to be DETACHED *and* to allow the lot to then be subdivided into four lots.

        There are many possibilities, but one thing is certain, they will be at the highest price that has reasonable risk. You could explain that to legislators: Investors get a higher relative and absolute return at the highest price of housing where the risk remains acceptable.

        Even the “build-baby-build” zealots have mostly retreated from the “soybean” version of “supply-and-demand” when confronted with the pretty much uiniversal belief by credible economists that housing has low “cross-category elasticity.”

        So, as one of the many negatives of the (long discredited) neoliberal position that deregulation and leaving results to the “free-market”will produce the best social outcomes, replacing one dwelling that is afforable to a “Low-Income” household (~80% of AMI) with two dwelliings affordable only to households above ~120% of AMI worsens housing affordability. (Ironically, this is the REAL “supply-and-demand” phenomenon — removing units in an “affordable” category will INCREASE price in that category.)

      • Can you please restate the appropriate analysis part please? I do not follow what you wrote sorry.

  2. […] Source: Labor Income is Booming | Oregon Office of Economic Analysis […]

  3. Any idea on whether job growth is in certain sectors or just all industries? I know hospitality employment demand is still real high.

    Also, any idea on employment rate? I mean are we short of workers period or just willing workers (ie some people just not feeling it and are happy watching the Price is Right on the sofa)?

    Since it is topical, any forecasts on OR budget for the next few years? You gonna be giving me a kicker the next few returns? 🙂

  4. I tired reading the housing comment and I’m lost, so please translate what that has to do labor income. Thanks you.


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