Council of Economic Advisers Blog

  • Did 'Cash-for-Clunkers' work as intended?

    On June 24, 2009, President Obama signed into law the Car Allowance Rebate System (CARS, commonly known as 'Cash-For-Clunkers'), one of several stimulus programs whose purpose was to shift expenditures by households, businesses, and governments from future periods when the economy is likely to be stronger, to the present when the economy has an abundance of unemployed resources that can be put to work at low net economic cost. 

    Critics of the CARS program argued that it would have little ultimate effect because most of the purchases under the program would have happened soon anyway - they were merely 'pulled forward' from the following few months.  In contrast, the CEA's September 10 economic analysis of the program argued that a substantial proportion of the CARS sales were pulled forward from a far more distant future, and thus represented an important increment to aggregate demand at just the time when such demand was sorely needed.

    Chart showing Actual versus Project Light Vehicle Sales. <a href="">You can download the data in this chart as a CSV file.</a>
    Download the data in this chart as a CSV file.

    With seven months of post-Clunkers sales data in hand (September 2009 through March 2010; see dark blue line in figure), now seems a good time for a reckoning.

    The 'short-term pull-forward' view was perhaps most vigorously articulated by automotive industry website  In late October, made a widely-reported forecast for the pace of sales in the last quarter of the year:  According to Edmunds, light motor vehicle sales in November and December would be only about 10.5 million at an annual rate (the dashed blue line in the figure).  Edmunds furthermore argued that, had the CARS program not existed, the pace of sales would have been higher, about 10.8 million, during those two months (the dashed red line in the figure). 

    But according to the final data now in hand, the actual pace of sales in November and December was about 11.0 million units (the solid blue line in the figure substantially exceeds Edmunds' October 28 forecast).  Last Thursday's announcement of a strong pace of sales in March also belies Edmunds' pessimistic trajectory.  Indeed, over the seven months following the end of the CARS program in late August, the sales pace has averaged 10.7 million units at an annual rate, much higher than the 9.6 million pace in the three months that preceded the program, and considerably stronger than the forecasts made by private forecasters just before enactment of the CARS program.

    A final source of evidence on size and timing of the 'pull forward' effect comes directly from the people who purchased a vehicle under the program.  According to a survey conducted by the Department of Transportation as part of the program, the average timeframe over which new car purchasers said they would have otherwise sold, traded in, or disposed of their old vehicle was 2.87 years - far longer than the timeframe of a few months that the program's critics hypothesized.  A plausible interpretation of the available data, in fact, is that many of the CARS sales were to the kinds of thrifty people who can afford to buy a new car but normally wait until the old one is thoroughly worn out.  Stimulating spending by such people is very nearly the best possible countercylical fiscal policy in an economy suffering from temporarily low aggregate demand.

    Christina Romer is Chair of the Council of Economic Advisers
    Christopher Carroll is a Senior Economist at the Council of Economic Advisers who focuses on Macroeconomics

  • On the Employment Situation in March

    Today’s employment report shows continued signs of gradual labor market healing.  Payroll employment rose significantly in March, and the unemployment rate remained constant despite a substantial increase in the labor force.

    Payroll employment increased 162,000.  Even after adjusting for the 48,000 temporary Census workers hired and a rebound effect from the February snowstorms, this number suggests an increase in underlying payroll employment.  Moreover, revised estimates now show a small job gain in January and a smaller job loss in February than previously reported.  As a result, for the first quarter of 2010 as a whole, job growth averaged 54,000 per month.  This is a dramatic change from the first quarter of 2009, when average job loss was 753,000 per month.

    Nonfarm Payroll Employment Q1 2010

    Download this data as a CSV file. April 2, 2010.

    The unemployment rate remained constant at 9.7 percent.  This stability reflects roughly proportional rises in the labor force and employment, as measured by the household survey.  This pattern of rising labor force and household employment has been repeated in each of the last three months.  Indeed, according to the household survey, the labor force has increased by 1.1 million since December 2009 and employment has increased by 1.4 million.*

    At the same time that we welcome today’s encouraging labor market news, it is obvious that the American labor market remains severely distressed.  More than eight million Americans have lost their jobs since the start of the recession in December 2007.  It will take sustained, robust employment growth to bring the unemployment rate down.  Further targeted actions to spur private sector job creation are critically needed to ensure a more rapid, widespread recovery.

    While this is the most positive jobs report we have had in three years, there will likely be bumps in the road ahead.  The monthly employment and unemployment numbers are volatile and subject to substantial revision.  Therefore, it is important not to read too much into any one monthly report, positive or negative.  It is essential that we continue our efforts to move in the right direction and generate steady, strong job gains.

    Christina Romer is Chair of the Council of Economic Advisers


    * The reported numbers are adjusted to remove the impact of revised population controls that the Bureau of Labor Statistics introduced in January 2010.  Without this adjustment the labor force increased by 851,000 and employment increased by 1.11 million.

  • The Economics of Workplace Flexibility

    As part of the White House Forum for Workplace Flexibility, the CEA released a report today presenting an economic perspective on flexible workplace policies and practices.
    Work-Life Balance and the Economics of Workplace Flexibility (pdf) highlights changes in American society over the past half century, including the increased number of women entering the labor force, the prevalence of families where all adults work, increasing eldercare responsibilities, and the rising importance of continuing education. These changes are among those that have increased the need for flexibility in the workplace.

    This increased need can be met with flexibility in terms of when one works, where one works, or how much one works (including time off after childbirth or other life events). As such, “workplace flexibility” encompasses a variety of arrangements that allow workers to continue making productive contributions to the workforce while also attending to family and other responsibilities.

    Data suggest that many employers are adapting to the changing needs of their workers. For example, in 2007 over one-half of employers reported allowing at least some workers to periodically change their starting and quitting times, although there is variation across workers who have access to such arrangements. And while most employers offer at least some workers the ability to return to work gradually after a major life event such as the birth or adoption of a child, job sharing is less widespread and only about one-fifth of employers permit some of their employees to work from home on a regular basis.

  • Exploring the Link between Rising Health Insurance Premiums and Stagnant Wages

    The rapid growth in health care spending in the U.S. in recent years has placed an increasingly heavy financial burden on individuals and families, with a steadily growing share of workers' total compensation going to health care costs. Because firms choose to compensate their workers with either wages or with benefits such as employer-sponsored health insurance (ESI), increasing health care costs tend to “crowd out” increases in wages. Therefore, recent rapid increases in employer-sponsored health insurance premiums have resulted in much lower wage growth for workers.

    Recent data from the Bureau of Labor Statistics' "Employer Costs for Employee Compensation" (ECEC) survey can shed light on this issue. According to the ECEC data, workers' inflation-adjusted average total compensation per hour increased by 1.3 percent per year from 2000 to 2009 (from $26.23 per hour to $29.39 per hour in 2009 dollars)1  However, the annual growth rate of average wages and salaries during this period was much lower. More specifically, if one subtracts out the employee share of health insurance premiums2, workers' average hourly wage and salary compensation increased by just 0.7 percent per year from 2000 to 2009. As shown in the following figure, the corresponding growth rate in ESI premiums (including both the employer and employee share) was much higher at 5.1 percent per year.

    Annual Growth in Components of Worker Compensation

    March 12, 2010.

    As a result of these very different growth rates, the fraction of workers' total compensation going to employer-sponsored health insurance premiums increased from 7.4 percent in 2000 to 10.3 percent in 2009. If the growth rates in both workers' average total compensation and in employer-sponsored health insurance premiums remain at their recent rates, this share will increase to 15.0 percent by 2019 and will continue to increase thereafter. Thus in the absence of reform that slows the growth rate of costs, a steadily increasing share of workers' total compensation will be eaten up by health insurance premiums.

    The increase from 2000 to 2009 in the average share of workers' total compensation going to ESI premiums is even more striking when one considers that a steadily declining share of workers and their dependents are covered by ESI. More specifically, according to the most recent data from the U.S. Census Bureau, the share of non-elderly adults and children covered by ESI fell from 68 percent in 2000 to 62 percent by 2008. This decline was to a large extent driven by a decline in the fraction of firms offering ESI to their workers, which fell from 69 percent in 2000 to 60 percent in 2009.3 Thus if one focused only on those firms that offered ESI during this period, the trends outlined above would be even more striking.

    These trends, along with recent empirical research4 on this issue, make clear that increasing health care costs are reducing the wage growth of American workers below what it otherwise would be. The President's Proposal for health insurance reform would genuinely slow this growth in costs, allowing workers to enjoy more of the benefits of their productivity increases in the form of higher take-home wages.

    Christina Romer is Chair of the Council of Economic Advisers
    Mark Duggan is a Senior Economist at the Council of Economic Advisers who focuses on Health

  • Statement on the Employment Situation in February

    Although the labor market remains severely distressed, today’s report on the employment situation is consistent with the pattern of stabilization and gradual labor market healing we have been seeing in recent months. 

    The unemployment rate remained constant at 9.7 percent.  Many had expected that some of January’s 0.3 percentage point decline would prove to be a transitory drop.  That it was maintained for a second month makes it more likely that it was a genuine decline, not statistical noise.  The number of workers unemployed for more than 26 weeks fell by 180,000, the first decline in over a year.

    Payroll employment declined by 36,000, slightly more than last month.  However, as many analysts have discussed in recent weeks, the large snowstorms in the Mid-Atlantic region in mid-February likely had a substantial negative impact on this number.  Someone who has a job but missed the entire pay period that included the 12th of the month because of the weather, and so did not receive a paycheck, is not counted as being on the payroll.  The Council of Economic Advisers estimates  that the impact of bad weather on the February employment number was likely substantially negative.  Importantly, negative weather effects this month would be expected to be counteracted next month, as workers who temporarily disappeared from payrolls because of the snow are once again counted.  In addition, according to the Bureau of Labor Statistics, temporary Census employment was an unusual factor adding about 15,000 to the payroll employment total in February.  Census employment is expected to rise substantially over the next few months, before declining again over the summer as the Census is completed.
    Of course, an unemployment rate of 9.7 percent is unacceptably high and we need to achieve robust employment growth in order to recover from the terrible job losses that began over two years ago.  That is why it is essential that Congress pass additional responsible measures to promote job creation.  It is also vital that we continue to support those struggling with unemployment.

    As always, it is important not to read too much into any individual data release, positive or negative.  Because of the disruptions from the weather, this is especially true of today’s employment data.  Although the overall trajectory of the economy has improved dramatically over the past year and appears to be continuing to improve, there will surely continue to be bumps in the road ahead.

    Civilian Unemployment Rate

    March 5, 2010.

    Christina Romer is Chair of the Council of Economic Advisers

  • Snowstorms Likely Reduced Measured Payroll Employment in February 2010

    The back-to-back snowstorms in the northeast corridor on February 4-7 and 9-11 appear to have substantially reduced payroll employment and shortened the workweek during the reference week for the February labor market data.  Based on previous instances of bad weather during the survey reference week, we think that measured February employment was reduced by roughly 100,000 while the measured workweek was shortened by about 0.3 hour.  Such a weather-related decline does not indicate that the February level of overall economic activity was weak.  Rather, it indicates that the survey reference week did not reliably reflect activity for the month as a whole.  Whatever the weather-related loss in February, it likely will be reversed in March, resulting in a larger-than-normal gain. 

    Why Weather Affects Measured Payroll Employment and the Workweek

    Although payroll employment data—collected from the Current Employment Survey—are released as monthly values, the survey counts employment for the pay period that includes the 12th of the month.  Because about half of firms issue weekly paychecks, one can approximately describe this survey design as measuring employment during the week that includes the 12th.  The back-to-back February snowstorms prevented many workers from reporting to work for several days during the week including the 12th.  Some missed the entire week.  Of those missing the entire week, some missed an entire paycheck, and so are not counted as employed in the establishment survey. (Salaried workers and others who are paid whether or not they have a snow day are counted as employed.)  In contrast, the household survey counts these workers as employed, so that bad weather would have only a small effect on the employment and unemployment data reported through that survey.   

    Although some workers may have missed an entire week of work, many more workers likely missed a few days during the week including the 12th because of the storms.  Because many workers are not paid for snow days, bad weather shortens the reported workweek.

    How Previous Storms Have Affected Payroll Employment

    One good measure of a storm’s effect on employment comes from the other survey released with each labor market report: the survey of households.  The household survey reports the number of people who usually work full time but did not work at all during the survey reference week because of bad weather (Series LNU02036012 from the Current Population Survey). 

    We detrended this “not at work due to bad weather” series by dividing by nonfarm employment.  Measured in this way, January 1996 was the most severe weather event during a survey reference week since our data began in 1976, when it prevented 1.66% of the workforce from reporting to work.  Chart 1 shows the number of people who said they were not working because of weather in the household survey along with the monthly change in payroll employment in the mid-1990s.  This figure makes clear that the 1996 snowstorm had a substantial one-time negative effect on payroll employment growth in January 1996.  This was followed by a corresponding one-time positive effect in February 1996.

    Weather Unemployment Charts

    March 5, 2010.

    Table 1 shows that in January 1996, payroll employment growth was 210,000 below the five-month moving average.  The table also shows the effect of six other important storms since 1976 (as measured by the household survey data) on not working due to bad weather.  As the table shows, the shortfall in payroll employment growth ranged from 53,000 to 210,000.  Although the February 2010 bad weather was less than half as severe as the January 1996 event, it was similar in scale to several of the others, such as January 1978 (when employment fell 146,000 below trend).  In view of the events shown in the table, an estimate of a bad-weather effect of roughly  100,000 for February 2010 appears reasonable.

    Weather Unemployment Table 1

    March 5, 2010.

    As shown in table 2, bad weather often has a big effect on the length of the workweek.  Another household survey question reveals the number of short workweeks among those who usually work full time (LNU02033223 on the BLS database).  Scaled against earlier storms, it appears that the February 2010 storm likely reduced the workweek by about 0.3 hour. 

    Weather Unemployment Table 2

    March 5, 2010.

    How the Recent Storms Compare with Previous Major Storms

    As can be seen in the weather map of the February 4-7 storm, and the February 9-11 storm, one or both of the February storms affected the highly populated region from Richmond to New York, with both storms creating heavy snowfall in the Washington to Philadelphia region.  According to NOAA, over 12 million people experienced over 30 inches of snow from the two storms combined.

    Measured by the impact on the population, these storms individually rank as the 20th and the 25th most severe snowstorms since 1956, according to National Oceanic and Atmospheric Administration’s (NOAA’s) Northeast Snowfall Impact Scale (NESIS).  According to NOAA, their combined impact is much more severe, however, and ranks their combined snowfall on a par with the January 1996 snowstorm, the second most severe in a record that extends back to 1956. 

    On the basis of the two bad-weather variables from the household survey, the two February storms do not appear to have as large an effect on the February jobs report as might have been expected based on the NESIS.  In particular, the February 2010 storms appear to have had only about half as large an effect on the survey reference week as did the January 1996 storm.  Differences between the severity indicated by the NESIS and the bad-weather variables from the household survey could be accounted for by factors such as the timing of the storms relative to the survey week, the efficacy of snow removal between the two storms, as well as many others. That said, the two storms had a major effect on the labor market survey. 

    Implications for March Employment Growth

    The workers who were unable to work in the February survey week because of the weather are likely to be working in March.  Thus, whatever negative impact the weather had on February employment growth will likely be roughly matched by a positive impact on March employment growth.  Similarly, the workweek is likely to rebound to a more normal level.

    Steven Braun is the Director of Macroeconomic Forecasting for the Council of Economic Advisers