How Tight is Michigan’s Labor Market?

By Martin Lavelle

Michigan’s labor market continues to recover from the Great Recession that ran from December 2007 through June 2009 and its own recession that started four years prior to that. Michigan’s unemployment rate peaked at 14.9% in June 2009, coinciding with the end of the Great Recession. Since that time, Michigan’s unemployment rate has dropped steadily, reaching 4.5% in August 2016. The last time Michigan’s unemployment rate was this low was in January 2001, just before the much shorter and milder 2001 recession. (1)

While Michigan’s current labor market expansion isn’t the longest in its history, (2) the fact that the state’s unemployment rate is now lower than that of the nation makes one wonder how much longer it can last. The superior performance of Michigan’s Southeast and Western Michigan Purchasing Managers indexes relative to the U.S. measures and recent indications that auto sales may have plateaued also imply that Michigan’s labor market expansion may be near a turning point. This blog examines some of Michigan’s labor market indicators to assess whether Michigan’s labor market is at or near “full employment.”

Chart: Unemployment Rates, Annual Averages: U.S., Michigan
Analysis
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Source: Author’s calculations using data from the Bureau of Labor Statistics.

The chart above shows the annual averages of the U.S. and Michigan unemployment rates, respectively. Since 1976, Michigan’s unemployment rate has generally been higher than that of the U.S., especially during the Great Recession and the severe 1981–82 recession. The two instances in which Michigan’s unemployment rate fell below that of the U.S. came during the mid to late 1990s and in recent months. The fluctuation in Michigan’s unemployment rate helps to show the cyclical nature of the state’s economy, driven by the manufacturing sector, specifically the automotive industry. The lows in Michigan’s unemployment rate came during boom times for the automotive industry and the highs came during rough times. Light vehicle sales volumes hit all-time highs last year and are just below those levels year-to-date in 2016. The majority of auto analysts feel that light vehicle sales will continue to slightly fall off of their 2015 highs in the next couple of years. With the automotive industry having peaked, does that mean Michigan’s labor market has peaked as well?

Historically, another sign of a tightening labor market are increasing wages and salaries. The chart below plots the unemployment rate versus workers’ total wage and salary income in the state.

Chart: Annual Wage & Salary Growth vs. Annual Average Unemployment Rate: Michigan
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Sources: Author’s calculations using data from the Bureau of Economic Analysis and Bureau of Labor Statistics.

Over the past 40 years, changes in wage and salary income have led changes in the unemployment rate. Michigan’s unemployment rate reached its previous low in 2000, a few years after the rate of growth in wage and salary income peaked. Wage and salary income growth in Michigan bottomed out in 2008, the year before Michigan’s unemployment rate peaked. As Michigan’s unemployment rate decreased after the Great Recession, wage and salary income consistently increased, accelerating in the last two years following some slowing in 2012–13. The pace of wage and salary growth edged higher in 2015 versus 2014, signaling further tightening in Michigan’s labor market. Despite the increase in wages and salaries, however, data from the Bureau of Economic Analysis show that per capita income in Michigan remains about 12% below the national average. Since 1980, per capita income in Michigan has typically been lower than in the U.S. as a whole.

When looking at wage pressures by sector, the story becomes more muddled. The chart below examines the year-over-year percentage change in wage pressures in select employment sectors in Michigan.

Chart: Average Hourly Earnings of Michigan Production Employees by Employment Sector, Year/Year Percentage Change, Not Seasonally Adjusted
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Source: Author’s calculations using data from the Bureau of Labor Statistics.

Michigan’s manufacturing sector, especially the automotive sector, led the state into the recovery it currently enjoys. However, after increasing in 2010, wages started to fall during 2011 and into 2012 as the new labor contract with the United Auto Workers (UAW) that created a lower, 2nd tier of wage ranges took effect. (3) After rebounding in 2013–15, wages are lower thus far in 2016 than in 2015, possibly because of the 2015 UAW contract that created a lower starting point for entry-level full-time workers. (4) Plateauing production volumes as light vehicle sales level off may also be a reason for lower wages in 2016.

Some sectors do support the full employment argument with their accelerations in recent months. Since the latter half of 2015, wages have moved higher in the construction and professional and business sectors, respectively. Labor shortages in building construction and within the engineering and information technology fields of the professional and business services sector have helped to create conditions for higher, more competitive wages. Wage increases have persisted in the retail trade sector since 2013. Competitive pressures from McDonalds and Walmart, as well as legislatively mandated increases in Michigan’s minimum wage, have contributed to higher wages in the retail sector. (5)

When a labor market tightens, it also means workers are increasingly hard to find. One unique characteristic of the current labor market recovery is the elevated level of those working part-time for economic reasons or involuntary part-time workers. The chart below shows what percentage of the labor force is comprised of involuntary part-time workers.

Chart: Part-Time Employment as a Percentage of Labor Force, 4-quarter moving average: U.S., Michigan
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Sources: Author’s calculations using data from the Bureau of Labor Statistics.

As labor markets expand, the percentage of the labor force that is working part-time falls. In Michigan and the U.S., the percentage of the labor force that is working part-time continues to be higher than during the previous labor market expansion. Interestingly, the difference between the part-time segments of the labor force in Michigan and the U.S. has shrunk after widening in the months leading up to and the year after the conclusion of the Great Recession. Another interesting point is that the gap between Michigan’s current percentage of the labor force that is working part-time and the percentage working part-time in the 2000s is narrower relative to the U.S. This could mean one of two things. One possibility is part-time workers in Michigan are finding increasing success in gaining full-time employment. An alternative possibility is part-time employment was elevated during the 2000s and Michigan’s one-state recession. Therefore, part-time employment as a percentage of the labor force would have been expected to fall since the mid-2000s.

In a tightening labor market, those who found themselves unemployed for a long period of time should find their way back into the workforce. The chart below looks at the percentage of the labor force that was unemployed longer than 15 weeks.

Chart: Unemployed Civilians for longer than 15 weeks as a Percentage of Labor Force, 4-quarter moving average: U.S., Michigan
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Sources: Author’s calculations using data from the Bureau of Labor Statistics.

Mirroring the previous chart, Michigan had a greater percentage of its labor force unemployed for more than 15 weeks than the U.S., most likely a result of Michigan’s recession in the previous decade. After peaking in the 2nd quarter of 2010, the percentage of Michigan’s labor force unemployed for more than 15 weeks fell and now equals that of the U.S. Are more previously long-term unemployed workers finding work or are they dropping out of the labor force altogether? Looking at the next chart, which shows the labor force participation rates of the U.S. and Michigan, respectively, we see that Michigan has seen a higher net increase off its lows than the U.S.

Chart: Labor Force Participation Rates: U.S., Michigan
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Source: Haver Analytics/Bureau of Labor Statistics.

Finally, what about discouraged workers? If a labor market is tightening, the number of discouraged workers should be decreasing. The chart below shows discouraged workers as a percentage of the labor force in the U.S. and Michigan, respectively.

Chart: Discouraged Workers as a Percentage of Labor Force, 4-quarter moving average: U.S., Michigan
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Source: Author’s calculations using data from the Bureau of Labor Statistics.

Again, the same dynamics are in play from 2003 through the end of the Great Recession, with Michigan’s labor market relatively worse off because of its one-state recession. As shown in the previous chart, the gap between Michigan and the U.S. converged and is now all but eliminated. The current percentage of Michigan’s labor force that consists of discouraged workers equals that seen during the mid-2000s, whereas the U.S. hasn’t reached mid-2000s levels yet.

Conclusion
A strong argument can be made that Michigan’s labor market is at full employment. The unemployment rate is currently below that of the U.S. and nearing historical lows. Also, wage and salary growth is at its highest in almost 20 years, labor force participation is off its post-recession lows, and data focused on the marginally attached to the labor force in different ways indicate those numbers are near or at trend. Some anecdotal reports support the argument as well. Multiple firms have instituted significant wage and salary increases in order to keep their most talented employees, while others are giving prospective employees a second look after rejecting their original job inquiry. Finally, with the auto industry operating at peak production levels and historically high sales levels and the state still significantly dependent on the auto industry, Michigan’s robust labor demand growth may be coming to an end.

Footnotes
(1) We are addressing labor market tightness here, not growth rates, not restoration of past levels of labor force size. Out-sized outmigration of working age population in response to the state’s prolonged downturn in the last decade is being held in the background.
(2) Based on BLS data going back to 1976.
(3) See https://www.chicagofed.org/~/media/others/region/midwest-economy/dziczek-dabe-january-2012-pdf.pdf.
(4) See http://www.freep.com/story/money/cars/chrysler/2015/10/22/done-deal-uaw-confirms-ratification-fca-contract/74380230/.
(5) See http://www.mlive.com/lansing-news/index.ssf/2015/12/michigan_minimum_wage_to_incre.html.

Are Baby Boomers and Millennials Moving Back into Michigan’s Cities?

By Martin Lavelle

Currently, the two most often talked about demographic groups in the U.S. are baby boomers, those born from 1948 to 1964, and millennials, those born from 1981 to 1999. Even though they’re separated by Generation X, baby boomers and millennials have at least one thing in common: their increasing desire to live in cities. Some baby boomers who are also empty nesters feel the best way to stay active is to partake in city life where there’s always something happening. Many millennials prefer city life for the chance to live near a large group of young singles, in effect continuing their college experience.

Michigan offers three urban experiences that rival any in the U.S., with each experience unique in its own way. Detroit is in the midst of looking more like a typical U.S. big city with a light rail line and entertainment district featuring the new Detroit Red Wings arena set to begin operation next year. Also, the construction of additional bikeways, especially popular with millennials, should complement the city’s riverwalk, thriving restaurant scene, and historically renowned Eastern Market.

On the other side of Michigan lies Grand Rapids, whose comeback is a little further along. The transformation of Grand Rapids’ abandoned furniture plants into apartments helped persuade people to relocate downtown, allowing ventures like the city’s ArtPrize competition to succeed.

Finally, there’s Ann Arbor with its blend of unique restaurants and boutique shops located around the University of Michigan. The university’s reputation of drawing young talent has helped persuade nascent entrepreneurs and firms to locate in the area, leading to a building boom that has significantly increased Ann Arbor’s downtown residential inventory.

Is the renewed interest in Michigan’s downtowns, specifically from baby boomers and millennials, translating into population increases in those three cities? A recent blog by Kolko showed that since 2000, baby boomers and millennials have been moving back into downtowns in significant numbers. This blog will look at how the characteristics of the aforementioned cities’ populations have changed recently.

Population Changes

This analysis will compare population changes using Census data from 2000 and 2014. During that time, if we look at the central city area, Ann Arbor saw a small increase (3.3%) in its total population, while Grand Rapids saw a small decrease (-2%); Detroit suffered a substantial decline (-28.5%) in its total population. Looking at each city’s greater metropolitan area, Ann Arbor (1) and Grand Rapids (2) showed double digit increases of 10.5% and 10.4%, respectively, while Detroit (3) experienced a 4.1% decrease in its population. Given the changes in overall population, can we say that baby boomers and millennials (and groups that share their characteristics) are moving back into the cities?

In the chart below, population by age group, we see that young adults (15-24) make up an increasing share of Ann Arbor and Detroit’s population. At the other end of the age spectrum, in all three places and in their respective metropolitan areas, the baby boomer and silent (aged 75+) generations experienced increases in both of their population shares.

Chart 1: Change in Population Share by Age Group, 2000-2014: Ann Arbor, Detroit, Grand Rapids

Chart 1: Change in Population Share by Age Group, 2000-2014: Ann Arbor, Detroit, Grand Rapids
Source: Author’s calculations using data from 2000 Census and 2014 American Community Survey (ACS).

As the next chart indicates, 20-34 year olds (millennials) now comprise a greater share of Grand Rapids’ central city population, the opposite of what’s occurred in the Grand Rapids metropolitan area. Ann Arbor’s population share that consists of millennials registered a small increase, also the opposite of what’s taken place in Washtenaw County. Meanwhile, 55-74 year olds (baby boomers) moved back into all three cities (and metropolitan areas). Ann Arbor and Detroit now have a higher percentage of those from the silent generation within their city borders.

Chart2: Change in Population Share by Demographic Group, 2000-2014: Ann Arbor, Detroit, Grand Rapids

Chart 2: Change in Population Share by Demographic Group, 2000-2014: Ann Arbor, Detroit, Grand Rapids
Source: Author’s calculations using data from 2000 Census and 2014 American Community Survey (ACS).

The next chart looks at changes in population by education level. Grand Rapids saw a small increase in those with some college experience and a substantial increase in college graduates. In contrast, Washtenaw County saw a modest increase in those with some college experience and a significant increase in its college-educated population, the opposite of what occurred in the city of Ann Arbor. In Detroit’s central city, there were declines in both categories, whereas the Detroit metropolitan area saw a significant increase in those who had at least obtained their bachelor’s degree.

Chart: Change in Population by Educational Attainment, 2000-2014: Ann Arbor, Detroit, Grand Rapids Source: Author’s calculations using data from 2000 Census and 2014 American Community Survey (ACS).

Chart 3: Change in Population by Educational Attainment, 2000-2014: Ann Arbor, Detroit, Grand Rapids
Source: Author’s calculations using data from 2000 Census and 2014 American Community Survey (ACS).

The next chart focuses on the number of families presently living in cities. Grand Rapids saw a small influx of families with no children while that number remained relatively similar in Ann Arbor. Both metropolitan areas witnessed robust increases in the number of families without children. Detroit witnessed a massive outmigration of families with children of all age groups from both its central city and metro area. Ann Arbor and Grand Rapids saw significant, but less severe, declines in families with children. In their metro areas, Grand Rapids experienced small increases in families with older children and families with young and old children, while Ann Arbor experienced a moderate increase in families with older children.

Chart: Change in Number of Families by Family Type, 2000-2014: Ann Arbor, Detroit, Grand Rapids Source: Source: Author’s calculations using data from 2000 Census and 2014 American Community Survey (ACS).

Chart 4: Change in Number of Families by Family Type, 2000-2014: Ann Arbor, Detroit, Grand Rapids
Source: Source: Author’s calculations using data from 2000 Census and 2014 American Community Survey (ACS).

The next chart looks at population share by race. All three cities saw increases in their Hispanic population, the largest occurring in Detroit. In contrast, all three cities saw decreases in their White population, though Detroit’s was small compared with the decrease in the metropolitan area’s white population. More recent census data suggests that Detroit’s White population increased in 2014 for the first time since the 1950 Census. (4) The Asian-American population grew in Ann Arbor and Detroit, while the African-American population increased in Grand Rapids.

Chart 5: Change in Population Share by Race, 2000-2014: Ann Arbor, Detroit, Grand Rapids Source: Author’s calculations using data from 2000 Census and 2014 American Community Survey (ACS).

Chart 5: Change in Population Share by Race, 2000-2014: Ann Arbor, Detroit, Grand Rapids
Source: Author’s calculations using data from 2000 Census and 2014 American Community Survey (ACS).

The final chart looks at household income. Since 2000, the population in Ann Arbor and Grand Rapids has increasingly comprised middle- to high-income earners. At the county level in both metro areas, the income distribution has shifted even more toward the higher end. Meanwhile, Detroit’s population still consists of mostly low- to middle-income earners. Comparatively, the counties that make up Detroit’s metropolitan area (5) have seen their income distributions shift away from the middle income brackets toward the low and high ends.

Chart 6: Change in Population Share by Income Decile, 2000-2014: Ann Arbor, Detroit, Grand Rapids Note: 1 is the highest income decile (greater than $200,000); 10 is the lowest income decile (lower than $10,000). Source: Author’s calculations using data from 2000 Census and 2014 American Community Survey (ACS).

Chart 6: Change in Population Share by Income Decile, 2000-2014: Ann Arbor, Detroit, Grand Rapids
Note: 1 is the highest income decile (greater than $200,000); 10 is the lowest income decile (lower than $10,000).
Source: Author’s calculations using data from 2000 Census and 2014 American Community Survey (ACS).

Conclusion

There is some evidence that three of Michigan’s most attractive and best-known cities are successfully attracting millennials and baby boomers. By age group, baby boomers and multiple segments of the millennial cohort now comprise a higher share of the populations of Ann Arbor, Detroit, and Grand Rapids. The picture becomes less clear when looking at changes in population by educational attainment and income, with Grand Rapids and Ann Arbor drawing a higher-skilled citizenry.
The most telling chart for me is the one concerning changes in family structure. The number of families with no children grew slightly in Grand Rapids, stayed the same in Ann Arbor, and significantly decreased in Detroit, though at a lower rate than the overall population decline during that time. While those trends are somewhat encouraging, the trends describing changes in the number of families with children are discouraging. Families with school-age children moved out of each of the three cities at relatively high rates, and we saw increases in families with children in the Ann Arbor and Grand Rapids metropolitan areas. The presence of families in cities signals an acceptable standard of living to those considering moving into cities from suburban areas, providing opportunities for cities to grow their populations and thrive.

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Footnotes:

(1) Ann Arbor’s metropolitan area consists of Washtenaw County.
(2) For overall population and population by race figures, the Grand Rapids metropolitan area consists of Barry, Kent, Montcalm, and Ottawa counties. Otherwise, the Grand Rapids metropolitan area consists of Kent and Ottawa counties because of the availability of data.
(3) For overall population, population by race, and educational attainment figures, Detroit’s metropolitan area consists of Lapeer, Macomb, Monroe, Oakland, St. Clair, and Wayne counties.
(4) See http://www.detroitnews.com/story/news/local/detroit-city/2015/09/17/detroit-white-population-rises-census-shows/72371118/.
(5) For household income, Detroit’s metro area consists of Macomb, Oakland, and Wayne counties because of the availability of data.

The impact of the changing structure of employment on wages in Michigan

By Paul Traub

As of June 2014, total nonfarm employment for the U.S. is reported to be greater than its January 2008 peak by 430,000 jobs. In contrast, according to the most recent data from the U.S. Department of Labor’s Bureau of Labor Statistics, Michigan nonfarm employment as of June 2014 is still down by 550,800 jobs or 11.7% from its previous peak of April 2000 (Chart 1). In addition, since the start of the last recession, Michigan nonfarm employment is still down 105,300 jobs or 2.5%.

Chart 1

It is important to note that since bottoming in 2010, Michigan’s job growth has outperformed the nation’s on a percentage basis, growing by 8.1% versus 7.0% for the nation. However, Michigan’s job growth since 2010 has been concentrated in nontraditional industry sectors, leading to a significant change in Michigan’s employment structure. In addition to this change in employment structure by industry, Michigan’s average weekly wage, once higher than the nation’s, has fallen below the national average (Chart 2). At $844 per week, Michigan’s average real wage in 2013 is about equal to what it was in 1999, with much of the lack of wage growth being attributed to the change in employment structure by industry sector and associated wages. This blog explores the change in Michigan’s employment structure and its impact on Michigan’s average weekly wage over the past 15 years.

Chart 2

Although job growth in Michigan has outperformed that of the nation as a whole since 2010, according to the data in Chart 2 wages in Michigan haven’t kept pace. In fact, Michigan’s positive wage gap disappeared in 2006 and has continued to turn more negative since then. Michigan’s strong job growth since 2010 started from a much lower base than any of the other states. Total U.S. nonfarm employment reached an all-time peak of 134.4 million jobs in January 2008 then fell by 6.3% to 129.7 million jobs by February 2010. However, Michigan’s employment difficulties started almost eight years earlier, just prior to the 2001 recession. Michigan’s nonfarm employment peaked in April 2000 at 4.7 million jobs, before starting to trend downward and finally leveling off in 2010. During the almost ten years of employment decline, Michigan nonfarm employment fell by 18.4 % or 861.6 thousand jobs, the biggest loss of any state in the nation. In addition, as of June 2014, Michigan’s nonfarm employment remains 11.7% below its previous peak, which gives Michigan the distinction of having the largest employment gap, defined here as current employment below a previous peak, of any state in the country. In fact, the next largest employment gap is only about half that of Michigan at 5.9% for both Nevada and Ohio.

Chart 3 shows the current percentage change in Michigan’s total nonfarm employment by major industry sector since 2000, when Michigan’s employment started its gradual decline. The two sectors that have performed the best for Michigan since the start of the recovery are leisure and hospitality and education and health services. It should be noted here that education and health services employment did not fall noticeably during the 2008 recession and, therefore, it is the only sector in Michigan that has actually sustained a positive trend of job creation since the 1990s.

Chart 3

The sectors that lost the most employment on a percentage basis were manufacturing followed closely by construction. Michigan still has one of the nation’s highest employment concentrations in manufacturing jobs but of the top manufacturing states by employment in 2000, Michigan ranks third in job loss behind only California and Ohio. While the U.S. has seen employment numbers exceed their previous peak for every sector except two (information and government), Michigan hasn’t experienced the same fortunate results.

What happened to manufacturing jobs in Michigan has been well documented. Throughout the decade of the 1990s, manufacturing employment in Michigan averaged about 20.2% of total nonfarm employment. A large percentage of those jobs were tied to the automotive industry. By 2009, manufacturing employment as a share of total nonfarm employment in Michigan had fallen to just 12.0% from 19.2% in calendar year 2000. This equates to a loss of over 433,000 manufacturing jobs in less than a decade, the equivalent of almost 23,000 jobs per year. By 2013, Michigan had recoved some of the manufacturing jobs that were lost during the recession, but manufacturing’s share of total nonfarn employment of 13.7% remained well below its share in calendar year 2000 (Chart 4). These events surrounding the loss of many automotive manufacturing jobs also explain some of the job losses in other sectors. Construction, for example, is closely tied to investment, and in Michigan much of that investment is related to the automoble industry—not only business investment on plant and equipment but also residential investment on housing and durable goods for automotive workers, some of whom lost their jobs or left the state during the recession.

Chart 4

During this time frame, Michigan’s total share of U.S. nonfarm employment fell from 3.5% in 2000 to 3.0% in 2013 (Chart 5). The decline was felt in every sector except information. Even though the infromation sector was able to gain share relative to the U.S.—going from 2.0% in 2000 to 2.1% in 2013—it actually lost share in Michigan, falling from 1.6% in 2000 to 1.4% in 2013.

Chart 5

Although there were some industry sectors that added share as a percentage of Michigan employment between 2000 and 2013, including education and health services (10.7% to 15.4%), leisure and hospitality (8.5% to 9.8%), professional and business services (13.7% to 14.7%), other services (3.7% to 4.1%), and financial activities (4.5% to 4.8%), some of these share gains can be traced back to lower overall employment. Only two of these sectors, education and health services and leisure and hospitality, have added enough employment to surpass their 2000 employment levels.

At the same time that Michigan employment was declining, so were average weekly wages. Chart 6 below shows Michigan’s average weekly wages divided by the average weekly wage for the U.S. by sector in calendar years 2000 and 2013, or the wage permium Michigan workers were earning.(1)

Chart 6

Based on the latest data from the U.S. Department of Labor’s Quarterly Census of Employment and Wages (QCEW), in calendar year 2000 Michigan’s manufacturing workers earned an average premium of 16% relative to manufacturing workers elsewhere in the country, and Michigan’s construction workers earned a premium of 15%. While workers in the manufacturing and construction industries still earn more than the national averages, their wage premiums have been reduced significantly. In addition, the ratios between wages in Michigan and the U.S. have fallen in every sector except government. As noted earlier, the manufacturing and construction sectors also had the highest percentage decline in employment since calendar year 2000 and continue to remain well below their calendar year 2000 employment levels. While Michigan workers earned a 5% premium in 2000, that premium had been entirely reversed by 2013, when Michigan workers earned about 5.0% less than the national average.

Since 2000, the structure of Michigan’s employment and average wages has changed considerably. Although Michigan has made some employment gains recently, total nonfarm employment still remains below its previous peak. But how much different might Michigan’s total employment look if we could go back to the way things were in 2000? To answer this question, I constructed a scenario in which Michigan maintained the same percentage of national employment by sector as it had in 2000. Chart 7 below shows the results of this scenario in percent change by sector from average year 2000 to June, 2004. This shows that Michigan’s total employment would be 3.2% higher than it is today and 0.2% higher than its previous peak, with the largest percentage gains coming in the mining and logging, education and health services, and leisure and hospitality sectors. However, Michigan would still have suffered significant employment declines in the manufacturing, information, and construction sectors.

Chart 7

To look at what impact Michigan’s changing employment structure has had on wages, I constructed two different scenarios. In the first wage scenario, I held Michigan’s current wage by sector constant but changed the employment shares by sector to what they were in 2000 to match what I did in the employment scenario above. In the second scenario, I held the employment shares by sector equal to what they were in 2013 but I changed the average weekly wage ratios to what they were in 2000. For each of these two wage scenarios, I then calculated Michigan’s weighted average weekly wage for all the sectors. Chart 8 shows the results of these two scenarios compared with the 2013 average weekly wage in Michigan. The first wage scenario implies that if Michigan had the same employment structure by sector that it had in 2000, the total average weekly wage would have increased by 3.0% to $933 a week. Even with this increase, Michigan’s average weekly wage would still be below the national average of $958 per week by 2.6%. In the second wage scenario, the average weekly wage in Michigan increases by 9.3% to $990 per week. This scenario places Michigan’s average weekly wages above the national average but by only 3.3% versus the 5.0% premium that existed in 2000.

Chart 8

In summary, while Michigan’s employment has made significant improvement during this economic recovery, there is still a lot of work that needs to be done. Without question, one of the most positive events pertaining to Michigan employment and wages has been the steady and long-lasting growth in the education and health services sector. The education and health sector has not only helped to offset some of the jobs lost in manufacturing and construction, but also the sector’s higher than national average weekly wage has been an added bonus to the state. Other sectors that could provide added help to Michigan’s employment structure and wage picture going forward include the manufacturing and construction sectors. Given that these two sectors still command a small wage premium, any improvement in either of these sectors would surely help total average wages for the state. However, going back to the way it was in 2000 doesn’t seem to be the remedy.

Even if Michigan could go back in time by 14 years, its employment and wage situation wouldn’t be that much different than it is today. Although total nonfarm employment would be higher today if Michigan had the same percentages of U.S. employment by sector as it did in 2000, it would only be higher by 3.2%. That would equate to an average job growth of just 0.2% per year over a 14-year span. We also saw that total average weekly wages for Michigan would seem to look considerably better if Michigan still enjoyed the same wage premiums it had in 2000, but the changes in the structure of employment by sector that have taken place would diminish some of the total wage premium. What isn’t apparent at first glance is how much more important the structural change in employment was to total wages in Michigan. Table 1 shows an estimate of total weekly wages in Michigan by multiplying total nonfarm employment by the average weekly wage for 2013 for each of the two wage scenarios discussed above. What this shows is that if Michigan maintained the same percentage of national employment by sector in June, 2014 as it had in 2000, together with the average weekly wage this assumption implies, Michigan’s total weekly wages would be greater than if the state held the same wage premiums today as it did in 2000. So even if Michigan had the same wage premiums as in 2000 and the higher weekly wage this scenario implies, total weekly wages for the state would not be as great as if the employment structure were the same today as it was in 2000.

Table 1

That’s not to say that the erosion of Michigan’s wage position relative to the national average hasn’t has a significant impact on total average weekly wages in the state, but it does seem that the wage premium change wasn’t as significant as the shift in the employment structure between sectors when taking total weekly wages for Michigan into consideration.

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(1) Calculations are based on U.S. Department of Labor’s and include only covered employment.

2013 Michigan Personal Income

By Martin Lavelle

Income received by state residents remains an important and widely followed measure of economic progress.1/ Personal income is income received from all sources (net of contributions to government social insurance programs, such as Social Security and Medicare).2/ State personal income can be broken down into three categories: 1) net earnings by place of residence (e.g., wages and salaries)3/; 2) dividends, interest, and rent; and 3) transfer payments (e.g., Social Security payments). As chart 1 shows, income received by Michiganders used to mainly come from net earnings, but the other two categories, especially transfer payments, have constituted a larger share of income in recent years, particularly after the Great Recession (which started at the very end of 2007 and concluded in mid-2009)/4. After 2011 (when Michigan’s economic recovery started to accelerate), there has been little change in the composition of Michigan personal income.

Chart 1: Breakdown of Michigan Personal Income
Chart 1 Source: Author’s calculations based on data from www.bea.gov.

Personal income growth in Michigan slowed for a second straight year in 2013: Personal income increased 3.5% in 2012 and 2.5% in 2013 after rising 5.5% in 2011./5 When deflated by the Detroit area Consumer Price Index (CPI), Michigan personal income grew 1.0% in 2013, decelerating from its 1.5% growth rate in the previous year. Michigan’s real disposable personal income growth also slowed in 2013: Real disposable income grew a scant 0.1% last year, compared with 1.1% in 2012./6

Michigan’s economy and its personal income reflected national trends in 2013: Somewhat lower growth in take-home pay for employees last year relative to 2012 and the resolution of the so-called fiscal cliff in January 2013 were largely responsible for the slowdown in personal income growth./7 With the exceptions of construction, finance and real estate, and health care, private nonfarm sectors saw slower growth in work earnings in 2013 than in 2012. When weighted by sector, manufacturing was the nonfarm sector that made the largest contribution (0.52 percentage points) to personal income growth in 2013. The government sector was the nonfarm sector that made the smallest contribution (–0.25 percentage points) to personal income growth last year; this occurred mainly because of changes in personal income growth for workers in state and local governments. In addition, changes to fiscal policies contributed to slower personal income growth in 2013. Specifically, the reinstitution of the federal payroll tax rate of 6.2% for personal contributions to Social Security (from 4.2%), as well as higher capital gains and dividend tax liabilities relative to 2012, helped temper personal income growth in 2013.

With respect to personal income growth, Michigan was in the middle of the pack among Seventh Federal Reserve District states in 2013, as table 1 shows; it was also close to the national value. Since 2010, both personal income growth and disposable personal income growth in Michigan were lower than the respective national values./8 With regard to disposable income, this trend may partly reflect fiscal policy changes that occurred in Michigan. Since 2010, Michigan has revised its tax code in multiple ways, including the application of state income taxes to retiree pensions, which has dampened disposable income growth./9

Table 1: Personal Income Growth, Seventh District and United States
Table 1 Source: www.bea.gov.

Table 2 shows Michigan comparing more favorably to the United States in terms of per capita personal income growth in 2013; but Michigan still ranks in the middle of the Seventh District by this measure.
During most of the 2000s, Michigan’s economic growth stagnated, and it fell into a one-state recession between 2003 and 2009. During the recession, per capita personal income growth slowed. In 2000 (when indexed), U.S. and Michigan per capita personal income were virtually equal. Over the period 2000–07 (before the Great Recession began), U.S. per capita personal income increased 31.2%, while Michigan per capita personal income increased 18.6%. However, over the period 2010–13, per capita personal income (as well as per capita disposable income) increased at a higher rate in Michigan than in the nation as whole./10 Michigan’s higher per capita income growth rates may be in part due to changes in its household employment and labor force participation rates. Both rates have been increasing more rapidly as of late.

Table 2: Per Capita Personal Income Growth, Seventh District and United States
Table 2 Source: www.bea.gov.

Chart 2 shows what percentage of the working-age population in the United States and Michigan was employed from 1976 through 2013. The ratios of employment to working-age population in the nation and Michigan fell during the Great Recession and slightly rebounded in the last couple of years. But Michigan’s ratio of employment to working-age population fell more sharply over the past decade (despite the state having lost population) and is now below its all-time low. After losing population during the 2000s, Michigan’s population grew an estimated 0.1% since 2010./11 Meanwhile, the U.S. population has grown an estimated 0.8%.

Chart 2: Employment-to-Working-Age-Population Ratio: United States and Michigan
Chart 2 Source: www.bls.gov.

When looking at changes in per capita personal income over the past 45 years, one can see how much the United States and the Seventh District have outpaced Michigan. Until 2001, only Illinois was higher than Michigan in terms of its per capita personal income relative to the nation’s (see chart 3). Michigan’s one-state recession during the 2000s becomes evident in chart 3, when its relative measure of per capita personal income diverges from those of other Seventh District states (except Indiana’s). During the 2000s, the income disparity between Michigan and the rest of the country grew quite a bit. This may have been due in part to “brain drain” from Michigan. Research from the Cleveland Fed has found that a state’s knowledge stock—which is composed of the number of patents issued and the number of high school and college graduates—is the main factor explaining a state’s relative per capita personal income over long periods of time./12 Since the end of the Great Recession, it appears Michigan’s per capita personal income growth is at least equal to, if not slightly greater than, those of the Seventh District states and the nation as a whole, but this growth hasn’t resulted in a return to parity with most of them as chart 3 shows.

Chart 3: Per Capita Personal Income Relative to the United States’: Michigan and Other Seventh District States
Chart 3 Source: Author’s calculations based on data from www.bea.gov.

As mentioned before, transfer payments have made up a large share of Michigan personal income growth lately. Indeed, transfer payments have played an important role in lifting income levels in Michigan in recent years. But that has come with a price: Michigan’s Unemployment Insurance Trust Fund has fallen into the red. Consequently, Michigan has taken on loans from the federal government and suffered reductions in Federal Unemployment Trust Act (FUTA) tax credits./13 In addition, Michigan employers are in the process of paying off revenue bonds (issued to pay off Unemployment Insurance Trust Fund liabilities); the bonds are held by the federal government. Such liabilities likely reflect future drains on personal income to Michigan residents as the trust fund is replenished from payroll taxes. In response to stress on the trust fund, the state made other changes to its unemployment insurance program, including cutting unemployment benefits to 20 weeks from 26 weeks in 2011./14 Because employers are paying off revenue bonds, Michiganders face not only the loss of potential income but also potential income growth.

Conclusion

Michigan’s one-state recession in the 2000s lowered employment and employment participation, thereby slowing its per capita personal income growth. In regard to state per capita personal income growth relative to that of the nation’s, Michigan has now reached a point where it has clearly fallen behind most of its Seventh District neighbors. As the national economy continues to recover from the Great Recession, we can ask whether Michigan has now returned to personal income growth rates of the past for the foreseeable future. The answer is yes, but this may not be good enough. Despite the noteworthy amount of positive economic news coming from Michigan since the end of the recession (including the auto industry’s resurgence), its personal income growth has, at best, matched the long-term trend for personal income growth in the United States. At this pace, the Michigan economy is vulnerable in losing further ground during the next national downturn.

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1/ Variations in personal income growth between states can stem from differences in the fortunes of the local industries that are sharply concentrated within each. For example, while analyzing fluctuations in payroll by industry sector, I note that manufacturing is to Michigan as mining is to Montana or as retail trade is to Nevada.
2/ Personal income is typically not adjusted for inflation.
3/ Net earnings by place of residence = Earnings by place of work – Personal contributions for government social insurance + Adjustment to convert earnings from a place-of-work basis to a place-of-residence basis.
4/ Another reason transfer payments now constitute a higher percentage of personal income is new retirees receiving Social Security.
5/ State personal income growth figures for the year’s previous quarters are normally revised with each new quarterly data release from the U.S. Bureau of Economic Analysis (BEA). Benchmark revisions for personal income are usually done shortly after with other BEA benchmark revisions.
6/ Real disposable personal income is after-tax, inflation-adjusted income.
7/ The fiscal cliff was a combination of expiring tax cuts and across-the-board government spending cuts that were scheduled to become effective on the final day of 2012. For further details, see www.chicagofed.org/digital_assets/publications/chicago_fed_letter/2014/cflapril2014_321.pdf.
8/ In 2010–13, annualized personal income growth for the United States and Michigan was 4.3% and 3.8%, respectively. Over the same period, annualized disposable income growth for the United States and Michigan was 3.4% and 2.9%, respectively.
9/ See www.mlive.com/politics/index.ssf/2011/05/gov_rick_snyder_signs_michigan.html.
10/ In 2010–13, annualized per capita income growth for Michigan and the United States was 3.8% and 3.5%, respectively. Over the same period, annualized per capita disposable income growth for Michigan and the United States was 2.9% and 2.7%, respectively.
11/ Since 1978, there is a positive, yet somewhat weak, correlation (0.35) between Michigan real gross state product (GSP) growth and population growth.
12/ See www.clevelandfed.org/research/workpaper/2006/wp0606.pdf.
13/ Go to journals.gmu.edu/newvoices/article/download/67/65.
14/ Ibid.

Michigan increases minimum wage

By Paul Traub

On May 27, Michigan Governor Rick Snyder signed legislation that would increase Michigan’s minimum hourly wage, making Michigan one of seven states together with the District of Columbia that have passed legislation to increase their minimum wage this year. The other six states are Connecticut, Delaware, Hawaii, Maryland, Minnesota, and West Virginia. In addition, 32 other states have considered minimum wage legislation during 2014, with 28 of those considering increases to their minimum wage. 1/ As of June 1, 22 states and the District of Columbia have state minimum wages above the federal minimum hourly wage of $7.25 (see map).

US Map

On September 1, Michigan’s minimum wage will increase from $7.40 to $8.15. As shown in table 1, under the new law Michigan’s minimum wage will continue to grow through 2018 until it reaches $9.25 per hour. From that point forward, the wage will continue to increase by the rate of inflation for Midwestern states up to a limit of 3.5%, so long as the unemployment rate is at or below 8.5% in the prior year.

Table 1

The new law is thought by some to be a compromise by Michigan legislators aimed at preempting a November ballot initiative asking voters to raise the minimum wage to $10.10 per hour, including for those workers eligible to receive tips. Under the new Michigan law, workers who are eligible to receive tips must be paid a wage equal to at least 38% of the minimum wage and will start by receiving $3.10 per hour, rising to $3.52 per hour by 2018. Many employer groups, including the Michigan Restaurant Association, that were opposed to the ballot proposal seem to see the new Michigan legislation as a workable compromise.

Since 1980, Michigan workers have seen the minimum hourly wage increase only six times. Chart 1 shows Michigan’s minimum wage in both nominal and real terms from 1980 through 2014.

Chart 1

After adjusting for inflation, using the personal consumption expenditures (PCE) price index, the minimum wage for 2014 comes out to $6.78 per hour, which is below 1980’s real hourly wage of $7.05 per hour. Throughout the years, increases in the minimum wage have repeatedly done no more than to return the real wage back to where it was in 1980, only to see it fall behind again as inflation ate away at the purchasing power of minimum wage workers. The biggest decline in purchasing power occurred during the 15 years between 1980 and 1995, when the real minimum wage fell by 38%.

One of the biggest complaints about the new minimum wage is that it will hurt small business owners the most. Because higher wages will increase the cost of labor and business owners may not be able to pass all of the increased cost on to their customers, their profits may be adversely affected. Some business owners say that in response to their declining profit margins, they will be forced to cut back on employee hours worked or the number of employees in total. Chart 2 below shows the annual percentage change in the new minimum hourly wage adjusted for inflation. The wage is adjusted using PCE price index estimates of 1.8% for 2014–15 and 2.0% for subsequent years. At first glance, it looks as if wages are going to increase substantially, increasing 8.3% the first year.

Chart 2

In purchasing power terms, Michigan’s real minimum wage has fallen more over the past three decades than it has increased. The new legislation will increase the real minimum wage by 2018 (give the above-mentioned assumptions) to an estimated $7.85 in 2009 dollars, which is equal to a compound annual growth rate of 0.3% since 1980. So one way to look at the most recent increase in the minimum wage is that it will bring the real wage back to where it was 35 years ago. Going forward, the wage is tied to inflation or 3.5% (whichever is lower), helping to a somewhat stable real income for minimum wage workers and protecting their buying power in the process.

1/ David Baily, Karen Pierog and Mary Wisniewski, 2014 “Michigan, in bipartisan move, raises minimum wage”, Reuters, chicagotribune.com, May 27, 2014.