Economic Impact: College degrees provide resiliency amid change

Apparently a college degree does make a difference — at least when it comes to a region’s ability to recover from recession.

Northern Virginia is a driver of growth in our state. This was the case in the period between the last two recessions. From 2002 through 2007, employment in the Northern Virginia portion of the Washington metro area expanded at an annual average rate of 2.7 percent, compared with a 1.5 percent rate statewide.

Employment in Northern Virginia also recovered from the most recent recession more quickly than the state and nation. It reached the former peak in employment early in 2011, compared with 2014 in both the state and the nation.

Then came federal budget cuts and a government shutdown. During this period, the lack of growth in Northern Virginia caused the economy in Virginia to stall.

Employment growth in Northern Virginia contracted 0.7 percent on a year-over-year basis in February 2014 and drove the overall state growth down 0.3 percent during the same period. In contrast, employment growth in the nation was accelerating and stood at 1.6 percent.

One would expect such a sharp slowdown in employment that is caused by one industry sector — federal spending — to generate a prolonged slowdown in economic activity as displaced workers try to find other employment.

Similar to the 1990s, when a cut in military spending slowed growth in Northern Virginia for a short time, the latest employment report shows the region growing at the same rate as the nation. For the 12 months ending with September 2015, employment grew 2 percent in Northern Virginia compared with 2 percent in the nation and 0.9 percent in the state.

A highly educated population is a major reason for the quick rebound in Northern Virginia.

Based on census data from 2013, 54 percent of residents in the region have a bachelor’s degree or higher, compared with 30.5 percent in the nation. The unemployment rate for people in the labor force with a bachelor’s degree was 2.5 percent in September, compared with 5.2 percent for those who have only a high school diploma.

Skills that come with a bachelor’s degree are more easily transferable from one industry to another. It’s not quite as easy as changing a consultant’s letterhead from Defense Inc. to Cyber Security LLC, but the transferable skills possessed by workers in Northern Virginia clearly give the region resiliency during times of economic change.

Tracking Liftoff: Will it be October?

The Federal Open Market Committee (FOMC) is getting ready for it October 27-28 two-day meeting, where it will decide whether it is time to raise the federal funds rate target.

Based on comments by some Fed officials, it appears that a rate hike might come before year-end.  As shown in the right-hand column of the graphic below, however, monthly employment gains have slowed, as has capacity utilization.  The deceleration in growth is causing some analysts to predict that the Fed won’t raise rates until its December meeting or even delay until 2016.

The graphic below allows you to track how FOMC members are thinking about when that liftoff in rates should occur. Click on the photo of an FOMC member to see that person’s view about the timing of liftoff, how their view may have evolved since last December, and key quotes that are hyperlinked to full speeches.

The photos of voting members are shown in circles with nonvoting members in squares. Key economic indicators are presented on the right (where the data shown represent the original estimates that were available at the time of the meeting rather than more recent revisions).

The number of people in college-age range is declining

Colleges and universities may want to take note: The number of people in the college age range of 18 to 24 is falling.

The nation's population is expected to grow by more than 13 million, or an annual average of 0.8 percent a year, from this year through 2020.

Virginia will see 403,585 new residents, or 0.9 percent a year, in the next five years. And the Richmond metropolitan statistical area will gain 67,346 people, or 1 percent a year.

However, not all age groups will grow over that period. While the number of echo boomers and retirees will increase, the number of college attendees over this next five-year period will decline, according to data based on the U.S. Census projections.

The “echo boom” births in the United States peaked in 1990. The children of that peak became college-freshman around 2008. Since then, the population of 18 to 19 year olds in the nation has trailed off.

Children born at the peak of the echo boom are now about age 25, and most are out of college. As a result, the size of the prime college-aged population is on the downswing.

The prime college-attending ages of 18 to 24 makes up about 58 percent of the college student population according to fall 2013 enrollment data from the 2014 Digest of Education Statistics. The U.S. population of people in that age range peaked in 2013 at 31,535,000.

As of 2015, this segment of the population has slipped 1 percent to about 31,214,000.

This downturn is expected to continue until 2020 when the number of people 18 to 24 hits a trough of about 30,555,000 - a drop of 2.1 percent from 2015 levels. 

Some areas of the country will see more drastic declines, while other areas can expect to see no drop at all.

Nine states are projected to grow in the 18 to 24 segment in the next five years, including Utah (up 3.9 percent) and Texas (up 3.4 percent).

States forecast to see steeper-than-average declines include Michigan (down 6.9 percent) and New Mexico (down 6.8 percent).

By comparison, Virginia is expected to see a 0.9 percent drop and the Richmond metro area is projected to decline by 1.0 percent.

There is some good news for those wanting to see an increase of population in the college-aged segment.

The number of U.S. births hit a trough in 1997. Many children born in that year are beginning their freshman years in college.

Following 1997, the number of births began trending upward and peaked in 2007 at a height surpassing that of the echo boom.

So while post-secondary schools are facing unfavorable demographics in the short run, another swell is on its way.

On another end of the pendulum, retirees - aged 69 and older - are growing by double digits. 

Nationwide, the population in that age group is expected to increase by 18 percent from 2015 through 2020.  The growth of this segment in Virginia (up 19 percent) and the Richmond metro area (up 21 percent) are both faster than the nation.

The fastest growing states are expected to be Alaska (27 percent) and District of Columbia (26.1 percent), while the slowest growth is expected in Connecticut (14.5 percent) and Rhode Island (14.9 percent).

This demographic group will put increased demand on the health care system for many years to come.

Defense Budgets and Actual Funding: Presidents Don’t Typically Get What They Ask For

Another budget showdown this fall seems inevitable. The President’s Budget for Fiscal Year 2016 calls for $561 billion in defense spending (excluding overseas contingency operations).  That’s $38 billion above sequestration levels.

Ultimately, however, budgeting is decided in Congress, and a look back at previous budget proposals shows that the president never gets exactly what he asks for. The chart below shows a five-year projection of Department of Defense (DoD) funding in each president’s budget proposal (the dashed line) compared with the actual funding levels passed by Congress (the solid black line).[1]

Differences between proposed and actual budgets have varied by president—especially during the last drawdown in defense spending in the late ‘80s and early ‘90s.  As in the past, we should expect changes to this year’s proposed budget.

Research support was provided by Patrick Clapp.

[1] This chart is a reproduction of Figure 21 in the Center for Strategic and Budgetary Assessments’ Analysis of the FY2015 Defense Budget, recalculated and updated with the FY2016 Budget. The numbers are shown in 2015 dollars.

As Employment Grows, When Will We See Wage Growth?

Wage growth remains relatively flat despite indicators of economic recovery. As the unemployment rate falls and employment grows, the increasingly smaller supply of workers is expected to lead to wage growth. As Loretta Mester, president of the Federal Reserve Bank of Cleveland, put it recently in the Wall Street Journal, “basic economics hasn’t gone out the window […]when employment grows, wages will start to grow.”

Over the past two years, however, most workers have not seen much wage growth. In fact, there is a somewhat weak but negative relationship between employment growth and wage growth for over 800 occupations from 2012 through 2014 (each occupation is weighted by the number of people employed in that occupation in 2014). There are some outliers, including occupations in the arts with an especially wide range of wages (such as models and makeup artists), but the majority of occupations are clumped approximately equally around low employment growth and low wage growth.

Employment and Wage Growth by Occupation

Using the Bureau of Labor Statistics’ occupation profiles and typical entry-level education requirements for each occupation, the relationship between employment growth and wage growth from 2012 through 2014 differs depending on the education typically required for an occupation.

Employment and Wage Growth by Typical Entry-Level Education for Occupation

Based on a review of the charts by education required, much of the negative relationship for all occupations is being driven by lower-skilled occupations, those that typically require a high school diploma or equivalent or less. Low-skill occupations with employment growth have seen a decline in real wages over this period, while many of the higher paying occupations have seen declining or stagnant employment. This is likely an indication that there is a surplus of available workers at the low-skill level. In fact, unemployment rates for workers without a college degree were well above the national average, as shown in the chart below from the Bureau of Labor Statistics.

Earnings and unemployment rates by educational attainment

For higher-skilled occupations such as those requiring at least a bachelor’s degree, the expected positive relationship between employment growth and wage growth is evident, indicating that labor market slack for these positions has been eliminated or nearly eliminated. Meanwhile, for middle-skill occupations (typically requiring some college or an associate’s degree) the relationship has been flat, which may suggest a tipping point in the near future as the remaining slack diminishes. Even so, the wage disparity between high and low-skilled jobs has been increasing for decades.

These charts align well with other reports indicating that employment is growing for jobs with higher wages and benefits packages, and most of these jobs are going to people with a bachelor’s degree or higher. This is good news for college graduates, but only part of the story—occupations requiring at least a bachelor’s degree made up less than a quarter of total employment in 2014, while  66% of employment in 2014 was in low-skill occupations.

Until the negative or flat relationship between wage growth and employment growth in lower- and middle-skill occupations reverses, we will likely continue to see little real wage growth in the economy at large.

Research support was provided by Patrick Clapp.