The labor market effects of employer confidence are probably real but have been exaggerated.
American employers have hired more than 230 million times since the recession began, but need to hire even more for employment per person to return to what it was five years ago.
One explanation for this state of affairs, according to the Mitt Romney campaign, has been a supposed lack of confidence among employers who are worried about taxes and new regulations, especially those associated with the Affordable Care Act (often referred to as Obamacare) as it is fully put in effect.
It is easy to find a businessman worried about government intervention, but the prevalence of such worries does not by itself tell us whether a lack of employer confidence depresses employment 10 percent, 1 percent or 0.1 percent.
Presumably if we have two employers who can hire workers at $20 an hour for the same task, the more confident of the two will hire more people than the less confident one, all else being the same. To put it another way, the less confident employer will require a greater immediate profit from his next $20-an-hour hire than the more confident employer, to compensate the less confident employer for the extra tax and regulatory costs associated with the hire that he anticipates in the future.
To the degree that an erosion of employer confidence has depressed the entire labor market, we should see the immediate profit from employees grow over time, as employers perceive more tax and regulatory costs on top of the cash and fringes they already owe their employees.
The gap between labor productivity and inflation-adjusted employee compensation is one way that economists measure the immediate profit from hiring, because the immediate benefits of hiring come from the production of the workers and the immediate costs include the employees’ compensation. (This measure is also sometimes called the “inverse of real unit labor cost.”)
The chart below shows indexes of labor productivity (red) and inflation-adjusted hourly employee compensation (black) since the recession began. Both indexes are measured after taxes and employee subsidies according to single marginal tax-rate series, so their gap reflects changes in the immediate profit from hiring. (For more information on these measures, see my previous post and my recent book on the labor market since 2007.)
About the time the Affordable Care Act was debated, after-tax productivity began to recover, and more quickly than after-tax real wages did. By the end of 2011, wages had still not recovered as much as productivity had.
(Another issue potentially depressing wages more than productivity is the anticipation of a new-employee tax credit, like the one proposed by President Obama in September 2011 and seriously discussed as early as 2009 and analyzed on this blog.)
Something prevented wages from keeping up with productivity, and perhaps eroding employer confidence is part of the story. But even if employer confidence were the whole story, it still explains less of the labor-market depression than do taxes on employees and subsidies for people who do not work. In early 2010, for example, after-tax real wages had been depressed more than 11 percent, of which only two percentage points were because of a failure of wages to keep up with productivity.
As I explained in a previous blog post, subsidies for people not working are the primary reason that wages fell so much after taxes and subsidies.
It would be incorrect to attribute all of the deviation between productivity and wages to employer confidence. A change in the composition of demand in the direction of less labor-intensive industries would have a similar effect, even if employer confidence had remained constant. New Keynesian economists also blame some of the deviation on a failure of employers to adjust their prices fully to their production costs.
Moreover, it is possible that employer fears of future regulatory and tax costs would not depress employment even while they depressed wages to the degree that employees eagerly anticipate benefits they would receive from those regulations and taxes.
While traces of eroded employer confidence are seen in labor market outcomes, it also appears that eroded employer confidence explains less than one-quarter of the overall depression of the labor market.