Professor of Economies, Peter Orazem

Kay Henderson What's happening with Iowa's labor market and what happens in the state of Iowa if there is a railroad strike? We'll ask Iowa State University economist Peter Erasmus. On this edition of Iowa Press.

Announcer Funding for Iowa Press was provided by Friends, the Iowa PBS Foundation, the Associated General Contractors of Iowa, the public's partner in building Iowa's highway, bridge and municipal utility infrastructure. Small businesses are the backbone of Iowa's communities, and they are backed by Iowa banks with advice, loans and financial services. Banks across Iowa are committed to showing small businesses the way to a stronger tomorrow.

Announcer Learn more at Iowa bankers dot.

Announcer For decades, Iowa Press has brought you political leaders and newsmakers from across Iowa and beyond celebrating 50 years of broadcast excellence on state wide Iowa PBS. This is the Friday, November 25th edition of Iowa Press. Here is Kay Henderson.

Kay Henderson Our guest today is an economist who's been on the Iowa State University faculty since 1982 after earning degrees at the University of Kansas and Yale University. He is an expert on the labor market. He also does research about transportation economics. So welcome back to the program. Peter Orazem

Peter Orazem Thank you.

Kay Henderson Joining the conversation today, Clay Masters of Iowa Public Radio and Aaron Murphy of the Gazette in Cedar Rapids.

Erin Murphy We have the looming possibility of a railroad strike between railroad workers and companies if if that happens, and especially if that is a protracted event, what kind of impact could that have on the economy generally and here at Iowa?

Peter Orazem Well, certainly, having the the potential strike, the cooling off period is expiring in December 4th for some of the railroads, December 8th for others, the strikes are going to affect some of the things that you really need in the wintertime. So coal is, of course, one of the things that we see rolling across Iowa and in the wintertime.

Peter Orazem And that's one of the things that they really worry about, is whether or not we'll be able to maintain supplies of energy protection, particularly if it's a really bad winter.

Erin Murphy So that's a worry about energy prices then possibly?

Peter Orazem No, it's a worry about whether you have enough coal to run. There's still a lot of of coal fired electric utilities around the country, but you also have heating oil and so on. So it would be a strict supply issue. And so the question is, you know, how patient will the government be if a strike actually occurs and how is this going to play out?

Peter Orazem So some of the unions have already said that they're willing to maintain the cooling off period for a longer period of time, even if some of the other unions decide to go on strike. Some of the other unions have said they would recognize the strike and then going in support of of their their their coworkers strike. So how this plays out still remains to be seen.

Peter Orazem But Congress could step in and mandate that the unions operate under the the proposed settlement, and that's another possibility.

Erin Murphy And can you kind of explain for us, how did we get here? And, you know, what are the workers asking for? What what what's the conflict that has led us to this point?

Peter Orazem Well, usually it's it's it's wages. That isn't the big dispute now. It's it's ours and in particular, flexibility of ours. So we know nationally that we're still about 1% below where we ought to be in terms of total employment. So there's about 3.8 million unfilled vacancies per month. Well, that's affecting then staffing. And for the railroads, it means that they've been much less able to give people time off on on vacations and flexible time for family emergencies and so on.

Peter Orazem And so it's actually flexibility that's been the biggest point of contention between management and labor in this case.

Clay Masters Well, let's take a bird's eye view of striking in America right now. And even here in Iowa, a year ago, John Deere factory workers were on strike. Ingredion in Cedar Rapids, we're still seeing some strike and going down in southeast Iowa and Burlington. Is this a temporary thing or is this going to be more long term? Because this is certainly making its way into the rotation of headlines in Iowa much more regularly than it has in the last several decades.

Peter Orazem That's right. So, yes, this is a particularly good period for strikes, right. If you have a lot of unfilled vacancies and firms are constantly talking about the fact that they're having trouble filling slots, workers are in a pretty good bargaining position. You also have inflation at 7 to 8%, which also means there's an ability to to pass on some of the the cost of increased labor wages and benefits to to the consumer.

Peter Orazem And but on the other hand, the actual incidence of strikes is relatively modest. And it's follows a longer term trend of declining labor disruptions nationally.

Clay Masters And certainly with the public sector workers in 2017 here in Iowa, when those rights were taken away, that has led to that, not a concern about any kind of strikes for public sector workers.

Peter Orazem There's restrictions on the ability of public sector workers to strike anyway so they can negotiate. But in Iowa, you would not be able to go on strike. I don't believe. So in some places it's legal for, say, teachers to go on strike. Those sorts of of of rights are limited and they're limited by state law.

Kay Henderson Let's talk about limits on the Mississippi River, talking about transportation economics again. Barge traffic seems to be bogging down, if you will. What impact does that have in Iowa, especially rural Iowa, as farmers and elevators are trying to move a crop out?

Peter Orazem Right. So you're your options are somewhat limited. So going back to the rail strike, one of the options is rail and certainly a lot of of of grain heavy nonperishable stuff gets it gets transport added by rail. And so rail is a good option in place of barge. And barge traffic hasn't been eliminated, but they can't fill the barges as as as much as they have been in the past.

Peter Orazem And so it's it's reduced the amount of barge traffic on the Mississippi. So I think the option depends on whether or not rail is going to be a substitute for for for missing barge traffic. We know that there's less grain in and that's getting down to the Gulf. We know there's strong world demand for grain. So the problem is, if it can't get down there, then that's going to transfer back to a lower price that farmers are going to get at the co-op or the elevator or their local purchasing agent.

Peter Orazem So you could end up with one of these odd things that there's a bigger gap between the price of, say, corn or soybeans in Louisiana relative the price of corn and soybeans in Iowa.

Erin Murphy You touched on this earlier. We wanted to ask you about the state of Iowa's workforce right now. The unemployment rate just ticked up a little bit, but it's still under 3%. The State Workforce Development Department was touting that it has recovered the jobs that were lost from the pandemic. But I believe that to your point, we're still not at the total workforce level we were before the pandemic.

Erin Murphy But what's your big picture view of the Iowa workforce right now?

Peter Orazem Iowa workforce is still about 1% below where we were pre-pandemic in terms of employment. Labor force participation is actually about 2%. So we're lagging the rest of the U.S. in terms of recovery of employment, and that's holding back, actually. The Iowa economy. So we've had three straight quarters of negative gross state product, which, you know, would meet the classic definition of a recession.

Peter Orazem I don't know what the third quarter or the third quarter numbers are going to be coming out and we'll see how the state did in the third quarter. But, you know, that's not helping us is the fact that we have not been able to recover our previous level of employment.

Erin Murphy What's holding us back? Why haven't we gotten that?

Peter Orazem We had one of the oldest labor forces in the country. And if you look at Iowans under the age of 45, labor force participate and rates actually went up. It's Iowans over 45 where labor force participation rates went down and they really went down for people over 55. So it didn't affect Florida because people in Florida, they go to Florida to retire.

Peter Orazem So they were already out of the labor market. Iowans who stayed in Iowa were not retired. They were atypically working. And so they atypically dropped out of the labor market relative to the rest of the US. And as a consequence, we don't think that they're coming back. And so that's going to be holding back the Iowa economy in terms of its ability to make up for for its lost labor.

Erin Murphy And that sounds like a challenge because this state has already had troubles growing its population over the past decade. Right.

Peter Orazem We have the ninth highest fraction of the population born in state. So we don't attract a lot of people from other other places. Nevada actually has the lowest fraction of its population born in state. So people go there, lose all their money and they can't leave. So but literally, if you look at what the sources of replacement labor in Iowa, it's really hard to come up with another one other than other than immigration, which is the has been the buffer for for the Iowa labor force for many years.

Clay Masters So the federal government implemented some things to try to help people during the pandemic of the early months and years, I guess, of the pandemic, though, I'm thinking of the extended unemployment, the child tax credit, these things have kind of gone by the wayside. Have we seen, you know, was the juice worth the squeeze, so to speak, as far as getting people back into the labor market by taking away some of these kinds of incentives?

Peter Orazem If you look if you compare government transfers during the Great Recession with government transfers in the pandemic recession, it's clear that the transfers during the pandemic recession and were atypically large and atypically poorly targeted. So they did didn't just go to the poor, the people who needed the money. They went to people all the way into the upper tail of the income distribution.

Peter Orazem If you look at the PPE transfer programs. And so as a consequence, a disproportionate share of the government transfer payments during the pandemic were actually saved and they were saved because, number one, the people didn't need the money. Number two, we didn't have a whole lot we could spend on, right? We shut down restaurants, bars, hotels, transportation and so on.

Peter Orazem And since the economy started to reopen, people have been spending that. So consumer demand has been atypically high and that's clearly fueling inflation. If you're saying does it have an impact on the labor supply? The answer is probably yes. But atypically the same people who have exited the labor market in the biggest numbers, the older workers who thought, well, we can use these transfer payments to work our way through at the time their furlough in case we're doing great, we didn't have inflation.

Peter Orazem And so we had a lot of people who probably retired a little bit earlier in their work careers than they anticipated. One of the things that's interesting is we also had an atypically large number of people retiring at the ages of 45 to 55. That's the peak of your lifetime earnings. And we now have survey data that some of those people regret having dropped out because they dropped out at the peak of their earnings potential with a firm.

Peter Orazem Those jobs have now gone to somebody else. And they're finding that when they go back in the labor market, the jobs that they can get are not paying. What the jobs that they left, even with wage inflation that we've had.

Clay Masters Another federal program was the legislation was the Inflation Inflation Reduction Act. What kind of an impact have you seen as you crunched the numbers here in Iowa that that's had? We've seen some dollars come into Iowa. What's your read of that?

Peter Orazem Well well, number one, I mean, you know, it didn't really reduce inflation. I mean, the only inflation reduction was in the title, I think. But but clearly, there's going to be winners and losers in in those policies. So you see massive increases in in, say, the demand or production for electric vehicles, for example. Well, that's effectively a transfer away from other things that we were producing.

Peter Orazem And so you're going to get some inflationary pressure just from the shift of resources from, say, Purdue. I mean, just for that example, producing internal combustion engines, which take a typically assembly line workers with educations at the high school or associates level. And we're going to transfer some of those that demand to software and computer engineers, but a much smaller labor component to the production of those vehicles and certainly a different type of worker than the ones who are currently producing a traditional automobile.

Kay Henderson You mentioned the internal combustion engine. What's your assessment of the economics of the proposed carbon capture pipelines?

Peter Orazem Well, that's a little bit difficult. I mean, you're dealing with a pipeline that exists in part because of some other government programs that increase the demand for ethanol above what would be occurring in the absence of those of those subsidies. And now we have another program where apparently another federal program aimed at supporting the renewable resource industry is going to help pay for the pipeline.

Peter Orazem So it's a little harder to talk about what's the economic value of neither of those two businesses would have existed absent the federal the federal intervention. So I think it's it's arguable as to what the the net value is. If you took into account the government the government support programs.

Erin Murphy The state revenue Department just announced the new tax brackets for next calendar year as a result of some recent legislation at the State House. The number of brackets are getting fewer and rates are coming down a little bit. So we know from Iowa and individual bottom lines that state income tax rate will come down and they'll have more money in their pocket book.

Erin Murphy What's what's your view of what's the analysis tell you about those kinds of income tax reductions and whether that's ultimately good for the state's economy as a whole?

Peter Orazem Well, I mean, there are costs and benefits to income taxes. Some of the work that we've done on on taxes suggests that that property taxes are more distortionary than income taxes or sales taxes. And certainly at state borders, property taxes are more distortionary relative to.

Erin Murphy And when you say distortionary, you mean.

Peter Orazem I mean, they they they change where or how people spend their money. One of the things that we've we've been able to show is that if you look at states with different levels of property tax at the borders, property values are higher on the side with the lower property taxes, as you might guess, because you have to equalize the after tax cost of property.

Peter Orazem Income taxes don't have as much of an impact. And in part because I think people can live on either side of the border and they can work on either side of the border. And so you end up with with some of that effect being being more limited. Iowa does not take a multi tax view. When they do tax legislation, they say, okay, we're going to fix this.

Peter Orazem But it's I mean, I used to be on the Ames City Council. The limitations, for example, on the use of sales tax in Iowa mean that we have higher property taxes than we should have, and as a consequence, we actually end up with non competitive tax structure overall compared to most of our surrounding states. And it's not driven by the income tax, it's driven by by the property tax.

Erin Murphy So if you had the ear of a state lawmaker, it sounds like, would you recommend doing something about property taxes?

Peter Orazem Well, I would certainly think about giving more power to the metro areas to use their sales taxes. Sales taxes on on consumer items are less of a problem than taxes on either income or property, and they tend to be less consequential at state borders as well.

Kay Henderson One of the things that Governor Kim Reynolds said recently was that her goal is to get to know income tax in Iowa by the end of the four year term that she just won from Iowa voters. Is that a good idea? Looking at South Dakota, which I believe uses the sales tax and property tax to basically run their government functions.

Peter Orazem You could do it that way if you're willing to let the sales tax rise. Otherwise, you're going to starve your ability to do to provide public goods. A lot of the states that don't have income taxes Texas, Wyoming, Alaska are able to do that because they have carbon fuels that they produce and they make the disproportionate share of their of their needed revenues by taxing natural resources.

Peter Orazem We don't have that unless we're going to tax the wind. Right. And so I think you would have to look perhaps a little bit more broadly in terms of how you set tax policy. It seems to me that shifting toward more of a consumer tax method away from income tax, but certainly away from property tax, would benefit the state.

Clay Masters Let's talk about rural Iowa for a moment. And farmland up near Shelden was $30,000 an acre is what somebody paid for a 73 acre tract. This is I remember ten years ago feeling like farmland prices were skyrocketing. I mean, where is is there a bottom to this? I mean I mean, is there a top to this or how high is this going to get?

Clay Masters And what does that say about the farm economy in the state?

Peter Orazem Well, farmland rose about 10% in the last year, and farm prices in 2022 are not as as strong as they were in 2021. But generally, the farm economy has been atypically strong, and we find that land prices react very rapidly to changing anticipated returns per acre. I don't think 30,000 is necessarily there's must be another story to that.

Peter Orazem Right. But but but certainly there's upward pressure on land prices reflecting the world wide increase in commodity prices over the last two years. Whether that lasts or not depends on on on some things that are pretty much outside our control. Right. So what's going to happen to war in Europe? What's going to happen to production in in South America?

Peter Orazem But should be there's going to be upward pressure on land prices in the near term.

Erin Murphy You mentioned the war in Europe. There is as the war in the Ukraine continues, does that have the potential to have any kind of impact on the economy here in the United States?

Peter Orazem Certainly on grain prices, the answer is yes, especially if they continue to make it difficult for grain to come out of Ukraine. I mean, Ukraine is pretty much the breadbasket for for that that part of the world. And certainly there are a lot of countries that depend on Ukrainian grain for for food. It's much more consequential for Europe.

Peter Orazem If you look at energy in terms of world prices. I mean, Russian production of oil hasn't really changed. They just found new customers. So they're selling in massive amounts to India and China, making up for their lost sales to Europe. But Europe, of course, is going to face higher energy costs, and that has an indirect effect on us because they're a big customer for us.

Peter Orazem And so if we end up with energy prices or energy access leading to a recession in Europe, we're going to get a shadow of that here in the United States and certainly here in Iowa.

Clay Masters Clay, I want to rewind back to when we were talking about farmland prices. How would you describe the rural economy right now in the state of Iowa?

Peter Orazem Well, actually, it's urban areas where we've had the slower recovery in terms of jobs than in rural Iowa. And the answer is because rural Iowa doesn't have a lot of hospitality jobs. And the and the and the urban areas, particularly Cedar Rapids and Iowa City and Dubuque, have been hit hard in terms of their loss of of restaurant, bar and and and hotel income.

Peter Orazem And and that just wasn't that much of an issue for for rural Iowa. So rural I was actually doing a little bit better than than some of the metro areas, the only two metro areas that have actually regained their previous employment levels are our Des Moines and Ames. So central Iowa is doing great. The places on on on the rivers are not doing as well.

Clay Masters What sets those apart? I mean, just curious, though, when you think about the economies of Cedar Rapids interview in Davenport versus Des Moines.

Peter Orazem And and finance has done atypically well, and that's benefiting Des Moines, even though we have a few hiccups for some of the firms, there's a lot of jobs and those firms have tended to do pretty well. Another area that's done relatively well is warehousing and and shipping. And once again, central Iowa has an advantage. So as we shift shifted from bricks and mortar retail to Amazon E retail, there's a lot of jobs related to getting that product then to the to the home and and and central Iowa was atypically benefited by that.

Peter Orazem I do think that Iowa City and Cedar Rapids got hit by their relatively more aggressive shut down of their local economies, which atypically hurt their hospitality industry. So, for example, when the Big Ten decided not to have fans in the stands, that was not good for trying to maintain your your business. And if you're in in restaurants, bars and hotels in Iowa City and Cedar Rapids, and we've seen a really slow recovery of that sector in those two cities.

Kay Henderson Professor, after a discussion of these very serious issues, you are also involved in something called the Comedy College.

Peter Orazem I'm the teaching assistant.

Kay Henderson At Iowa State University. In the closing half minute we have. What's the value of comedy in our modern times? Well.

Peter Orazem Comedy has always been a way of of looking at your problems and getting through them. So I do think that there is a little bit of that in terms of our students. I will assure you that we have some people who take this class just to force themselves to get on a stage. And it is amazing to me how we have one kid who an engineer who said he got no interviews the first time he went to a career.

Peter Orazem He was a freshman. So maybe there are reasons why other than comedy. But after he took the comedy class so he went to the next career fair. That's all anybody wanted to talk to him was he's an engineer and he could tell a joke. And I think that being able to get on a stage and do something where you're writing your own original material and presenting it in front of people and not throwing up is a really good skill to have.

Kay Henderson Well, thank you for showing that and other skills today at this table with us at Iowa Press.

Peter Orazem Oh, it's a real honor to be asked. Thanks.

Kay Henderson Thank you for everyone here at Iowa PBS. Thanks for watching. Have a great Thanksgiving holiday.

Announcer Funding for Iowa press was provided by Friends. The Iowa PBS Foundation, the Associated General Contractors of Iowa, the public's partner in building Iowa's highway, bridge and municipal utility infrastructure. Small businesses are the backbone of Iowa's communities, and they are backed by Iowa banks with advice, loans and financial services. Banks across Iowa are committed to showing small businesses the way to a stronger tomorrow.

Announcer Learn more at Iowa Bankers dot com.