A look at why part-time employment is high

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As I noted earlier this morning, involuntary underemployment remains well above pre-Great Recession levels. A research note from the Federal Reserve staff last spring ("Why is Involuntary Part-Time Work Elevated?") tries to explain this situation:

Our analysis offers several clues on why involuntary part-time work has increased during the recession and why it has remained elevated even as other labor market measures have improved. Cyclical forces likely accounted for the bulk of its increase during the recession, but as the economy has improved, the number of persons working part-time due to slack business conditions has recovered. On the other hand, the share of workers who could only find part-time work remains high, and the continuing lack of available jobs weighs on the ability of unemployed and involuntary part-time workers to find full-time jobs.

They also note there is has been a net flow of workers from involuntary underemployed to full time employment for the past few years. During the Great Recession, more workers had switched from full time to part time. Importantly, the additions to the involuntary underemployed come from those who had previously been unemployed. So there seems to be a two stage progression evolving:
     1) from unemployed to part-time (underemployed); and,
     2) from part-time to full-time.

That might not be the best situation for workers, but it seems to be the labor force adjustment system at work. Our policy task is to speed up, and many create a short-cut, in that system. That means looking at policies that improve the transition from unemployment to part-time and part-time to full-time. One of those policies is job-sharing (see earlier posting). Rather than laying off workers, a job-sharing program would compensate workers for lost wages due to switching to fewer hours during slack time. In doing so, it would open up more part-time employment with a path toward full time work as demand increased.

However, job-sharing should be paired with a knowledge tax credit. Rather than reduce their hours, a tax credit could be given for workers spending those hours for training, either on-the-job training or in the classroom. This would have a dual effect. It would increase our human capital -- a major input to productivity and economic growth. And it would immediately increase consumer demand by creating more employment slots for others to fill the working hours of those in the classes.

Involuntary underemployment continues to be a problem with the U.S. labor market. Policy makers are beginning to pay attention (see early posting). But awareness alone doesn't help. The authors of the Fed note cited above believed that "As hiring improves, this should further reduce the share of involuntary part-time work." However, there has not been any great improvement in the situation of the involuntary underemployed since they wrote that back in April. Creative thought needs to be given to solutions - especially micro-economic, labor policy solutions. Just worrying about the macro-economy simply won't be enough.

August employment

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Somewhat disappointing employment news from the BLS this morning. They report only 142,000 net new jobs in August with the unemployment rate ticking down to 6.1% (where it was in June). Economists had expected a gain of 230,000 jobs.

The story for involuntary underemployed (part time for economic reasons) was mixed. The total number of involuntary underemployed declined in August. However, that improvement was due to a decline in number of workers part time because of slack work. The number of those who could only find part time work actually rose. The total involuntary underemployment remains well above pre-Great Recession levels. As many analysts are beginning to understand, this constitutes a continued waste of human capital (see early posting).

Involuntary underemployed Aug 2014.png

July trade in intangibles

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Some interesting economic news this morning. July's trade deficit dropped unexpectedly to $40.5 billion from $40.8 billion in June (revised), according to data released by the BEA. [Note: June's deficit had been originally set at $41.5 billion - see discussion below.] Economists had been expecting an increase to $42.4 billion. Exports were up by $1.8 billion while imports climbed by only $1.6 billion. As was the case last month, our deficit in both petroleum and non-petroleum goods improved (see last chart below).

The surplus in pure intangibles also improved in July, although only very slightly. The surplus grew by $32 million to $13.9 billion as exports rose faster than imports. The improvement was due in part to increased revenues from the use of intellectual property by foreign sources (exports) growing while charges for the use of intellectual property paid out to foreign sources (imports) declined. Exports of financial services grew while imports rose only slightly. Business services exports also rose but imports of those services grew even faster resulting in a lower surplus in this category. In telecommunications, computer, and information services, exports fell and imports rose leaving us with a slightly higher trade deficit in this area. Both imports and exports of insurance services dropped with a slight improvement in this deficit.

Our Advanced Technology deficit also improved in July, dropping to $6.9 billion from $7.5 billion in May. Interestingly, aerospace technology exports dropped, which would have normally increased the overall deficit. But imports of information and communications technology dropped slightly more. A large decline in flexible manufacturing imports led to the overall improvement.

Advanced Technology goods also represent trade in intangibles. These goods are competitive because their value is based on knowledge and other intangibles. While not a perfect measure, Advanced Technology goods serve as an approximation of our trade in embedded intangibles. Adding the pure and embedded intangibles shows an overall surplus of approximately $7.0 billion in July, up from $6.4 billion in June.

As noted above, the June data was revised by almost $1 billion. This change was due to an upward revision of exports of services and intangibles of $0.4 billion and a downward revision of imports of $0.5 billion. Exports of government goods and services and business services and revenues for the use of intellectual property (exports) were revised upward. telecommunications, computer, and information services exports revised downward. Imports of financial services and business services and charges for the use of intellectual property (imports) were revised downward. These revisions remind us of how tenuous our measurements are of intangibles and the need to continue to improve both our data collection and measurement frameworks in this new intangible economy.

Intangibles trade-July14.png

Intangibles trade parts-July14.png

Intangibles and goods-July14.png

Oil goods intangibles-July14.png

Note: I am now reporting the trade data using the new BEA classifications for services trade, which breaks services into more categories. In the past, the intangible trade data was the sum of Royalties and License Fees and Other Private Services. Under the new classification system, intangibles trade data is the sum of the following items: maintenance and repair services n.i.e. (not included elsewhere); insurance services; financial services; charges for the use of intellectual property n.i.e.; telecommunications, computer, and information services; other business services.

Charges for the use of intellectual property n.i.e. is simply a renaming of Royalties and License Fees. This includes transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights.

Maintenance and repair services n.i.e., financial services, and insurance services, were previously included in Other Private Services. Telecommunications, computer, and information services is a combination of those two items (telecommunications and computer & information services) that were also previously included in Other Private Services. Three categories previously in Other Private Services -- education-related and health-related travel and the expenditures on goods and services by border, seasonal, and other short-term workers -- were removed and reclassified to travel. The new category of other business services is a continuation of the older category Other Private Services with those components removed.

Thus, other business services includes categories such as advertising services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; and industrial engineering services. It also includes personal, cultural, and recreational services which includes fees related to the production of motion pictures, radio and television programs, and musical recordings; payments or receipts for renting audiovisual and related products, downloaded recordings and manuscripts; telemedicine; online education; and receipts or payments for cultural, sporting, and performing arts activities.

For more information on the changes, see the March 2014 Survey of Current Business article, "The Comprehensive Restructuring of the International Economic Accounts: Changes in Definitions, Classifications, and Presentations."

2Q 2014 GDP shows increase intangibles investment

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Looks like good news this morning. The BEA has revised its estimate of economic growth in the 2nd quarter of 2014 upward to 4.2%. The advanced estimate released last month showed a growth rate of 4.0%. Economists had been expecting a slight downward revision to 3.9%. Growth in business investments in intellectual property products (IPP) was also revised upward to 4.4% from the previously estimated 3.5% growth rate.

IPP percent 2Q14 -2nd.png

SEC's next task: disclosure of hidden loan IP collateral

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This morning the SEC unanimously adopted a long delayed rule on transparency of asset-back securities (ABS). Required under the Dodd-Frank Act, the final rule turned out to be less controversial that previously proposed versions. The new rules will require collection and disclosure of certain types of information ("data points") about the underlying asset (i.e. the mortgage). This includes information such as the credit score and income of the borrower and information about the property (e.g. location, age, valuation). The earlier proposal had been held up in part because of concerns over privacy and the protection of this level of sensitive data. The SEC had re-opened the rulemaking process earlier this year to deal with these and other issues.

In adopting the new rules, SEC Commissioners mentioned that more to be done, including looking at other asset classes such as student loans. However, they did not mention nor include in the new rules disclosure of hidden loan collateral: IP.

Intangibles assets, specifically intellectual property, have always been part of the U.S. financial system. As I've noted before, the first trade secrets case in the United States involved the debt on a bond secured in part by a secret chocolate-making process in 1837. In 1884, Ara Shipman loaned Lewis Waterman $5,000 to start a pen-manufacturing business, secured by Waterman's patent.

[Note: we have discussed that role in numerous publications such as "Commercialization of University Research - Using Intangible Asset Financing", "Intangible Assets in Capital Markets", "Intangible Assets: Innovative Financing for Innovation", Intangible Asset Monetization: The Promise and the Reality and Maximizing Intellectual Property and Intangible Assets: Case Studies in Intangible Asset Finance.]

That interest appears to be growing. Gabe Fried and David Peress recently noted that "Increasingly, ABL [asset-based lending] structures incorporate intangible assets such as trademarks, patents, customer lists and other intellectual property assets in the borrowing base" (see their article "The Continued Growth of Asset-Based Lending Secured by Intangible Assets" which gives a good overview of why intangibles make good collateral). William Mann found, based on USPTO filings of a creditor's security interest in a patent, "20% of patents held by domestic corporations during the 1990s had been used as collateral at some point in their lives" (see "Creditor Rights and Innovation: Evidence from Patent Collateral" - summarized as "Patents as Collateral"). Research by Maria Loumioti on "The Use of Intangible Assets as Loan Collateral" found that "twenty-one percent of U.S.-originated secured syndicated loans during 1996-2005 have been collateralized by intangibles, with intangible asset collateralization significantly increasing over this time period." Importantly, she found that "loans secured by intangibles perform no worse than other secured loans."

With this growing interest in intangible-backed lending, it is important that our financial regulatory system come to grips with this trend. As I've noted before, the failure to overtly include intangible assets in collateral analysis may have the following consequences:
•  Underestimation in the amount of collateral a lending institution has to call on in case of default (and therefore the undervaluation of the underlying loan).
•  Miscalculation of a lending institution's ability to recapture collateral if the lending institution is dealing with an asset it does not understand.
•  Improperly priced loans due to a failure to assign the correct value to the intangible assets or a tendency to apply exceedingly low loan-to-value ratios that are less a reflection of risk than of the institution's lack of knowledge about the performance of intangible assets.
•  Higher capital costs for borrowers, especially those in businesses heavily reliant on knowledge and technology.

Here we can learn from others. Our friends across "the Pond" (friends notwithstanding a nasty little incident 200 years ago) in the UK are taking steps to better utilize intangibles in the financial system. Starting with a study Banking on IP? The role of intellectual property and intangible assets in facilitating business finance, the UK Intellectual Property Office (IPO) then issued its report Banking on IP: An Active Response. As I noted in an earlier posting, one of the more important task will be to begin to standardize the process of looking at IP.

The first step will be to develop common terminology, so that lenders and businesses can talk the same language. The finance and IP worlds are both full of terms not readily understood by the lay person and which can be misused or confused. As a first step to developing a common understanding the IPO, working with businesses and the finance community, will develop a glossary of accepted definitions to be used when describing and valuing IP and intangible assets.

This common language will form a foundation on which we will develop templates and guidance which will help business accurately to document their IP assets in a way that supports the decision making of a potential lender. We recognise that most lenders already use standard templates or application forms for client businesses seeking finance. We will therefore seek to produce templates for IP related assets that can either be directly incorporated into this existing documentation or which can be used as a databank for information likely to be required by lenders.

The SEC could jumpstart a similar activity here. The databank envisioned by the UK IPO is similar in format to the data points the SEC now requires to be disclosed for ABS portfolios. Based on this experience, the next step is for the SEC to broaden the asset class covered by the new rules to include disclosure of information on intangible assets (starting with IP) used a collateral in securitized portfolio of loans. For example, an ABS using commercial loans as the underlying asset should be required to disclose information on any patents pledged as collateral on those loans. Any valuation of those patents used by the lender on those loans should also be disclosed. Such disclosures would set the template for lending institutions to use regardless of whether or not the loan is eventual part of an ABS offering. That would go a long way to helping both lenders and borrowers understand and better utilize the value of intangible assets.

    Note: the views expressed here are solely those of the author and do not necessarily represent those of Athena Alliance.

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