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Economic Review

Economic Review
C O N T E N T S
First Quarter 2005/Volume 90, Number 1

Economic Review articles are posted on the Web as they become available. Page numbers in the PDF file posted here may not reflect the page numbers of the printed version.

These files are in PDF format, which requires Adobe Acrobat Software (links off-site)

PRESIDENT
JACK GUYNN

EXECUTIVE VICE PRESIDENT AND
DIRECTOR OF RESEARCH

ROBERT A. EISENBEIS

RESEARCH DEPARTMENT
THOMAS J. CUNNINGHAM
Vice President and
Associate Director of Research

GERALD P. DWYER JR.
Vice President, Financial

ELLIS W. TALLMAN
Vice President, Macropolicy

JOHN C. ROBERTSON
Assistant Vice President, Regional

PUBLIC AFFAIRS
BOBBIE H. MCCRACKIN
Vice President

LYNN H. FOLEY
Editor

TOM HEINTJES
Managing Editor

JILL DIBLE AND
PETER HAMILTON
Designers

ALISON BOUNDS
Marketing and Circulation

CHARLOTTE WESSELS
Administrative Assistance

The Economic Review of the Federal Reserve Bank of Atlanta, published quarterly, presents analysis of economic and financial topics relevant to Federal Reserve policy. In a format accessible to the nonspecialist, the publication reflects the work of the Research Department. It is edited, designed, produced, and distributed through the Public Affairs Department.

Views expressed in the Economic Review are not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System.

Material may be reprinted or abstracted if the Economic Review and author are credited.

Please use the WebScriber Service to order free subscriptions and additional copies as well as to receive e-mail notifications when articles are published online. For further information, contact the Public Affairs Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470 (404.498.8020).

ISSN 0732-1813

Employment Growth and Labor Force Participation: How Many Jobs Are Enough?
Julie L. Hotchkiss
Public concerns about the “jobless” recovery following the 2001 recession have centered on whether enough jobs will be created for those who want to work. A more pressing question, however, may be how many jobs are needed to sustain desired growth in overall economic output.

This article provides an analysis of just how many jobs are needed to keep unemployment in check and considers whether the current rate of job creation is enough to fuel optimal gross domestic product growth. The author examines the decline in the labor force participation rate that has occurred since the late 1990s. Part of the decline in the rate is likely a response to fewer job opportunities as a result of the recession. She also notes, however, that the decline suggests other, noncyclical factors may be at play and are likely to be compounded by baby boomers entering retirement age. The author discusses the pros and cons of some options for increasing the flow of workers into the labor force, including raising the retirement age, increasing immigration, and offshore outsourcing.

While the current rate of job creation should be able to sustain the expected labor force growth for the near term, she concludes, it is not clear that this rate can sustain a desirable rate of economic growth in the long run. Any of the options policymakers have for affecting this trend of slower labor force growth will take time to implement and adjust to, suggesting that serious discussions of these options’ respective merits should begin now.

On the Uniqueness of Community Banks
Scott E. Hein, Timothy W. Koch, and S. Scott MacDonald
To the public, all banks seem alike. But banking insiders make important distinctions between community banks and all other banks. Policymakers worry that community banks’ unique characteristics threaten their survival in the face of industry consolidation. However, despite dramatic regulatory and technological changes in the industry in the past two decades, community banks have not only survived but often prospered.

This article explores the differences between community banks and larger banks to discover what makes community banks unique. Large banks engage primarily in transactional banking—the provision of highly standardized intermediation services, such as gathering deposits and extending loans, that require little human input to manage. Community banks, in contrast, typically focus on relationship banking, which requires more human input, more detailed credit evaluation, and localized decision making.

Examining profit and risk measures for the 1998–2002 period for both community banks and large banking organizations, the authors find evidence that small banks were generally profitable. In all but the smallest size category, community banks have performed as well as, and often better than, large banks in managing net interest margins, aggregate profits, and credit risk. Also, community banks are more likely to adopt Subchapter S tax status, which allows them to avoid direct federal income taxation and pass tax benefits on to shareholders. These institutions typically have relatively higher returns on both equity and assets than larger banks do. Whether community banks will be able to sustain this good performance will depend, the authors conclude, on how well managers find valuable relationship lending niches, invest bank capital, and balance asset quality with growth.

On the Remitting Patterns of Immigrants:
Evidence from Mexican Survey Data
Catalina Amuedo-Dorantes, Cynthia Bansak, and Susan Pozo
Understanding the remitting practices of immigrants has taken on new urgency for banks seeking to tap the potential of this burgeoning market as well as for economists, who note that remittance inflows into developing nations often match or exceed traditional sources of foreign currency earnings.

To gain an understanding of who remits, how much and why they remit, and what transfer mechanisms they use, the authors review the basic trends in remittance transfers from Mexican immigrants in the United States—who account for about one-third of U.S. immigrants—to their families in Mexico.

Using survey data from the Mexican Migration Project and the Encuesta Sobre Migración en la Frontera Norte de México, the authors examine the demographic characteristics and the remittance and banking behavior of Mexicans who have migrated to the United States. The surveys encompass nearly 11,000 documented and undocumented immigrants.

The authors’ analysis indicates that immigrants’ motives for remitting to their home communities are at least as varied as their reasons for migrating. Altruism, investment, and mitigating risk appear to play important roles in explaining immigrants’ remitting behavior. The propensity to remit seems to be greater among immigrants who are undocumented, those who have left dependents in Mexico, those with lower levels of education and English skills, and the unbanked, the authors conclude. Over the 1993–2000 period, the use of money transfer firms to make remittance payments declined from 77 percent to 66 percent of all transfers while banks’ market share increased from 4 percent to 17 percent.

The Quality of Preventive and Diagnostic Medical Care:
Why Do Southern States Underperform?
Brian S. Armour and M. Melinda Pitts
As the cost of health care increases rapidly, the health care industry has turned its attention to methods of cost containment. However, concern exists that the drive to contain costs could lead to compromises in the quality of medical care. One practice that may slow the growth rate of health care expenditures and improve morbidity and mortality rates is the widespread use of preventive and diagnostic services.

Using data compiled by the Centers for Medicare and Medicaid Services, this article evaluates the quality of care received by Medicare beneficiaries in each state. The authors examine states’ use of preventive services (influenza and pneumococcal immunizations) and diagnostic services (mammograms and diabetes screening tests) among Medicare beneficiaries.

The analysis points out regional differences in preventive and diagnostic care across the United States. The West has higher levels of preventive care while the Northeast has higher scores for diagnostic care. But the South had the lowest average score for quality of care in both categories. The authors attribute differences among states’ levels of preventive and diagnostic care to their socioeconomic and demographic characteristics, noting in particular that the percentage of a state’s Medicare population that is black is inversely related to the quality of medical care.

A better understanding of the causes behind racial disparities in the quality of medical care, the authors conclude, will promote the delivery of the highest quality of care to all Medicare beneficiaries and slow the growth rate of health care costs.