The Independent Market Observer

11/14/12 – A Hard Look at Employment: Why the Recovery Will Be Faster than People Think (Part 3)

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Nov 14, 2012 5:18:00 AM

and tagged Employment

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In the last post I talked about why the employment level had to reset and did and about how normal growth in employment appears to have restarted. That alone would argue that employment will come back over time, but there are also other reasons why the employment recovery will be faster than most people expect at this time.

I mentioned earlier that the number of job seekers rose with the population due to the demographic profile. As the baby boomers get older, that rate of increase will slow, as more and more leave the workforce. Because of that, a slower rate of job formation will serve to lower the unemployment rate, and any level of job growth will have a more powerful effect. Several economists believe that this is already happening, and that it is one reason for the recent larger-than-expected declines in the unemployment rate. An inevitable result of this, however, will be that the labor force participation rate will decline. This is exactly what is happening, and it is not a bad thing.

Another supporting factor is that actual employment growth has been suppressed by business uncertainty. Businesses are sitting on large amounts of cash but are unwilling to hire or invest, given the myriad uncertainties in place. You can actually see this in the chart (see below), where uncertainty leads unemployment and has a visually strong correlation.

When uncertainty declines, as it is bound to do eventually, hiring should pick up and unemployment should come down. As I noted previously, given the changing demographic profile of the country, this will have a greater effect than has historically been the case.

Another positive factor, on several levels, is the housing recovery. At its most basic level, the return of residential construction provides jobs for those who have few other skills and who worked in that area during the last decade (many of these individuals have not been able to find work since). That will be a direct aid. Housing is also foundational to any recovery and will provide supporting demand for many other goods, which will spur hiring in those industries. Finally, as housing prices recover, labor mobility will increase, as workers will no longer be underwater on their mortgages, allowing a better match between skills and demand across geographies.

The final factor that will support increased employment is the growing phenomenon of “re-shoring,” or businesses bring back jobs from abroad—usually manufacturing in nature. This deserves a paper of its own; however, briefly, wage gaps between the U.S. and emerging markets have become narrow enough that the U.S. is price competitive. Given its additional advantages—market access, productivity, stability, among others—it is often the best choice from a business standpoint. Studies from the Boston Consulting Group and PricewaterhouseCoopers, among others, project job gains in the millions over the next decade or so.

Overall, the large drop in employment is a necessary correction to the excesses of the past several decades, but it seems to have completed itself. The resumption of growth at close to previous trend levels suggests that employment growth is back on track. In addition, there are several supporting trends that could well end up resulting in above-trend employment growth for many years. Although there are certainly risks in the short term, I expect employment to outperform expectations in the medium to long terms.

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