4/8/13 – A Deeper Look at the Employment Slowdown

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Apr 8, 2013 12:41:00 PM

and tagged Employment

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Unsurprisingly, last week’s disappointing employment results have generated quite a bit of discussion. The most interesting part for me has been a quantitative finding from Ned Davis Research: if you compute the actual hours worked, given the number of jobs and the increase in the average work week, it’s the equivalent of another 328,000 jobs added. Therefore, the aggregate hours worked—the actual labor input into the economy—actually rose 0.3 percent rather than declining, and the increase is pretty strong, above the 12-month average.

Viewed this way, the slowdown isn’t so bad—and isn’t really a slowdown. I mentioned in Friday’s post that the increase in hours worked could well reflect employers’ need for workers but their unwillingness to hire additional ones, and these calculations support that. Working existing employees harder doesn’t help those who need jobs, but it does point to a brighter picture for the economy as a whole.

More positive news includes a decline in people working part-time for economic reasons—which dropped by 350,000 and brought the underemployment rate, the U-6 series, down from 14.3 percent to 13.8 percent—as well as a decrease in the self-employed of 279,000. Both of these are positive factors, suggesting that, in the same vein as above, companies are moving part-time workers to full-time status rather than hiring new workers, and self-employed workers (many of whom would prefer to have a job) are starting to find them.

None of this is to minimize the headline employment figure, which has at least a negative psychological effect, but rather to suggest that the underlying economic trend doesn’t reflect as sharp a slowdown as the decrease in new jobs would suggest. That said, the trend is down, with the private payroll increase the smallest it’s been since last June, and the three-month trend down.

For the economy as a whole, what matters from the employment reports is wage income. With the increase in total hours worked and flat hourly wages month-on-month, wage income increased somewhat, which should support continued spending growth. Aggregate payrolls rose 3.9 percent year-on-year, consistent with recent results, even as average hourly wage increases dropped to 1.8 percent from 2.1 percent, again suggesting that overall income is growing faster than wage rates.

The unwillingness of employers to hire new employees is being matched by a decrease in the number of people working. The workforce participation rate dropped to a multi-decade low, as the following chart shows.

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What does this mean? For the economy as a whole, nothing good. Employers’ reluctance to hire has pushed employees out of the workforce. A front-page story in today’s Wall Street Journal reports that the disability insurance program has exploded, noting that the ranks of the “disabled” are not coming down even as the economy improves. Combined with other factors, such as baby boomers starting to retire and younger workers staying in school longer, this may permanently reduce the size of the workforce.

If so, the economy will grow more slowly. We’re already looking at a demographic squeeze on available workers, and a reduced participation rate will only exacerbate the problem. A lack of workers isn’t seen as a problem today, but, over time, the fewer workers we have, the more slowly we will grow. In the face of other challenges such as the debt burden, this is a headwind we don’t need.

The current employment challenge is creating jobs. The next employment challenge will be finding workers. The trends we’re seeing today will morph the current challenge to the next one. It doesn’t make it any easier today, but ultimately, these trends will solve the problem.

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