Jobs: This Week, Part Two

For three days in a row this week we get employment data. Yesterday it was the ADP Employment Report, today it is the weekly unemployment claims data, then tomorrow we end with the government’s monthly payroll information. So we are inundated with insights into the state of the labor market.

Generally the best we can say is that things are not as disastrous as earlier this year. Businesses seem to have done the majority of head count reduction. There is, however, little or no sign of re-hiring going on. I am afraid it will stay this way for a while.

Today’s report shows the number of people claiming unemployment assistance for the first time last week as 570,000. That’s over a half million people added to the unemployment lines. There is no way to spin that as being good news other than to note it is less than the peak influx of unemployed earlier in the year. So we have made progress of sorts. Just nowhere near enough.

More distressing is the continued mass of continuing claims: these are people who are well into their unemployment assistance period. Their numbers rose to 6.23 million in the week ending August 22nd. which is the last week for which we have data.

To put these numbers in context: initial claims are up 30% from this time last year, while continuing claims have risen 82% over the same time.

There are hints of good news within the data only to the extent that the four week moving average of continuing claims has dipped slightly, but we have no idea why that is. The jobs market is weak in every respect so I would guess that any decline in people making ongoing claims is likely to be caused by them exhausting their benefits rather than being caused by them finding work. There are no statistics on this, so we are left to speculate. To make matters worse we have reached a point where over half of all people who claim assistance exhaust the aid before finding another job. this data has been collected since 1972, and this is the worst it has ever been.

To say that this recession has been a doozy is somewhat of an understatement.

There is simply no way to make the outlook appear promising. Jobs will remain scarce for many more months. Businesses are far more aggressive in their labor management practices than they used to be. In many prior recessions firms would avoid firing for months, which drove their productivity down drastically – they kept on workers in excess of production requirements – but also meant they could ramp up production more quickly when the recovery started. This practice used to be referred to as ‘labor hoarding’. Nowadays businesses operate on a hire and fire policy that assumes there will be plentiful labor available on demand. Apparently modern management is more willing to take the risk that they will be able to meet demand for their products by re-hiring only when that demand turns up. It also seems to imply that jobs have been de-skilled sufficiently to allow the labor pool to be less differentiated – so a business can fire its ‘specialists’ because they are really not that specialized.

Either way, it is clear that changes in management techniques have added to the pain of unemployment this time through the business cycle. More to the point: these same techniques imply that the recovery will not generate a quick turn around in the job market.

This is almost a classic example of the paradox of thrift: each business, by focusing relentlessly on its own ‘efficiency’ and profit, ends up contributing to the shared loss of consumption revenues that the higher and more persistent level of unemployment creates. Firms have thus hurt themselves by appearing to have ‘weathered’ the storm so well. They have created an illusion of profitability that can only be sustained in an environment of much lower unemployment.

Without stating it overtly these firms have relied on the fact that government will fill the breach that is left when business retreats.

As you know the paradox of thrift sets up a downward regress; each round of sensible cuts leads to a worse situation that sets off another round of cuts. The only way to break this cycle without falling into a years long depression is for the government to spend in excess of its revenues.

Fortunately that’s what we are doing.

And that’s why these unemployment numbers are not worse: the stimulus package, inadequate though it was, has been sufficient to prevent a total collapse.

That’s a good lesson to keep in mind next time you hear someone criticize government spending.

Given what we’ve learned so far this week, my guess is that the unemployment rate will edge up a bit – as long, that is, if the number of discouraged workers hasn’t risen too much.

But that’s tomorrow.