Our Jobs Conundrum

There are always two things we look for first in the monthly payroll release: the change in the number of jobs, and the change in the unemployment rate. Since these two statistics are derived from different sources they can sometimes contradict each other. Very often they simply move to a different rhythm. Today is one of those days.

The optimists, basically anyone trying to sell stocks, will latch onto the quite sharp drop in the unemployment rate, which now stands at 9.4%. This figure is calculated from a monthly survey of households, in which obvious questions are asked about employment history and attitudes. Last month we had a 9.8% unemployment rate, this month we have 9.4%. That’s the sharpest one month decline since April 1998, which we all recall as a great era for job creation.

So this must be good, right?

Not really.

The problem appears to be that a considerable part of the decline can be accounted for by people simply dropping out of the workforce. Once they say they are no longer looking for work, they aren’t considered unemployed. Presumably, according to the folks doing the surveys, such people are now leading a life of voluntary leisure. Maybe they are. There is no reliable way to tell from the data. Or they could be so disillusioned they they have given up the search for work and are making do by consuming savings or living off the wages of a partner or other family member. The fact is that the unemployment rate dropped predominantly for a negative, not a positive, reason. So headlines touting the 9.4% figure are a little misleading. The truth is more nuanced.

The pessimists will latch onto the increase in payrolls. This number is derived from the survey of businesses – called the “establishment survey” – and is a more solid statistic because it doesn’t include any leeway for opinion or attitude. So the increase of 103,000 jobs is a reliable datapoint. Which is unfortunate because it isn’t very encouraging. After the ADP payroll number two days ago – one that I warned was probably an exaggeration – most analysts had been looking for growth in jobs of at least 150,000. So the actual figure is disappointing. The economy is still not generating enough jobs to cut the unemployment rate consistently. Especially when we consider that about 125,000 new employees enter the workforce each month.

In a way this failure to create jobs is nothing new. The US economy has been very poor at creating jobs fro about a decade. The entire period encompassed by the last business cycle, from 2001 through 2008, was the worst in recent history for job generation. This is something I have tried to hammer away at for years. I spent a great deal of time criticizing the Bush regime for not making jobs a greater focus for policy. Their emphasis was on profits. Given that goal, they succeeded mightily. Profits have surged since 2001. They are now at all time highs. Business is flush with cash. The problem is that the cash is being hoarded or used in non-productive ways. Such as paying massive bonuses to CEO’s!

The key point to keep in mind is that the economy simply is not creating jobs fast enough, and that this trend is a decade old. Something is going on, and that something is not necessarily anything to do with the crisis and the recovery.

Tyler Cowan, in his usual antiseptic way, took a stab at discovering the cause of the problem, and all he could come up with was that businesses have finally shed all the marginally productive workers who they had tolerated before. These workers were those who added very little to the profits of their employer, but who were never fired because their cost was buried within a strong profit stream. The late 1990’s were such a period, so businesses had little incentive to purge unproductive workers. Profits were good, sales were surging, and the time and effort to cut costs was seen as exceeding the benefit. That changed after 2001 when the Clinton boom was replaced by the Bush yawn years. The economy grew, but sales were not growing at anything like their previous rates. In order to keep short term profits rising – to meet Wall Street estimates and to justify CEO bonuses – corporations turned inwards and implemented another round of cost control. Hence the gradual elimination of marginal workers, and the increase in productivity.

That’s Cowan’s thesis in a nutshell. It has a great deal of validity. His solution is far less satisfactory. I can sum it up in one word: tough. He seems to think we should expect to see unemployment rates near 10.0% for quite a while as all these marginal or unproductive workers are slowly re-absorbed. His point being that since these workers are less productive they are also less attractive to hire. They will therefore lurk on the fringes of the workforce for a long time.His thesis also rests on the assumption that there are no fast rising businesses or industries to absorb the size workforce we have. Apparently we have reached a point where we can meet our needs with fewer workers than we have. Maybe that’s because we import so much, but let’s not talk about that today.

I have a couple of problems with this as the only explanation of our jobs drought. First, if it were true that only marginal workers have been eliminated, then I would expect to see wages for the remaining, and presumably more productive workers, rising more than they are. This is because there should be competition for those workers amongst businesses searching to hire. Average wages are showing no signs of such pressure. On the contrary they are lagging behind profits by a very long way. Second, I would expect to see a similar pattern within industries as well. By this I mean if the shedding of jobs is productivity related, then where there are whole industries whose competitive position has deteriorated relative to others, so we should be seeing sectoral shifts in employment as weak industries are pressured by stronger ones. It is hard to detect such shifts going on.

So I am skeptical of the Cowan thesis as a single or primary factor for our malaise. It may well be one factor, it is not alone.

So what is the problem?

I still maintain that the lack of demand is the dominant issue. With aggregate demand so low, as compared with its peak years, there is little or no incentive for businesses to hire. They are managing to meet current demand from their reduced workforces and an increase in productivity. To add more workers would threaten profits and is seen as a high risk proposition given the outlook.

To put all this into perspective, consider this: total employment, that is the number of jobs in the entire economy, is now at about the same level it was in late 2001. We have labored away for a full decade and not added to the number of jobs we have. So talk of a prospective “lost decade” misses the point entirely. We have just lived through one. The next decade would simply be the second such. Fairly soon we will be talking about a lost generation. Or a lost era.

That’s something we should avoid. But the current outlook for policy is antithetical to job creation. Instead it seems to center on making matters worse in the name of fiscal rectitude.

Too bad, because another of the figures in today’s report that needs more attention in the media is the fact that about 44% of all our unemployed have been without work for 27 weeks. That’s a terrible statistic and points to a growing crisis that could destabilize the recovery by undermining demand even further.

Ah. But according to our neoclassical economist friends and their right wing political allies, no one is voluntarily unemployed. They are simply resting up, or are too lazy to get a job. So there can be no negative ramifications from long term unemployment.

Think of it as a holiday. There. That makes it all better. No? Who needs to boost demand when we have managed to get so many people such long vacations?

Ugh.

Addendum:

I want to point you to this chart from Paul Krugman’s blog, I came across it subsequent to finishing my post.

The story it tells is a visual representation of the point I was trying to make above. The ratio of people in the workforce to the total population has dropped precipitously during the recession. But take a look at the period between 2001 and 2008. Payrolls scarcely kept pace with population growth. Early in the decade the ratio fell as job generation lagged population growth. Later in the decade jobs were at last sufficient for the ratio to increase.

This is not a pretty picture. In fact it’s pretty awful.