Employment

Talk of the economy tends to focus on two areas, unemployment and the stock market.  The stock market has done well as corporate profits have based on current economic policies.  In addition each month we are reminded of how the unemployment numbers are near record lows.  The problem is that those statistics, while accurate are a bit misleading for many of us.  The chart below reflects workforce participation in the labor market.  As you can see following the great recession it dropped significantly This drop means millions of Americans are no longer looking for work, so they are not unemployed, but they aren't working.

This very well may reflect the impact of the boomers leaving the workplace, or it might reflect the jobs we have lost.

Wages have also been largely stagnant over this period, not completely but not rising as much as they would if the jobs of today were the same as the jobs of the past.

If machinist jobs paying $30 an hour are eliminated and filled by robots but a low paying service job is created paying minimum wage, we see employment numbers unchanged but wages decreasing.

So are people  better off than they were?  Not as much as they should be, if at all.

Wages and Compensation

 How is the economy actually doing after a year with the dotard?

Pretty much the same as it was when he took over with most trends continuing.

There at of course some changes and the elimination of regulations and big tax gift to corporations is going to help their profitability and may lead to some hiring.

In general the unemployment numbers have improved over the last year, although they were already pretty low by historic standards.

Unemployment trends

What these numbers never measured were the people who were forced to take lower paying service jobs who used to have high paying manufacturing jobs.

The other area that hits workers is that while total compensation is up, the share of that compensation going to benefits is continuing to grow.

Increases in the cost of health insurance are not seen as pay raises by most.  Increasing costs with higher co-pays and deductibles.

Further there has been a trend in many companies and industries to switch from defined benefit pension plans to 401 K plans which makes the employee put aside additional take home pay.

These three changes, rotation into service jobs, increased health costs and increase pension contributions have made the growth in compensation less noticeable.

The current administration is not going to do anything to reverse these trends.

If labor gets scarce enough you may see companies reversing some of this, but they really prefer to simply use one time cash payments.

Its not a commitment.

Of course if you do work in the right place and the right industry, things are just fine.

Unemployment turnaround?

If you consider the supply side argument of economics, the argument is that if you make supply more abundant, it will drive down prices and create demand. The way to increase supply is to incentivize the businesses with tax breaks.

Businesses pass the cost reductions on to consumers as lower prices leading to the greater consumption, leading to additional production, more jobs, more demand, economies of scale, and so on and so on.

The only potential flaw in this approach would be if the cost reductions are not passed along, or not passed along fully. In classic supply and demand analysis, the price reductions must be significant enough to truly stimulate demand.

Now, in our recent economic contraction, we saw significant price reductions because of the fall in demand. In order to sell off inventory businesses were required to reduce prices and those that survived then reduced costs in order to return to profitability.

To some extent, some of this cost reduction was enabled by the cheap credit policy the Government has followed. The other cost reductions were primarily achieved by reducing locations and employment. Now, these type of cost reductions, lead to reduced demand and the cycle will continue until at some point demand is increased in some fashion.

We have seen one program on the demand side that may actually have the potential to reverse the cycle. This was the so called cash for clunkers program. This program increased demand by stimulating the demand side and effectively reducing the cost of product via a Government subsidy.

As the Auto manufacturers start to ramp up to cover demand, the wave of hiring will spread throughout all their suppliers including commodity suppliers. Will this be enough of a spark to reverse the cycle? By itself, maybe not, but if we start to see the stimulus create additional jobs in road construction and infrastructure repair or creation we may see a bottom.

Whither the middle class?

One of the trends that is hidden when you look at employment/unemployment numbers is the fact that for many Americans, the traditional path to the middle class is disappearing. This is because of the transitioning of America from a manufacturing country to a service industry country.

Starting in the late 19th century and continuing through much of the 20th, we saw tremendous growth in American manufacturing. Industries, such as the Auto Industry, Steel, Aircraft, heavy machinery and many many others needed workers. It coincided with a migration of many rural workers to cities and suburbs. It also provided good wages and benefits and enabled American workers, often starting with few skills and maybe a high school education, to own homes, cars, send their children to college and generally have a standard of living that exceeded that of most of the world.

In the latter stages of the 20th century, the cost of labor in the United States began to become a significant drain on profitability for American industry. Foreign competition started to seriously challenge many of these industries. What we saw happen then and what is still continuing is that these jobs started to disappear, or perhaps more accurately, migrate from high cost areas to lower cost areas. Initially, a lot of this migration was from the Rust Belt to the Sun Belt, but of course ultimately, it is now going overseas to even lower cost areas.

If you consider the garment industry, once a major employer in New York, and then a major employer in some Southern States and now almost universally moved offshore. The International Ladies Garment Workers Union has lost a tremendous number of members and has merged despite that catchy jingle.

There are many examples of other industries, many of them better paying than garment workers where the jobs have left, look at Michigan, and are not coming back. So what happens? Well eventually, other jobs, mostly service industry jobs, get created.

Now there are two types of service industry jobs. One is relatively high paying and generally requires at least a college degree for entry. At the top of this pyramid you have financiers, lawyers, doctors, and other professionals who make very nice salaries when there is work. The other type of service job is best typified by the phrase "do you want fries with that?". Now of course there are only so many fast food jobs, but there are many service jobs that require few skills for entry but also don't pay very well.

So workers who used to get high paying jobs in manufacturing are now lucky if they make half as much in some service industry. Of course many of these folks work multiple jobs and both spouses are now required to work in order to maintain the lifestyle they have come to expect. The problem is that ultimately, on a permanent basis that is not sustainable. First, even many of these jobs are disappearing as we go to self service in service industry after service industry and replace brick and mortar stores with on-line retail. We need fewer and fewer tellers, grocery check out clerks, gas attendants, sales clerks at stores, etc. etc.

So if we have lost the high paying manufacturing jobs and are starting to lose the lower paying service jobs, what is next? Well, one thing you hear discussed is retraining. However, there are clearly limits to that. First, the jobs you retrain people for have to exist, and if you train too many you will create a glut.

Now one area that helped absorb this workforce had been construction. However, with the glut in housing, many, many jobs were lost in that sector and while some will come back it is unlikely they will get back to the bubble numbers. There is money in the stimulus program for public works projects, repairing and replacing infrastructure, but while that is necessary work, it is hard to see how we can absorb enough of the workforce that way on a long term basis.

So is it inevitable that the American worker is destined to see continued deterioration in their standard of living? Well, ultimately, if the trend were to continue long enough it would self correct as it became cheaper to manufacture here and employment would rise, of course at much lower rates than previously. However part of the problem there is that the cost of manufacturing here is not limited to labor costs, but also the cost of taxation and regulation. We need to reduce those burdens, or at least spread them better if we want to preserve and revive manufacturing in this country. We also need to address the cost of health care and how much of that burden is passed on to employers. It is a significant employment cost driver.

It seems unlikely that we will reform the tax system to one that will tax consumption instead of production and ingenuity. Simply if we had a national sales tax instead of the taxes we have now, everyone who sells product in this country would share in the burden of maintaining America. It would also encourage investment, local enterprise and saving, all of which ultimately would increase wealth and prosperity. Unfortunately, we seem determined to pursue policies for political purposes that lead in a different direction.

Employment

One of the things being revealed during this earning season is how quickly companies shed payroll in order to preserve profits. Yes profits are down from last year but had companies continued historical patterns, they would have been much smaller and possibly non-existent. What they did differently was to shed employees at an unprecedented pace.

The question is why. Well, despite the fact that many companies like to say that employees are their greatest asset, in reality most don't feel that way. In fact if you consider the built in cost of an employees fringe benefits, the incremental cost of hiring or keeping an employee is out of proportion to increased production. Now, had this been viewed as a short downturn, companies may not have reduced payrolls as much, but with the "new depression" talk and the tremendous drops in assets, companies trim workforce and will rehire very slowly. Generally, technology has now become much cheaper than payroll.

In an earlier post I talked about the loss of jobs in retail, the most visible industry to most of us. This trend is not limited to that industry. In fact, the bad economy is a wonderful opportunity for many companies to shed payroll and invest in new technology to reduce ongoing payroll and increase profitability.

There is a saying that Generals always prepare to fight the last war. This propensity isn't restricted to Generals, it is also true of economists. It is almost inevitable that when you predict the future based on prior behavior, you will have problem predicting sudden change. The high cost of health care and pensions where they are still offered simply make full time, long term employees too expensive unless they are essential.

There will be some growth in employment in current industries when the recovery gets fully going, but it will not increase as quickly or as much as it has in the past. The only real way to reduce unemployment dramatically is to create one or more new growth industries.

Recession bottoms

While we have seen a surge in the stock market after an analyst upgraded Goldman Sachs, these type of low volume summer moves come and go and will likely reverse either later this week or possibly after earnings. While there are many clear signs that the economy is not going to get significantly worse and, in fact, will start getting better, possibly only in a few sectors at first and possibly slowly, there are still a large number of people pushing negative news.

I read an article titled "Nine reasons the economy is not getting better" that focused on the recent unemployment report and tried to demonstrate that as bad as it was on the surface it was actually much worse. Some of the data was real but there was an awful lot of speculation related to part time workers, trends used by the labor department and the status of people who were unemployed but are no longer collecting unemployment. Now, I don't pretend to know what these people are doing right now, but the author doesn't either and speculated a worst case scenario. Being a worst case scenario, it may have some validity, but, statistically, worst case is normally not very likely.

One point made in the article concerned the fact that unemployment has increased at a record pace during this downturn. He thinks this bodes ill for the economy, but why would that be? Companies reacting quickly and dumping workers, is going to make them profitable much faster than if they reacted slowly.

So what is required for economic recovery? The most obvious answer is businesses that are making money. Profitable businesses will survive and eventually grow. One way to stay profitable during a drop in demand is to become more productive. Companies that fail to react quickly soon go out of business, unless of course the Government bails them out, but economics requires that efficient companies survive and non-efficient ones don't.

It would seem we are now at the point where the companies that are going to survive have reduced costs to the level they need to. Before you can have growth, you have to have some stability. The second step will be some increase in demand.

I should point out that many negative analysts argue along the following lines. Increased demand is being created to replenish inventories and not because consumers are buying more. Therefore, since there isn't top line growth, it isn't a real recovery.

Let's consider this logic. If the economy has reached a point where inventories are depleted and therefore companies have to increase production to replenish it, what does that mean? It means plants that have laid off employees will need to bring at least some of them back or increase the hours and pay of those currently there. Now, this would represent an incremental increase in disposable income and even if savings were to stay at the recent high levels, it would represent an incremental increase in demand. This is the start of a recovery cycle. Because just like on the slope down, each incremental decrease in demand resulted in less employment and less demand, you recover the same way. Will it be an explosive increase? No, it has to build, but it will pick up speed over time.

In addition, we are going into a period where the stimulus package the Government has passed is going to start having more impact. If you add this to the incremental increases in demand, you will suddenly start to see some real growth in consumer spending. If past experience is any measure, by the time the stimulus is fully hitting the economy, it may no longer be needed and may simply start to fuel inflation. I wouldn't predict that since we have some other fundamental issues related to housing and credit, but I wouldn't rule it out either.

Simply put, recoveries always happen, and many times they seem to be a surprise. Pessimistic views will continue and some analysts will talk about false recovery and how we are living in a fool's paradise and eventually we will have another recession, and they will point out how right they were all along.