Guest Post: Why Employment Is Dead in the Water

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Employment is dead in the water because opportunities for organic expansion are few and the cost basis of doing business in the U.S. keeps rising.

 
Let's start by reviewing the basics of employment in the U.S. Courtesy of the St. Louis Federal Reserve, here is the non-institutional civilian population of the U.S. (Note that the Civilian Non-institutional Population With No Disability, 16 years and over (LNU00074593)--roughly speaking, the workforce of the nation-- is 215 million).
 
 
Here is the percentage of the population with some kind of job: note this could be self-employment that earns $1,000 a year or a job with 4 hours a week; recall that 38 million American workers earn less than $10,000 per year, 50 million earn less that $15,000 a year and 61 million earn less than $20,000 annually. All these numbers are drawn directly from Social Security Administration payroll data.
 
 
Here is real (adjusted) gross domestic product (GDP), which includes government spending: (in other words, as you borrow-and-blow trillions of dollars, GDP rises).
 
 
Unfortunately, employment hasn't risen along with the population or the GDP: the only metric with any meaning is full-time employment, as self-employed and part-time jobs may pay a few thousand dollars a year and should not be included in the same category as full-time jobs.
 
 
In sum: the population and GDP have both expanded smartly since 2000, but full-time employment has barely edged above levels reached 13 years ago.
 
Academic economists and political progressives would have us believe that the only thing restraining employers from hiring millions more people is lack of access to cheap credit.
The explicit assumption here is that cheap credit is all employers need to expand their workforce. This is so out of touch with reality that it beggars description.Progressives and academic economists generally claim the Federal Reserve's zero-interest policy (ZIRP) and its other policies of flooding the economy with liquidity "are working," i.e. boosting the economy.
Here is what the Fed's policies are boosting: financial sector profits Please compare this chart with the chart above of full-time employment, and then decide where the Fed's free money/easy credit is flowing.
Here are financial profits per capita:
 
 
The only way to understand why employment is dead in the water is to stand in the shoes of a potential employer or entrepreneur. Remarkably, this perspective is unknown to economists and progressive politicians because they have never been an employer (and no, hiring a grad student to grade papers or an illegal nanny to watch your kids does not make you an employer.)
 
I have described this vast divide between small business employers, entrepreneurs and the self-employed and those working in government or Corporate America as one of the least explored social/economic divisions in the nation.
 
Those who have spent their careers in government or academia have little idea what it takes to hire more people. Number one is a business with strong demand for one's products or services. In a developed world with too much of everything except energy, that is no small challenge: the world is awash in over-capacity in every field except niche industries such as deepwater oil rigs.
 
Second, you need a process that generates so much value (specifically surplus value) that you will generate immediate profits by hiring more people.
 
If the value added by additional labor is low, then you have no reason to hire more employees, even if Ben Bernanke personally knocked on your door begging you to borrow a couple million dollars at low rates of interest.
 
If an additional unskilled worker will cost $10 an hour and might generate $100 a day in additional gross revenues, that is $20 in gross profit. But the overhead costs of operating a business are rising faster than inflation: junk fees imposed by cities, counties and states, workers compensation and disability premiums, healthcare costs (if you hire full-time workers), energy costs, and so on.
 
For most businesses, overhead costs 50% to 100% of total employee compensation--wages plus benefits and payroll taxes. So adding another employee to gross 20% more doesn't make it worthwhile--it actually generates a loss once overhead costs are paid.
 
The only time it makes sense to hire another worker is if that worker will create 100% or more surplus value from their labor. For example, a worker paid $200 a day in total compensation generates $400 more in gross revenues--enough to not only support the added overhead but net the business a profit.
 
In a global economy, competition constantly lowers the premium most businesses can charge. That places most businesses in the vice of declining gross margins and higher labor/ overhead costs. The only way to stay solvent is to grow revenues and slash costs so declining gross margins are still enough to pay the bills and leave some return on capital/time/risk invested.
 
Cheap credit doesn't create surplus value, increase gross margins or get rid of over-capacity. It is a financial non-sequitur for all but a relative handful of enterprises. The only firms interested in borrowing money for expansion are those relative few in sectors that are not burdened with overcapacity. That might include oil services, network security and a handful of others.
 
But high-margin sectors such as technology either get funding from venture capital or their high margins generate enough income to fuel expansion without taking on debt.
 
The only companies borrowing vast sums of money are those paying off higher-cost existing debt with new cheap-credit loans. The savings from lower interest payments don't flow to new hires, they flow to the bottom line and from there to executives, owners or stock buybacks that boost the portfolios of institutional owners.
 
Employment is dead in the water because opportunities for organic expansion are few and the cost basis of doing business in the U.S. keep rising. That vise forces businesses large and small to reduce labor costs while boosting productivity. There is no other way to stay solvent in a post-bubble, over-capacity, over-indebted consumerist economy awash in too much of everything but energy, common sense and fiscal prudence.

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apberusdisvet's picture

Excellent post; it should be shoved up Krugman's ass and eaten by Obama

ReptilianSlaveMaster's picture

I guess we'll need some more QE, buying more calls on SPY on Monday. It's time for you intelligent snobs to stop thinking and turn off all information.. JUST BTFD AND SLEEP, BITCHEZ

Bear's picture

Soulda let the banks fail in 2009 ... we would have recovered by now

espirit's picture

...and new bubbles would have been born from greed that goes unpunished...

TWSceptic's picture

Hello there. Greed is not the problem, fascism is.

 

Actually without greed we'd probably still live in caves.

philipat's picture

But other than that, all is well?!!

Tijuana Donkey Show's picture

Good links. The final one about deposits needs some detail on retail vs corporate. People in America are waiting for something to happen. I normally go the range at least once a month to practice, but I can't find new ammo to save my life. I fear using it for practice, when I might need the real deal soon enough. Thank God for the air rifle, at least I can target shoot and stay somewhat focused!

espirit's picture

Also a comment on the final article/link.

$114 billion out of $5.35(?) trillion may sound like a fortune to you and me but... it's chump change to the Fed and banksters.

"Another set of data from the US Federal Reserve shows some deposits may have moved within the banking system from one type of account to another."

Duh! Not hard to imagine said banks moving "your" money around for an administration fee, scalping interest, or investing for you at the most untimely rampapaloozas.  Or, the Fed is just guessing because they don't have permission to look at the cooked books.

Son of Loki's picture

Deposits will keep flooding out of banks as people use cash to buy stuff since many stores now charge a "swipe fee" of 1-3% for credit card users. Basically, they are passing their costs on the cc users. So more folks are using cash at check out. Take a look nex ttime you are shoppng and see how many wip out their cash instead of a credit card.

 

Of course, you have a large group sucking cash out of their 401's and bank accounts to pay for every day living expenses ---food, little Johnny's new iShit, Buffy's latest Calvin Klen jeans, etc.

Tijuana Donkey Show's picture

Great, direct point on this article. I run businesses as a CEO for hire (small businesses, for turn-around. The "company jet" is a joke about my station wagon.) Loading a business with the junk fees, health costs, etc, is crippling in an economy where the inflation rate is higher than reported, and most small businesses are living off an owner subsidy. The owner subsidy is when an owner runs a company, and does more work than it would cost to replace them. I have businesses that I vet out all the time, and I see this happening. Add the fact that many have gotten by on a little extra cash by claiming losses, and the tax impact of actually making a profit, and most people are stuck on a slow treadmill of doom. I thought the vendors at the flea market were smarter than most, as they were able to dodge and avoid some sales, business, and income tax, until the state came through, and nailed them for 10+ years back! (Flea markets are a great gauge of the economy and society, btw. I see many larger ticket items priced in pre-1965 silver, gun transfers, and people getting irritated when ICE and Homeland agents roll through looking for non-licensed sportswear and DVD's.) America has a case of the flu, and I'm waiting for it to puke (revolt) and finally start to feel better. I understand the anger of those who still have something being mad about the freeloaders, but what is there for them? Working is pointless, you get less, and feel worse for it if your not on the top. Who here would flip burgers, mow yards, etc, when your getting less, and getting messed with more? I have a peer who hasn't existed on paper for 8+ years, and he lives nearly as well as I do, with less paperwork. Only tech or GOVT supported businesses that can chase returns that are above the cost of capital, and inflation, have any chance. Anyone else is just circling the drain, waiting to die. 

Omen IV's picture

"Loading a business with the junk fees, health costs, etc, is crippling in an economy"

my experience it isnt these operating costs - but dwindling unit volume with no pricing power which cant reach breakeven- when you can all buy the same goods from china from multiple sources they all start discounting to gain volume which never appears -

services are the same but more sticky - the solution is cut the border off and the WTO - starving the people's wages directly or indirectly  on a macro basis only produces less aggregate disposable income and therefore less demand - viscious circle with no resolution

 

TrustWho's picture

I buy and sell main street businesses with revenues less than $5 million. You are absolutely correct as gross margins are getting squeezed, balance sheets shrinking and owner sweat equity increasing. In fact, small business owners have NOT received their due in helping this economy through this depression. How much longer can they continue? My opinion--not much longer.

I think I need to buy a gun's picture

thats me and your right,,,,boehner cries and says small business i can't fuckin stand it

augustus caesar's picture

Good post, I see it every day as well

phaedrus1952's picture

My sentiments exactly.  I am in the food distribution business here on the left coast and a great many of my competitors/peers are throwing in the towel at an accelerating pace. Former owner/operators are working as hired help - when possible - in remaing firms, supervisory personnel are back to doing entry level work just to keep an income.  Our customer base, collectively, is shrinking dramatically.  Biggest uptick I've seen is in tupperware-covered food jamming office refrigerators for lunchtime consumption ... and I'm referring to some pretty upscale businesses.

sitenine's picture

Spot on, and here's something else to think about - most 'family units' that are still functioning now rely on two incomes to support the household, and this was not true in the 1980's. So, in truth, the situation is far more dire than the data suggests.

Tijuana Donkey Show's picture

Spot on. Two incomes, and the kids don't get raised properly, and no one can cook a proper dinner for the family. 

Race Car Driver's picture

... and the art of conversation is lost.

Never One Roach's picture

The private sector is dead. period.

Anusocracy's picture

And the public sector is growing but brain dead.

A recipe for success.

FreeMktFisherMN's picture

But, but, Obama says 'the private sector is doing fine.' And besides, 'they didn't build that.' /s

yogibear's picture

And the public unions can fix it with more taxes, tolls and fees, which just about doubled in many cases.

No wonder public union jobs are the most sought after. 

otto skorzeny's picture

30 years ago only retards worked for the govt-now those are the most sought after jobs(but still the retards seem to have those jobs)

Anusocracy's picture

Idiocracy grows on the backs of public workers.

tony bonn's picture

this article will survive the year as one of the top 20....

ItsDanger's picture

Think its bad now?  I guarantee it will get a lot worse.  Wait until more software efficiencies are gained and robotics reaches practical rollouts.

Anusocracy's picture

Wait until government gets bigger and more controlling.

Government is fully capable of destroying the efficiencies that technological advances create.

Over the last century, the work week went from about 60 hours for one family worker, to 40 hours for one family worker, then to 40 hours each for two family workers. After creating the need for two workers in a family, government is now destroying their jobs. I would hazard a guess that at this time, a livable work week should be about twenty hours.

Instead, thanks to government, people are living in poverty working twenty hours.

moneybots's picture

"Employment is dead because all the jobs were shipped overseas."

 

Meet Baxter, a robot.

 

Technology has been eliminating jobs.  Smart electric meters have replaced meter readers where i live.  Automated warehouses.  Online bookings for travel.  Self checkout at the super market. 

It all starts to add up.

espirit's picture

Meet SkyNet1 defense drone.

Designed and built to protect robotic infrastructure from carbon based lifeform intervention.  Armed with the latest weaponry not currently available to other life forms.

Yep, I see it. 

willwork4food's picture

Meet carbon based construction worker. Designed and trained for decades to address quality and efficiency, until everyone under the sun decided they can get a $9/hr employee, when cost mattered more.

See carbon based construction worker begin to die a slow death.

DR's picture

No robots here...just cheap labor. Thanks NAFTA!

 

 

Volkswagen to Produce Golf for Americas at Mexican Plant

http://www.bloomberg.com/news/2013-01-25/vw-to-shift-golf-production-for...

 

"“With its existing infrastructure, competitive cost structures and free-trade agreements, Mexico is the ideal location to produce the Golf for the American market"

401K of Dooom's picture

Why are they producing their Golf's in Mexico?  I thought it was currently under a state of war due to narcotic demand? 

Oldrepublic's picture

Mexico is not as bad as the press says. I was impressed with many aspects of Mexico. Not so dangerous. Mexicans down there are not to be compared with the ones in the US.  

QQQBall's picture

Yes, local supermarket has done away with "Quick Check" line forcing you through the scanners. They have one attendant for 4 to 6 scanners.  Pretty soon, you will just roll the cart under a transponder and it will automatically bill your account the full amount of the purchase. Fresh & Sleazy has no checkers and their scanner work very well.

Caviar Emptor's picture

The economy is going Bi...Biflation. Employment won't pick up because of the cost basis as the article states. Solution? Lower wages and benefits, part-time employment. Disposable income vaporizes. And so does demand. And hence the deflation side of Biflation. But cost basis of jobs rises. Hence the inflation side of the coin

SWRichmond's picture

+1. This is the recipe for the continuing destruction of the politically troublesome middle class. Those of us who lived through it in the 1970's recall vividly; it was named "stagflation" at the time, but the effect is the same: everything you need costs more, the value of your labor decreases, everything you already own becomes less valuable in real terms.

In other words, theft of labor and real property by the central bank.

Jack Burton's picture

If only we could get back to the job creation explosion during the 8 years Bush presidency. Obama took millions of new jobs and flushed them down the toilet. The Bush tax cuts were proven job creators as business used the increased profits to hire and expand to service a public flush with cash from their tax cuts. Obama has squandered the great job creation decade of the 2000's.

Channeling Million Dollar Bonus.

Bobbyrib's picture

The job creation explosion had nothing to do with the housing bubble either. Don't look at housing related industries to see what the employment figures were. /sarcasm.

ZeroAvatar's picture

CHS said "....opportunities for organic expansion are few.".........."Number one is a business with strong demand for one's products or services. In a developed world with too much of everything except energy, that is no small challenge: the world is awash in over-capacity in every field except niche industries such as deepwater oil rigs."

 

I don't think Charles expounded enough on the 'organic expansion' part of the thesis.  As icanhasbailout said, ""real GDP growth is not translating into full-time jobs" because that GDP growth ain't real."  He's right.....printing and borrowing fiat dollars to sustain the growth paradigm through debt is not 'organic growth'.  It's rot, plain and simple.  Rot on the inside. 

 

  Everything that printed- money GDP has gotten us for the past 4 years was all for nought.  All we have to show for it is a system that is rotten on the inside.  This rot is growing daily, and will consume the economy.  We need ORGANIC growth, not rotten fiat printing tricks.  There has been no ORGANIC GROWTH.

Slightly Insane's picture

I am a small business guy, self employed.  What is misunderstood is that .... if you're in a service industry, you've got to hire an accountant (tax rules too complicated), purchase general liability insurance (most folks require it), along with paying Unemployement Insurance (in Illinois every month even though the self employed is never unemployed ... he, he, he), Workman's Compensation Insurance (if you have 1 employee other then self), pay an attorney for incorporation (mine was $700 quite a few years ago .... still pay a franchise fee $100 juice to the state every year), still pay for health care (although now, due to the new law, I will be omitting it and paying only a penalty), Pay both sides of the social insecurity and medicare taxes, also pay the state income taxes (5% thanks to the communist democratic party in Illinois).  Then to work in many of the communist suburbs, one has to pay for a contractors license (good for 1 year or less ... $200), not to mention permitting fees.  If you're lucky enough to make some serious dough, then you can pay the feds some income tax.  Of course there is the rent, the gas, electric, phone, and advertizing bills ..... and if you're lucky, you can fund a retirement account.  It is absolutely thankless, but at least I can sort of ... avoid working for some assholes.  Then of course there is the matter of getting paid after the work is completed.  Then we get an ahole in the feral gubermint who say's "you didn't build that"!  All I can say is, fuck you, yeah I did mofo.  (I do fabrication and engineering).  I am slightly insane because of all the fucking bullshit that I have to put up with, most of which is caused by faceless stupid asshole regulators that ain't got a clue.

trav777's picture

the problem here is that you cannot see through your racism.

It is not people like you who built this country, it was women and minorities.  You can check down the list of all the important pieces of infrastructure that women and minorities developed and built.  The list of inventions by both is humongous.  This is why we should spend all of our time celebrating these groups.

otto skorzeny's picture

that's why Dee-troit,Atlanta, and sub-Sahara Africa are so fuckin' well run

joego1's picture

I'm a minority fuck you.

joego1's picture

I'm a minority fuck you.

Slightly Insane's picture

trav 777 - I am not a racist.  I am NOT a Communist.  It IS PEOPLE LIKE ME THAT BUILT THIS COUNTRY!  My kind was referred to as "the Mick's".  Since this countrry is comprised of a bunch of folks that no one wanted around (misfits), we are largely all "not from here".  I suppose one would have to exclude the American Indian, as this was his country.  Since I am not an American Indian, and a second generation Mick, then I am no different then any other group, or race represented in the US.  You obviously wish to pander to the lowest common denominator, and play the race card.  (Communist activity to generate division). Get over it, and get an original thought.  I celebrate one thing .... and that's work.  I don't need parasites like you getting in the way.  Go out and "build something".  If you're incapable of that, then get out of the way!