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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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!

otto skorzeny's picture

I like the state of IL-hate the fuckers that run/work for the govt- but I have the feeling that IL or CA will unravel first and I'll be at ground zero for the Big Show

phaedrus1952's picture

While California is an incredible place in so many ways, it may very well lead the way in the coming implosion.  Few weeks back a Highway patrolman retired with, if IRR, 400 G's walk away money in accrued sick/vacation benefits along with a 200 grand FOR LIFE retirement (that's 4 grand per week for you state school grads).  Putting aside any judgemental input, this state of affairs is clearly unsustainable.  What cannot be sustained, will not be.

Missiondweller's picture

This state school grad and CA resident agrees with you.

slightlyskeptical's picture

I'm all for unions and benefits, but these packages are way over the top. Anyone who spends their life in public service can do this if they play their cards right. We need to do away with retirement benefits on overtime, make vacation and sick pay use it or lose it and completely eliminate the secondary retirement packages these people are able to accrue. Max benefit - average salry through career. With social security and their own savings they will still have it better than their working years, which is more than fair.  My neighbor was a firefighter and retired last year to a $750,000 lump sum and $175,000 a year. Went on no more than 3 calls the last dozen years. Falling down drunk through most of them. Lucky bastard!

If only we had known as kids how rich we could get worrking for the government, more of us would have followed our dreams to be a firefighters, paramedics, policeman and even teachers. 

Pareto's picture

Still not accpetable.  Sorry.  I can't get past the idea of somebody that does not serfvice a market need (and therefore, is not accountable to nobody for anything), can get paid more than I do, and retire better than I might ever hope to.  Its shitty economic calculus and has fuckall to do with productivity or economic value.  Don't get me wrong, I respect the disciplines/careers you note, but, there has to be some economic connection between productivity and compensation.  And the idea that you don't have to save for retirement is fucking nonsense.  Its arrogant and immoral to expect market participants to pay other people's way until their death, while they struggle to look after their own.  Its fucking asinine, and it instills a sense of entitlement and irresponsibility.  Capitalism requires that everybody play by the same rules.  If some are more equal than others, then fuck it!  I'm out.  See?  thats what happens when people get looked after at other people's expense.  Pretty soon nobody looks after anybody.  Thats socialism.

joego1's picture

Im with you brother but I ditched my last employee got bless him. Fuck that gov!

sitenine's picture

'ditched my last employee'? - wow - it's assholes like you who that can really turn people off. Frankly, I think you're lying anyway - An honest employer would say that he "regretfully had to let his last employee go." But whatever, I just wanted to note here that I think you're an asshole.

sitenine's picture

@ Slightly Insane - You sound perfectly sane to me. Of course, in a nation run by folks who may not be so sane makes us all feel like we're the ones living in a parallel universe. From time to time. I'm with you 100% on self employment, and I admire you for playing a game that actually pays honest income regardless of what your trade may be (even though the odds are stacked so heavily against us). Too many have forgotten what took us so far, and it is sad that some seem so willing to give that up. Hang in there friend. You are not alone.

401K of Dooom's picture

Mr. Insane, your comments would be perfect for an aspiring politician.  Thank you for the great diatribe!

dolph9's picture

The fossil fuel powered machines rule.  We've made ourselves dependent on them.

Many here continue to rail against the welfare and disability cheats.  And to a certain degree I agree.

But think about it logically...suppose you have government subsidized shelter, food, and cable and internet porn.  What incentive do you have to work?  The only incentive you have is if you happen to have some skill, and you actually want to go out there and practice it.  Otherwise, the free Big Mac wins every time.

And it actually doesn't cost alot...just the bare minimum needed to get people by.  And then some will get more and can get obese.  And these people aren't really doing much of anything other than the occasional trip to Wally World or Mickey D's.

In other words...welfare is LESS EXPENSIVE than jobs.  As long as this is true, there will be no end to welfare.

So welfare will rise and rise until it bankrupts every last working person.  That's the endgame.

mess nonster's picture

ILCA always the test states. Now testing how insolvency can benefit totalitarian motherfucking communist State control of every fucking thing possible.

Anybody that can swing it should figure out how to live so low and invisible that no-one takes notice.

Warm and dry- check.

Food. Check

Clothes. Check

Excess income that puts me on some communist tax radar, who the fuck needs it?

The Soviet Union collapsed after three generations of no-one doing jack shit except get drunk. And that was during a period of cheap, cheap energy-If everyone just quits and stays drunk,  it will take this country five years to disintegrate and then we can start over. Don't pay attention to Anonymous- that's just the CIA, trying to start trouble. Opt out, find a nice dry hole in the ground, make some moonshine, and let the system choke on its own shit.

joego1's picture

Hmm, I wonder if I can distill shit?

Tom Green Swedish's picture

I'm getting real sick of this trashing USA crap.  Most of the people who are unemployed are completely unqualified to do anything. It's not the companies fault they are working with a pile of garbage.  Do you want to hire somebody who's only qualifications are posting pictures on facebook and getting plastered? We have almost no inflation here

 

 

joego1's picture

The only qualified to be employed is me me me me....

alfbell's picture

As Martin Armstrong explained, it is really all about CONFIDENCE and it's pendulum swing. After the 2007 crisis the public confidence pendulum swung towards the government: the government will save us and fix the system. When the pendulum swings in this direction it allows government to get bigger, exercise more control, intervene in your personal and business affairs, move towards totalitarianism, etc.

There will have to be a radical drop in the private sector's CONFIDENCE in the government for the pendulum to swing the other way which will then bring about reform, smaller government, reinstatement of freedoms and liberties, reinstatement of rule of law, etc. etc.

If reform is correct and TRUE instead of false data is utilized, we could put an end to the business cycle (boom and bust) and rid ourselves of inflation and other created negative conditions in our society and economy.

It will take some major failures and crises in the public sector/government before that will ever happen. Wonder how long we'll have to wait? 10 years? 20? 50?

Pareto's picture

The pendulum doesn't swing on its own and confidence in government has little to do with the business cycle.  The Federal Reserve creates the business cycle as does government spending.  By any measure, government has failed at accomplishing anything, and especially has failed at bringing resolve to the financial crisis.  But, this should come as no surprise since bailouts beget bailouts.  If bailouts and government spending actually worked, or, added to GDP such that for every $ of government spending, yielded, $1.25 in GDP growth, wouldn't that be a permanent line item on the government's income statement.  Fact is, it doesn't work, because it cannot work, because by design, in order for the government to claim "value creation", it must first confiscate value from somebody else.

 

Not sure what you mean by "reform being correct and TRUE".  If by reform you mean getting government out of the economy, maybe.  If however, you mean "tweaking government here and there....na uh.  Expect no substantive change in the course of increasing economic imiseration.

alfbell's picture

 

 

We the people, Americans, citizens, producers, voters, tax payers (or whatever we call ourselves) have been...

 

DISENFRANCHISED !!!!

earleflorida's picture

yesterday's word for today's, many a tomorrow:  "inshoring" ; [raft fill'd with mandarin speaking americana expatriates ]

Note: too old for reunification and [un?]suitable for front-line infantry? great candidates for welfare indoctrination...yes-- no? 

and, 'obi' just keeps on singing, 'old man river' to michele's`bell-- banjo a strummin... we jus keep rollin em along...

q99x2's picture

Yep that is the way it is. Perfect for moving the Chinese in to manage once the US is in the same condition as Greece. Then the elite can live a happy go lucky life in private cities around the world. That is if they can stay alive through the revolution and/or keep the military from turning on them.

sitenine's picture

What? Keep the military from turning on them? Are you serious? Private cities, one's that try to live beyond the reach of federal government, will be crushed mercilessly. Just ask Randy Weaver or David Koresh how it worked out for them - oh, that's right - they're dead.

slightlyskeptical's picture

How do we fix it? We need to pay people more and we need to make sure the productive capitalists get rewarded.  The current balance of wages, prices, profits isn't working out very well unless you have monopoly power and can kill supply to maintain pricing. There is a equilibrium of living wages, prices and profits that we need to get to in order to get the economy running smoothly again. 

Given our fiscal situation and the need for inflation to get out from it,  to get wage, price, profit equilibrium, wages would need to rise dramataically, prices would need to rise somewhat less dramatically,  In order to spur internal demand and thus restart domestic manufacturing, we would need to take a protectionist stance on foriegn trade - I.E. we can't import anything for less than we can produce it ourselves.

Solution = common sense

 

Slightly Insane's picture

In my opinion, this cannot be fixed.  The Guberment has a monopoly on force.  It is this "force" that keeps me paying taxes, and things like "unemployment insurance".  The game is so rigged in favor of the parasites that there just does not seem to be any way to clear them out of the way.  I think the solution, if it may be called that is "John Galt".  Takers out number makers.

Give up your 2nd Amm'dmt rights, and you can call yourselves "slaves, and prisoners".

hooligan2009's picture

fixing it involves rolling back the clock with as much intent as the clock was rolled forward ot this point,

that is...fiscal surpluses, less regulation, closing of borders, forced repatriation of capital employed overseas, direct education to high value activites post graduation, lower health costs, clamping down on corruption and drugs, reducing the size of the military to one third of its current budget, making "spin" a crime, utilizing common sense at all levels of government, alienating communist regimes (including China), refusing to allow imports of products without reciprocal labor laws, Fed fund rates of 5% to reward people who save and make people think twice about living beyond their means. 

the ist goes on and on. it is not impossible. touch of national pride never hurt anyone. governments that only give their voters their problems back in their faces will depress the voters. 

one project i would suggest is taking 400 billion from the defence budget and firstly, eliminating crime/corruption and secondly, rebuilding infrastructure (including resiting unemployed people in brand spanking new cities). 

others will have more and better ideas, but one thing is for sure, it is not only possible but compulsory.

401K of Dooom's picture

Mr. Durden, great column.  This explains a lot about what is going on.  I would add that there is the extra complication of appreciating real estate prices.  When I was living in Massachusetts (there are some nice people there, unlike the Kennedy lovers), all of the properties were appreciating in value without regard to their real net worth.  The average cost of a home in that state is up to 400k-500k and that's a starter or first family home.  What I see happening is the local govt's trying to get around prop 2and a 1/2 is to boost up the assessed value of the property and collecting more revenue from that.  This is done without regard to the value or the location of the property.  I have a friend who's father lives in Lowell and the street he is on once had a big-time drug seller.  Yet her father's house is assessed at mid-six figures.  No one has done an analysis of over-appreciated property values versus unemployment or other factors in this depression.

nicoacademia's picture

head and shoulders with snapped neckline on the Usually Work Fulltime chart.

ebworthen's picture

Time to end financial engineering and re-institute labor uinons and livable wages and benefits (and sound money and the rule of law).

Bleed the banks and corporations, the new plantations of the 21st century.

Kill big government and restore the constitution.

End the FED!

QQQBall's picture

Clueless... other than sound money. Just raise the min wage to $50/hour and voila! Hahhahahha!

The Swedish Chef's picture

Don´t worry, energy won´t be cheap for too long and sooner or later the last illiterate Chinese farmer has moved to the city and his new "well paid" job. It might hurt right now but once oil has a price closer to it´s real value and Chinese start demanding real wages, the tide will start turning.

Spigot's picture

There are many dynamics at work which seem to spell "doom". One dynamic is the mushrooming of governmental confiscation through taxes, mandates, regulation and inflation. A close cousin to that is the rapid expansion in wealth transfer from the broader populous to the very few at the very top, and that classes agrandizement at the expense of the many.

Another dynamic is the destruction of businesses whose assumptions and business models predated the 2007-8 crisis period, and the subsequent flatlining of consumer debt increases. Adding to this that .GOV has decided in their infinite wisdom that devaluing the currency (and the consequential raise in inflation) would "make up for the plateau in private consumption", when in fact it (inflation) continues to eviscerate the middle class so that they can NOT increase consumption, there by creating a destructive feedback loop that drives the middle and lower classes into greater dispair. (not a recipe for consumer confidence)

The world has changed. Your business and way of doing business has to change as well. You have to reinvent. No you can not do that well if you are carrying huge loads of costs, debt or dependencies. Yes you can do that if you are by yourself. IMO there are a lot of new, 1-3 person businesses which are flying under the radar figuring out how to reinvent themselves and recycle parts of other businesses into their own business.

For my business I just bought a $50,000 pc of equipment for $200 at auction. I am gutting it and selling the parts and should be ahead just on the parts sales. I will use some of that money to refit the machine to my needs. I will use open source software to drive the machine. With this machine I will be able (by myself) to produce in 1 or 2 days 150% of what I produced in 2012. I will then use all the saved time to focus on sales and establishing new markets in other parts of the country. I will never hire anyone. I will hire out my needs to other 1-3 person businesses. I will eventually sell this business but only after it has taken me were I want to go, and no further.

The web based integrated manufacturing, inventory and sales applications I will be creating to support this business will become a product suite that I lease to other businesses for ridiculously low monthly fees. The server farm I will be creating will provide cloud services for other businesses. Everything becomes another business, and every business is up for sale, or partnering. But there will be no employees. I can't afford them unless they are as innovative and resourceful as I am. But then I would expect them to leave and start their own businesses, so why bother?

 

Slightly Insane's picture

Spigot .... pray tell, what was the $50K equipment?  (CNC - 3/4 axis lathe, mill, or edm?)

Spigot's picture

See my reply to you below.

hooligan2009's picture

You are Spartacus. Well done sir!

toomanyfakeconservatives's picture

Thank you for stating the obvious.

Gimp's picture

Guys, you know the old saying:

" If you have no plan for yourself, someone else does"   = slave laborer.

JayKitsap's picture

Yes, become self employed fixing Legacy Equipment or finding ways to do more with current assets.  So much now is disposable, the equipment that predates that has a lot of value because it continues to work.

Our .GOV keeps adding regs and costs to employees and employers, no viable reason to expand, more reason to become smaller and more profitable.  Just O'care adds $5k to the cost of a $20K worker.  If their work before was just breaking even, somehow he needs to make 20% more return to stay even.  Not 20% more revenue because only the net matters.

Oh, everybody with US content will need to raise prices to cover those added costs, making imported goods relatively cheaper.  Duh - Ocare will shift all the more production overseas or to be made by robots.

 

QQQBall's picture

Read "Your Money or Your Life" & "Cashing in on the American Dream, How to Retire at 35" and perhaps the "Millionaire Next Door." These are kinda "how to" books, but really philosophy books.  After reading "YMorYL" in the 1980's, I cut my expenses in half and really started living. My opinion - you have to be the boss - figure 80 hrs a week and go the extra mile. and yes, margins are getting really squeezed, maybe this time will be different but in the past, the people who make it through the rough times lick the gravy on the other side. Go check the books out at the library. It does seem tougher now; when I graduated from college I had no worrires off employment.  In 1984 or 1985 I made $75k in 9 months with commissions.. I quit and went to work at my current profession and started at $6/hour - slept on a buddies couch for 3 months and now I own my "job." It is harder now, but I love what I do and have no plans to reitre. I am tempted to buy a really nice home, but once you get out of the matrix, the idea of a mortgage is not so satiisfying and prices are too high for my taste. It is a digital world my daughter works for me remotely as does my sec'y. Sec'y is 2000 miles away and daughter is moving to UK. They work as IC's, which they are.... I am not saying anything is easy, but you have to adapt, live below your means, save and invest... and as to employees - screw that - ObomberCare just made them less attractive...Try to be "value added" to your Clients - I have lunch every year with Clients just to show my face and I never discuss business, always there family and now we each know what our kids are studying, what they like and dislike, etc... Its easy to fire a name, but harder if they know you... I am not a genius, but I have servived for 30 years...  I have borrowed & invested when rates were high, not low.Nothing pays like patience.

hooligan2009's picture

you are spartacus! well done sir.

Spigot's picture

Slightly Insane,

You are on the right track. Its what is called a Liquid Handling Robot, pc of lab equipment. I am refitting this to be an automated filler for my product line. Replacing the proprietary controller and drive boards with generics, replacing a few motors. Will use EMC2 (Linux) to control the movements and script the runs. One press of the button and off she goes. Precision filling.

It will be salable outright or I can lease it as well to others or fill other people's products. I can also start a business refitting these machines.

Putting this into perspective, a contract company would require me to commit to a minimum run of 8,000# of product, with lead times of 6-9 months. Unknown what the cost would be since we never got that far in the conversation. With this machine I can fill huge #'s of bottles a day, am far more flexible, can manage my own inventory as needed (already doing that). So, where's the "economy" in this kind of "economy" of a small guy buying services from a large guy whose business model requires this type of crap?

Obviously I am an inventive and handy sort. If other business owners are not so handy, then...they are living in the past, and will fail. They sat around watching TV when I was learning and practicing. They bought big boy toys when I was investing in machine shop tools. They were reading the news paper when I was reading ZeroHedge. You get the picture.

What I am saying is that there IS an economy being born in the fires of this depression, but it doesn't look anything like the fat assed businesses of yesterday. These small companies are lean, mean and undercutting the established companies by keeping a death grip on costs, re-using, refitting, inventing instead of buying over priced new equipment, etc. If you are reading ZeroHedge you are probably one of these.

hooligan2009's picture

yep, those are the facts...now..have we got any leaders who can transform the current shit into gold?

or is it down to this: 

Bernanke: I have had it with Charles Hughs SMith. He won't stop making us look stupid.

Pentagon: We have an app for that (aside to colleague...engage the drone!)