Submitted by Lance Roberts of STA Wealth Management,
"If we are creating between 150,000 and 200,000 jobs a month, how could we be at peak employment?"
The point is very valid and made me realize that a more apropos title would have been "Have We Reached Peak Employment GROWTH." While it is very true that we are creating 150-200,000 jobs a month, it is also important that the working age population is growing each month either through natural births or immigration. The chart below shows employment versus population growth.
Over the last 12 months, employment, as reported by the BLS has averaged 186,500 jobs per month while the working age population (16-54 years of age) has grown by 187,700 jobs. In other words, employment is being created only by the incremental demand increases caused by population growth.
The issue of population growth is consistently overlooked when evaluating isolated jobs numbers. By accounting for population growth, the monthly employment report is put into a contextual framework. The chart below illustrates my point.
Prior to the turn of the century, employment accelerated faster than population growth. However, beginning in 2000 the structural shift in employment began in earnest. Outsourcing, increased productivity and technological innovations have contributed to slower rates of employment growth as the drive for profitability surged.
While my previous post generated many questions, the point was that there is a limit to employment growth in any given economic cycle. It is also important to remember that economies do cycle. Therefore, could the stagnation of employment growth be indicating a mature stage of the current economic cycle?
The Job Opening Labor and Turnover Survey (JOLTS) may provide some additional evidence to support the idea of "peak employment growth." The chart below shows the ratio of job openings to hires.
As you would expect, there is an equilibrium where the number of individuals being hired matches the number of job openings. At 90%, or above, the economy may be pushing the limits of full employment.
The next chart shows Net Hires (new hires less total separations) versus employment growth.
Again, as you would suspect, there is an equilibrium point where employment is "full" and job openings and hires are simply matching job separations caused by quits, discharges and layoffs. This also brings up the point of "labor hoarding" as it relates to initial jobless claims.
Employers have slashed labor costs to the bone in order to maximize profitability. This is why corporate profits are at their highest levels on record while wage and employment growth lag. However, there is a point where businesses simply cannot cut any further and they begin to "hoard" what labor they have. The focus then turns to maximizing the labor force's productivity (increase output with minimal increases in labor costs) and hire additional labor only when demand, such as through population growth, forces expansion.
It is this issue of "labor hoarding" which explains the sharp drop in initial weekly jobless claims. In order to file for unemployment benefits, an individual must have been first terminated, by layoff or discharge, from their previous employer. An individual who "quits" a job cannot, in theory, file for unemployment insurance. However, as companies begin to layoff or discharge fewer workers the number of individuals filing for initial claims will decline. This is shown in the chart below which shows the 4-month average of layoff and discharges versus the 4-week average of initial jobless claims.
The "good news" is that for those that are currently employed - job safety is high. Businesses are indeed hiring; but prefer to hire from the "currently employed" labor pool rather than the unemployed masses. The "bad news" is that full-time employment remains elusive and wages remain suppressed due to the high competition for available work.
While the Federal Reserve's interventions continue to create a wealth effect for market participants, it is something only enjoyed primarily by those at the upper end of the pay scale. For the rest of the country, the key issue is between the "have and have nots" - those that have a job and those that don't.
While it is true that the country is creating jobs every month, the data may be suggesting it is "as good as it gets." Of course, this is a very disappointing statement when you consider that roughly 1 in 3 people sit outside of the workforce, 20% of the population uses food stamps, and 100 million people access some form of welfare assistance. The good news is, we aren't in a recession?
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