Following the March Jobs Report, ConvergEx's Nick Colas got to thinking about the composition of employment growth rather than just the headline number. Is every new job created really the same when it comes to overall economic impact? Consider that the average household income in Maryland is $69,920, versus $39,592 in Mississippi. Or that Mining and Logging jobs pay, on average, $28.77/hour and Retail Trade positions average only $14.22/hour. To expand on this point, Colas came up with three 'Ideal' marginal hires, when considering which jobs bring the most "bang" for the wage/employment "buck".
- a construction job for a middle aged male with an 11th grade education in Texas,
- an upgrade to full time status for a single mom who is a teacher in Pennsylvania, and
- new job at a tech company for a recent college grad in Colorado.
All three offer excellent multipliers for the national economy, highlighting that at this point in the cycle we should be focused on job quality as much as quantity.
Via ConvergEx's Nick Colas,
After +20 years looking at capital markets, I have found that making the complex seem simple is an underappreciated discipline. It is easy to revel in the complexity of modern high finance, but cutting the Gordion’s knot of excess data with a sharp stroke does make life easier and leads – generally – to better decisions. It is a double edged sword we’re using, yes, and small mistakes can mean a nasty cut. Still, even just the process of trying to distill the complex into the understandable is usually worth the effort.
By way of example, consider a large multinational automotive company like Ford or General Motors. How do you get a handle on whether earnings estimates should rise or fall through a quarter? Both companies operate in scores of countries, manufacture on multiple continents, have full product ranges from tiny cars to large SUVs, and set pricing through constantly changing dealer and consumer incentive programs. Your earnings model can run into the thousands of line items if you pull every financial item from the 10-Q in your quest to build the perfect forecasting tool. I know – I did exactly that for a decade as a brokerage analyst covering the sector.
Or, you can think at the margin – what single high volume product has an outsized impact on incremental earnings? Consider that large pickup trucks are still very popular in the U.S., with Ford F-Series and Chevrolet Silverado selling a combined 1.2 million units last year. Not surprisingly, therefore, they are the #1 and #2 best-selling vehicles in the country, with #3 (Toyota Camry) and #4 (Honda Accord) selling only 775,000 units combined. Add to these unit volume numbers the fact that pickups are still very profitable vehicles for any automaker, with contribution margins of $4,000 or more (often a lot more) versus $2,000 or so for passenger cars. And where is the biggest pickup truck market in America? Yep. Texas.
Therefore, when it comes right down to it, the single most important thing to know about a U.S. car company is: “How are pickup truck sales in Texas?” If they are doing better, it will take a lot of screw ups elsewhere in the system for the company to disappoint on earnings. And if they are dropping unexpectedly, well, watch out below.
While many of my economist friends may bridle at the comparison, I think we can do a little ‘Pickups in Texas’ style analysis on the U.S. labor market and how job growth translates into overall economic expansion. Just as the profits from a small car are different from those on a fully loaded Crew Cab, not all jobs are created equal when it comes to their impact on the broader economy. Consider the following (with several accompanying tables and charts after this text):
Unemployment might be 6.7% nationally, but the spread is wide on a state-by-state level. North Dakota is the lowest, at 2.6% and Rhode Island anchors the other end of the spectrum at 9.0%. Even large states can be outliers – California still suffers from an 8.0% unemployment rate.
State-by-state wages vary widely as well. In Maryland, the average household pulls in $69,920 annually. In Mississippi that number is $39,592. Yes, the cost of living is radically different, but where would you rather see jobs added if all you care about is GDP growth? It’s not down on the bayou.
Wages by profession are also quite different. Land a gig in a retail store, and the average job pays $14.22/hour. Get a job in the Information Technology sector and your hourly wage is more than double that, at $28.77.
So where are the “Pickups” in this data, or (in other words) what kinds of jobs will most quickly increase total economic growth? It’s not just a matter of what and where; you have to consider “Who”. While it might be tempting to say that one more hedge fund analyst job paying $500,000 in New York City would help the U.S. economy the most, it’s probably not true. That person is likely married, needs to save a lot for either an apartment or a child’s college education, or perhaps both. Wealthier people don’t actually make great consumers – they are generally more focused on maintaining and investing their income and savings.
You want someone who will basically spend all the money they get from their new job – that’s the best economic bang for the buck when it comes to marginal employment. While there are many answers for where these newly employed high-impact workers might be, we offer up three examples here as a way to expand on the core idea:
Single, 23, living in Colorado, with a new job in Information Technology. Younger workers have had a tough time in the current economic environment, and the unemployment rate for the 20-24 year old cohort is still 11.9%. That puts many of them at home, living with their parents, even after a four year college degree.
In this scenario, a college grad gets a good full time job in IT making the going wage in the sector, roughly $60,000. They finally move out of their parent’s house and into their own apartment. That household formation has a large multiplier effect, as they buy everything they need for their new life. As long as they aren’t flooded with college debt – the national average is just over $15,000 – much of what they make will quickly flow back into the national economy.
And why Colorado? It has a good combination of high household income ($60,180) and average unemployment at 6.1%. Job growth in a troubled area of the country may not yield as many benefits as healthier parts, with local job cuts offsetting the incremental benefit of the marginal worker.
Married, middle aged, construction worker in Texas who did not complete high school. The last five years have been toughest for workers without a high school degree. Even now, their unemployment rate is 9.8% and there are over 1 million unemployed in this cohort. Construction is one career where on-the-job experience trumps formal education, and it pays well: $24.57/hour on average. Our marginal worker would be married with kids, and therefore likely to spend his new income on necessities and child-rearing.
Why Texas and not, say, Florida? The housing market in the Lone Star State has fully recovered from the Financial Crisis, and our construction worker’s house is now worth more than ever. In Florida, we would run the risk that he would use his income to catch up on his mortgage payments or credit card bills (run up because he had no equity in his house and no income).
Single mom, school teacher, moving from a part time to full time position in Pennsylvania. There are still over 7 million Americans working part time jobs even though they would like full time employment. Yes, this is down from the +9 million in this group in 2010, but this pool of workers represents a lot of dry powder for an accelerating U.S. economy. Pennsylvania’s average income is right in the middle of the national distribution, at $51,245. Teaching pays well, at $21.60/hour on average.
Why did we make her a single mom? Women who maintain families continue to have a higher unemployment rate than their married peers. It’s not even close. Single moms have an unemployment rate of 9.1% versus 4.2% for married women with their spouse present in the household. If promoted to full time status, there is no doubt our mom would spend all the incremental income on their family.
To sum up, we should focus much more on the kinds of jobs being created than on the raw number of additions. It’s not just wages that matter, either – a whole range of factors go into the equation. To harken back to our automotive analogy, we need a “Big pickup” recovery. All we ever seem to get is a compact car, however.