Wednesday, October 21, 2015

There's Still a Jobs Problem in America

Once a month the Bureau of Labor Statistics (BLS) reports on jobs. From it's peak in 2009, the BLS has reported a falling unemployment rate, from 10% to the current 5.1%. Despite these impressive gains, there's still a jobs problem in America. Here's why.

Many Americans are aware of the falling unemployment rate. They hear about it on the nightly news. They read about it in the newspaper. But behind the headlines, economists have quietly been warning about the quality of jobs being created and the falling labor participation rate. Low paying jobs in the services sector and a record number of Americans mysteriously dropping out of the labor force, both serve to artificially reduce the unemployment rate, making the jobs economy appear much stronger than it actually is. 
The counterargument is that retiring baby boomers are the reason for the falling labor participation rate. It's to be expected, with an aging population. But is that really true? First, let's explain the labor participation rate. It's the share of Americans, age 16 and over, who are employed or actively looking for work. If fewer Americans are in the labor force, then those holding jobs represent a greater percentage of this total. Hence, a lower unemployment rate.

Thus, the unemployment rate has been biased by the steeply falling labor participation rate since 2008. For this reason, the more compelling chart to look at may be the employment to population ratio, also maintained by the BLS.
With no bias in the data due to a falling labor participation rate, this chart simply shows the proportion of the population, age 16 and over, that is employed. Now it's true that this chart would be influenced by retiring boomers, but it's hard to believe that 5% of the working population, or 7.7 million people, would have all decided to retire in the two years from 2008-2010. In fact, the first of the baby boomers to turn 65 did not occur until 2011. So something else is clearly responsible for the steep decline in the employment to population ratio in the first two years of the great recession. 

The problem is weak job creation, not retiring baby boomers. Not only are fewer high paying, full-time jobs being created, but the employment that is being generated is seasonal, part-time or in lower paying jobs in the services sector. 

To understand why this is occurring, we first have to step back and understand how new jobs are actually created in the private sector. Since there are few, if any, economic incentives for hiring new employees, businesses hire new people when they forecast they will see the sales and revenue opportunities to pay these salaries. Think about it. If you run a small factory that makes running shoes, the only way you would expand and hire more staff is if you believed that demand for your shoes would support the investment in increasing production. And that, right there, is the problem.

Let's take a look at new business investment in America since the beginning of the recession. After recovering somewhat dramatically in the year following the 2009 recession, the rate of growth of new business investment has leveled off and in fact fallen in recent years. Why? Because companies are not seeing the demand for their products in the US or, increasingly, abroad. Weak demand, weak investment, weak hiring.

Unfortunately, the public sector isn't helping. Faced with a slowly recovering, but now flat tax revenue outlook, state and local governments are desperately struggling to pay rising salaries, retirement benefits, energy and health care costs. As a consequence, new capital investment fell off a cliff in 2009 and continues to decline today.
                        U.S. Investment in Public Infrastructure
With business and local government investment this lackluster, the prospects for meaningful new job creation looks highly doubtful. Until businesses see new demand they will be unlikely to expand current production. Entrepreneurs will shy away from starting new businesses and investing in new ventures. 

Unfortunately, igniting demand is something that America and other developed economies have very little experience addressing. And so, we have a bit of a chicken and egg problem. If consumers had more job certainty, higher wages and more disposable income, they'd be willing to spend more freely, thereby generating demand for products and services. However, businesses are unwilling to increase hiring or pay greater salaries, without seeing greater business opportunities. So which comes first, jobs or consumer demand? For this very reason, we've remained mired in the same stalled economy for the past seven years, with uncertain prospects for new job creation.