Full Employment Shortages (Jul. 11)

Update 190: Full Employment Shortages
June Jobs Report & the Labor Market
The BLS jobs report for the month of June, released last Friday, showed a resumption of net jobs gained — 222,000, up from 138,000 in May.  Unemployment came in at 4.4 percent, not far from what economists regard as maximum, or “full,” employment.  But wage growth rate was again 2.5 percent, unchanged in a year.  Economists regard these labor market conditions, taken together, as puzzling.
Indeed, the labor market has presented this glaring paradox for several years: historically low and lowering rates of unemployment, steady labor force participation rates, and abysmally low and flat wage growth that has declined in real terms over the last decade.
We examine and explain the paradox and offer some other cautionary analytic notes on the report, below.
The US economy is large and complex. The BLS numbers do not tell the story of one market, but many.   Multiple countervailing forces bring us to what seems a perplexing point.  The causes for wage stagnation are multifactorial, including globalization, the rise in automation, the decline of labor unions, a  low minimum wage, and declining labor productivity.  Unseen in the statistics is a skills mismatch in the workforce — a disjuncture between what employers seek in skills and what today’s workers offer.
The Picture:  Mixed, not Mixed-up 
Those without work are unsure of whether there is or is not opportunity. They have entered and exited the workforce intermittently, often for a decade or longer.  Last month, the number of people looking for work fell by over 400,000.  In June, about that number returned to the labor force.  What does all this tell us about the expectation people have that they will find work?  The numbers cannot tell us how many of those who left the workforce in May  returned again in June or whether a trend is discernible in the data.
Employment statistics are notoriously volatile month to month, giving us at best a momentary snapshot we should not make too much of.   Even almost six months after Inauguration, not much of the current jobs picture is clear attributable to Trump administration policy.  Whether the picture is auspicious or not is likewise unclear.
Taking a step back, however, the healthy-looking jobs data is tempered by two statistical trends that belie the sanguine-sounding phrase, full employment.
•  Wage Growth — The trend here has gotten worse for workers, not better, over the last decade.  Wage growth grew by 2.5 percent from last year.  Last month, the figure was the same. Last year, the figure was about the same, 2.6 percent.  A decade ago, before the recession, wage growth was 3.9 percent a year.
 •  Labor Participation — Last May, the labor force was reported to have shrunk by 429,000 people.  In June, the loss reversed itself and the labor force participation rate increased to 62.8 percent.  From 1988 to 2008, the rate stood around 66 percent, reaching the highest levels at the end of the Clinton administration.  The rate’s range dipped below 63 percent in 2013 for the first time since the 1970s and has remained there the last four plus years.
Consider that inflation is at 1.9 percent and you realize workers are not seeing their standard of living rise. In the 2000s, wages grew around the 4 percent mark annually. Yet low wage growth in real wages has been a problem for decades. From 1964, real average hourly wages have remained virtually constant: $19.18 in 2014 adjusted dollars in 1964 to $20.67 in 2014 dollars in 2014, according to the Pew Research Center.
Where are the Workers?
For some companies, labor shortages have become a constraint on growth.  While other indicators of the economy are improving, participation in the labor force has been steadily declining.  Employers may have to increase wages if they hope to increase interest in labor.
Another reason could be demographic.  One of the sectors with the largest shortage is construction. Many people have moved away from this sector since the recession, and it is only likely to get worse.  The WSJ recently reported that, “on the current demographic course, the shortage will worsen.  The average age of construction equipment operators and highway maintenance workers is 46.”
Other Culprits and Solutions
•  Labor Productivity —  This is the measure of worker output per hour.  From 1948 to 1973, labor productivity grew annually at an average of 3 to 3.25 percent.  It took 22 years for per capita income to double.  Since 1974, labor productivity growth has been low — just 1.7 percent over the period — with the exception of the IT boom. It now takes 41 years for per capita income to double.
•  Private Investment —  US companies have parked trillions of dollars of profits overseas rather than investing it domestically, creating jobs.  Wall Street banks spend marginal disposable capital
on stock repurchases and dividends instead of lending to job creators.
•  Job Training —  Improvements in labor quality, or the capabilities of the workforce, are the goals of federal worker training programs, through education, training, and experience.
• Paid Family Leave — Got your attention?  Sen. Kirsten Gillibrand proposed a comprehensive national paid leave program that is estimated to return $320,000 to women workers and $280,000 to male workers over a lifetime. While this may not directly increase wages, it would give financial support to millions of workers. Gillibrand’s proposal is not limited to maternity care — it gives all workers an opportunity to take care of sick or dying relatives, and would return much-needed money to hard-working citizens.  90 percent of businesses say the proposal would have no negative and/or a positive impact. 70 percent of small businesses say it would give increase their hiring opportunities.
Administration Asleep on Jobs Job?
Little to nothing in the jobs reports to date bears the fingerprints of the Trump administration.  In the next few months, it will come to own these sticky labor market conditions.   After campaigning as the Johnny Appleseed of jobs, promising  economic opportunity for the forgotten and disenfranchised, Trump looks more like the Grinch.   His first budget cut job training programs by 40 percent of current funding levels in one year.  Before unveiling these proposed cuts, the President said “workforce development and vocational training — [are] very important words.”  The best words.

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