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Jobs Need a Jolt
Labor reports were weak in May, reflecting the harmful tax and regulatory environment facing the U.S. private sector. At the end of May, the employable population (those over 16 years old) stood at 243 million. Of those, 155 million were considered part of the labor force, a 63.8% participation rate. This is well below the 67.3% peak participation rate in 2000, due to discouragement with labor conditions and also retiring baby boomers. Within the labor force, 142 million were employed and 12.7 million unemployed, up from 12.5 million in April. That pushed the May unemployment rate up to 8.2% from 8.1% in April. Good weather early in the year contributed to stronger labor reports, but March, April, and May have been weak. This reflects a letdown from weather-related strength plus business uncertainty about policies in Europe and Washington. The under-employment rate rose to 14.8% in May from 14.5% in April. It includes the unemployed, plus part-time workers who would like more hours, plus workers who would like a job but aren’t actively looking. In May, the Labor Department’s survey of business establishments showed 69,000 net job gains. There was also a 49,000 loss in jobs from downward revisions to the March and April surveys. The Labor Department’s May survey of households showed a welcome employment gain of 422,000 versus a 642,000 gain in the labor force. However, the survey showed that part-time workers rose 618,000 while full-time workers fell 266,000, suggesting school-year effects and employer uncertainty about the future. Partly reflecting the shift from full-time to part-time work, average weekly earnings fell to $805.30 in May, down $1.66 from April. GDP growth hasn’t been strong in part because job growth is coming from lower-paid sectors or part-time employment. Over the past 12 months, weekly earnings are up only 1.7% for the typical worker, well below the inflation rate. Looking at the broader population, after-tax real incomes are barely keeping up with inflation even with near-record government transfer payments, the payroll tax cut, and the resulting increases in the national debt. We view the near-term bearish case in March and April as follows: Weather helped the fourth quarter of 2011 and the first quarter of 2012. There wasn’t much continuation into the second quarter. Credit relaxation isn’t progressing fast enough to offset the mounting U.S. policy disappointments and Europe's deterioration. Some hiring is occurring, but mostly just to reverse the heavy layoffs in 2008 and 2009. The U.S.election rhetoric and policy mix are sapping confidence. Business investment isn’t gaining momentum; instead it is waiting for the political uncertainties to diminish. Corporate profits may begin to fade more than expected in a delayed reaction to the 2011 Europe crisis. Pent-up demand in autos has been met, so growth in auto sales and production should slow some. Looking longer term, labor dynamism hasn’t been coming back as fast as it should. The Labor Department provides a quarterly study of employment turnover, a measure of labor dynamism. One worry in the weak recovery has been that the difficult health-insurance situation and the weak housing market are discouraging labor mobility. The latest study, released May 1, confirmed the concerns. It showed that gross job gains in the third quarter of 2011 were 7.1 million versus an average 7.9 million quarterly gain from 1992-2007. Gross job losses in the third quarter were 6.3 million, well below the average losses of 7.5 million per quarter. Adding the two, labor mobility is 13% below average. As the chart shows, in the 1990s, roughly 8% of jobs were new each quarter. This declined to 7% in most of the 2000s, and then slumped to 5.4% in the first quarter of 2009 and 6.5% in the third quarter of 2011. On average, newly-created businesses provided 1.6% of the job gains from 1992-2007. Reflecting the weak environment for new businesses, new-business job gains declined to 1.1% of jobs in the first quarter of 2009 and 1.2% in the third quarter of 2011 (the latest report.) In the Labor Department’s monthly report on job openings (the JOLTS report), job openings have recovered to 3.7 million in March from a low of 2.2 million in July 2009. That’s well below the 4.7 million openings recorded in the 2007 expansion peak and the 5.2 million openings at the end of the 1990s expansion. Of more concern, the JOLTS report (which includes job changes within firms) shows that jobs turnover — the rate of hires and separations — remains at recession levels. Monthly hires have risen to 4.4 million (up 537,000 from July 2009) while separations have stayed about the same at 4.2 million. In a more dynamic expansion, both hiring and separations would be much higher. Efforts to build a faster-growing U.S. economy will have to include steps to encourage labor mobility and more dynamism in job turnover. Some of the policies at issue: health insurance constraints including limitations on national and out-of-state plans; litigiousness that discourages hiring and firing; defined benefit pension plans that discourage mobility; and the credit crunch on small and new businesses and venture capital through Sarbanes-Oxley and Dodd-Frank. Solving these and other barriers is critical to creating the best fit between employer and employee, teamwork that allows innovation, productivity, efficiency, and profit and income gains. Those are all below average in the current recovery, explaining its sluggishness and also pointing to a path to faster growth.
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