The Chronic Sickness of the US Labor Market

Special thanks to Robbert Van Batenburg of Newedge who Co-Authored this report.

Today’s jobs report is once again a testament to the malady of the US labor market. While the total number of people employed increased by a seemingly impressive half a million, a whopping 83% of those job gains came from temporary workers. Note that the half a million job gains is derived from the household survey of the US jobs market, which covers more of the labor market than the non-farm payrolls. It is also this enigmatic household survey that generates the national unemployment rate.

The US labor market is sick. More than five years after the failure of Lehman Brothers, the number of full time employed workers in the US is still 4 million less than in December of 2007.  

Year      US Population    Full Time Employed     % of Pop.

2000           281.4ml                   114.3ml                                 41%

2007           301.6ml                   121.6ml                                 40%

2013           316.7ml                   117.3ml                                  37%

The thought making economists sweat is that we are looking at a US labor market which has been unable to absorb all the people coming into the labor force.

From 2007 till today, the working-age population has increased by a total of 13 million but there are 1.3 million fewer people employeds than in 2007.  Like a million man march for jobs, this means that millions of people who joined the national work force were never able to find a job. What makes this so troubling is that young entrants to the labor force who fail to find a job will be less productive for almost their entire working lives.

In the first few years after people enter the labor force, they enjoy the steepest learning curve. So the average worker who starts his or her career in their mid-twenties has the most to learn and learns the quickest. By the time this worker reaches their early to mid-thirties, the learning curve levels off as they reach their peak earnings and productivity years.

However, if labor market entrants struggle for years to find their first job they are set-back several years in terms of on-the-job skills. So during what should be the worker’s peak earning years either salary or productivity or both fall short due to lack of experience.  This is why rising youth unemployment, those 18-29, is such an eye opener.

According to the Millennial Jobs, the declining labor force rate has created an additional 1.95 million young adults that are not counted as “unemployed” by the U.S. Department of Labor.

The current unemployment rate for youngsters aged 18-29 is 22%, this is adjusted for those who have “given up” looking for work.  When you look at the non-giver-uppers, it’s 11.4%, that’s nearly double overall unemployment rate of 6.7%.  Maybe this is why politicians make such an effort to get out the youth vote.  Is Washington buying votes, paying people not to work in this “strong” economic recovery?

 Year     US population (000)    Labor Force          Not in labor force
2000        281,422                                 141,489                             69,254
2007        301,621                                  153,866                             79,290
2013        316,739                                   154,937                             91,808

Global corporations are increasingly agnostic to the citizenship and location of their workers and will direct jobs and investment capital to the location with the highest potential return on capital. If Toyota or Microsoft find more productive employees in Shanghai and Munchen then in Dallas and Seattle, they will act accordingly. To wit, non-farm productivity in America has shown anemic growth in the last four years but unit labor costs are close to all time highs. In other words, American workers have never been as expensive as they are today, but are not becoming more productive.

The Dissapearance of Corporate Investment

It’s a fact, US corporations just don’t trust the economic recovery.  Even more, CEOs detest the lack of regulatory and tax visability comming out of Washington.  The more the President and Congress publicly condem eachother, the more CFOs are sitting on their cash and NOT investing in job creating innovations.

S&P just reported on unprecedented levels corporate cash hoarding, but crucial capex is 25% off historical normal levels.  Capex is capital expenditures, job creating corporate investment.

Companies Investing?

 From 1994-2000 capex growth moved from 5% to 30% and the stock market exploaded higher. Today, capex growth is flat lining.

2013 0%
2012 +11%
2011 +18%
2010 +26%

Newedge Data

From 2011-13: US Corporate Cash Cash Pile Rose to $3 Trillion

 In recent years, if US corporations had used a normal, historical use of cash, a stunning $900 billion would have been positioned in job creating investment. 

The problem does not stop here.  The declining participation rate is a well-known. This number tells us that a declining portion of the working-age population in the US is in the labor force. The growing cadre of baby-boomers that are retiring cannot explain away this phenomenon. The very young people are also increasingly being left behind. In 2007 the participation rate for workers below 20 years of age was 41% but has now dropped below 33%. The unemployment rate in this group is currently 22% vs. around 16% in late 2007.

The underlying story here is that post-2008 US labor market seems incapable of employing young workers without a college education and as a result, more and more of these workers never find a job and become structurally unemployed. This creates a European-style underclass of people that trapped in a permanent life on welfare. The proof is in the details; among the more than 10 million people that are unemployed, close to 65% is unemployed for more than 2 weeks. Before the “great recession” only around 30% of the unemployed were out of a job for more than 2 weeks. In those days, a lot of workers decided to resign from their current job to find a better one elsewhere; a sign of a healthy labor market. Today, the majority of unemployed are long-term unemployed. 

The end result of the ailments of the US labor market is that fewer workers are financing a growing army of people that are relying on government support in one form or another. The government is taking an increasing portion of the paychecks of this shrinking workforce to finance all these support programs. While costs per worker increase, productivity is not and this is a rising deterrent for global corporations to invest and employ in America. Accordingly, the downward spiral of shrinking employment and rising costs becomes clear and we need to look no further than Europe to see what the future holds.  Europe is laboring under the seeming oxymoron of both a declining labor force and structurally high unemployment. 

Every day “change” in America represents a Europification of America.  While not working together, politicians in Washington are creating structural unemployment on this side of the pond.  They’re building an ugly foundation resting American job seekers in a system layered in new wet cement.   These burdens on the US  job market must be reversed before it dries.

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