Which employment number should we believe?

Today's headline story: payroll employment increased by only 20,000 in February.  Some in the financial press have taken this as a sign that the recovery is slowing down.  Others say the numbers are off because of the recovery from the federal shutdown.

The feds track employment with two different series and they do not always tell the same story, as this WSJ piece from yesterday explains.  It turns out that the household survey of employment showed a gain of 255,000 jobs in February and a drop in the unemployment rate from 4.0 to 3.8 percent.  The household survey has been showing slower employment growth than the payroll survey over the last six months but it now appears to be catching up.

The Fed could start raising interest rates sooner if the employment numbers grow at 300k per month. Today's report indicates that the Fed will keep its powder dry for a little bit longer.

Are we facing "Robocalypse Now?"

For ages there have been concerns about workers being displaced by machines.  remember Ned Ludd?  John Henry?  With the growth of machine learning and artificial intelligence, those concerns have become heightened recently.

Basic economics says that the introduction of a new advanced technology will have two effects on the labor market: (1) there will be some displacement of workers whose skills are no longer in demand (e.g., blacksmiths and the automobile, bookkeepers and the computer) and (2) the extra wealth created by more efficient production methods will lead to increased demand for a wide range of products.

MIT economist David Autor has taken a look at the historical evidence on productivity enhancements and displacement.  Exploring 19 countries over 35+ years, he finds that the displacement definitely happens and is sizable within the affected industries.  However, employment actually ends up growing overall.

The downside is that some skilled workers are displaced and lack attractive options.  This means we face a challenge creating new opportunities for the unskilled and medium-skilled workers who are most likely to be affected.  The full report can be found here.

Saving jobs at what cost

I have been searching for the words to express how exasperated I am with United Technologies' decision to keep 700 or so jobs in its Carrier plant in Indianapolis.  Kudos to Larry Summers, today in WP, who totally nails it.  In a market system based on stable regulations and enforced laws, everyone plays under the same rules.  Who you are does not matter.  In a system based on ad hoc deals, all bets are off and companies will redouble their efforts to make friends in high places in government.  

Money quote:

Most companies will prefer the good to the bad will of the U.S. president and his leadership team. Should that reality be levered to get them to locate where the president wants, to make contributions to the president’s reelection campaign, to hire people the president wants to see hired, to do the kinds of research the president wants carried out, or to lend money to those that the president wants to see assisted?

Some of the worst abuses of power are not those that leaders inflict on their people. They are the acts that the people demand from their leaders. I fear in a way that is more fundamental than a bad tax policy or tariff we have started down the road of changing the operating assumptions of our capitalism. I hope I am wrong, but I expect that as a consequence we are going to be not only poorer but less free.

Job gains in the middle of the wage distribution

For at least two decades the data have shown a hollowing out of jobs in the middle of the wage distribution.  Job growth has been concentrated in the two extremes: the high end and the low end.

But that trend may be coming to an end.  Today's WP has a short article summarizing research by the New York Fed on job growth by wage tiers.  There was much more job growth in middle-wage jobs between 2013 and 2015 than there was in the low and high wage tiers.  Industries such as construction, education and transportation led the way.

What to make of last week's jobs report?

After months of jobs growth in the 250k range, the report for March shows a marked slowdown.  Jobs growth in March amounted to 126k and the numbers for January and February were revised downward.

Usually one bad month is not cause for alarm, but this news, combined with other recent reports of slowing economic activity, suggests that we are hitting a rough patch.  One possible reason is the stronger dollar has reduced export opportunities.

Despite recent wage increases announced by Walmart and McDonalds, wage growth continues to be slow.  This WSJ report indicates wages are growing at the top and the bottom of the distribution but not in the middle.

November job numbers: Let's party like its 1999!

I have always been cautious about making too much out of one jobs report, but the numbers reported last Friday merit serious attention.  We now have a string of consecutive months with strong increases in employment.  Unless the last 20 days of December turn out to be an unforeseen disaster, 2014 will be the best year for job growth since 1999.  

Two more reasons for optimism:
1) Wage growth is becoming more widespread.  More jobs is nice; more people making more money is even nicer.
2) The unemployment rate did not go down.  This is good news because it means that more people have entered the labor force looking for jobs.

Tom Friedman's take on "How to Get a Job"

Great NYT column this week on the changing job market.  Employers continue to be swamped with applications but have difficulty finding people who are ready to add value.  Colleges are not preparing students with many of the skills they will need to be successful in the workplace.  Demands for Excel expertise have ramped up a lot (better know how to "Pivot Tables"), as have the more traditional issues associated with writing and speaking.  Employers are developing their own tests to determine if applicants have the skills they really need AND know how to apply those skills. 

Friedman's advice:

People get rejected for jobs for two main reasons, said Sharef. One, “you’re not showing the employer how you will help them add value,” and, two, “you don’t know what you want, and it comes through because you have not learned the skills that are needed.” The most successful job candidates, she added, are “inventors and solution-finders,” who are relentlessly “entrepreneurial” because they understand that many employers today don’t care about your résumé, degree or how you got your knowledge, but only what you can do and what you can continuously reinvent yourself to do.

Prelude to Friday's job report

First quarter GDP growth was disappointing, so all eyes will be on the April jobs report that comes out on Friday.  But we should all heed the words of Stanford Business School professor (and former chief economist for Bush 43) Ed Lazear in a recent WSJ op-ed: "The initial reports are often inaccurate and don't say anything useful about where the economy is heading." Research has shown that the monthly job number is, on average, off by 73k jobs.  Sometimes the revision in later months is in the hundreds of thousands. 

Bottom line: even if the new jobs number is a lousy 25k or a marvelous 200k, we should neither despair or celebrate too much. 

A different take on labor force shrinkage

Just ran across a couple of references to Chicago economist Casey Mulligan's new book on the Great Recession: The Redistribution Recession.  In light of yesterday's post, I feel obligated to post on Mulligan's explanation of why the labor force has shrunk so much.  Mulligan puts much of the blame on the stimulus package itself for eroding the incentives to work.  Expansions in the availability of unemployment benefits, housing assistance and food stamps explain as much as half of the decline in employment and hours, Mulligan argues, by eroding the payoff from working.

Here is an example from a Forbes piece by John Goodman I saw yesterday: 

Mulligan gives the example of a two earner couple — each earning $600 a week. After the wife gets laid off she obtains a new job offer, paying $500 a week. But after deducting taxes and work related expenses her take home pay would be $257. Since untaxed unemployment benefits total $289, clearly she is better off not working.

I have not had the chance to read Mulligan's book, so it is hard for me to evaluate his analysis and compare it to Robert Moffitt's work that I cited in yesterday's post.  WSJ reviewer Stephen Moore puts Mulligan's work in perspective by saying

By the way, Mr. Mulligan doesn't challenge the claim that a surge in unemployment benefits, food stamps and other subsidies may have been desirable to prevent hunger or severe poverty for out-of-luck families or unemployable people traumatized by the recession. He simply and inconveniently notes that, though increasing subsidies may be compassionate in the short term, it comes with costs in the long term that eventually cause more hardship rather than less. 

Why is the labor force shrinking?

The drop in the employment-population ratio from 63 to 58-59 percent since 2007 is the most striking evidence of the sharp drop in job prospects.  The unemployment rate has recovered from its peak of 10 percent, but the employment-population ratio has not.  Many labor economists, including myself, believe that the employment-population ratio is giving us a much more accurate read on overall labor market conditions than the unemployment rate. 

Today's WP has an article on research by Johns Hopkins professor Robert Moffitt on the causes of shrinkage in the labor force. Moffitt argues that the decline may have started as early as 2000.  He looks at a number of possible causes and finds that declining wages may be part of the explanation; why bother working if the reward is declining?  He mentions rising incarceration rates in previous decades as another possible factor.  Some economists also have mentioned the rising share of the population receiving disability benefits as another key element. 

Hours cuts at Olive Garden

Prediction: it might start taking longer to get your second helping from the endless salad bowl at Olive Garden.  The Orlando Sentinel reports that Olive Garden restaurants in four different markets (including central Florida) have cut back significantly on full-time schedules.  To be precise, they are doing their best to make sure no one works 30 hours or more.

At a new Olive Garden in Stillwater, Okla., former busboy Keaton Hasty said employees were routinely limited to 29 1/2 hours.

"It was 29 1/2, and they'd kick you out," said Hasty, a college student who now works at a pharmacy. "They'd always print off a little slip every day and say who was getting close."

Darden Restaurants, the parent company of Olive Garden, Red Lobster, and Longhorn Steakhouse (among others) openly admits that they are doing this to reduce expenses on health insurance under the Affordable Care Act of 2010 (also known as Obamacare):

In an emailed statement, Darden said staffing changes are "just one of the many things we are evaluating to help us address the cost implications health care reform will have on our business. There are still many unanswered questions regarding the health care regulations and we simply do not have enough information to make any decisions at this time."

ACA requirements kick in for employees who regularly work 30 hours or more a week.  So Darden avoids having to provide health insurance (or pay the $3k fine for failure to provide health insurance) by cutting back on hours.  Darden outlet managers had best be prepared to deal with this dilemma: on nights when there is a bigger-than-expected crowd: do you add personnel knowing it may lead to higher insurance costs or do you lose business from disappointed customers get tired of waiting longer for tables and service?  (I bet you there are some MBAs who are working as we speak on algorithms to deal with this issue.  Click here for info on their internship programs in marketing and finance.) 

Today's jobs news

The September jobs report came out this morning.  Press accounts are trumpeting the drop in unemployment from 8.1 to 7.8 percent.  This number comes from the Current Population Survey, which examines 50k plus households each month.  According to the CPS, employment rose by 873k and unemployed persons dropped by 456k from August to September.  On net this implies that 417k persons who were not even in the labor force in August found jobs in September, which strikes me as implausible.  Lay persons should keep in mind that it is hard to extrapolate from 50k households to a labor force of 155 million.  Another sign of unusual volatility in the numbers: CPS data show declines in employment in July (-200k) and August (-100k) which probably were overly pessimistic, thereby making part of the big jobs gain in September a statistical correction.  

On a month to month basis, the monthly survey of establishments is a more reliable indicator of employment trends.  It shows a slow but steady increase in jobs of 100 to 180k each month over this period.  My take: the jobs recovery remains painfully slow but at least it is moving in the right direction.  Make whatever political hay you want out of that comment!

How will new healthcare law affect employment?

Now that the Supreme Court has upheld the key provisions of the Affordable Care Act (AAC), employers are taking a more careful look at the details, according to today's WSJ.  Here are some examples of the decisions employers are facing:

• A Quiznos franchisee in Virginia Beach has two locations with 36 employees.  At 50 employees he must provide health insurance or pay a fine.  He once was hoping to triple the size of his operation, but now is not so sure.  It will no doubt depend on how the final regulations define the size of an enterprise, whether by location or by ownership.  
• A Dunkin' Donuts franchise with 10 locations in New Hampshire provides health insurance but his policies do not provide enough coverage to meet AAC standards.  His choice: pay higher premiums or dump the coverage and pay the fine.  
• AAC kicks in for employees working 30 or more hours.  Watch out for a surge in the number of employees capped at 29 hours. 

This is all basic microeconomics: when the price of something rises, people seek substitutes.   

This does not look good

Today's jobs report for May is a total disaster.  WSJ reports that employment grew by a mere 69k and unemployment inched up to 8.2%.  Stock market dropped 2.5% in reaction to this and the even worse news coming out of Europe.  Ouch!

Changing job market for MBAs

Worthwhile Financial Times piece on how the job market for full-time MBAs has changed over the last couple of years.  A few of the more interesting trends:

• Gaming companies such as Zynga and Electronic Arts are starting to recruit MBAs
• The hot skills: communications (as always) and analytics
• Hiring and salaries are up a little bit from a year ago
• Finance and consulting down; "consumer goods, pharmaceutical, media, technology and industrial companies" up; social media also hot
• Students are more likely than ever to be directing their own job searches: "Even at Harvard, the master at on-campus recruiting, almost 50 per cent of students now find a job via a different route."

Hiring of Jenkins MBAs at NC State is tracking close to last year.  Employers include American Airlines, Caterpillar, Chevron, Cisco Systems, Lenovo, Novartis, Red Hat, Siemens, Simmons, and Wells Fargo, among others. 

WSJ's best and worst jobs

The top and bottom 5:

1. Software engineer
2. Actuary
3. Human resources manager
4. Dental hygienist
5. Financial planner

196. Newspaper reporter
197. Oil rig worker
198. Enlisted military soldier
199. Dairy farmer
200. Lumberjack

Where do they get this stuff?  I can see the bottom four: long hours and, in most cases, dangerous working conditions.  But I do not see queues of undergrads and MBAs lining up for positions in HR or financial planning.  And dental hygienists???? 

Another encouraging jobs report

For the third month in a row, the US added 200k+ jobs in February.  With upward revisions to data from earlier months, WSJ reports that we have added 1.2m jobs over the last six months.  This is the most impressive job growth we have seen since the end of the recession.

However, the labor market still has a lot of ground to make up.  Employment is still 5m+ lower than it was when the recession started.  The employment-population ratio also is 2 full percentage points lower than it was in 2008.  Unemployment held steady at 8.3% in February, but could very well inch up in coming months as people re-enter the labor force. 

Good news on the jobs front

Two bits of good news in the last 4 days.  First the January jobs report was the best since April, with the economy notching a net of 243k new positions.  Unemployment fell to 8.3 percent, the lowest since February 2009.  Sectors showing the largest gains: health services, professional and business services, and manufacturing.  Construction is still flat.  The other bit of good news: job postings from employers are up. 

Surging productivity and stagnant hiring

Productivity continues to grow at a rapid clip.  Today's WSJ takes a closer look at why.  Without even reading the article, students with a firm grasp of economics should suspect that either the cost of capital has fallen, the cost of labor has risen, or both. 

The answer is all of the above.  Capital costs have fallen because interest rates are nearly zero and companies could write off 100% of investments made in 2011.  Uncertainty about future labor costs (health care and taxes) makes employers averse to new hires.  As a result we see modestly rising output and it is coming from increasing output per worker rather than increased employment. 

Michael Mandel takes a deeper dive into the productivity issue in this article.  He points out that outsourcing is another important factor behind the increase in output per unit of input.  The reason is that we use value added, the difference between total revenue and labor and materials costs, as our measure of output.  When supply chain managers find cheaper sources of materials (or services), that increases margins and output with no change in labor or capital. 

Historically increases in productivity lead to higher standards of living; at least that was the case in the 20th century when society first shifted out of agriculture to manufacturing.  Now we are shifting out of manufacturing to services; hopefully the increase in living standards is just around the corner.

NYT columnist takes field trip to NC

Joe Nocera has a NYT piece today about his factory field trip to Charlotte and Winston-Salem to visit new plants built by Siemens and Caterpillar.  The most interesting takeaway is that these two companies decided to build in NC instead of China because (1) NC technical colleges do a great job partnering with industry to provide training; (2) for skilled labor, the cost differential between the two countries is not all that large; and (3) shipping costs for the types of products Caterpillar makes play an important role in plant location decisions. 

Is there a manufacturing renaissance on the horizon?  The good news is that construction of new plants has picked up.  The less good news is that the new plants are very capital-intensive and generate modest numbers of new jobs: 800 in Charlotte and 500 in Winston-Salem.  Cat is getting $14m in state and local incentives for those 500 jobs, a tidy $28k per job -- a much better bang per buck than the President's jobs bill, as I noted recently on this blog.