At a recent investment forum, The Certainty of Uncertainty, I looked at three sources of uncertainty that seem to be plaguing investors today despite the fact that risk assets of all types have been on a meteoric rise since the lows in 2009. (iShares MSCI ACWI ETF (ACWI) +113.2%, iShares iBoxx High Yield ETF (HYG) +110.9%, PowerShares DB Commodity Index Fund (DBC) +42.6%.) By some measures it even seems that investors have never been more certain of their own uncertainty! Two weeks ago I unpacked the issue of The Growth Recession on my blog, in which I cited productivity growth as one of many possible answers to the question of where all the jobs have gone. Today I ask a different question: Where have all the workers gone?
Over the past 15 years, the labor force participation rate here in the U.S. has declined steadily from over 67% to below 64%, which is represented in the green shaded area in the chart below.
The labor force participation rate is the percentage of eligible working age Americans who are participating in the labor force by either working or looking for work. The drop-off in participation has had an enormous impact on our nation's economic output. According to John Mauldin's analysis, if we had the same proportion of people employed today as we had at the turn of the century, our GDP output would be roughly $800 billion higher even if those additional workers were 25% less productive than the average worker today.
We've also plotted the headline and U6 unemployment rate, both of which have steadily declined since peak unemployment in late 2009. There are two reasons unemployment has declined. The first is that jobs have been created; the second is due to the decline in labor force participation. As more and more potential workers have either retired or simply stopped looking for work the denominator in the unemployment rate calculation (the number employed divided by total labor force) has declined. By this logic, even if no new jobs had been created the unemployment rate would still have declined due to a drop off in the labor force participation rate.
The reality is that this jobs recovery has been incredibly weak when compared to history. The chart below shows that compared to the previous recovery from the recession brought about by the tech bubble, our current recovery in jobs is lagging at only 64% recovered over a much longer time horizon, albeit the magnitude of jobs lost in the recent recession was much greater.
So where have the workers gone? As usual in all things economics there are numerous potential answers to this question, and it's impossible to pinpoint all the moving parts perfectly. However, one anecdotal answer is that many of these workers are now on welfare. Over the past five years transfer payments from the government have grown by an amount four times greater than the increase in wages paid, and there are now more people living on government assistance than there are gainfully employed in the U.S.
The table below reflects data taken from Senate Budget Committee report for fiscal year 2011 (including our own assumptions for taxes). It's striking to see that on average, a household below the poverty line is receiving roughly 27% more in government assistance than a family earning the median household income after taxes.
To be fair, the median household income does not include health benefits, and the government assistance numbers are likely skewed by large Medicaid outlays for extreme health situations. If we remove the "health programs" component from the government assistance calculation, the net assistance number drops to roughly $41,000. This amount is most likely still higher than the median household income after subtracting out the cost of medical expenses (health insurance + medical bills) from the $45,054 in after-tax income.
Social safety nets are absolutely critical and reflect a nation that desires to provide help and assistance to take care of its own. I have seen these government assistance programs step in and provide needed relief during critical periods of transition for some of my own friends and family. There are many warped views out there that say all welfare programs are bad, and anyone who takes advantage of them must be lazy. I wholeheartedly disagree with this sentiment, but also understand there are vast amounts of empirical evidence showing the inefficiencies of government implementation giving way to widespread abuse.
As an example, a blog entitled The Last Psychiatrist (written by an actual psychiatrist) reveals an unmistakable attitude of entitlement and apathy towards disability income benefits:
Say you're poor and have never worked. You apply for Welfare/cash payments and state Medicaid. You are obligated to try and find work or be enrolled in a jobs program in order to receive these benefits. But who needs that? Have a doctor fill out a form saying you are Temporarily Incapacitated due to Medical Illness. Yes, just like 3rd grade. The doc will note the diagnosis, however, it doesn't matter what your diagnosis is, it only matters that a doctor says you are Temporarily Incapacitated. So cancer and depression both get you the same benefits. There's no accountability, at all. I have never once been asked by the government whether the person deserved the money the basis for my diagnosis-- they don't audit the charts, all that exists is my sig on a two page form.
There is clearly a subset of our culture that has become dependent on government assistance for its day to day life with no intention of changing. This is problematic and should be a part of the high level debates in Washington about fiscal spending, welfare and entitlement reform. Improving the efficiency and productivity of government spending is especially relevant amidst the current debates over the arbitrary sequestration cuts. Perhaps if incentives could be shifted away from remaining on government assistance towards genuinely seeking gainful employment, we could begin to shift more capable workers into a productive capacity on the margins of our economy, while spending less money at the state and federal levels. There is no perfect fix to this issue, but our goal should always be to move the needle in the right direction.
As an investor, this issue is relevant to my portfolio composition and risk/return outlook. Today's markets are incredibly policy driven, so anything at the margins that will impact our nation's economic output and/or the fiscal balance will have implications for the direction of future policy out of Washington, not to mention the impact that investor sentiment will have on stock prices themselves. To the extent that government aid programs are easily abused, the economy will lose out on productive labor while the fiscal deficit will feel additional weight from more participants in its welfare programs. This, in essence, diverts capital from productive investment to unproductive consumption and acts as a headwind to risk assets of all types.
Disclosure: I am long ACWI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Transparency is one of the defining characteristics of our firm. This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities. It represents only the opinions of Season Investments or its principals. Any views expressed are provided for informational purposes only and should not be construed as an offer, an endorsement, or inducement to invest.