This Market to Workers: 'Welcome to the Jungle'

Despite the latest string of “less bad” employment news, there may be plenty more bad news coming on jobs, according to a number of well-regarded economists and observers. But this “worse bad” news might not come from the so-called headline jobs numbers, but rather from structural changes in the U.S employment market that suggest permanent destruction of jobs and wages.

ECRI’s Lakshman Achuthan called the current U6 unemployment rate, which showed 16.8% of U.S. workers are unemployed or under-employed, a “jungle-variety reading.” Achuthan also pointed to a spike in long-term unemployment that he ties to a declining U.S. manufacturing sector and that he believes will lead to another “jobless” recovery.

Former Secretary of Labor Robert Reich is more blunt about the longer-term trend, recently predicting that most workers who are losing jobs will not find new ones paying “nearly as much.” This, Reich says, is because many of the new jobs being created are in the service sector, and though typically sheltered from global labor competition, they generally do not pay high salaries and wages. Reich added some telling statistics from the 2001-2007 recovery, in which real median wages declined in the U.S. for the first time ever in an economic recovery.

Could anyone cram more “dismal” into this dismal science? Enter PIMCO Senior Strategist Tony Crescenzi, who declares that over half the jobs lost in this recession are “gone for good” because they are being lost in industries whose business models are broken. Crescenzi contrasts this with a typical recession, in which job losses are a temporary cyclical event that reverses when recovery mends businesses’ health.

Similarly, the trend-savvy Washington Post, in a story aptly titled “A Recovery Only a Statistician Can Love,” reported over a month ago that the record number of long-term unemployed indicates to some economists that job losses are being caused by structural economic changes, and that many laid-off workers won't be rehired when the economy picks up.

Of course, there are cheerier economists than these. Robert Brusca (of Fact and Opinion Economics) flatly disagreed with Reich in a recent joint interview, citing inventory rebuilding and government stimulus, among other factors, as spurs to job growth. To some, however, these may seem more near-term cyclical than long-term structural arguments.

And what might such legitimately bad news mean for the stock market? It’s easy enough to find voices in the chorus of conventional wisdom that says consumers without jobs don’t spend, which is bad for economic growth and therefore bad for business revenues and stocks. But the market may be softly humming a different tune, probably a disturbing one to many. In character with its sometimes perversely unharmonious logic, the stock market may be cold-heartedly cheering the prospect of continued reduction in labor costs.

For example, a Barron’s article attempting to explain the impressive July and August market gains was explicit: “Capital is routing labor.” The article cites market strategists and statistics disclosing that recession productivity, compensation reduction and the resulting profit leverage are all at historic levels. And the market rejoiced at this.

The capital vs. labor pain-point also ached with worker misery during the last recovery. BusinessWeek reported in late 2002, a year after the recession ended, that to get earnings up during that budding expansion, companies would need deep payroll cuts, and meeting profit targets would require cutting costs “again and again” by shutting down underperforming factories and business lines. And so, along came one of the jobless recoveries Achuthan referenced and Reich’s declining median wages. All this in a bull market that doubled the S&P.

Granted, companies made far deeper cuts in the current downturn than in the last one, so workforces are much leaner going into this recovery than in 2002. And that means millions of workers no doubt need to be rehired to get staffing up from recessionary levels.

But Achuthan, Reich, Crescenzi, and the Post’s sources know that as well as you and I know it. Their point, it seems, is there will be millions more to leave behind this time, which will keep both competition for jobs and worker productivity high, and wages low. And that profit formula, even in a low growth environment, may be exactly what the market thinks it knows as well.

Of course, the fight between capital and workers is often waged according to the Law of the Jungle rather than Robert’s Rules of Order, seemingly a survival struggle as old as the ranting of that least talented Marx Brother, Karl; as serial as airline bankruptcies; and as current as the U.S. auto industry restructuring, in which still-bloodied labor tore a large bite out of bondholders.

And it certainly seems impossible for an individual to ward off the hoodoo of structural disruption. Though there might be a bit of self-protection in some common investment wisdom: diversify.

Specifically, diversify your largest asset, the decades of future earnings from your labor, by investing in capital markets as much as you can. True, stocks have not given strong returns over the past decade. But for too many people, neither has their own labor. More to the point, if some very astute observers are even nearly right, the coming decade’s hunt for earnings will affirm capital the hungry hunter and labor the running prey.

Welcome to the jungle.

Author’s note: This was not an easy piece for me to write. Like many people, I have friends and former co-workers who are experiencing personal and professional hardship in the current job market. But I wrote based on what I found, not what I wish I found.

References and Links:

Nightly Business Report, Achuthan segment of broadcast, “Working It Out” September 7, 2009. http://www.pbs.org/nbr/info/video.html

Nightly Business Report, Interview transcript, Former Labor Secretary Robert Reich and Robert Brusca of Fact and Opinion Economics” September 7, 2009. http://www.pbs.org/nbr/site/onair/transcripts/robert_reich_and_robert_brusca_090907/

Tony Crescenzi, PIMCO in “Unemployment is Much Worse than You Think” at businessinsider.com, September 2009. http://www.businessinsider.com/henry-blodget-unemployment-is-much-worse-than-you-think-2009-9

The Washington Post, 'A Recovery Only a Statistician Can Love' August 12, 2009. http://www.washingtonpost.com/wp-dyn/content/article/2009/08/11/AR2009081100988.html?hpid=topnews

Robert Brusca, Fact and Opinion Economics. See Transcript of joint interview with Robert Reich, referenced above.

Barron’s, “Gummy Bears” August 24, 2009. http://online.barrons.com/article/SB125089395111750479.html

BusinessWeek, “The Painful Truth about Profits” November 4, 2002. http://www.businessweek.com/magazine/content/02_44/b3806001.htm

Bull market gain: Bespoke Investment Group, “Recessions and Bear Markets” April 10, 2008. http://bespokeinvest.typepad.com/bespoke/bespoke_reference/

Disclosure: Long equities.

Comments

[Carlos Lam:]

The fly in the ointment: labor can move around the world too. Firms in China are hiring young Americans at a good clip.

Sep 21 05:57 AM

[manya05:]

Indeed, if you do not believe labor can move around, just go and take a look who is painting, roofing, cleaning, trimming, and loading in America.

It may still be a small percentage, but the fraction of people living on a country other than the one where they were born and raised (educated) is exploding all over the world (save for a few countries such as Japan....and look what is happening to their economy). And there is no reversal of that trend.

Sep 21 10:08 AM

[sportsguy:]

this structural change will continue until the cost of US mfg = foreign mfg cost plus transportation. Then, the playing field will be leveled, and the world will be flat. Now this is almost here now or a long way down, depending on your current position. AND how will the US Government prevent possible social upheaval, leading from the survival need to be fed and sheltered, during this structural change.

Minsky's thesis that capitalism is inherently unstable, creating booms and busts, is still true, as is being seen today. Likewise, let companies pay people whatever they want, just lets tax the excess at a significantly higher rate, to benefit all the cost cutting unemployment the executives actioned for their own benefit.

sportsguy

Sep 21 11:30 AM

[rosey99:]

This is an interesting, and sobering, perspective. I wonder what implications this has for politics, especially in the "democratic" countries. Historically, this type of situation has led to social and political change, perhaps "the least popular Marx brother" will come back into vogue, possibly in disguise. It seems to me that the word "class" is already creeping back into American discourse, having been banished for over thirty years. Where are the welfare queens when you need 'em?

And at what percentage of GDP will corporate earnings top out I wonder? What will happen to personal income taxes? I think we all know they will go finally go up, but will it be a "Great Compression" as it was in the 1930s? Does American political machinery even operate as is used to?

Interesting, and visceral piece.

Sep 21 03:29 PM

[Low Sweat I...:]

Thank you for your comments.

I was particularly struck by comments regarding implications for class-based politics and those suggesting that while we are exporting manufacturing jobs, we may in effect be importing service workers (though I guess some are “importing themselves”).

This latter point would make service jobs less insulated from global competition that Fmr Secretary Reich’s statement implied. Oddly enough, it might bolster his overall point that new service-sector jobs will not replace lost manufacturing wages.

Also, today’s Wall St. Journal coincidentally ran a front-page piece on “slack” in the economy and its counter-effect on inflation. The WSJ story includes a brief discussion of the negative impact of unemployment on wages. The story did not mention any implications for the stock market.

Sep 21 08:00 PM