The Tide Is Going Out On U.S. Labor

by: Jason Tillberg

With a good degree of precision, we have been able to calculate the rise and fall of the ocean tides. It's a normal cycle that is caused by the revolution of the moon around the earth and its gravitational pull. It's actually a 12 hour and 25 minute cycle.

Whether the tide is going in or out, waves continue to form against the shoreline and storms will occur causing the waves to become bigger.

When the tide is rising, you can ride out these storms and waves and be confident that when the lull between the waves comes back, the water level will be higher.

But when the tide is going out, the growth or rise in water only comes when the waves come pushing ashore. In time, the decline will only get lower and lower until the declining tide bottoms and the cycle repeats again.

Does the economy work the same way? Was the year 2000 the high tide for U.S. labor?

Let's begin by looking at the evolution of American labor.

Here is a chart of the employment to population ratio in the U.S.:

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One contributing factor as to why such a high percent of the population was working in 2000 was due to the high participation rate of the population in the workforce, especially woman.

Below is a chart showing labor force participation rates of men (red), woman (green) and combined (blue). While the participation rate of men continues to decline, woman participation peaked at about 60% in the late 1990's and held steady up until the end of the last recession. Woman labor participation is also now in decline.

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Combined, the aggregate labor force participation rate rose from the mid 1960's and peaked in the mid/late 1990's. It has been declining since.

Another interesting component of work in America is the average number of hours we work per week.

Here is a chart showing the average number of hours worked per week for production and non-supervisory jobs in the private sector:

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By multiplying the total number of non-farm payroll jobs in the U.S. by the average hours worked per week and then dividing that by the total population, we can see the average hours worked per week per capita in the U.S. in this chart below:

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This chart above is most telling to show that the tide is going out on U.S. labor.

This recent post recession wave pushed the employed hours worked higher, but its about to recede again and when it's done receding, we may find that the overall average number of hours worked per capita is even lower than it was at the end of the last recession.

The year over year percent change of the chart above will give us an idea of the current trend:

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If the tide is moving lower on U.S. labor, is low tide where per capita, we will be working less than 12 hours per week like in the mid 1960's?

I can tell you this, we're not trying to go there. We're trying to get growth and create jobs.

Most everyone looks to the Fed to "fix" the economy and stimulate growth. Second to the Fed is Government. They tend to get the blame in bad times or take the credit in good times.

Fed Chairman Ben Bernanke, at the recent Jackson Hole meeting in Wyoming, made the case for why the previous Fed policies were helping the economy. In his speech he said,

"Model simulations conducted at the Federal Reserve generally find that the securities purchase programs have provided significant help for the economy. For example, a study using the Board's FRB/US model of the economy found that, as of 2012, the first two rounds of LSAPs may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred."

Two million jobs is not even 1% of the population of the U.S.! The employment to population ratio went down nearly 5 percentage points from just before the start of the last recession to where it is today.

This is akin to building a jetty to try to stop the tide from going out in my opinion.

Also from his speech, he suggests,

"Overall, however, a balanced reading of the evidence supports the conclusion that central bank securities purchases have provided meaningful support to the economic recovery while mitigating deflationary risks."

The question whether or not being able to prevent the U.S. labor market from declining further regardless of policy choice is a question I believe is worth asking.

In other words, if the economy wants to adjust itself lower, return back to work levels we had in the 1950's and 1960's, is there simply no policy great enough to stop it? Productivity gains may well warrant less hours needed for work anyhow.

We can mitigate the decline, sure, but can't prevent it from happening just like we can't prevent the ocean tide from receding those 6:12 hours after hitting high tide.

Future policy ideas consist of simply more large scale asset purchases and continued zero percent interest rates. More of the same and again, that barely put a dent in preventing the decline in jobs the last time.

Have low expectations for growth. More specifically, have low expectations for wage and salary growth which in turn should give reason to having low expectations for personal consumption expenditures and retail sales growth.

Here is a chart showing year over year percent change of wage and salary compensation, personal consumption expenditures and retail sales:

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All three are rolling over and I am expecting them to be negative in 2013 which may well put us in a recession.

This in the aggregate should prove bearish for the overall stock markets in the U.S. but could prove bullish for long term treasuries.

Disclosure: I am long SH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.