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With advanced degrees in both economics and finance, I place great deal of importance upon macreconomic developments and fundamental analyses of industries and individual companies In typical markets, I seek out investment themes which offer compelling reasons to invest in a group of like... More
  • Putting a Big Red Bow Around Labor Market Data 1 comment
    Aug 31, 2009 2:42 PM
    Over the past months there has been much discussion about various measures of labor market activity and health, generally leading to dissonance and confusion. In this article I would like to highlight the sources of different releases, attempt to reconcile the various economic releases, reveal underlying labor market dynamics that distort some of the releases and simply provide light wherever possible.

    Going back to the beginning of the great recession, Dec., 2007, the BLS' monthly hiring and separations data, based upon establishment survey data, reveals that approximately 6 million jobs have been lost through June of this year, the last month for which all data is available. This is close to the claimed losses in the media of 6.8 million and reasonably close to the 6.7 million who were reported to be drawing continuing claims at the end of June.

    Based upon the same establishment survey data, the BLS reports that during June there were 3.776 million hires (hires do not = job formation) and 4.337 million terminations, implying that 561,000 jobs were lost in that month. In its monthly Employment Situation Report the BLS reported that 467,000 jobs were lost in the month of June. Revisions, seasonal adjustments, birth/death adjustments and other factors could account for the apparent discrepancy.
     
    As noted above, hiring’s do not equal job creation; people retire and are replaced, people quit and are replaced and sometimes new jobs are created. These monthly numbers sound very high because they include underlying churn and turnover in the labor market. People are constantly quitting jobs and finding new ones; labor market churn is imbedded within the monthly numbers.

    It is estimated that our turnover rate is somewhere around 20% or thereabouts; taking this to be the case and the labor market to be 154 million, you would expect monthly turnover.....expressed in hiring’s and terminations....to be around 2.56 million in a frictionless market. And this is just churn and ignores all of the other dynamics within the market including additions, hiring’s, terminations and retirements. The important point is that the monthly numbers are distorted by normal economic activity; economic stresses are difficult to isolate.

    During the same month, June, the Department of Labor released a series of weekly Initial Unemployment Claims, based upon a compilation of data provided by the states, with the monthly series totaling 2.45 million. This is far below the 4.337 million terminations tallied for the month but it must be borne in mind some terminations are voluntary, potentially disqualifying some for unemployment insurance, and some may have not have worked long enough to qualify for state benefits and there are lag effects. At its best, unemployment insurance claims is a marginal indicator for the health of the underlying labor market; the best indicators are hiring’s and measures of the workweek.
     
    Also reported during the month of June, though based upon surveys of households, was that the unemployment rate was 9.5% based upon total unemployment of 14.792 million and a workforce of 154.926 million with an average workweek of 33 hours. Since the start of the recession in December 2007, under this data series the number of unemployed persons has increased by 7.2 million and the unemployment rate has risen by 4.6 percentage points. Again, reasonable agreement with the other series on the total economic cost as measured by lost jobs. Not reflected in the data, though, is the 8.8 million who are involuntarily working part-time and the 2.3 who are marginally detached from the labor market; accounting for these and other groups the U6 rated of unemployment was 16.8% at the end of June.

    Looking forward, it is widely expected that employers in the face of rising final demand will first expand hours in the work week while simultaneously converting part-time workers to full time status; expanding the work week to 35 hours is the economic equivalent to creating 7.7 million new full time jobs, suggesting years of pernicious underemployment. Longer-term, this problem will be exacerbated by lack of hiring stemming from the formation of new jobs; the economy is and will remain fragile and administration policies are highly threatening to business interests, particularly small businesses. Meanwhile, the potential labor market expands by 150,000 each month
     
    For us to realize employment gains obviously hiring’s will need to exceed terminations in its many forms. In some of the best months of the early 2000's hiring’s were above 5.0 million per month and exceeded terminations by 2.0 million or more. Given the current economic climate, the structural challenges, the administration’s policies and the lack of attention being given to small businesses, there is little reason to be hopeful.

    Disclosure: NA
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    The ongoing retirement of the Baby Boomer generation that are not being fully replaced by the Generation X will affect the working population in a material way.
    1 Sep 2009, 12:04 PM Reply Like
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