4 Key Reasons Why The Labor Market Isn't As Healthy As It Seems

by: APAC Investment News

Summary

The labor market seems to be improving with unemployment rate and initial jobless claims both dropping.

These developments have helped bolster stock markets, especially in the United States.

Still, things may not be as good as they seem. Many people are still unemployed/underemployed and quality of the jobs being created is questionable.

Investors need to consider several key challenges in the labor market that could cause markets to decline in the future.

Data regarding the labor market these past few weeks has been largely positive, helping to bolster markets amid a period of relative turbulence. Certainly, there is a lot for investors to get excited about with initial jobless claims falling to fourteen year lows last week and the unemployment rate now coming in at under 6%. Initial jobless claims dropped to 264,000 for the week ended Oct. 11.

US Unemployment Rate Chart

US Unemployment Rate data by YCharts

As with many other investors and analysts I find these developments encouraging, however, when digging deeper into the data I also find numerous points that force me to wonder if conditions are improving as much as many of us assume, and more importantly if systemic challenges could still be a threat to markets in the long run.

Make no mistake, at the moment I am confident that the U.S. economy is on firm footing, but I do believe that several key factors could present serious challenges for investors in the future. Markets are heavily impacted by economic trends, so as investors we need to keep our eyes on the data.

1. The gap between the rich and the poor continues to widen

I don't list this point as first because it's the most important. Just the opposite, for this point to gain importance it depends on several of the later points. The widening gap between the rich and the poor is often constructed as a moral argument, and many of the most contentious points for this phenomena are indeed moral.

The gap between the rich and the poor, however, could have potentially huge impacts on our economy. Over the last thirty years the gap between the rich and the poor has continued to widen, but generally all boats were being lifted at once. When this occurs, the widening gap between the rich and the poor is not as worrisome. People across the socio-economic spectrum will enjoy steadily improving material conditions, consumer spending should continue to rise, and inflation should come in at a healthy rate.

What's worrisome now is that while the rich are indeed growing richer, the poor may actually growing poorer. According to the Fed, from 2010 to 2013 the pre-tax income of the wealthiest ten percent of Americans rose by 10%, but the median household income fell for every other wealth bracket. The middle 50% of Americans saw their income decline by 5% during this same period.

(Source)

If wealth becomes concentrated in the hands of too few people, it could constrain consumer spending. Sure, investments might remain strong for a time as the wealthy look to protect and increase their wealth, but the economy depends upon a large and healthy middle class to generate demand. That middle class may now be at risk.

2. Wages Have Stagnated

Through the year wages have grown by only 2%. At first glance this growth might seem reasonable enough, but inflation will wipe out most of the gains, especially as the price of necessary goods continues to rise. Indeed, when adjusted for inflation the typical American family now makes less than a family did 15 years ago.

Median household income actually appears to be on the decline. The median household income in the United States was $51,939 in 2013, statistically unchanged from the median income of $51,759 seen in 2012. These two stagnant years actually followed two years of decline. Indeed, since 2007 median household incomes have declined by 8.0%. Declines in income were seen in all races, as seen below.

obtained from http://www.census.gov/prod/2013pubs/p60-245.pdf

(Source)

Stagnant wages are not just a problem for the United States either. Across the developed world wages have stagnated as fully developed economy are struggling to compete in a globalized economy.

(Source)

Further, stagnant wages are not merely a symptom of the Great Recession and its fallout. Wages have largely stagnated over the last three decades, though the recession has indeed exacerbated the problem with most of the gains since having been concentrated into the wallets of the wealthy. And these stagnant wages could some day have a major effect on our economy.

This isn't the hypothetical worries of some economic analyst, either. 68% of American biggest retailers recently reported that America's stagnant wages are now a major threat to their bottom lines. (Ironically, many of the companies surveyed, such as Walmart, are chief among the biggest employers of low wage workers.)

Even most critics are quick to acknowledge that wages have stagnated, but they like to fall back on the age old argument that quality of life has been improving as the price of goods has fallen. They do have a point, a refrigerator is certainly cheaper now than it was in 1980, but as we will show in the next section, other costs have begun to skyrocket.

3. Costs for essential goods and services are rising dramatically

Often, pundits like to point out how poorer individuals own flat screen TVs, DVD players, and numerous other modern luxuries. How could people who get to enjoy such material goods be considered poor? If quality of life was measured by such things (as it sometimes falsely is), such pundits would have a strong argument.

Essential goods,or those goods that have the most dramatic impact on one's quality of life, and also one's social mobility continue to sky rocket in terms of price. While there are many factors to consider, two worth touching on are health care costs and college tuition.

Health care is certainly an essential good with access to high quality health care often a matter of life and death. Analyzing health care can be difficult as we now have access to much more advanced procedures than 50 or even 10 years ago. Regardless, health care spending is a necessity and people will spend as much as they can and as is necessary to stay alive.

Health care costs may not have changed much for people with so-called "Cadillac" plans that cover the vast majority of their costs, but for the average American out-of-pocket costs are rising dramatically.

For example, low-wage workers (who earn $23,000 or less per year) contributed approximately $1,470 towards their family health care plans in 1999, but in 2014 will contribute about $4,693. Total worker contributions for family plans from all workers was $5,508 in 2014, vs. $1,831 in 1999. A similar upwards trend has been observed for individual plans.

So-called Obamacare will help some individuals without private insurance, but benefits will be concentrated primarily for low income families and individuals.

Meanwhile, in 1973-1974 the average cost of college tuition at a public university was $2,710, adjusted for inflation (2013). By 2013-14 the average cost of tuition was $8,893. This means that college prices have practically quadrupled over the last 40 years.

(Source)

Further, consider that student loan debt has now topped $1 trillion dollars and with tuition continuing to rise, this debt will surely grow. Given slow wage growth and the sheer amount of debt, it should come as no surprise that defaults on student loans have risen by 5% this year as default rates have hit a shocking 13.5%.

Again, the argument here isn't strictly a moral argument, but primarily an economic argument. As people are forced to spend more money on these goods, they'll have less discretionary income to use to buy consumer goods and other services.

4. Unskilled, Part-time, Low-wage employment is becoming the norm.

Perhaps the biggest reason that incomes are stagnating, and even declining, and part of the reason why the gap between the rich and the poor is widening, is the shift to part-time and/or low-wage employment. Simply put, the quality of jobs is going down.

Part-time employment peaked in 2011 at just over 14% and then began to trend downwards. Through 2014, however, part-time employment has begun to increase again.

Consider this, during the recession, 958,000 medium paying and 976,000 high paying jobs were eliminated. Since then, 1.85 million low-wage jobs have been created. Yes, people are employed, but skilled workers are now manning cash registers and flipping burgers.

Conclusion: Labor Market Improving Slightly, But Risks Remain

Yes, the unemployment rate is dropping, and I expect that to pay off with a strong holiday season. Still, the actual progress being made by the labor market may prove to be largely illusionary. With wages stagnating, costs rising, and the gap between the rich and the poor ever widening, our economy is facing severe systemic challenges that could one day tear it apart.

This might seem inflammatory but there is at least enough evidence to force us to pause and wonder if it's possible. It's important to remember that with the economy depending on consumer consumption, if wages stagnate and consumer spending declines, growth may become impossible. Indeed, in 2013 consumer spending actually declined by .7% and in Europe deflation is now a serious risk.

And yet even as governments try to tackle the problem of stagnant wages, solutions remain elusive. That should worry economists and investors alike.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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