Thursday, February 23, 2012

Still more improvement in the labor market


It should now be quite obvious to all that there has been some significant improvement in the labor market over the past several months, since first-time claims for unemployment have been consistently lower than expectations. At the current rate of improvement, claims could very soon be about as low as we might expect them to get if the economy were healthy (approximately 300K per week). But of course what is still missing from the picture is a significant increase in new hiring. Businesses have done almost all the cost-cutting that they need to, but they have not yet made a serious effort to grow.

The reluctance to expand and hire more aggressively is very likely due to a number of factors commonly cited, such as increased regulatory burdens, increased healthcare costs, and uncertainty about the future level of tax rates. In other words, businesses are reluctant to hire because the cost of labor has increased substantially, and the cost of labor and overall tax burdens might increase even more in the future. This is what happens when government spending ratchets higher, as it has over the past 3-4 years; a higher level of public-sector spending relative to the economy must eventually require a higher level of taxation, and a state-managed healthcare industry must eventually become more expensive and less efficient (government bureaucrats cannot possibly run the healthcare industry better than free markets can). The slow-growth fundamentals which frustrate us all—and which boil down to government crowding out the private sector—are unlikely to change in the near term, but the outlook for spending and taxation could change significantly (for the better, I hope) as the presidential election debate kicks into high gear this summer.


PE ratios are still substantially below average and profits are at record levels, which means the market is priced to a substantial deterioration in the fundamentals and is probably resigned to some increase in future tax burdens. But with the ongoing improvement in the labor market, equity prices have little choice but to drift higher, as the chart above suggests. As I've been suggesting for years now, this market is being driven not by optimism, but by the realization that the economy has not proven to be as bad as was expected. Three years ago the market thought we would still be in a deflationary depression today, but instead we're in a slow-growth expansion, climbing walls of worry.

8 comments:

Benjamin said...

"In other words, businesses are reluctant to hire because the cost of labor has increased substantially, and the cost of labor and overall tax burdens might increase even more in the future."--Grannis.

Actually, unit labor costs have been falling. BLS puts its index at 108.7 for 3Q 2011, down from an annual peak of 111.0 in the 2Q 2009.

Labor costs may be slowing rising again, but thanks to private-sector innovation, unit labor costs are well in hand. I don't know why Grannis is concerned about unit labor costs, which have been deflationary. His concerns appear completely misplaced.

Of course, I would like lower taxes and regulations on productive people and businesses. Obama's plan for lower corporate tax rates is welcome, just not aggressive enough.

And no one, GOP or Dem, is calling for replacing income taxes with consumption taxes.

Still, the general news is good, corporate profits are skyrocketing (better than ever) and hiring is getting better, and the nation faces only the threat of deflation, which can be avoided by an aggressive Fed, with the very nice side benefit of more growth. (Fed tightness now may reflect a partisan bias against Obama, though I hope Bernanke is being as fair as possible.)

The risks to business are an overly timid Fed that suffocates the economy Bank of Japan style, and the usual risks posed by destructive competition--no one is assured profits ever. That is the nature of the beast.

I suspect we will see the right-wing call for a bullish Fed as soon as Obama is voted out of office.

Dr William J McKibbin said...

The good news is that the emerging recovery is not based on hiring - in fact, labor participation is likely to decline for at least another decade regardless of any recovery -- what we must all accept is that labor is no longer a vital input to production -- my evidence is that unit labor costs have been in sharp decline for almost a decade, with no sign of improvement in sight -- moreover, excluding labor from the coming recovery can only bolster profits and dividends -- the future of labor in the US is hopeless, especially for those who lack world-class skills -- I remain optimistic for those with skills, including professional atheletes, moviestars, physicians, and skilled trial attorneys -- I am also optimistic for accredited investors -- everyone else has a date with the abyss -- I expect that steady growth will continue through the remainder of the decade, and will accelerate dramatically after 2020 or 2025 -- conversely, labor will see their wages cut by another 20-25 percent over that same period -- the future is in the hands of those with means and skills -- everyone else will likely become casualties of what is emerging in America and around the world.

More about unit labor costs here:

http://wjmc.blogspot.com/2012/02/us-unit-labor-costs-in-dramatic-decline.html

The future is in the hands of those with means and skills -- fortunately, most people will not even try to get their share of either, which is just another boost for those who might...

Dr William J McKibbin said...

PS: Inflation will eventually kick in probably after 2025 -- by then, the idle and unemployed will be burning down America, and the Fed will throw some cash around to the poor in order appease quelle violence, as well as to drive up equity prices even further...

Squire said...

My small business clients are loathed to hire. The number one reason is that they are fearful of firing. One employer (who was forced to put his wife as president by his customers who are big corporations so they could list him as a minority owned supplier) only hires what he believes are healthy hetero white males as they don’t have the usual defenses that everyone else has. The company is too small to be attacked by social engineers for being too white, but there are state and federal agencies ready to pounce on it from a discrimination complaint. It is a shame, he turned down an obese lady recently who I thought was the best candidate. This is not discrimination, it is self-preservation. He would have hired her but for the risk that if she didn’t work out he was stuck with her. Of the 25 or so employment cases I have consulted on over 30 years, not one, again, not one was a valid complaint against my small company clients or employers.

Wall St. Jr. editorial: Mario Monti, put it, growth "will have to come from structural reforms or supply-side measures." He will probably get assassinated for that.

The social engineers have it backwards when they assume employers to be the bad guys. Fiscal and monetary stimulus is a substitute for making labor market reforms.

Squire said...

My small business clients are loathed to hire. The number one reason is that they are fearful of firing. One employer (who was forced to put his wife as president by his customers who are big corporations so they could list him as a minority owned supplier) only hires what he believes are healthy hetero white males as they don’t have the usual defenses that everyone else has. The company is too small to be attacked by social engineers for being too white, but there are state and federal agencies ready to pounce on it from a discrimination complaint. It is a shame, he turned down an obese lady recently who I thought was the best candidate. This is not discrimination, it is self-preservation. He would have hired her but for the risk that if she didn’t work out he was stuck with her. Of the 25 or so employment cases I have consulted on over 30 years, not one, again, not one was a valid complaint against my small company clients or employers.

Wall St. Jr. editorial: Mario Monti, put it, growth "will have to come from structural reforms or supply-side measures." He will probably get assassinated for that.

The social engineers have it backwards when they assume employers to be the bad guys. Fiscal and monetary stimulus is a substitute for making labor market reforms.

Squire said...

My small business clients are loathed to hire. The number one reason is that they are fearful of firing. One employer (who was forced to put his wife as president by his customers who are big corporations so they could list him as a minority owned supplier) only hires what he believes are healthy hetero white males as they don’t have the usual defenses that everyone else has. The company is too small to be attacked by social engineers for being too white, but there are state and federal agencies ready to pounce on it from a discrimination complaint. It is a shame, he turned down an obese lady recently who I thought was the best candidate. This is not discrimination, it is self-preservation. He would have hired her but for the risk that if she didn’t work out he was stuck with her. Of the 25 or so employment cases I have consulted on over 30 years, not one, again, not one was a valid complaint against my small company clients or employers.

Wall St. Jr. editorial: Mario Monti, put it, growth "will have to come from structural reforms or supply-side measures." He will probably get assassinated for that.

The social engineers have it backwards when they assume employers to be the bad guys. Fiscal and monetary stimulus is a substitute for making labor market reforms.

Scott Grannis said...

Squire: excellent example of increased regulatory burdens on employers. Thanks for contributing!

Squire said...

It seems I am a regulatory burden myself with 3 postings of the same thing.