Friday, November 7, 2014

Employment: steady gains continue

If there's anything remarkable about the private sector jobs market (the only one that really counts, since the public sector is far less efficient), it is the under-appreciated fact that it has been growing at a relatively steady pace of just over 2% per year for the past four years. That's as fast as it grew in the prior business expansion (2002-2007), but that pace of growth lasted only three years. So in at least one important aspect, this recovery has actually been better than the last. The big difference between the two, of course, is the labor force participation rate: there are upwards of 10 million people who have dropped out of the workforce. The economy has been adding jobs at a decent rate, but from a lower base.

The current recovery boasts four years of jobs growth exceeding 2%. In the prior one, there were only three years.

The labor force grew at just over 1% for many decades until growth virtually ceased starting in 2009. There's been only a very slight uptick in growth in recent years. 

Despite four years of over 2% growth in private sector jobs, total employment today is only marginally higher today than it was at the peak of the last expansion. If this had been a normal recovery there would be at least 10 million more people working. That adds up to an annual income shortfall of about $2 trillion.

The big question is whether this picture will change if the Fed continues to keep short-term interest rates extremely low. I for one fail to see how low interest rates will cause the economy to add jobs at a faster rate than it has managed for the past decade, or how low interest rates will encourage 10 million people to start looking for jobs again.

I think the underlying problem is not interest rates or monetary policy. We've created numerous barriers to re-entry to the labor force: transfer payments are at all-time highs relative to disposable income; and marginal tax rates for those receiving government assistance are extremely high (for many, the decision to work would mean the loss of benefits and less disposable income). And there are barriers to jobs creation as well: marginal tax rates on capital are higher than they have been for decades; and regulatory burdens have never been so heavy. In short, the economy still faces a nmber of significant headwinds which will not diminish just because interest rates are low.

So the fix needs to come from Congress, not from the Federal Reserve. I'm optimistic that Congress will manage to convince Obama to accept at least a few pro-growth changes in coming years.


Lawyer in NJ said...

Infrastructure spending and tax credits to incentivize capex make sense to me.

Benjamin Cole said...

For sure, lower tax rates on productive bdhavior---some serious cuts in FICA taxes, perhaps compensated for by QE make a lot of sense.

That is, have the Fed buy $500 billion of Treasuries every year and put it into the Social Security Trust fund, while cutting FICA taxes in half.

Get rid of ethanol, VA and SSDI disability, and food stamps.

Scott Grannis said...

Interesting facts:

There are almost 11 million people receiving disability payments, and their average monthly payment is about $1000. That totals to about $130 billion per year, or about 3.8% of total federal spending.

Total spending on food stamps is running about $65 billion per year, or about 1.9% of federal spending.

Scott Grannis said...

Re infrastructure spending. As Obama realized after the fact, there are no shovel-ready infrastructure projects. Only 8% of the ARRA "stimulus" spending—some $65 billion—went to infrastructure projects, and much of that ended up wasted.

If there is a need to build infrastructure, it should be done at the local level. No way can or should Congress make those kinds of decisions.

ae966ad2-6749-11e4-a68e-d7691c4e07cb said...

Scott, I am a long time reader of your excellent blog. Thank you for the incredible yet free service you provide to the "average Joe investor".

Anyways, I have one quick question: What data did you use to create the Transfer Payments chart? I'd love to have the facts behind the figures as this is such an astounding chart and to me represents the heart of the global malaise.

Joe in NY

Scott Grannis said...

The data for the transfer payments chart is available from the Bureau of Economic Analysis.

William said...

Ed Yardini: "Why Easy Money Policies Might be Deflationary"

"I’ve previously explained why ultra-easy monetary policy might be deflationary rather than inflationary. In brief, it might stimulate supply more than demand. In the past, easy money stimulated demand more than supply as borrowers borrowed lots of money and spent it all. Now their debt burdens are such that many may be maxed out. Meanwhile, suppliers have taken advantage of easy money to expand their capacity, assuming that “if you build, they will come.” That’s been a bad assumption for a lot of producers, especially of commodities.