Friday, September 4, 2015

The problem is the lack of productivity

August job gains were weaker than expected (+173K vs. +217K), but that shortfall was exactly offset by upward revisions to prior months. (That's a reminder that this series is volatile and can be significantly revised after the fact, so you can't read too much into any one month's report.) It did nothing to change the big picture, which is one of an economy that for the past six years has been growing at a moderate, but disappointingly-slow pace. That it has not grown faster despite extremely low interest rates and very accommodative Fed policy is not evidence of the failure of monetary policy or the need for yet more Quantitative Easing. No, the failure to grow faster is rooted in weak productivity, which in turn is the result of weak investment, a general aversion to risk-taking, and a general unwillingness to work. Those problems are not the sort that respond to the Fed's ministrations, nor can they be fixed by more money; instead, they respond to changes in the after-tax incentives to work, invest and embrace risk.

The chart above should be a real eye-opener. What it shows is the annualized growth rate of labor productivity over rolling 5-yr periods. For the past 5 years, productivity has increased by a miserably slow 0.54% per year on average. In the past 70 years, productivity growth was weaker only in the 1976-82 period—a period notorious for its high and rising inflation and a general malaise among the population.

The chart above highlights the degree of month-to-month volatility in the jobs numbers. For the past 4 years, the private sector has averaged jobs gains of 212K per month, with a standard deviation of 70K. The August report was within this range.

For the past four years, the year over year growth rate of private sector jobs has been in a range of 1.9-2.7%. It's currently 2.4%. Steady as she goes—nothing at all remarkable here.

One enduring problem of the current business cycle expansion is the very slow growth of the civilian labor force. Lots of people—about 10 million—have simply "dropped out" and are no longer looking to work, for a variety of reasons. Hint: transfer payments now make up almost 20% of disposable personal income, up 20% from 2007 levels and up 300% from the 5% that prevailed in 1951.

Still, despite the disappointments, there has been a non-trivial expansion in the number of private sector jobs: a little over 4 million net new jobs have been created since 2007, the peak of the last expansion. In contrast, the public sector has shed a net 500K jobs since 2009, for which taxpayers should be grateful.

Part-time employment during the current expansion has behaved pretty much the way it always has. Coming out of the recession, part-time employment surged, as businesses began to hire but were reluctant to make long-term commitments. As the economy became more resilient and confidence in the future picked up, part-timers were replaced by full-timers. 

In the 55 years since 1960, there have only been 15 years or so when the unemployment rate was lower than it is today. Today's 5.1% unemployment rate says the economy is doing a good deal better than average. One naturally wonders, therefore, why the world is so concerned that the Fed might raise rates above zero. This is a fragile recovery desperately in need of monetary TLC?

No. This is a sluggish recovery desperately in need of better incentives to work, invest, and take risk. Cutting marginal tax rates would help tremendously, as would a reduction in regulatory burdens.


marcusbalbus said...


Benjamin Cole said...

I would like to see cuts in FICA taxes.

Increase incentives to work and to hire.

steve said...

Scott, pithy, lucid and cogent. Hard to argue with the facts!

Bodin said...

Bingo Mr. Cole... I like the way you think....

William said...

Market Volatility Has Changed Immensely - Volatility is not what it used to be

"The dramatic events of last month underscore the degree to which the explosion in the popularity of volatility trading is now feeding on itself, creating booms and busts in implied volatility. Even as the VIX reached a post-crisis intraday high, the VVIX, which looks at the price of options on the VIX to gauge the implied volatility of the index itself, easily surpassed the levels it reached in 2008.

"1. Analysts, investors and traders point to two market developments that have arguably increased volatility in the world’s most famous volatility index, beginning with the rise of systematic strategies....That suggests a large (almost 70 million) reversal in positioning and a classic ‘short squeeze’ as traders were forced to close their bets against volatility amid seesawing markets.

"2. The proliferation of exchange-traded funds and notes that allow investors to bet on the future direction of the VIX has also arguably exacerbated the VIX's movements. Bloomberg News reported late last month that the amount of assets held by volatility-related exchange-traded products has jumped from practically nothing less than a decade ago to $4.3 billion currently.

William McKibbin said...

Watch for real working wages, real home values, and the employment to population ratio to stagnate over the balance of the 21st century...