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September 23, 2013

Five Job Market Myths

Conditions in the job market have always dominated impressions of the overall economy. This is true not only for investors, but also for policy officials. Indeed, in the contemporary recovery, decision making at the Federal Reserve seems almost solely tethered to the unemployment rate. Like other economic indicators, most labor market measures have lacked vigor in this recovery. Due to the severity of the 2008 collapse, the unemployment rate began the recovery near a post-war high and has declined only slowly. Similarly, both job creation and labor force participation have proved sluggish and inconsistent. Finally, wage gains have remained very modest. Recently, the characterization of the labor market has been heavily influenced by several myths which have been promulgated, repeated, and accepted as indisputable truths. We shed light on five such illusions which hopefully provides a more accurate assessment of the current U.S. job market.

Myth # 1The unemployment rate is only declining because frustrated job seekers are leaving the labor force!
While the U.S. labor force did decline during the first couple years of this recovery, it has trended higher since mid-2011. Contrary to popular perceptions, the unemployment rate has actually fallen faster and more persistently in this recovery since the labor force began growing. That is, the trendy idea the unemployment rate is declining only because the labor force is contracting is simply not true. Chart 1 overlays the unemployment rate (solid line) with the labor force (dotted line). When the recovery first began, the unemployment rate declined only modestly and the U.S. labor force contracted. However, in sharp contrast to perceptions, once the labor force began growing again in the late summer of 2011, the unemployment rate initiated a steady decline. Indeed, for the two years between July 2011 and July 2013, the unemployment rate declined from 9% to 7.4%, while the labor force increased on average by 103,000 a month! Neither the unemployment rate nor the labor force has trended in a straight line. There have been several months in the last couple years when the labor force has contracted and the unemployment rate has risen (each receiving considerable media coverage claiming the unemployment rate is only declining because seekers are exiting the labor force). However, what is clear from Chart 1 is the unemployment rate has declined steadily in the last two years while the labor force has trended higher, not lower.

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The reality is nearly opposite the myth. It has not been frustrated job seekers leaving the labor force which has caused the unemployment rate to decline. Rather, the unemployment rate began steadily declining in this recovery once new job seekers began regularly entering the labor force in anticipation of finding work.

Chart 1
U.S. Unemployment Rate vs. U.S. Labor Force

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U.S. Labor Force (In Millions) (Dotted)

U.S. Unemployment Rate (Solid)

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Myth #2Real wages have fallen for years!

Another consensus myth is that for years U.S. wages have failed to keep pace with consumer inflation and labor has suffered a steady erosion in real purchasing power. Chart 2 shows while this was true between 1980 and the mid-1990s, it has not been true since. Wage gains smartly outpaced inflation from 1995 to 2002, and labor enjoyed a significant boost in purchasing power when consumer prices declined during the 2008 crisis while wages kept rising. Indeed, since 1995, wages have outpaced consumer prices by about 13% or almost 0.7% annually. During this recovery, real wages rose until early 2010, declined until 2012, and have since been rising again. Overall, despite widely held impressions otherwise, the real U.S. wage rate has risen fairly steadily for much of the last 20 years, and during this recovery, wage gains have kept pace with the gain in consumer prices.

Chart 2
U.S. Real Wage Rate
*Average Hourly Earnings Index divided by Consumer Price Index

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Myth #3New job creation is mainly low paying positions!

This assertion appears not so much false as simply overstated. Chart 3 provides a construct to examine this contention. It illustrates the proportion of total job creation (since overall U.S. employment bottomed in December 2009) comprised by each of twelve major U.S. economic sectors arranged by the average wage rate paid by each sector. Consider the retail industry. From the recovery low in overall employment, retail (the second lowest paying sector) has created about 2% less jobs than it should have based on the proportion of total U.S. jobs comprised by the retail industry as of December 2009. Consequently, retail is an example of a low paying sector (less than a $14 average wage rate) which has produced fewer jobs than expected in this recovery. By contrast, the mining industry is an example of a high paying sector which has produced more jobs than expected. Chart 3 does not seem to show an overwhelming bias toward low-paying job creation. Not surprisingly, the epicenters of the last crisisfinance and constructionillustrate weaker job creation in this recovery than normal, and both are above-average compensation sectors. The technology sector, another high payer, has also proved a disappointing job creator in this recovery. However, it has not just been high-paying jobs which have been underrepresented in this recovery. Some low-paying sectorsretail and nondurable goods manufacturinghave likewise produced fewer jobs than normal in this recovery. Moreover, while the lowest-paying sector (leisure industry) has produced outsized job creation, one of the highest paying sectors (mining industry) has also outpaced expectations. Job creation in the services industry has been markedly outsized in this recovery. While many suggest this proves only low-paying service jobs are being created, the reality is the services sector provides about an average wage of almost $20 (nearly as much as durable good manufacturing jobs!). Undoubtably, some traditional high-paying job sectors have been abnormally weak job creators in this recovery (construction, finance, and technology). But some low-paying sectors have also been underrepresented (retail and nondurable goods). Overall, job creation in this recovery does not appear excessively biased toward either high-paying or low-paying positions.

Chart 3
Job Creation and Wage Rates Proportion of Total Job Creation Since December 2009 Comprised by Each Sector LESS the Proportion of Total Jobs Comprised by Each Sector as of December 2009

Average Wage Rate of Each Sector Between December 2009 and August 2013
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Myth #4Most new jobs are only part-time positions!

To the contrary! Most of the job creation in this recovery has been full-time positions! Charts 4, 5, and 6 respectively illustrate full-time job creation, part-time jobs taken due to economic reasons, and part-time jobs taken by choice (i.e., for noneconomic reasons). Clearly, most job creation has been full-time positions. Of the 6.15 million jobs created since household employment bottomed in December 2009, more than 5.6 million have been full-time jobs (Chart 4)! Moreover, part-time jobs taken for economic reasons (Chart 5) have declined during this recovery by almost 1 million! Finally, although part-time jobs for noneconomic reasons have increased slightly in this recovery (Chart 6), this is not due to frustration over lack of job prospects but rather, is due to a personal choice. Overall, as these charts suggest, widespread claims this job market recovery is abnormally dominated by part-time job creation is simply false!

Chart 4
U.S. Full-Time Employment
In Millions

Chart 5
U.S. Part-Time Employment For Economic Reasons
In Millions

Chart 6
U.S. Part-Time Employment For Non-Economic Reasons
In Millions

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Myth # 5No need to worry over wage inflation!

Few are worried about imminent wage pressures. Most believe with the economy still growing disappointingly slow and with the unemployment rate still above 7%, wage inflation will likely remain modest for the foreseeable future. However, during each of the last three recoveries, the four year anniversary of the recovery (just passed in June 2013) proved significant for wage inflation. Chart 7 illustrates the annual rate of wage inflation since 1970. Prior to the 1980s, the rate of wage inflation typically accelerated again soon after the recession ended. By contrast, beginning with the 1982 recovery, wage inflation has continued to decelerate well into economic recoveries. In both the 1980s and 1990s recoveries, annual wage inflation did not begin rising until the end of year four. Similarly, in the early-2000s recovery, wage inflation continued to moderate until about three years into the recovery. The contemporary recovery seems to be following this new pattern. Until late last year, annual wage inflation steadily declined in this recovery. Despite widespread calm about wage trends, and right on schedule with the four year recovery anniversary, the annual rate of wage inflation has subsequently increased from 1.3% last October to 2.2% currently. Has wage inflation begun to accelerate for this recovery? Little comfort should be taken from the fact the unemployment rate is still above 7%. The unemployment rate was often elevated throughout the high inflation 1970s. Moreover, in late 1986, wage inflation started a rise which would persist until the next recession despite the unemployment rate being about 7% when wage inflation bottomed. Could the widely accepted premise wage pressures are dormant prove a myth catching both the Federal Reserve and bond investors by surprise?

Chart 7
Annual Wage Inflation Rate Note: Shaded areas represent recessions.

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Summary
Like the rest of the economy, the U.S. job market is improving much slower in this recovery compared to the post-war experience. However, are perceptions surrounding the job market being unfairly and incorrectly influenced by a number of exaggerations and untruths? First, the unemployment rate is regularly declining and not because job seekers are leaving the market in frustration. Second, even though household income growth may only be modest, laborers have not been suffering for years with falling real wage rates. Indeed, real wages have been mostly rising since the mid-1990s. Third, while the job market is not being dominated by high-paying job creation, it also is not producing only low-paying jobs. Fourth, despite stories to the contrary, full-time employment has comprised almost 92% of the new jobs created in this recovery. Indeed, part-time jobs for economic reasons are about 1 million less than when the recovery began. Finally, while current wage inflation remains only slightly faster than overall consumer price inflation, as we enter year five of this recovery, there is precedent (evident in each of the last three recoveries) for more pronounced wage pressures.

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Written by James W. Paulsen, Ph.D. 612.667.5489 | For distribution changes call 415.222.1706 | www.wellscap.com | 2013 Wells Capital Management