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April 2013

A PUBLICATION OF CHILTON CAPITAL MANAGEMENT


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Quitting Time
Samuel Rines

he economy loves a quitter. In January, 2.175M people quit their jobs. This was more than the 1.72M that quit in December, and the 1.75M that quit in November of last year. According to the Job Openings and Labor Turnover Surveyknown as JOLTSmore than 25M people left their jobs in 2012. And this is a very good thing. In a healthy economy with a robust and dynamic labor market, people quit. People who voluntarily leave their jobs are signaling they are confident they can find employment. The quit ratethe number of people who quit as a percentage of the total number of people employedis hovering at around 1.6 percent for the past year after reaching a high of 2.3 percent in 2006. And people are also separating (including quits, lay-offs, and discharges) less. In January, the lay-off and discharge rate hit a decade low of 1.1 percent, matching last July. During the Great Recession, lay-offs and discharges surged and quits declined rapidly as workers sought stability. November 2008 was the first time ever in the JOLTS database that more people were laid-off than quit in the US. This phenomenon lasted until March of 2010 as the economy began to heal. Under normal conditions, roughly 1.5 as many people quit as are laid off or fired, with the ratio peaking at 1.9 times in March 2006. Today, quits to lay-offs are nearly back to normalized levels, 1.47, and lay-offs are actually at an all-time low.

Of course hiring matters too. We often read about the net number of job createdwhich is the number used in calculating the unemployment rate. Employers in the US actually hire many more people than this number would seem to indicate. In January, the US economy created a net of 119,000 jobs, but 4.25M people were hired with 4.1M separating. So while the economy only created about 120,000 jobs on a net basis, the turnover and hiring required to get there is tremendous. And while hiring may have stabilized, it has yet to trend upward in any significant way. Thus, despite the increase in turnover and quits from the bottom, the unemployment rate continues to be well above the recent norm in the US. To understand why, we look to the Boomer generation. Young and Old Until the Great Recession struck, the Boomer generation had enjoyed stable and steadily declining rates of unemployment to the extent that the preceding 25 years has come to be known as The Great Moderation. Much of this was due to the aging of the workforce from young and inexperienced into their prime years. As they aged, the US economy had shorter and gentler business cycles along with a more stable labor market and declining unemployment rates. By some accounts, the shift in demographics towards a greater proportion of prime workers drove 40 percent of the downtrend in unemployment (the natural rate of unemployment was about 6 percent in the early 1980s and steadily declined to 5 percent precrisis). There were also positive effects as women joined the labor force in increasing numbers, and as people on the fringe of the marketcalled marginally attachedleft completely.

But the effects of business cycles on employment are barbell-esque, with younger and older workers suffering greater volatility than workers in their prime. Younger workers entering the job market are in the process of matching their skills to their careers and employment. Many do not succeed on the first try, and this leads to turnover in the labor markets. Younger workers can be expected to have higher rates of unemployment across time as they search for a match. However, unemployment should fall dramatically as these workers find matches and move into their prime working years. Workers gain job and employer specific skills, therefore increasing productivity and causing alternative employment to be less enticing. The longer a worker is at the same firm, the less likely she is to separate (quit or be laid-off ). Younger workers have a tendency to jump into an employment opportunity to collect a paycheck, and search for other employment that more closely associates with their wants. This matching takes place mostly at a younger age, as tenure on a job is much less vital to long term earnings earlier in a career. Also, younger workers have much less experience, and are attractive candidates for separation in the case of a downturn in the business cycle. Emerging from the Great Recession, the unemployment rate spiked to levels only seen one other time since the end of World War II. Younger workers suffered the most. The unemployment rate for 16 to 19 year olds moved from 15.4 percent in October 2007 to 27.2 percent in October 2010, topping 25 percent for the first time ever. This 3 year, 77 percent move higher has ended, but the rate is still 25.1 percent. For perspective, 16 to 19 year olds made up about 3 percent of the civilian labor force in February, but compromised about 11 percent of the unemployed. Among 20 to 24 year olds, the unemployment rate rose from 7.2 percent in May 2007 to 17.2 percent in April 2010 (a more than 139 percent increase) and remains at 13.1 percent now. At the other end of the barbell, unemployment among those 55 and older is a fairly low 5.8 percent, but this is nearly double the pre-crisis level. Compare this to the unemployment rate among newly prime workers between 25 and 34, which is similar to the overall rate. Newly prime aged workers are settling into their careers and finding a proper fit for their skills. In March 2007, 25 to 34s had an unemployment rate of 4.3 percent. By November 2010, it topped out at 10.5 percent. But the decline has been steady, and it has crept back to 7.8 percent with the overall rate sitting at 7.7 percent. The lowest unemployment rates are found among those ages 45 to 54 who sit at 5.5 percent.
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All Together Now But the center cannot hold. The Boomers are still in the labor force, and most are under 60 years old, and thus in their prime stable employment years. Over the next 10 years they will begin to age into their more volatile employment years. Younger workers continue to have much higher rates of unemployment, especially when considered against their relative size in the labor force. Neither of these is likely to shift dramatically in the next decade. This could create issues for the Federal Reserve, and its stated unemployment target of 6.5 percent. The large number of people moving towards retirement, and the relatively small number of people following them in their prime years could cause severe labor market swings without much actual business cycle f luctuation to cause it. As labor markets move from being driven by cyclical market forces to more structural, demographic forces of the aging baby boomer population, long term trends in the unemployment rate could move higher. Not because of an unhealthy labor market or economysimply because of more volatile labor market participants. This could make the goals of Fed policy, and the target for unemployment difficult to reach and sustain.
Sources: Bureau of Labor Statistics; Congressional Budget Office; Measuring Mismatch in the US Labor Market by Sahin, Song, Topa, and Violante; Labor Turnover and Youth Unemployment by Leighton and Mincer; Job openings and hires show little postrecession improvement by Klemmer and Lazaneo; The Young, the Old, and the Restless: Demographics and Business Cycle Volatility by Jaimovich and Siu; The Determinants of the Cycles and Trends in US Unemployment since 1976 by Barnichon and Figura; Census Bureau.

SAMUEL RINES is an A nalyst and Economist at Chilton Capital M anagement in Houston, Texas. direct questions or comments to: srines @chiltoncapital .com ZACH BECK is the E ditor of Chilton Currents and an Operations Specialist at Chilton Capital M anagement in Houston, Texas. For further information on Chilton Capital M anagement strategies and services, please contact Christopher L. K napp, cknapp@chiltoncapital .com For reprints contact srines@chiltoncapital .com www.chiltoncapital .com/currents