Welch Consulting Employment Index Rebounds in January

The Welch Consulting Employment Index is 94.9 for January 2013, up from 94.5 in December.  The employment index increased despite the increase in the U.S. unemployment rate because more people were participating in the labor force in January, as a fraction of the total population, compared to December.  An index value of 94.9 means that full-time equivalent employment (from the BLS household survey) is 5.1% below its level in the base year of 1997, after adjusting for both population growth and changes in the age distribution of the labor force.  The index has recovered from sharp declines in the summer of 2012 and is the same as it was in March 2012.  This means that full-time employment has kept pace with population growth over the past ten months.  Over the past five years the Welch Consulting Employment Index has fallen 6.2% (it was 101.2 in January 2008).

The Welch Consulting Employment Index, disaggregated by gender, is 92.8 for men and 97.7 for women.  Both the indices for men and women are up sharply slightly from December.  Over the past ten months the men’s index is up 0.3% while the women’s employment index is down 0.2%.  Over the past five years the men’s employment index is lower by 6.5% and the women’s index is lower by 5.7%.

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Technical Note: Full-time equivalent employment equals full-time employment plus one half of part-time employment from the BLS household survey.  The Welch index adjusts for the changing age distribution of the population by fixing the age distribution of adults to the 1997 base year.  The Welch Index adjusts for population growth by fixing total population to its 1997 level.  Seasonal effects are removed in a regression framework using monthly indicator variables.

 

 

Private Sector Hiring is Slowing Down

According to the Bureau of Labor Statistics JOLTS data (Job Opening and Labor Turnover Survey), private sector hiring, while still ahead of 2011, has slowed.  The JOLTS data record information on the number of persons hired by establishments and not merely total employment.  Thus the JOLTS data can provide information on whether companies are hiring new workers and replacing workers who have left their jobs or whether they are holding back on hiring.

According to the JOLTS data there were 12.73 million workers hired by private sector employers from August through October in 2012.  This represents only a 1.34% increase from the same three months in 2011.  The increases for 2009-2010 and 2010-2011 were 5.03% and 6.92% respectively, for the same three-month period.  Moreover the number of workers hired remains 16% lower than it was in 2007, before the recession.  Hiring in goods-producing industries (mining, construction and manufacturing) actually fell by 4.3% in the past year to the lowest level since 2009.

The slowdown in hiring may be due to uncertainty about the economy, including the budget negotiations in Washington.  Another sign that economic uncertainty may be impacting the labor market is that the pace at which workers are quitting their jobs has slowed down as well.

The number of workers quitting their jobs is an important indicator of how sure workers are that they can find a new higher-paying job.  When the labor market is booming more workers are willing to quit their jobs for better opportunities.  From 2009-2010 and 2010-2011 the number of private sector workers who quit their jobs increased by 12.2% and 9.7% respectively (based on data from August through October of each year).  In the past year the number of workers quitting their jobs increased by only 1.5% and remains about 26% below pre-recession levels.

The non-farm total payroll employment data from the BLS indicate that the economy has added about 136,000 private sector jobs per month over the past six months – or just enough to keep pace with population growth.  The JOLTS data indicate that the pace at which companies are hiring workers and the pace at which workers are quitting their jobs has slowed, after two years of solid increases in both hires and quits.

The labor market recovery is still fragile.  Both employers and workers may be holding back on decisions awaiting the outcome of Federal budget negotiations and the resolution of uncertainty about tax rates and government spending.  If the policy compromises by Congress and the President raise the cost of doing business, including the hiring and retention of workers, the gains in employment we have seen over the past two years could be reversed in 2013.

Despite Drop in Unemployment Rate the Welch Consulting Employment Index Declined in November

The Welch Consulting Employment Index is 94.6 for November 2012, down from 94.8 in October.  The slight decline is due in part to the impact of Hurricane Sandy in New York and New Jersey.  The employment index dropped despite the fall in the U.S. unemployment rate because fewer people were working in November, as a fraction of the total population, compared to October.  An index value of 94.6 means that full-time equivalent employment (from the BLS household survey) is 5.4% below its level in the base year of 1997, after adjusting for both population growth and changes in the age distribution of the labor force.  The index has recovered from sharp declines in the summer of 2012 and is the same as it was in February 2012.  This means that full-time employment has kept pace with population growth over the past nine months.  Over the past five years the Welch Consulting Employment Index has fallen 6.3% (it was 101 in November 2007).

The Welch Consulting Employment Index, disaggregated by gender, is 92.5 for men and 97.3 for women.  Both the indices for men and women are down slightly from October.  Over the past nine months the men’s index is up 0.3% while the women’s employment index is down 0.3%.  Over the past five years the men’s employment index has declined by 7.2% and the women’s index has declined by 5.4%.

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Technical Note: Full-time equivalent employment equals full-time employment plus one half of part-time employment from the BLS household survey.  The Welch index adjusts for the changing age distribution of the population by fixing the age distribution of adults to the 1997 base year.  The Welch Index adjusts for population growth by fixing total population to its 1997 level.  Seasonal effects are removed in a regression framework using monthly indicator variables.

Shovel-Ready

In 2009 President Obama and the Democratic-controlled Congress passed an $800 billion stimulus package that was supposed to mitigate the impact of the recession.  There has been much debate about the effectiveness of the stimulus spending and the cost per job “created or saved.”  Other criticism focused on government’s failure to identify and fund shovel-ready jobs that would have improved and updated our infrastructure.  Much of the stimulus money helped fund state and local government positions for teachers, firefighters and other public employees.  It appears that the stimulus legislation did little, if anything, to stop the decline in certain types of construction employment, most notably street, highway and bridge construction.

Proponents of the stimulus package argue that public investments help foster greater economic growth.  Skeptics argue that projects are funded are based on cronyism and political paybacks rather than priorities for economic growth.  Economists on both sides of the argument should examine employment in private-sector construction industries during the recession and recovery.  Many Keynesian economists lament the fact that employment in state and local government has lagged during the recovery despite the stimulus package.  However, large increases infrastructure spending are not expected to result in big gains in public sector jobs.  Infrastructure investment will instead re-direct resources to private sector government contractors that build and repair the infrastructure.

The following chart shows the changes in quarterly employment in two of the biggest heavy construction industries: construction of utility systems (other than oil and gas pipelines) and construction of streets, highways and bridges.  Employment in both industries has been normalized to 100 as of the first quarter of 1990.  There are fewer employees building and fixing highways and bridges than at any time in the past 20 years.  Employment in street, highway and bridge construction is down 5.3% in the past two years and 18.5% in the past five years, and the share of total employment in this industry is at a record low.  Employment in the construction of utility systems dropped from 2007 through the end of 2009 and this industry has recovered almost 25% of its job losses.  In contrast construction in the booming oil and gas pipeline construction industry is up almost 35% in just two years.  This boom in energy construction is not the result of 2009 stimulus program, however.

 

Government spending largely redistributes resources through the entitlement system which is why the government budget is a much higher fraction of GDP than the public sector’s share of total employment.  Even when governments devote resources to infrastructure projects, the workers are typically private sector employees of government contractors.  Government spending over the past five years has been primarily on transfer programs and not infrastructure.  This is best seen by examining employment in the heavy construction industries.  Employment in highway and bridge construction is well below pre-recession levels and has even dropped in the past two years.  The situation is somewhat better for employees of firms that build and repair utility systems where about 25% of the job losses during the recession have been reversed.

Why Even Mark Zandi Can’t Improve ADP’s Forecast of the BLS Jobs Report

This is the first month that the ADP national employment report is being produced in conjunction with Mark Zandi and Moody’s Analytics.  Previously, Macroeconomic Advisors helped ADP generate forecasts of the Bureau of Labor Statistics (BLS) nonfarm payroll employment report.  This month’s report was released with the announcement of a partnership with Mark Zandi and Moody’s Analytics and a newer and better methodology for predicting the key BLS jobs number.  The ADP report typically is released one or two days prior to the BLS report which is released the first Friday of each month.  ADP claims that, since 2001, the correlation between its forecast of the change in payroll employment and the BLS change in payroll employment is .96.  If this is true, as I explain below, the ADP report is either very close to being the best possible forecast of the BLS employment change or ADP has been very lucky in its forecasting over the past decade.  Mark Zandi and Moody’s Analytics will have a very difficult time improving on the previous track record for ADP.

Since 2001, the average change in BLS monthly payroll employment has been an increase of 7,000 employees per month.  There is considerable dispersion in monthly changes in employment, however.  The standard deviation of changes in monthly employment has been 241,000 employees per month.  The BLS reports that the standard deviation in monthly employment changes due to “sampling variation” is 61,000 employees per month.  In other words, even if the BLS drew an equally large and representative sample of employers and generated a second independent count of the monthly change in payroll employment, it would not be surprising if the second calculation differed from the first by 61,000 employees.

By converting these standard deviations into variances, and taking a ratio of sampling variation to total variation, it follows that 6.4% of the month-to-month variation in BLS payroll employment changes is due to “noise” or “sampling variation”, and 93.6% of the variation is due to “true” changes in employment.  Even if the BLS drew an equally large and representative sample of employers and generated a second count of the change in payroll employment in a given month, the correlation between the two different BLS employment changes would be .968.  (Because a correlation coefficient is simply the square root of the percentage of variation explained, and .968 is the square root of .936).

This means that even if Mark Zandi had access to the same data as the BLS, it is unreasonable to expect a forecast to be correlated more closely than .968 with the employment change reported by the BLS.  A forecast of the BLS change in payroll employment can’t be more reliable than the report itself.  The BLS acknowledges that their reports are imperfect.  Even if the BLS could make repeated independent calculations in the same month the correlation between independent BLS calculations would be only .968.  Consequently, if in the future ADP claims that their new model generates forecasts that are correlated .97 or more with the BLS jobs report we should all be dubious.

Tailored Clothes, Typewriters and Buggy Whips

A news headline today from the Associated Press reported that the company that owns the iconic American tailored clothing brands of Hickey Freeman and Hart Schaffner Marx (HMX Acquisiton Corp) is  is filing for Chapter 11 bankruptcy protection.  As reported by the AP:

The labels Hickey Freeman and Hart Schaffner Marx got their start in 1887 in Chicago and have been worn by presidents including Barack Obama, who wore its suits for his inaugural and election nights.  Their original parent company, Hartmarx, filed for bankruptcy in 2009 and was acquired by British company Emerisque Brands and the North American branch of Indian clothing company SKNL.

The tailored clothing industry in America employs slightly more people than the extinct typewriter and buggy whip industries.  Jobs in the manufacture of men’s and boy’s clothing have been either outsourced or replaced by mechanization.  Employment in men’s and boy’s clothing has declined from 459,000 in 1965 to 234,000 in 1990 to 29,000 today.  The US lost 93.7% of the jobs in the manufacture of men’s clothing at a time when total employment in the economy increased by 120%.

The US doesn’t produce (or consume) the same goods as it did a generation ago.  The US economy must continually transform itself, because of competition in a global economy and the mechanization of production, to generate enough economic growth to create jobs.  The changes required to keep up with foreign competitors will be the result of innovation, risk-taking, and investment in human capital.

President Obama was probably correct when he admitted in this week’s debate that some manufacturing jobs are gone from the US for good.  Outsourcing of these jobs makes economic sense if foreign competitors are more efficient and pass on their lower costs to US customers.  However, outsourcing of jobs is harmful for the US economy if it occurs because of stifling taxes and regulatory burdens.

Losing Ground to Great Britain

It is hard to admit it, but Great Britain is doing a much better job at creating jobs than the U.S.  That has not always been the case, but it’s been true for the past decade.  What’s even worse is that we are falling further and further behind our British friends.  The United States economy is still the largest in the world, but we are no longer the preeminent job creator in the developed world.  While it is understandable that our job growth is slower than in China and parts of the developing world, there is no reason why employment in the U.S. should be falling relative to employment in Great Britain.

The latest employment figures were just released by the UK’s Office for National Statistics.  About 71.3% of adults age 16 to 64 were employed in Great Britain, in the three-month period from June to August.  That represents a one percentage point increase from the ratio in June to August 2011 (70.3%).  Moreover, this means that the employment to population ratio, the preferred measure of labor force activity by most labor economists, is almost 4 percentage points higher in Great Britain than in the United States for adults age 16-64.

The following chart shows the employment to population ratio for adults in the United States than Great Britain from 1984 to 2011.  The employment rate in the U.S. was higher than in Britain in 17 of 18 years from 1984 to 2001.  In a typical year 1.7% more adults were employed in the U.S. relative to Great Britain.  Since 2001 the Brits have been working more.  For 10 straight years the fraction of adults working in the U.S. has been lower than in Great Britain, and the gap is getting wider.

Changes over the past year have only widened the gap in employment rates between the two countries.  The employment rate increased by a full percentage point in Britain but by only half as much in the U.S.  Both rates are lower than they were prior to the recession but the U.S. employment rate is 4.1 percentage points lower while the British employment rate is only 1.6 percentage points lower than in 2005.  The employment rate of 71.3% in Great Britain and 67.4% in the United States means that 4 percent fewer adults are working in the U.S. than in Great Britain.  This translates into 8 million fewer jobs in the U.S. than if our policies led to employment rates more comparable to the U.K.

Economists and pundits in Great Britain have complained that fiscal austerity has reduced growth in their output and employment.  Whether or not these criticisms are valid, Americans would be happy to have the same record of job creation over the past four years as the British.  The decline in our employment rate in the past four years is troubling.  The employment rates illustrated above exclude individuals age 65 and above, so this is NOT due to the aging of the baby boom.[1]  It should not be too much to expect the employment rate in the U.S. to equal the rate in Britain, and that would mean eight million more jobs.  Eight million more jobs would solve a lot of problems in this country concerning the deficit, poverty and the long-term unemployed.  The government does not create jobs but tax and regulatory policy can get in the way.  Let’s hope that the presidential candidate who wins in November can work with the Congress to reverse the course we are on so that the U.S. can once again reclaim its position as the biggest job creator in the developed world.


[1] If one compares overall employment rates across countries it should be noted that there are actually a higher fraction of adults age 65 and above in Great Britain than in the U.S.

Welch Consulting Employment Index Rebounds Sharply in September

The Welch Consulting Employment Index is 94.6 for September 2012, up 1.4% from September 2011 (seasonally adjusted).  An index value of 94.6 means that full-time equivalent employment (from the BLS household survey) is 5.4% below its level in the base year of 1997, after adjusting for both population growth and changes in the age distribution of the labor force.  The index rebounded sharply in September reversing most of the declines experienced over the past six months; the index was 94.9 in March 2012.  The index is now 1.4% above its level three years ago.

The Welch Consulting Employment Index for men is 92.2 for September 2012, up 1.6% over the past twelve months, and up 2.2% over the past three years.  The index for women is 97.7 for September 2012, up 1.2% over the past twelve months, but up just 0.4% over the past three years. Although employment growth has been slower for women than for men over the past twelve months, men’s employment remains far below its pre-recession peak.  Men’s employment relative to population, adjusting for the changing age distribution and accounting for part-time employment, is down 7.9% since early 2007.

Technical Note: Full-time equivalent employment equals full-time employment plus one half of part-time employment from the BLS household survey.  The Welch index adjusts for the changing age distribution of the population by fixing the age distribution of adults to the 1997 base year.  The Welch Index adjusts for population growth by fixing total population to its 1997 level.  Seasonal effects are removed in a regression framework using monthly indicator variables.

Two Million Fewer Full-time Jobs Created in this Recovery Compared to George W. Bush Recovery

Last week Nobel Prize winning economist Paul Krugman wrote “The best hypothesis about the US economy this past year and more is that it has been steadily adding jobs at a pace roughly fast enough to keep up with but not get ahead of population growth.”  Professor Krugman is correct.  Total employment in the U.S. stopped its recessionary decline in February of 2010, whether measured using the Bureau of Labor Statistics (BLS) household or establishment payroll surveys.  In the two and a half years since then the economy has steadily gained enough jobs to just keep pace with population growth and demographic changes.  This would be good news if starting from a position of full employment.  But starting from a labor market trough, after the worst recession since the Great Depression, the job market performance over the past 30 months is best described as treading water.  We can be relieved that employment did not fall even more, but what we have seen for the past 30 months is an extremely weak labor market recovery.

The labor market situation must be dismal when even one of President Obama’s strongest critics on economic policy, Jim Pethokoukis of the American Enterprise Institute, has understated the weakness of this jobs recovery.  In a recent post Pethokoukis observed that, according to BLS establishment payroll data, the “Bush jobs recovery” created 5 million private sector jobs while the “Obama jobs recovery” created 4.6 million private sector jobs.  Although true, that is only part of the story.

Pethokoukis didn’t raise two important issues.  First, in the “Bush jobs recovery” household employment grew more rapidly than payroll employment.  Economists can’t provide an exact accounting of the differences between the two employment series, but much of the difference is due to new start-ups, small businesses and the self-employed.  Small businesses and the self-employed are either underrepresented or missed entirely in payroll employment totals and births of establishments are very difficult to track.  However, it is clear that many people were starting their own businesses or taking jobs with small businesses in the “Bush jobs recovery.”

A focus on payroll employment also ignores the difference between part-time and full-time work.  In addition to the millions of jobs lost in the recession, millions more moved from full-time to part-time work.  For the labor market to fully recover, underemployed workers in part-time jobs must find full-time work.  Consider a comparison of gains in full-time jobs during the two most recent recoveries.  The “Bush jobs recovery” began in August 2003 while the “Obama jobs recovery” began in February 2010.  The comparison is over a 30 month periods because the most recent data available are from August 2012.  The “Bush jobs recovery” created about 5.59 million  full-time jobs in 30 months compared to 3.51 million in the “Obama jobs recovery.”  The 2003 -2006 recovery was not as robust as previous recoveries but still produced two million (59%) more full-time jobs in 30 months than have been created since February 2010.

Welch Consulting has developed an employment index based on the BLS household survey that accounts for differences between full-time and part-time work, as well as the changing age and gender distribution of the workforce, population changes, and seasonal effects.  The index has moved up and down since February 2010 but is imperceptibly different from 30 months ago.  No change in the Welch Index means the economy created full-time equivalent jobs at the same rate as population growth.  In contrast the Welch Index steadily increased from 2003 to 2006.

A side-by-side comparison of the two recoveries is easier if one compares percentage changes in the index relative to the employment trough (beginning of each jobs recovery).  The following chart shows that after 25 months the Welch Index gained 2.3% in the “Bush jobs recovery” compared to 1.8% in the “Obama jobs recovery.”  Just five months ago the difference in the two recoveries was modest.  In the past five months nearly all of the gains in full-time equivalent employment (relative to a growing population) have been lost.  The full-time equivalent employment to population ratio is no better than it was in February 2010, at the end of a deep and prolonged recession.  In contrast in the “Bush jobs recovery” full-time equivalent employment growth was accelerating and grew much faster than the adult population over the corresponding time period (September 2005 to February 2006).  By 30 months into the recovery the index had grown over 3%.

Recognizing that President Obama inherited an economic mess, the amount of job creation on his watch has been disappointing.  What looked promising in early spring 2012 has stalled and the hope for a “recovery summer” faded long ago.  The job creation record under President George Bush’s leadership was not only better at this stage in the recovery, it was improving.

Any President has a limited impact on the rate of job creation.  Economists may disagree about the magnitude of the effect of tax policy uncertainty on job creation, but none would advocate a system where businesses large and small are uncertain of tax rates just four months in the future.  Tax policy is, however, the responsibility of both the President and Congress.  The President has a much greater impact on the regulatory landscape through the executive branch.  Labor market regulations, such as those in the Fair Labor Standards Act, can also discourage hiring (and encourage outsourcing).  It is difficult to tell, at this time, how much the Obama Administration’s expansion of regulations has had a chilling effect on hiring.

The Obama campaign will remind us that in early 2009, for about six months, the economy was losing 700,000 to 800,000 jobs per month.  The more pressing issue, however, is which candidate has better policies to help employment grow relative to our population over the next decade.  Some policies require bipartisan cooperation in a divided Congress.  Other regulatory reforms are more directly under the control of the executive branch.  Let’s hope the Presidential debates challenge the candidates to describe regulatory reforms that will reduce the headwinds and even help foster job creation in the U.S.

The Misguided Focus on Green Jobs

The Bureau of Labor Statistics (BLS) counts the number of “green“ jobs in the U.S. economy and earlier this summer its methodology for determining whether a job was “green” came under fire in a Congressional committee hearing when we learned that oil lobbyists, antique store operators, and sales persons at used record stores are “green” jobs.  While it is appropriate for the BLS to measure employment in all sectors of the economy it is foolish to make an increase in “green” jobs a policy goal.  “Green” jobs represent the cost, not the benefit, of investments in cleaner energy technology.  The benefits of “green” investments are cleaner air and water.  The U.S. government should evaluate environmental policy by measuring improvements in environmental quality relative to the costs of achieving those gains.  The policy goal should be to achieve cleaner air and water at the lowest cost which typically means with fewer “green” jobs.  Even if the Obama Administration’s loan guarantee program created many new “green” jobs (which it didn’t) that would not make the initiative a success.  Small gains in environmental quality per job created (or dollar spent) is inefficient.  It is costly to divert resources to “green” jobs that provide little benefit to the environment.

A corollary to this argument is that we should not put high tariffs on solar panels imported from China to protect “green” jobs in the U.S. even if Chinese manufacturers are selling their products for less than the production costs.  Unfortunately this is precisely what is happening.  If Chinese manufacturers selling solar panels to the U.S. for less than cost is bad for our economy then receiving free solar panels from China must be extremely harmful.  Of course that is absurd.  If foreign producers are willing to (perhaps) foolishly subsidize the production of solar panels and sell them to us for less we should accept their gift.

Jobs are the by-product of wealth and value creation not a means unto themselves.  The value of cleaner air and water is not directly measured in GDP.  Clean air, rivers, and oceans are public goods and not traded in markets where prices reveal marginal valuations.  (Of course solar panels and windmills are traded in markets and if it is profitable for U.S. companies to sell these products overseas, without subsidies from the U.S. government, more power to them.)  The additional costs of generating cleaner energy, including the wages and salaries paid for “green” jobs, are included in GDP.  However, investments in new energy technologies can be expensive but not valuable; Solyndra is a notable recent example.  As long as our goal seems to be the creation of more “green” jobs, whatever the cost, we will continue to make errors in environmental policy.

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