The labor market is better now than it was a couple of years ago. That’s an easy one. You know the main bullet points about the unemployment rate and payroll growth. And you know that the labor market recovery is the Fed’s comforting answer to some otherwise questionable data on the GDP, retail sales and industrial production. There is no argument that the labor market has gotten off the mat, but in my opinion, it’s not what it was when it entered the ring eight years ago to battle the Great Recession; it is different now: It's worse.
The National Bureau of Economic Research (NBER) is the group that determines, with the benefit of hindsight, the date that a recession began and when it has run its course. In their terminology, the economic downturn, go from Peak to Trough. The NBER dated the last recession from Peak, December 2007 to Trough, June 2009. So let’s take a look at two snapshots of the labor market; one from the month the NBER decided was the economic Peak and the other from the most recent reading.
The unemployment rate was 5.0% in December 2015, the same as it was in the opening month of the recession. As job losses mounted, the jobless rate doubled to ten percent by late 2009, but the roundtrip is now complete. The unemployment rate might be the same, but the labor market looks different; for one thing, it's older.
The Household survey shows there are 3.6 million more people employed now than there were in December 2007, but that doesn’t tell the whole story. The number of employed people aged 25 to 54 years has fallen by 3.5 million in the last eight years, while at the same time, the number employed who are 55 years or older grew by 7.8 million. Sure, to a great degree, it’s a demographic story, but not completely, since the participation rate for the 25 to 54 group is down a couple of points from where it was eight years ago, and the older group participation rate is up slightly. Furthermore, the age breakdown is what it is, and that has ramifications for the broader economy.
At the beginning of the recession, the younger of these age tranches made up almost 69% of the employed. They now account for less than 65%; the 55 and over group are 22.7% now, up almost five points from eight years ago. The graying of the workforce matters for aggregate demand; for instance, old folks are looking to downsize, not add a bedroom, and they are more likely to save for the golden years than shell out the cash for their children’s teen years.
Aggregate Demand is Lagging
The Establishment survey also tells a story that seems to reflect badly on aggregate demand. Total nonfarm payrolls grew 4.9 million from December 2007 to December 2015; a sizeable dip in between, but that is the gain from then to now. But importantly, the kinds of jobs offered by the labor market have changed. The number of Good Producing jobs fell by 2.3 million during that time, from just under 22 million down to about 19.7 million. The long established shift into Private Service Providing jobs was very pronounced over the last eight years; jobs in this sector rose 7.2 million. The Private Service Providing jobs now account for 71% of all payrolls, while Good Producing employment fell 2.2 point to 13.7% of total payrolls; government jobs are the other fifteen percent of the pie.
It is notable that the average weekly earnings for the private sector service providers are just 73% of the average for a goods producer; $680 versus $928. But the story gets a bit more interesting when you look behind the headlines. Thirty-seven percent of the total payroll increase in the last eight years is in Leisure and Hospitality jobs: that’s 1.8 million jobs in this sector versus an overall gain of 4.9 million. The average weekly pay packet for this category of worker is $313, or 46% of the average for all private service jobs and a just slightly more than one-third of the average week’s pay for a goods producer, the sector that saw its numbers fall by 2.3 million since December 2007 to now. The shift in the type of jobs on offer must also play a role in the slower wage growth; the reading that captures the annualized rate for eighty percent of all workers was 3.8% in the first snapshot, its 2.4% as of December 2015.
To be clear, the Leisure and Hospitality jobs make up less than eleven percent of all payrolls, but the shift from the higher paid employment to the lower end in the last eight years is bound to leave a mark on demand. And sometimes it can seem like they are the only jobs available; at least that’s one of the unfortunate findings in a report called “The Class of 2015”, from the Economic Policy Institute:
However, the share of young college graduates working in jobs not requiring a college degree increased over the weak 2000-2007 business cycle, increased further in the Great Recession, and has not yet begun to improve. In 2007, 38 percent of employed college graduates under age 27 were working in a job that did not require a college degree, and this share increased to 46 percent by 2014. Furthermore, the “non-college” jobs that workers with a college degree are ending up in are of lower quality now than they used to be. In 2007, half of recent college graduates who were in a job that did not require a college degree were nevertheless in a “good” job that tended to be career-oriented and fairly well-compensated—such as electrician, dental hygienist, or mechanic. That share has dropped substantially, while at the same time, there has been an increase in the share of recent college grads who are in low-wage jobs, such as bartender, food server, or cashier. The bottom line is that for recent college graduates, finding a good job has become much more difficult. These findings are consistent with other research showing that among the workforce as a whole, there has been a decline in the demand for “cognitive skills” since 2000.
These trends also underscore that the unemployment crisis since 2007 among young workers more broadly did not arise because young people today lack enough education or skills. Rather, it stems from weak demand for goods and services, which makes it unnecessary for employers to significantly ramp up hiring.
(An additional crimp on demand for goods and services is related to this group of young college grads; both those on the way to a career of their choice and those who are underemployed. According to Federal Reserve data the student loan debt burden was $548 billion at the end of 2007, it has more than doubled since then; as of Q3 2015 the total outstanding is $1.2 trillion.)
So, while the headlines suggest the labor market has returned to its pre-recession condition, the details suggest that it is just not what it was; it is different now...it is worse.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer