Labor Market: Myths vs. Reality

Neil-DuttaThe following excerpt has been provided by Mr. Neil Dutta, Head of Economics at Renaissance Macro Research.

Myth #1: America is a nation of part-timers
Here is what is true: Over the last four months, part-time employment has expanded by 8.9% at an annual rate while full-time employment has risen at just a 0.5% annual rate. What is not true is that rising part-time work represents a new structural phenomenon in the U.S. labor market.

8.20.13_Dutta_RenMac_LaborMarketConsider the following points: part-time employment represents one-fifth of total household employment. A quick inspection of this series screams cyclical NOT structural. That is, the series rises during recessions and falls as the recovery gains traction. The Household Survey is notoriously volatile, so it makes sense to analyze longer-term trends. Over the last year, all of the increase in part-time employment has been for non-economic reasons (child care, vacation, schooling, training, etc.)

Why has this subject generated so much attention? Simple. The Affordable Care Act (ACA). However, there is little survey evidence that firms plan to materially alter worker hours because of the health law. A survey of firms across the New York Fed District found that only 12% of respondents refrained from hiring or shifted full-time workers into part-time; that compares to 7% that made minimal changes to their workforce. So, the ACA is having marginal impact, but it is overwhelmed by business cycle dynamics.

Myth #2: Job gains are all low wage
Earlier this month USA Today ran with the following headline, “Many new jobs are part-time and low-paying”. This is a true statement. Many of the jobs being created are low-paying and that may or may not be something to worry about. What is not true, however, is that this is a new development and unique only to this recovery.

8.20.13_Dutta_RenMac_LaborMarket_2The two sectors that get the most attention are retail trade and leisure & hospitality. So, we went back five economic cycles and looked at the composition of employment growth from the payroll trough to peak. Here is what we found: retail trade and leisure & hospitality employment, typically accounts for one-fourth of the job creation. In this cycle, 28.2% of the new jobs are in these categories. That compares to 28.4% in the 2003-07 recover, 23.4% in the 90s, 28.5% in the 80s, and 23.7% in the 70s.

More broadly, the narrative misses the fact the wages typically lag in employment recoveries. While the labor market continues to recover in a relative sense, there is still plenty of slack. What is important is that these unemployed workers here value. Otherwise, they would not be able to exert downward pressure on the wages of those working and the newly employed. That tells us the labor stack is cyclical not structural. As the labor recovery ensues and the slack is absorbed, wages will begin to rise. When growth bears fret about low-wage work, a more apt translation at this stage is: it is still early in the jobs recovery.

8.20.13_Dutta_RenMac_LaborMarket_3

The views expressed above are those of Neil Dutta and are not intended as investment advice.

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