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.

Parable of the Broken Window

Neil Dutta, Head of U.S. Economics, Renaissance Macro Research

In thinking about the devastation caused by Hurricane Sandy, I’m reminded of the Parable of the Broken Window.  In the 19th century, French classical liberal economist Frederic Bastiat tells a story to draw the distinction between what is and what could have been. We can see how the money is spent to repair a broken window, however, we do not see how the money would have been spent otherwise.

The dilemma that is faced in Bastiat’s parable is one to ponder as we assess the economic fallout of Hurricane Sandy.

We do not believe that billions of dollars in property damage is a good thing. Still, damage to roads and bridges does not shave GDP while rebuilding activity helps boost GDP and employment. Dramatic weather events act as a temporary shock, weighing on growth in the immediate term then boosting growth over subsequent quarters. Economic activity is delayed or shifted. Taking a two quarter view, the entire event is essentially a wash.

A few quick points:

  • Recall the fallout from Hurricane Katrina. Growth moderated in Q4 2005 and then rebounded sharply in Q1 2006. Hurricane Sandy hit the most populated area of the United States during the workweek. The flooding the Hurricane has left in its wake suggest a more persistent drag on activity. A 0.5ppt hit to Q4 GDP growth would not surprise us though we would expect the activity to be made up in subsequent quarters. It may well be possible that the recovery is faster, spanning months, limiting the impact to quarterly GDP. Time will tell.
  • Some retailers will see sales decline while others will see sales improve. When a tree is blocking you from leaving your neighborhood, it is relatively safe to say that you will prioritize buying things you need immediately over things you don’t. Auto dealers, apparel retailers, and restaurant sales will likely weaken while spending on grocery stores and home renovation stores pick-up. The broader story is that consumers have already drawn down their savings quite a bit over the last three months, raising the risk to discretionary spending beyond the immediate aftermath of the Hurricane.
  • Residential construction and utilities production will likely moderate in the Northeast. There are a number of reports that refineries in this part of the country have been idled, and that means higher gasoline prices at the pump.

It is all about your time horizon. The near-term effect of the storm will be to make a weak economy that much weaker. Thereafter, we would expect the data to look strong relative to the underlying trend in the economy.