The economy is always creating jobs. Even at the worst point of the recession, there were still thousands of people being hired every day. Furthermore, there were 1.5 million more workers on payrolls at the end of March than at the same time last year. The economy expanded by just under 3 percent in real terms last year. So why is it that, 22 months after the official end of the recession, employment prospects for many Americans remain less promising than an M. Night Shyamalan film?
Source: Bureau of Labor Statistics
Our short answer is lenders lack the confidence to engage an already skittish business sector that is stuck in a wait and see economy. At the same time worker confidence has been dismal and discouraged workers have fled the labor force. As can be seen in the chart above, unemployment has a long way to go before it gets back to pre-recession levels. Unfortunately this means that even if net job gains become strong in the coming months it could still be years before there is a more stable labor market.
For the long answer, let’s look at three problems that need to be addressed before employment will return to a state of net growth.
1) Fools, Not Employers, Rush In
First, employers need to have more confidence in the economy. Put yourself in the shoes of a businessman that nearly got wiped out by a debt-fueled recession and might be facing a number of tax and regulation changes: would you be looking to hire right now?
Just in case you are not a small business owner, here is what has been really happening over the past few years. Currently, American companies are holding tight to nearly $2 trillion in cash and liquid assets-money that could be used to create jobs. Since the recession ended, the number of job openings has increased 39 percent, but monthly hiring for those jobs has only increased 9 percent. And the most recent Labor Department data shows there are an average of 4.9 unemployed workers competing for each job. While the heavy competition for work means employers could offer relatively lower wages, they’ve chosen to consolidate their workforces. As a result, both productivity and wages are up. Moreover, the data show companies have still been taking their time filling positions.
One reason for the slow going can best be described as a hangover. The last decade was one crazy borrow and spend binge that crashed in spectacular fashion, bringing the entire economy to its knees. Many borrowers are still feeling the after effects and have no intention of jumping feet first back into that lifestyle. Businesses that are content to pay down debt and maintain their revenue stream are not going to be hiring many additional employees.
There is a lot of anecdotal evidence to suggest that uncertainty over future tax rates in 2010 also contributed to the slow growth in hiring. But even with the Bush-era tax laws temporarily preserved, companies may still be unwilling to make long-term investments-like opening a new factory or extending a franchise to new locations-that could create jobs but also take more than the two-year tax extension. Congress will have to make significant, permanent changes to the tax code in the coming year to truly rid employers of this concern.
Another reason for the slow hiring has also been concern over regulatory compliance costs. From hundreds of new rules coming out of Dodd-Frank to increased tax preparation paperwork in Obamacare to the threat of cap and trade regulations, businesses big and small have voiced concerns about potential cost increases that have kept them from hiring. However, the President signed an executive order in January creating a review of government rules to stamp out regulations that “stifle job creation and make our economy less competitive.” If his commission stays true to its mission, employers may breathe a sigh of relief-and exhale jobs. But until then, Washington policies on taxes and regulations threaten to keep employers slow to hire. It’s the curse of the “wait and see” economy.
2) Discouraging Signs of Discouragement
The second, critical change needed for employment growth is a return of worker confidence. A curious sign in the midst of the recession and recovery is that productivity has remained stable. In the wait and see economy, employers have used a mix of part-time workers, contractors, and interns to meet demand instead of permanent staff with salaries with benefits. The number of workers who took part-time work because they couldn’t find a full time gig was 8.4 million in March. 5.6 million of those took part-time work because business is slow, according to the Bureau of Labor Statistics.
What adds to the discouragement in these working conditions is the significant drop in labor force participation since the start of the recession, as seen in the below graph.
Source: Bureau of Labor Statistics
Furthermore, the number of discouraged workers-those people who have stopped looking for work because they believe it is not available-has grown by over 500 thousand since the start of the recession, with 23 percent of that growth coming after the official end of the recession. It is also worth noting that the percentage of individuals out of work for 27 months or more has grown 37 percent since the end of the recession.
Reintegrating this many workers into the labor market is going to be difficult. There is an increased demand for skilled labor, such as jobs in the business services and health services sectors, and a growing percentage of unskilled labor that remains unemployed. Since June 2010, those with a bachelors degree or higher were roughly twice as likely to find work as those without a high school diploma. This suggests the coming year will see even more lower-skilled workers give up the job search before employment returns to normal levels.
3) The Lending Problem
Third, lenders need to find more qualified borrowers to invest in the economy and thereby boost economic growth and creating job opportunities. Several months ago, we pointed out that bank reserves are at an all time high, nearly double what they have been historically. At the same time, business lending has dropped off a cliff since October 2008 (see the graph below).
As John Mauldin wrote last summer while discussing this chart: “Leverage and loans allowed small and medium-sized businesses to expand. That blood supply has been cut off, and with it the job creation that comes from business expansion.” This doesn’t mean that banks should lower underwriting standards that were increased in the wake of the meltdown. But it does mean that more money will need to become available-either in form of debt or equity-before companies can expand again.
Conclusion: The Policy Change
The Obama administration has tried many things to encourage lending and job growth over the past two years. But the simple fact is that unemployment has grown and stayed high. Stimulus spending was poorly targeted and has crowded out trillions in private investment. A historically massive increase in regulation and tax uncertainty has weighed down on economic growth. And while the banks were saved from drowning and holes in state budgets temporarily plugged, all the economic team in the White House accomplished was bailing water as the ship continued to sink. While the need for quality borrowers, confident workers and entrepreneurial banks is important, there is also a desperate need for change in the public policy approach of the White House and Congress.
Government spending that props up zombie businesses only inflates the cost of labor and increases unemployment. The results of the stimulus have shown fiscal policy can at most provide a temporary boost to employment, but at the cost of delaying necessary changes in the labor market. Eventually the real problems in the economy will need to be worked out-the alternative state of permanent stimulus is not sustainable (see Japan).
The brightest news in the whole jobless mess is that unemployment claims declined and the private sector steadily added jobs in the second half of 2010. But while the economic outlook for the next two years may be brighter than the last two, it is going to take a long time to reverse these trends. That thick red line in the first graph featured has been slowly trending upward the past few months, but it has a long confidence struggle to get back to the “0.00%” line and a return to pre-recession levels.
This commentary is an extended look at the April 2011 issue of Ahead of the Curve. See here for a parallel unemployment story, the long-term trend that has developed over the past few decades where it is taking longer and longer for employment to recover after a recession.