Category Archives: employment

“What Workers Lose by Staying Put,” Enrico Moretti in the Wall Street Journal

May 29, 2012 By in economics, employment Tags: , , , , , , , , 2 Comments

The New Geography of Jobs

“What Workers Lose…” is an article in the Weekend Edition of the WSJ, adapted from Dr. Moretti’s recent book (which I haven’t read) The New Geography of Jobs.  Dr. Moretti was born and grew up in Italy, but now teaches economics at Cal Berkeley.

The thrust of the article is that Americans are unusually mobile in search of work, in contrast with Continental Europeans, who seldom stray from their birthplace.  Dr. Moretti believes that this flexibility is an economic virtue–not necessarily a surprise, given his own career.

His observation is interesting because it runs so counter to the views of prominent 20th century European literary and social critics, who look on American willingness to move as evidence that we’re rootless, soulless wanderers who have no sense of belonging.  Even worse, we eat at McDonalds, vacation at Disneyland and use disposable pens!  That’s all evidence, in their minds, that we’re an inferior brand of humanity–which, by the way, finds its highest and purest expression in the stay-at-home residents of whatever their native country is (read: themselves).

More important from a stock market point of view, the article sheds some light on the problem of the current high level of unemployment in the US.  And it offers a policy prescription for helping to alleviate it.

cyclical or structural?

The key unemployment issue, to my mind, is whether the current high level is

–a cyclical phenomenon, that is, a function of the slow economic rebound from the Great Recession, or

–a structural one, meaning that the unemployed don’t have the skills needed to qualify for jobs in today’s world.  If so, unemployment won’t just go away.

White House and Capitol Hill vs. the Fed

Politicians in Washington seem to adhere to the former view, which, conveniently for them, means that no legislative action is needed.  Time, patience and continuing low interest rates will solve the problem.  The Fed is in the latter camp (where, for what it’s worth, I am, too).  Structural unemployment requires retraining programs, plus continuing unemployment benefits until workers gain skills needed to compete successfully in the job market.

JOLT
The Fed points to the Labor Department’s Job Openings and Labor Turnover (JOLT) studies.  The latest report, from the end of March, shows the private sector has 3.7 million+ unfilled job openings.  Washington replies that workers are trapped in their home towns by houses the can’t sell because the mortgage exceeds the house value.

What does Dr. Moretti bring to the discussion?

He says:

–“willingness to relocate is a large factor in American prosperity”

–“the financial return for geographical mobility keeps increasing”

–the willingness to move is very strongly related to education level.  45% of college graduates will likely move to find better jobs before they’re 30 years old, vs. 17% of high school dropouts.  Dr. Moretti cites research by Prof. Abigail Wozniak of Notre Dame who says education explains most of the willingness to move.

Why the huge difference?

The less educated:

–have less information about the possibility of good work elsewhere

–may lack the skills needed in high-paying jobs

–don’t have the savings needed to finance the trip and support themselves while they look for a job.

Example:  the Motor City, 2009

Dr. Moretti cites the example of Detroit in 2009. Unemployment there was 18%.  Unemployment in Iowa City, 500 miles away, was 4.5%–basically meaning Iowa City firms were crying for workers of all stripes.  But high school dropouts in Detroit didn’t budge.

a policy recommendation

Dr. Moretti suggests that in high unemployment areas government unemployment benefits include vouchers that cover part of the expense of moving to find work.  This doesn’t address the lack-of-marketable-skills problem, but it does address the lack-of-cash one.  Such a program–already being implemented in a small way for workers whose firms have been hurt by foreign competition–would have two benefits.

It would help shift workers who were willing to move to places where they could find work.  And, by starting to drain the pool of unemployed in high unemployment areas, it would make the job search there somewhat easier.

two kinds of structural

All of the commentary–at least all that I’ve seen–about structural unemployment is concentrated on the long-term issue that many young men leave the US school system unequipped to compete for the best-paying jobs.  They’re prime candidates to be chronically unemployed.

Dr. Moretti’s insight is that while we can’t educate these men overnight, we can make them more mobile with the stroke of a pen.  We may also find that removing the structural rigidity of no-money/no-information does much more to relieve unemployment than we might imagine.

the April 2012 Employment Situation report

May 7, 2012 By in economics, employment, Employment Situation report, Portfolio management, Recent Market Action, Strategy Tags: , , , , , , , Leave a comment

the report–+115,000 net new jobs

Before the opening of stock trading on Wall Street last Friday, the Bureau of Labor Statistics of the Labor Department released its monthly Employment Situation report for April 2012.  According to the ES, the US economy added 115,000 new jobs last month.  That was made up of +130,000 net new positions in the private sector, offset by -15,000 layoffs by state and local governments.

While a reasonable performance, the figure was substantially weaker than both the median estimate of domestic economists (which was for a gain of around 160,000 new jobs) and the stellar performance of the winter months, whose gains comfortably exceeded 200,000 each.

revisions were positive

Job additions for February were initially reported as +227,000 (+233,000 for the private sector, -6,000 for the public).  That figure was revised up in the March report to +240,000 (+233,000 private, +7,000 public).  The final numbers, reported in the April ES, were revised up again–to +259,000 (+254,000 private, +5,000 public).

Job gains for March were initially reported last month as +120,000 (+121,000 private, -1,000 public).  The April revision boosted that figure to +154,000 (+166,000 private, -12,000 public).

Taking February and March together, April revisions boosted the number of net job additions during those months by 53,000 (+66,000 in the private sector, -13,000 in the public).

Wall Street was disappointed

Investors had been hoping that the April ES would reestablish the more favorable job gain trend of last winter, or at least show that the low reading in March was a fluke.  Arguably, the +34,000 upward revision of the initial March figures did that.  But all eyes–or at least those of short-term traders–appear to have been focused entirely on the current month figures instead.

As a result, the S&P 500 declined by 1.6% for the day.

why the slowdown in job growth?

Three explanations appear to be on offer:

1.  The US economy is doing the same thing it did in 2010 and 2011, lurching into a “seasonal” deceleration in economic growth.

2.  The unusually warm winter weather in normally cold regions of the US allowed an early start to what’s normally springtime work. Construction or home renovation, for instance.  This shifted job creation ordinarily seen in March or April into January and February.  If so, what we’re seeing now is temporary payback.  The real job growth trend is +160,000/+180,000 new positions a month.

3.  A third possibility comes from a Goldman report I’ve only read about in a Gavyn Davies blog for the FT. The idea comes from Okun’s “Law,” the suggestion that changes in the workforce move in line with the rise and fall of GDP.  In the Great Recession, argues Zach Pandl of Goldman argues, layoffs were much heavier than the fall in GDP warranted.  Similarly, during the recovery, job gains have been a lot greater than a tepid economy would justify.  However, we’ve recently reached the point where all the “extra” workers shed by companies during the downturn have been rehired.  Therefore, from this point on job gains will again move in lockstep with rises in GDP.  In other words, they won’t be much to write home about.

does it matter for investors?

For what it’s worth, I think there’s a small effect from warm winter weather in the ES data but the rest of the apparent weakness in March and April is a fluke–probably having to do with the seasonal adjustments Labor Department economists make to the raw data.

That’s not the important investment issue, though.  We all have to ask ourselves how much difference having the correct explanation for the April jobs figures makes for our equity investment strategy.  After all, we’re back to record-high levels of real GDP in the US even with a high level of unemployment.  The long-term unemployed are a political and social problem.  They aren’t necessarily a stock market one.

I can think of two ways in which interpretation of the ES results makes a difference:

–in the (unlikely, to me) case that the US economy is beginning to stall, or even to shrink a bit, a defensive stance is called for

–if there’s going to be negligible job growth in the US from this point on, then the strategy of 2009-2010 of emphasizing emerging markets and domestic firms that cater to the global affluent will likely be the right way to go.

Otherwise, the pattern of market action over the past eight months or so is going to continue–slow but steady outperformance by IT and by consumer discretionary firms that appeal to the broadest spectrum of domestic customers.

care for a Beveridge? … a curve, that is.

May 4, 2012 By in Beveridge curve, employment Tags: , , , , , , , , , Leave a comment

the Beveridge curve

This is a new one for me.  …and I thought I had seen most basic macroeconomic relationships.

The Beveridge curve is named in honor of a British economist, William Beveridge–although he didn’t develop it himself.  It maps the relationship between the unemployment rate and the job vacancy rate (number of unfilled jobs as a percentage of the labor force).

The relationship is inverse:  the higher the unemployment rate, the lower the percentage of vacant jobs should be; the lower the unemployment rate, the more likely it is that jobs will go at least temporarily unfilled–therefore raising the vacancy rate.

why is the curve important?

I found out about the Beveridge curve from a post written by Gavyn Davies, former head of the global economics department for Goldman, on the blog he writes for the Financial Times.  The post is titled “Why the Fed has taken QE3 off the agenda.”

It gives two important reasons for thinking that further quantitative easing is unlikely in the US.  One of these is the current behavior of the Beveridge curve.

In illustration, Mr. Davies prints a pair of charts which he’s borrowed from an economist from Barclays Capital, Peter Newland.  They depict the job vacancy rate on the vertical axis and the unemployment rate on the horizontal.

The first chart demonstrates that the current Beveridge curve is different from the pre-recession one.  The curve has shifted substantially to the right since 2008.  The present job vacancy rate would have been associated with a 5.5% unemployment rate less than a decade ago.   It’s now associated with an 8%+ unemployment rate.

Both Mssrs. Davies and Newland appear to believe that this shift is a permanent change.  In support of this idea, Mr. Newland’s second chart shows that a similar phenomenon occurred after the first oil shock in 1973-74, which triggered the worst post-WWII recession the world had seen until the recent Great Recession commenced.  So an outward shift of the Beveridge curve during a time of great economic change has already occurred before.

The conclusion they draw is that the current 8% unemployment rate is the functional equivalent of the pre-recession 5.5%.  If they are correct, and I think they are, today’s shifted Beveridge curve signals that we’re much closer to full employment in the US than the raw unemployment data would suggest.

This is important.

At full employment, monetary easing doesn’t create new jobs–there’s no one with the skills needed to fill them.  Instead, all loose money does is create a potentially damaging inflationary wage spiral as bidding wars break out to lure already employed workers from one firm to another.  Therefore, QE3 won’t happen.

another reason QE3 is off the agenda:  labor force participation rate

The labor force participation rate is the percentage of people of working age who are actually in the labor force–that is, either employed or willing to/looking for work.  What’s left over includes homemakers and students, among other groups.

One other group of non-participating persons of particular economic concern are so-called “discouraged workers.” These are people who have lost heart because they can’t seem to find a job and have ceased to look.  Although without jobs, they disappear from the unemployment statistics.  But they still lurk in the shadows, as it were, waiting to reenter the workforce when they conclude their chances they’ll find a job are more favorable and start looking again.

A quick look at the labor force participation rate suggests there might be a lot of discouraged workers.  The rate during 1998-2001 was 67.3%.  Now it’s at 64%.  Where did all those other 3.3% go?  Are they discouraged workers?

The short answer is “no.”

Mr. Davies cites a recent study by the Chicago Fed which concludes that the largest force behind this decline isn’t workers being discouraged by recession.  Rather, it’s a natural falloff in participation owing to the aging (and retirement) of the Baby Boom.  The Chicago Fed predicts that by 2020 the labor force participation rate will be lower than it is today, for the same age-related reasons.

Why is this important?  It, too, suggests that, with no gigantic pool of discouraged workers to fall back on, we’re much closer to full employment than the raw data would lead one to believe.

my thoughts

I’m solidly in the structural unemployment camp.  The wage increases for workers that we’re just beginning to see are further evidence that the US is running out of suitable candidates for jobs available.

Chronic unemployment is a terrible social problem.  But it can only be fixed through retraining and through continuing unemployment benefits.  Accommodative money policy won’t help.  Make-work infrastructure spending programs won’t do anything, either.   Facing a similar situation in 1990, Japan launched a series of massive public works construction projects, whose sole impact has been to mire that country more deeply in debt.

The bottom line is that the present loose money stance isn’t likely to last until late 2014, in my opinion.

Bond Environment, 2Q12 (i)

April 26, 2012 By in Bond Environment, Current Market Thoughts, economics, employment, Portfolio management, Strategy Tags: , , , , , , , , , , Leave a comment
Here’s the first part (of two) of the April bond market analysis prepared for clients by the firm of my friend and mentor, Denis Jamison.  The second will appear tomorrow.
The alarm clock sounded for bond investors in the March quarter.
On the strength of some positive readings on the economy, markets discounted the possibility of additional Federal Reserve easing.  More accommodative policies by the European central bank reduced the risk of a credit crisis in Spain and Italy. Accordingly, doomsday speculators pulled money from the U.S. government bond market. The result was a dip in bond prices. With little coupon income to cushion the fall, investors suffered big losses.
Long term U.S. Treasury bonds recorded a negative 6% total return. Other sectors fared better; mortgages returned about 0.6% for the quarter while corporate bonds gained about 2.5%. The investment dynamics of these sectors differ somewhat from those of the government bond market. Mortgages are big beneficiaries of the Fed’s zero short-term interest rate policy while corporate securities are helped by the improving financial strength of U.S. business, especially the banks. Yield spreads between corporate bonds and U.S. Treasuries narrowed sharply during the quarter. Whether this can continue, remains to be seen.
Bond prices snapped back sharply after a ho-hum employment reading for March (reported on April 6th)
…and on renewed concerns about Spain’s fiscal position. However, investor focus on these transient economic and credit risk factors obscures the underlying reality of the government bond market. The current low yield level has made these securities more risky. Their price sensitivity to any given change in interest rates has increased. For example, a full coupon thirty year bond priced to yield 3% is about 10% more volatile than a similar full coupon security priced to yield 4%. In addition, there is significantly less coupon income now than in prior periods.
The fixed income markets are anesthetized by a cocktail of promised zero short-term interest rates, a flood of liquidity being provided by central banks around the world and quiescent inflation.  So, it is likely we will continue along the bottom of this interest rate trough for some time.  That doesn’t mean, however, that the bumps and dips won’t provide large swings in total returns for bond holders.
Back on track?
For the U.S. economy, that’s probably true. Despite disappointment regarding the March employment numbers, by any reasonable measure, the U.S. economic expansion is where it should be. Based on the March workplace survey by the U.S. Labor Department, about 132.8 million folks are employed versus 130 million a year ago. That’s a 2.1% year on year gain. A respectable increase considering that the public sector – particularly state and local governments – reduced payrolls. Only 22 million people worked in the public sector in March – 600,000 less than a year ago. In addition to the increase in total workforce, those employed are taking home more money. Average weekly earnings are up about 2.6% over the last twelve months.
Thanks to the employment gains and higher earnings,
retail sales have fully recovered from the recession lows.  They are running ahead 6.5% on a year over year basis. Auto sales are now averaging between 14 and 15 million units on an annualized basis compared with less than 10 million units during much of 2009.  GDP – the broad measure of total goods and services being produced in the U.S. economy – grew at a 3% rate during the final quarter of 2011. While that pace of expansion is unlikely to be sustained, it is reasonable to expect growth will exceed the 1.6% pace set during the full year of 2011. Most economists predict something between 2% and 2.5% growth this year.
Most of the risks to this moderate expansion scenario don’t hold up well under close examination.
Some argue that the recent growth spurt is being fueled by the large increase in reported consumer debt – consumer credit expanded 6.9% in the final months of 2011. However, most of that increase reflected an expansion of government education loan programs which replaced private sector programs that were not included in the consumer credit totals. Basically, the consumer is not overextended. Gasoline prices are also a concern to many. However, auto fuel efficiency has increased and gasoline usage is down. Price changes at the pump will have a much more muted impact on consumer spending. Given this backdrop, it isn’t surprising that many Fed governors are beginning to question the need for a continuation of the current monetary stimuli being provided by the central bank. However, financial markets now appear to be addicted to these opiates. This may be the real risk facing both investors and the working public.
Stay tuned for the concluding section of the Jamison report tomorrow.

The March 2012 Employment Situation report: hiring slowdown?

April 9, 2012 By in economics, employment, Employment Situation report, Recent Market Action, Strategy Tags: , , , , , , Leave a comment

the report

The Bureau of Labor Statistics of the Labor Department released its March 2012 Employment Situation report last Friday, while virtually all the stock markets of the world were closed for Good Friday.  The US bond and derivative markets weren’t, however, and both reacted to the news.

The report said the US economy added 120,000 jobs during the month–about half the gains posted in each of the prior three.   The main areas of difference were in:  temporary help, which recorded 54,900 new positions in February and a loss of -7,500 in March; and in healthcare, which added 26,100 jobs in March vs. 52,800 in February.

revisions weren’t any help, either

February job additions, in their first of two monthly revisions, went up from 227,000 new positions to 240,000.  January additions, first reported at +243,000 and revised up last month to +284,000, were revised down in the March report to +275,000.   So net upward revisions of past months totaled only +4,000 extra jobs.

market reaction was swift, and negative

S&P 500 stock index futures dropped a bit more than 1% last Friday.  Government bond prices regains much of the ground they had been losing over the past month.

Two reasons for the reaction:  the March BLS figures showed only about half the gains of the prior three months, casting doubt on investor belief that economic growth in the US had reached a permanently stronger stage of recovery;  also, the March job additions are at or below the level needed to absorb new entrants into the workforce, so they do nothing to help reduce the number of unemployed.

what significance do one month’s figures have?

Not a lot.  Last August’s Employment Situation, for example, initially showed zero job growth in the economy–a figure subsequently revised up to +104,000 new positions.

Currently, other indicators–like consumer confidence and retail sales–have been rising, adding support to the idea that the strong ES figures from December-February are valid signs of an improving domestic economy and broadening economic recovery.  The evidence I’ve seen from individual company reports tends to support this view.  And the ADP employment report last Wednesday, quirky as it may be, showed +209,000 new jobs.

But, I think, the market has maintained an underlying suspicion that somehow the mild winter in the most heavily populated parts of the US has messed up the BLS’s seasonal adjustment mechanism,  and that, as a result, the apparent economic strength is just work that usually must wait until March or April being done in January of February.  So it’s very willing to believe the December-February ES reports overstate the job situation.  On this view, March is just a return to reality.

my thoughts

I don’t think the current ES report is enough evidence to warrant changing an equity portfolio orientation away from the idea that 2012 will be a year of broadening recovery.  We need more evidence.

If seasonal adjustment factors are responsible for skewing the ES numbers, it’s possible that March is the victim–not Dec-Feb.

The S&P 500 has moved up so sharply so far in 2012 that backing and filling for a while wouldn’t be surprising.

Stock price movements today will be interesting to analyze–especially to find economically sensitive stocks that outperform the market.

Typically, a strong economy with rising interest rates means weak bonds but a flat to up stock market.  Will this rule of thumb hold in 2012?   …by showing the other side of the coin, today may provide a valuable clue.