Employment and unemployment are hot topics these days, with some praising the July jobs report as a sign that the labor market is in recovery mode. The jobless rate plunged to 4.3%, leading some economists to pronounce the U.S. job market at full employment. Then there are the issues of underemployment and labor slack. Some say underemployment is improving, while others say it’s worsening, and if labor slack is declining, it would suggest that underemployment isn’t a problem.
Clearly, it's all about how economists want to angle the results they're looking at.
Labor slack is steadily declining
In a report dated Aug. 4, Macquarie Capital analysts David Doyle and Neil Shankar highlighted that labor slack has been falling steadily. They define this measurement in two different ways, with one being "want a job now, not in the labor force," and the other being the employment-to-population ratio of 25- to 54-year-olds.
Mohnish Pabrai: 6.5x Return On Deep Value Turkish Stock [2020 Letter]
In his year-end letter to investors, Mohnish Pabrai, the Managing Partner of Pabrai Investment Funds, explained that 2020 had more impact on his way of thinking about the market than any other year since 1999. Q4 2020 hedge fund letters, conferences and more Following last year's lessons, Pabrai explained he has decided to move away Read More
The Macquarie team explained that most of the gap with labor slack is cyclical, while the other part is structural. They estimate that about 70% of what's left is cyclical, so they peg labor slack about 1 million workers but add that what's left is being eliminated fast.
The analysts peg the employment growth trend rate at about 180,000 jobs per month and the number needed to keep pace with the underlying labor force growth at about 45,000 per month. The reason this second number is so much lower than what most perceive it to be is because retirements among the Baby Boomer generation are picking up steam.
But what about underemployment?
These growing concerns about labor slack can be juxtaposed with the worries about underemployment. According to Business Insider, a growing number of Americans are needing a second job just to make ends meet. Data from the Department of Labor revealed that 7.6 million workers were holding multiple jobs in July, a 2% increase from the July 2016 total of 7.4 million. It's also the highest level recorded in two decades, and it isn't a sign that Americans are taking advantage of all those extra jobs by holding down a second one.
Economist Komal Sri-Kumar finds this trend "troubling" and argues that it is a sign that there's more labor slack in the market than most analysts realize. He said workers usually hold more than one job because there isn't a single job that provides a living wage, adding that when a "robust economic recover" is underway, the number of full-time workers should be climbing while the number who have part-time positions or are holding multiple jobs should be falling.
He notes that the U-6 unemployment rate, which better captures underemployment, was flat month over month at 8.6% in July. For comparison, the measure stood at 8.4% in November 2007, which was the month before the Great Recession is considered to have started.
Promises about wage growth
Interestingly, Bloomberg reported in May that the underemployment measure reached its lowest level since the last recession in April. The media outlet also reported that labor slack was disappearing then, using it as a signal that wage growth must be coming soon. However, by the time the July jobs report rolled around, that promised wage growth was still not enough to keep up with inflation. The July report revealed a 2.5% increase in wages to $26.36, while economists would rather see wages grow 3% to 3.5% so that consumers can stay in step with inflation. It seems clear that the growing number of workers needing two jobs to make ends meet is a symptom that consumers are sinking despite the Federal Reserve's years-long efforts to support them. No wonder even the most experienced economist is having trouble predicting when the Fed will raise interest rates.
CNN Money reported last week that the reason wages aren't rising is because employers don't feel they need to offer higher wages, even though the U.S. labor market is "roaring." The economic problem here is that employers aren't having trouble finding workers because they're hiring people who "were left behind during the recession and are happy to be finding jobs at all." Hence, until those labor shortages some are forecasting actually show up, Americans can expect to keep working two jobs just to pay the bills because significant pay increases are unlikely.