Fundamental Weakness Remains In Regards To Labor Market

Fundamental Weakness Remains In Regards To Labor Market

The past several days have seen a rash of positive data regarding the economy being reported. Initial jobless claims are down to their lowest levels since 2006, the unemployment rate has dropped below 6%, private sector hiring has picked up, and last month the economy added 248,000 jobs. You couldn’t blame investors and economists for getting excited.

Still, the job market may not be as strong as a casual glance suggests. Yes, jobs are being created but the quality of these jobs is questionable. And when it comes to jobs, not all are created equal. Low paying jobs do little to boost discretionary income, which in turn drives consumer consumption.

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Labor Market: Consumer Consumption Drives The Economy

Before digging into the data it’s important to consider the role of consumer spending. In the United States and most other advanced countries, consumer spending now accounts for about 70% of the GDP. Demand from advanced countries also drives export oriented economies in Asia and elsewhere.

Meanwhile, the average consumer relies on his or her wages in order generate discretionary income. As wages rise, spending tends to rise, which in turn spurs economic activity. In the years since the Great Recession consumer spending has barely rose,

Labor Market: Often Ignored Weaknesses Remain In Labor Markets

When it comes to economic data, economists and political leaders could be cherry picking the good data points while ignoring the negative. For example, the labor force participation rate remains near historical lows, with only 62.7% of the adult population actively participating in labor markets. This compares to historical norms of 67%.

Meanwhile, the U-6 unemployment rate declined only .2% to 11.8% in September. The U-6 unemployment rate is often viewed as a more accurate measure of unemployment since it also accounts for people forced to work part time and those who have simply given up on trying to find a job.

The U-6 rate is especially important as it gives a better idea of whether or not discretionary income levels are improving. The U.S. economy depends upon consumer consumption, and said consumption in turn depends upon wages. If people have dropped out of the job hunt, or are working at a low-wage part-time job, their discretionary income levels are likely low, and almost certainly not improving.

Labor Market: Wages Remain Stagnant

Perhaps worse yet wages have largely stagnated over the last several years and the trend has shown no sign of changing, even if the unemployment rate itself is going down. The average non-management worker now owns $20.67, having risen just over 2.3% this year, barely beating inflation.

Wage growth in excess of 2% might seem like a lot, but with inflation wiping away most of those gains and given that this is a supposedly “tight” job market, wage growth is tepid at best. Most importantly, with the costs of goods and services gradually rising, spending power itself won’t increase.

Labor Market: Are The Jobs Being Created Low Wage?

While the data from the most recent jobs report is to fresh to conduct an in-depth analysis, there has been a disturbing trend of the recovery: Many of the jobs being created are in-fact low wage jobs.

The National Employment Law Project conducted a study to determine the created and/or loss of jobs categorized as low, mid, and high wage between February 2008 and February 2014. Low wage industries paid between $9.48 and $13.33, while mid-wage jobs paid between $13.73 and $20 and high wage jobs paid between $20.03 and $32.62.

The results were somewhat shocking. During the time frame of the study some 958,000 mid-pay jobs and 976,000 high-wage jobs were lost. At the same time, 1.85 million low wage jobs were created. Interestingly, the number of low wage jobs created corresponds almost exactly with the number of mid and high pay jobs lost.

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