Posts Tagged: unemployment

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13
Jun 11

The New York Times Finally Discovers Structural Unemployment

We have visited the issue of structural unemployment several times.  See, e.g. Unemployment and the Fall of Labor, Why this May be Worse than the Great Depression and The New Reality: Permanent Job Loss.   Let’s define it again:

Joblessness caused not by lack of demand but by changes in demand patterns or obsolescence of technology, and requiring retraining of workers and large investment in new capital equipment. Source:  Business Dictionary

How incredulous that it took until June 9th, more than three years into the current recession, for The New York Times to finally discover this “new” reality. Companies Spend on Equipment, Not Workers.

What Did the Times Discover?

Workers are getting more expensive while equipment is getting cheaper, and the combination is encouraging companies to spend on machines rather than people. See Companies Spend on Equipment Not Workers

The article at issue focuses on a Minnesota plastic products manufacturer which hired only two workers, but spent almost three times more on new labor saving machinery. The Times attempts to draw from this example some larger societal and economic points:

  • American workers just can’t compete with Chinese and other low cost foreign workers.
  • Since the recovery began, equipment prices have declined 2.4% while labor costs are increasing about 6.7%.
  • The four newly purchased machines mentioned in the article all come from foreign suppliers.
  • Much of the labor cost increase arises from increasing health care costs and other benefits.
  • Hiring has hidden costs:  including days spent culling the resumes of unqualified applicants.
  • Many applicants lack basic writing, mathematical, technical or computer skills.
  • New employees must go through a federally required safety program, be drug tested at a cost of $150 and require ongoing training, which diverts management from other work.
  • “You don’t have to train [or drug test] machines.”  Generous depreciation allowances and tax credits favor investment in machinery rather than people.

I would argue that The Times article misses one key point, zero interest rates.  Holding interest rates at artificially low levels further encourages equipment purchase rather than new employment.

Complete Lack of Journalistic Insight?

The Times has an amazing lack of self awareness.  Perhaps reporters and editors forget their own editorial stance on key issues:

  • Free Trade – We were implored by The Times to support free trade and open our borders to foreign goods.  These goods are often produced by workers earning less than a dollar a day without employment, safety or environmental protections. How could American business hope to complete with this?
  • Economic Stimulus – Among other incentives, The Times has advocated liberal tax breaks for equipment purchases.  Is it surprising that employers indeed invest in labor saving equipment?
  • Zero Interest Rates – Krugman and other Times editorial and op-ed writers have favored Bernanke’s zero interest rate policy.  With ultra low borrowing rates, of course employers purchase equipment rather than higher cost labor.
  • Obamacare – Once again, The Times has supported a government initiative that effectively has put a stranglehold on employer benefit costs.
  • Other Pro-Worker Legislation – The Times has long promoted employment and labor law reforms which make hiring expensive: The Family and Medical Leave Act, The Americans with Disabilities Act, The Older Workers Benefit Protect Act all have hidden costs which make hiring unattractive.  Couple that with attempts to expand union involvement, and employers are compelled to favor machines over people.

Late to the Party Again

Once again, the pre-eminent New York Times is not reporting the news, but rather restating the obvious. Why have they missed another major economic trend?  Their reporters are smart but ideological.  They are ideologically and emotionally wedded to Keynesian nostrums of economic stimulus and ultra loose monetary policy.  If instead they took a holistic view of what is happening in the real economy, following real business people making real hiring and investment decisions, they would be forced to reassess their adherence to old and dubious politics and theory.

If The Times is about all the news that’s fit to print, it should be least be subjected to  intellectual rigor, and critical and honest thinking.  And let’s not forget timeliness; do we really need to clutter Page One with what we already know?

 

 

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20
Dec 10

The Dignity of Work

Then:  Bosses and Workers

During a tour of his new automated plant, a famous exchange took place between auto maker Henry Ford and Walter Reuther, president of the United Auto Workers:

Ford: “Well, Walter, how are you going to get these machines to pay union dues?”

Reuther: “But Henry, how are you going to get them to buy cars?” Quotes

One of my college jobs was working for my university’s Labor Education Center.  Many of the faculty members were ex-UAW officials.  These men had witnessed the bloody organizing campaigns at Ford and other manufacturers.   After law school and clerkship my first associate’s job was with a small law firm representing unions. I confess to a bit of a soft spot for the old time labor unions that looked out for the welfare of the working man.  Unfortunately, in their current incarnation unions deliver less protection to workers, and arrogate more power unto themselves.

The director and senior professor of the Labor Education Center began as a factory worker, became a union organizer and earned a doctorate.  He was dedicated to the education of workers and union leaders.   A valuable lesson he taught was the simple dignity of work, regardless of status, pay or title.  A working person possessed a quiet and mostly unsung nobility:  producing a decent day’s labor, supporting a family, being a role model for his or her children, contributing to community.

I remember once being in the hallway of the Labor Education Center chatting with another student intern.  A janitor was cleaning the hallway. The director, by this time my valued mentor, walked up to me and said, “if you cannot help this hardworking janitor, at least get out of his way.”

Now:  The Reality of Unemployment

The most recent new claim number for unemployment is 427,000.   Despite the media spin of an improving job market, this still connotes a troubling and recessionary employment level.   Missing from the media coverage is that 893,000 workers moved into the extended unemployment coverage category.   In Who’s Lying, James Quinn deconstructs the government’s employment statistics:

The number of Americans employed over the last few years is as follows:   2007 – 146.0 million,  2008 – 145.5 million,   2009 – 139.9 million,  2010 – 138.9 million.

It seems there are 7.1 million less employed people than there were three years ago. Contrary to the spin from the White House, there are 1 million less people employed today than during the horrific 2009 year.  Luckily, another 6 million people left the work force, or we’d really have a problem. The truth is that if the government actually counted everyone in the country who wants a job, the unemployment rate is not 9.8%, but 23% and it continues to rise. Who’s Lying, See also Shadow Government Statistics.

Losing Our Way

In the employment arena America has lost its way.  We have focused on short term profits to the detriment of the long term welfare of our society.  Outsourcing and layoffs have been the means to achieve short term performance.

Corporate human resource departments once protected and educated their employees.  In the modern world human resource departments view employees as adversaries: costly, demanding and ungrateful.  Few employees today believe corporate sloganeering that employees make the key competitive difference in the marketplace.

Government policy is less than supportive of hiring.  The morass of workplace rules, tax policy that favors off shoring and outsourcing, and expensive health care mandates are all disincentives to hiring.

An effective 23% unemployment rate denotes a troubled and unfair society.

We have forgotten the simple dignity of work.  Even worse, we have forgotten how to respect the simple and mostly unsung work of others.  The Reuther-Ford conversation resonates today:  if we keep laying everyone off, who will buy our cars?

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6
Sep 10

Labor Day 2010

In an earlier and different time in America, Labor Day was celebratory, a transition from the leisurely light-hearted summer to the more serious autumn, and a return to the busy rhythm of school.   This year, Labor Day is a grim reminder of an American economy that cannot produce new jobs.  How did we get here and how do we get out of this mess?

Lies and Statistics

Friday, the stock market rallied on a better than expected unemployment report.  But behind the statistics there was little reason for optimism.  Mike Larson of Money and Markets analyzes Friday’s Labor Department report:

  • The economy shed another 54,000 jobs in August after losing a similar number in July and 175,000 in June. If you strip out the impact of the Census, you see that private industry created a paltry 67,000 jobs last month. That’s far, far too low to bring down unemployment.
  • Speaking of unemployment, it rose to 9.6 percent in August from 9.5 percent in July, a three-month high. And if you include all unemployed and UNDERemployed workers, you get a whopping 16.7 percent of American workers who are discouraged, only able to find part-time work because full-time work isn’t available, and who have just given up looking entirely!
  • Then look at who’s hiring and who’s not! Education and health care continues to see reasonable growth, with 45,000 jobs added. But hiring health care workers to take care of an aging population isn’t going to drive your economy long term. See America’s Unemployment Nightmare

The problem is that higher paying economic sectors are either not growing or continuing to lay off workers:

Economically sensitive sectors are showing virtually no growth, with only 13,000 jobs added in leisure and hospitality and 19,000 in construction. Manufacturing shed 27,000 workers … trade and transport lost 9,000 jobs … and financial firms cut workers for the fourth month in a row. In fact, the “diffusion” index which tracks how many industries are adding jobs versus how many are cutting jobs sank to 53 from 56.7.

And let’s step back and look at the big picture for a minute. We’ve added just 650,000 jobs in the first seven months of 2010. We lost 8.4 million jobs in the recession that started in December 2007. It would take several YEARS to get back to even at this pace. See America’s Unemployment Nightmare

A Look at the Real World

Much reporting of the Great Recession (Depression) comes from New York, Los Angeles or Atlanta based media.  Few of these outlets examine what is really going on in most of the country. Michael Panzer in Financial Armageddon looks at who is really being hurt:

  • Two million workers over age 55 are looking for work.  Over a million have been out of work for six months or longer.  The unemployment rate in this age group is 7.1%, the highest rate since the 1940’s.
  • A sector of the work force denominated as “middle-skill, middle-wage” has been decimated.  These are entry level white collar jobs such as administrator or secretary, or blue collar jobs such as assembler or machine operator.   Instead of finding good paying jobs, these workers are taking massive pay cuts to work as wait staff or other service personnel, or health aides in homes or health care facilities.
  • Among young blue collar workers employment has fallen 18%.
  • Middle class and upper middle class managers and professionals are seeking assistance from social service agencies due to unemployment or underemployment.   Former donors to these agencies have become recipients of their services.
  • A recent Rutgers study found “that 73% of Americans have either been unemployed themselves (14%) or saw an immediate family member (12%), another member of their family (30%) or a close friend (17%) lose a job.” See Another Installment of ‘Scenes from a V-Shaped Recovery’

Why Intractable Unemployment?

Explanations of “we couldn’t see this coming” or “it was just bad luck” mask several reasons for our current state of unemployment:

  1. Technology is a “game changer.”  Technology will replace many lower skilled administrative and manufacturing jobs (postal workers, telephone operators, computer operators, etc).  See e.g. 23 Occupations That Will Never Recover from the Great Recession
  2. Outsourcing – Closely allied to technology is the outsourcing of jobs to other countries.  With high speed telecommunications, sophisticated software, larger faster ships and lax foreign labor and environmental standards, American companies will continue to outsource jobs.
  3. Financial Excess- The combination of financial engineering of mortgage back securities,  subprime loans and a zero interest rate policy misallocated capital to the housing sector.  With the inevitable housing bust, we destroyed construction jobs and supporting professions such as law, mortgage banking, appraisal, insurance brokers and real estate brokerage.  Moreover, until bad debt is completely recognized and restructured or defaulted upon, the banks will continue limiting new loans.
  4. Government Policy – Small business owners are the growth engines for new jobs.  Faced with new health care mandates and the prospect of heavy fines, new business owners are reluctant to expand.  A full description of the problem is outlined in “Angel Heart” and Obamacare.

Many of these issues were identified in The New Reality: Permanent Job Loss and Why This May Be Worse than the Great Depression.

Wall Street spokespeople and the Obama Administration have been less than candid with the American public about what the real prospects are for reducing unemployment.  While there is a certain inevitability about technological progress, poor government policy is not necessary.  We need to stop some of the self-inflicted wounds of zero interest rates, poor tax policy, wasted stimulus and new mandates, all of which impede economic growth and stymie new hiring.

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2
Sep 10

The Economy at Street Level

While we have examined macroeconomic issues extensively, rarely do we focus on the micro. We need to look at what is happening to real people.  Examining economics at street level is not as scientific or as mathematically precise as our econometric brethren would be.  We would probably fail the basic intro econ course at a prestigious academic institution.  Nevertheless, the timeless philosopher, Yogi Berra, says it well: “you can observe a lot by just watching.”

Walking

The best way to learn what is going on somewhere is to walk, not drive.  I live in a small city, a bedroom community for a larger city.  The median family income is $62,000 and the per capita income $35,000.  The city is racially diverse and attempts to cater to its upscale resident consumers.  Dropping my car for service at the local auto dealer (there are Porsche, Volvo, Mercedes, Lexus, Subaru and Buick dealers within walking distance),  I politely declined the courtesy shuttle and, to observe business conditions, walked home.   Covering about a mile through one part of our retail  and commercial district, I observed the following:

  • Ten retail establishments were vacant.
  • Each of several small office buildings had “space available” signs.
  • Each of the apartment buildings and garden apartment complexes I passed advertised one and two bedroom apartments for rent.
  • An office building which started construction six months ago has not progressed.
  • Almost every retail establishment had sales in progress, and restaurants advertised specials.
  • A major wind and rain storm hit our city in March.  Several damaged city trees have not been removed and badly buckled sidewalks have yet to be repaired.

Listening

The economy continues to impact friends, neighbors and family.  Here is what the Washington beltway political elites are not hearing:

  • One question, I regularly ask: on a percentage basis how much has your income declined from your most recent peak earnings year?  Other than one medical specialist who said his income has not declined, the response is a decline of 25-50%.
  • For an over-fifty executive, attorney, senior information technologist or finance specialist the job prospects are almost nil.   These are highly trained, experienced competent individuals who have been out of work from one to two years.  Unarticulated age discrimination is endemic in our system.  This type of candidate probably has a better chance of getting hit by a meteorite than getting a full time position with a firm.
  • Sending a high school senior to the state university has come back in vogue.  In the past, State U lacked the cache of the Ivy League or better private schools.  Suddenly this option has gained new luster.
  • Instead of the direct path to graduate school, new college graduates, even Ivy League grads, are scrambling for jobs.  Many new alumni of prestigious universities are interning with no pay or $10 per day stipends.  The entire economic value of graduate and even undergraduate degrees is under question.
  • Overseas vacations are out and domestic, and automobile vacations are in.  And we’ve all recently heard a new word:  staycation.
  • Since the banks have tightened lending requirements, the re-sale house market is virtually dead.  Sellers cannot find qualified buyers.
  • Small business owners and professionals have had their credit lines reduced, which de facto has cut back on business expansion.
  • Friends who are doctors and dentists are finding that they cannot fill their weekly schedules and are going to 3 and 4 day workweeks. Even in large firms, attorneys are having difficulty generating billable hours.
  • Home equity lines have been slashed, further undercutting spending plans.  I question why some of my high earning friends were using these lines for luxury expenditures in the first place.

It May Not Be Science but It Is Real Life

Again I have presented “street level” anecdotal information on the real economy.  I believe this anecdotal information more accurately presents the state of the economy, compared to the endless cheerleading from financial media and the Administration.

Perhaps some of the elite should bring their own cars in for service, avoid the courtesy shuttles, and walk home.    Rather than this cheerleading, what Yogi might say about our current recession is the real truth for many people: “it ain’t over until it’s over.”

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26
Aug 10

Artificial Sweeteners Turn Sour

Last week in Artificial Sweeteners we discussed how government intervention has distorted the economy, the stock market and the housing market.  The basic thesis:

Excessive economic stimulus and a misguided zero interest rate policy has created false bottoms in the housing and stock markets.   See Artificial Sweeteners

Dour economic statistics released this past week only confirm that thesis.  While extrapolating from one month’s statistics is dangerous, nevertheless the numerosity and interrelated nature of recent reports raises questions whether there ever was an economic recovery.

Scanning the Headlines

The past week we have been bombarded by negative economic reports from housing to employment to durable goods.  A quick look at the headlines:

The Super Sweetener

The Congressional Budget Office calculates that stimulus added 4.5% to GDP.  Further, these programs created up to 3.3m jobs.   One estimate is that without stimulus, GDP would have been negative 3.5%.   What happens next?

So now that the stimulus is tapering off, America has the following rather unpleasant things to look forward to: a 4.5% reduction in run rate GDP as the direct economic boost disappears, the gradual loss of 1.4 to 3.3 million jobs, and the eventual realization that non-recurring, one time items can not be projected into perpetuity, despite what Keynesian dogma may preach. See CBO Estimates that Stimulus Boosted Q2 GDP by 4.5%, Standalone Number is likely under around -3.5%

Shoveling Money to No Avail

Morton Zuckerman captures the folly of current economic policy:

Tons of money have been shoveled in to rescue reckless banks and fill the huge hole in the economy, but nothing is working the way it normally had in all our previous crises. See End of American Optimism

All we have created is a “new normal” of slow or little growth. Compared to sales growth of 4% in past recessions, sales are increasing at a little over 1%.

…there are at least 14.5 million Americans still searching for work: 1.4 million of them have been jobless for more than 99 weeks, 6.5 million have been jobless for over 27 weeks. This is a stunning reflection of the longer-term unemployment we are coping with.

The unemployment numbers are worse than reported. Last year the Labor Department admitted it over-counted the number of jobs by 1.4 million….

Since April, the Labor Department has counted 550,000 nonexistent jobs under this so-called birth/death series. Without these phantom jobs, the economy this year created virtually no jobs—certainly not the 600,000 the administration has been touting.

The Obama administration projects the unemployment rate will drop to 8.7% by the end of next year and 6.8% by 2013. That is totally unrealistic. See The End of American Optimism.

A policy of artificial sweeteners has misled the American public and merely put off the day of reckoning.  Trillions of stimulus dollars have masked underlying weakness in the American economy.  Instead of these sweeteners, banks should have been forced to write off bad debt, insolvent firms should have gone bankrupt, government interference in the economy should have dwindled,  and programs increasing employment costs should have stopped.

If the economy were permitted to self correct, we would be on our way to recovery rather than be suffering the sour aftertaste of artificial sweeteners.

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5
Aug 10

Zero Interest Rates Equals Zero Jobs

Following World War II, typical economic downturns and recoveries have been “V” shaped.  That is, a sharp downturn in Gross Domestic Product and rising unemployment followed a quick turnaround in both economic activity and employment numbers.   This time is different.  We are witnessing zero or negative job growth and an anemic recovery.

Today’s situation is a different animal: a balance sheet recession.  Both businesses and individuals took on too much debt. And that debt was unsupported by income.  We are now saving to pay down that debt (the most recent savings rate increased to 6.4%), or defaulting on obligations (in May home foreclosures rose 44% to a new record).

Paradoxically, second quarter earnings demonstrate that corporations are beating earnings estimates and reporting healthy profits.   Gluskin, Sheff reports that

…78% of the companies reporting have beaten estimates and earnings per share are up 42% year over year versus initial expectations of 27%.

Companies have focused on tight cost controls to achieve these results.  The most recent durable goods report provides a clue to how costs are being controlled.

Orders for non-military capital equipment excluding aircraft climbed 0.6 percent last month after jumping 4.6 percent in May, more than previously reported, figures from the Commerce Department showed in Washington. See Second Quarter Earnings: Companies Beat But Investors Shrug

Looking further, we see we are in a jobs depression. Karl Denninger slices through the obfuscatory government data and finds that from July 2009 to July 2010 unemployment is 17% worse. See Watch the Birdie (Jobless Claims). After trillions of dollars of stimulus and guarantees and a zero interest rate policy, all we have to show for the effort is zero, or negative, job growth.

My strong suspicion is that management is substituting capital for labor.

A Brief Anecdote

One of my friends is the cost cutting guru for his company.  Always on the lookout for new labor saving technology, he found a type of packaging machine that could replace five employees currently performing the function manually.  His view is that labor saving technologies are the only thing preventing the economy from crashing.  By laying off those five employees, the machine pays for itself in two years or less.

On the other hand, employees unionize, get sick, go on vacation, file worker’s compensation and discrimination claims, and go out on pregnancy and family medical leave.  As an employer, machines suffer none of these disabilities.  Substituting capital for labor is firmly rooted in all corporate cost cutting strategies.

Unintended Consequences

With Obama, Bernanke, Geithner and Summers setting economic policy, I always feel it is improvisation night.   This team seems to bounce from one economic policy to the next with little thought given to unintended consequences.

-          Zero Interest Rates – I have written about the pernicious effect of zero interest rates on savings, especially for senior citizens.  See e.g. Is the Administration Determined to Make the Elderly Poor? Nothing from Nothing.  However, the upside is that low interest rates encourage the creditworthy to borrow for capital investment.  For example, IBM was able to borrow at 1% for 3 years.  If you can purchase labor saving machines with low interest rate loans and tax depreciation savings, why not?

-          Expensive Social Programs – Ignoring high levels of unemployment and economic stagnation the Obama Administration pushed ahead to pass health care reform.  The law does not apply to businesses with less than 50 employees.  The perverse effect is obvious:

…potential tax penalties for employers with more than 50 workers could cause many smaller businesses to rethink any hiring or expansion plans.

“It could have a negative effect on hiring as businesses figure out just how much the new law and offering health benefits will actually cost them,” many … small business clients have kept their staffs below 50 workers to avoid the complicated compliance requirements of laws such as the Family and Medical Leave Act.

“The new tax penalties for businesses with more than 50 employees will certainly make many business owners think twice about expanding and hiring more people….”  See Small Businesses Ponder Impact of Health Care Reform

Add in the threatened expansion of unions through the Employee Free Choice Act and no wonder large and small businesses are reluctant to hire.

Machines Make Better Employees

At its core, the Democratic Administration has failed in its campaign promises to reduce unemployment and get the economy back on track.  Through its zero interest rate policy the Federal Reserve and the Administration have “manufactured” our current high unemployment rate.  Today’s jump in new unemployment claims, to a weekly rate of only emphasizes the point. See Weekly Initial Unemployment Claims Increase to 479,000

The net effect is that machines provide better value than employees.  The labor market has structurally changed and not for the better.  Zero interest rates coupled with zero forethought is harming the working population.

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1
Mar 10

Labor and Employment Laws: The Hidden Job Killer

When we ignore government sleight of hand, the real number of unemployed Americans is a staggering 26.9 million.  In For 15 Million Unemployed any Job is a Good Job; Questions for Pollyannas; Wishes Aren’t Fishes, Michael Shedlock (“Mish”) continues his excellent analysis of the unemployment situation.  Contrary to Bernanke and Obama Administration rosy projections, Mish predicts that official unemployment will remain greater than 9 % through 2015.  In a quote from Allen Sinai, chief global economist for Decision Economics, Mish describes corporate hiring behavior:

American business is about maximizing shareholder value…You basically don’t want workers. You hire less, and you try to find capital equipment to replace them.

Workers are expensive. Federal, state and local employment laws make them more so.

New Deal Labor Legislation

In the late 19th and early 20th century, rapid industrialization resulted in powerful owner/capitalists, virtually powerless workers, and deplorable working conditions.   Upton Sinclair’s The Jungle dramatized the deplorable state of affairs in the meatpacking industry.  In reaction, in 1935, Congress passed the Wagner Act to permit union organizing. Then it enacted the Fair Labor Standards Act to establish minimum pay, limitations on hours and pay for overtime work.  Perhaps labor legislation should have stopped at that point.

Nothing Succeeds Like Excess

New Deal labor legislation was just a springboard for greater federal control over the workplace.   Since 1964, there has been a flood of labor and employment legislation and Executive Orders.

  • The Civil Rights Act prohibits race, color, religion, sex or national origin and pregnancy discrimination.
  • The Age Discrimination in Employment Act prohibits age discrimination.
  • One Executive Order prohibits all forms of discrimination and requires affirmative action.  This includes training and outreach programs and other positive steps which must be incorporated in written personnel policies and a plan which must be updated annually.
  • The Equal Pay Act requires that men and women in the same workplace be given equal pay for equal work.
  • The Americans with Disabilities Act prohibits disability discrimination. The Rehabilitation Act requires most federal contractors and subcontractors to take extra measures to hire and promote qualified disabled individuals.
  • The Occupational Safety and Health Act requires employers to meet legal health and safety standards.
  • The Employment Retirement and Income Security Act (“ERISA”) sets uniform minimum standards to assure that employee benefit plans are established and maintained in a fair and financially sound manner.
  • The Workers Adjustment and Retraining Notification Act requires that covered employers provide notification sixty days before a plant closing or a mass layoff.
  • The Family and Medical Leave Act provides covered employees with entitlement to up to 12 weeks of job-protected, unpaid leave during any 12 months for the following reasons:

-Birth and care of the employee’s newborn or adoption or foster care of a child

-Care of an immediate family member (spouse, child, parent) who has a serious health condition

- The employee’s own serious health condition

These are the major pieces of federal labor and employment legislation, but there are additional enactments regulating the employment relationship.

Since we live in a federal system, state and even municipalities impose additional employment, benefit and labor obligations.  Moreover, the courts have intervened to create doctrines such as wrongful discharge to limit an employer’s right to dismiss an employee at will.

Real World Consequences

Much of the above legislation is grounded in noble sentiment: workplace fairness and employee protection.  But there are real world consequences: a loose definition of “serious health condition” allows employees to take large unpredictable amounts of time off, harming production schedules.  Affirmative action programs require lots of staff and recordkeeping, extra recruitment and training, and slower hiring.  ERISA imposes fiduciary liability on plan sponsors. With virtually every workplace sector protected, firing an employee is difficult, with the ever present danger of a discrimination or retaliation charge. And so the American workplace is now one of the most regulated areas of our economy.

Laws are often a hidden tax. See Ask Your Congressional Representative to Do Nothing.   Allen Sinai has reached the correct conclusion: why hire expensive workers who have a host of protections and entitlements when you can substitute cheaper capital (automated machinery, robots, computers, etc)?  In a globalized economy where a highly motivated, well-trained Chinese worker makes about $1 per hour, the over protected American worker may have priced himself out.

If the Obama Administration is serious about reducing the unemployment rate, it should be thinking about shelving expensive health care initiatives and the Employee Free Choice Act.  More employer cost will equal less American employment.

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2
Dec 09

Thinking About Jobs

Now that the US is mired in a recession and unemployment is more than 10% (and functionally more than 17%) it is worth thinking about jobs.  I worked for large corporations, a state government and a law firm for more than 35 years.   I also had the generational “good” fortune to graduate and be a job seeker during deep recessions.  I was always relieved and thankful when I was hired for a position. The way I expressed my appreciation was to “work my tail off” for my employer.  Working more than 60 hours a week, nights, weekends and much of my vacation time were the norm.  I often figured if I was not smarter than my co-workers, I at least could come to work prepared and outwork them.  Plus, I kept Woody Allen’s wisdom in mind: “eighty percent of success is showing up.”

Sadly, my attitude toward a job was not the norm.  I was always amazed at how casually some of my colleagues approached their work: often coming in late, exercising in the company gym for several hours mid-day, leaving early, never missing a child’s soccer match or play (I actually have regrets on this one), arranging vacations wherein they could not be reached, constantly complaining about pay, bad bosses or workload inequities.  A job had become an entitlement. Gratitude for their good fortune at being employed, often in high level positions, was sadly lacking.

Jobs as Annuities

In a world of zero interest rates, it is worth looking at employment in another way.  Until the current recession, a job was often a 20-30 year annuity within a large corporation. Better than a real annuity, the employee did not have to part with a large sum of money to purchase this “work annuity.”  The only entry fee was a best effort in performing the job.

Now, let’s use the annuity model to value a job. Thus, if one is paid $100,000 a year (a relatively low salary in corporate law) and applies a 1% interest rate (an amount lower than the 2-year Treasury note) one would need to invest a principal amount of $10m dollars to replicate a $100,000 income stream.  Even if the 10-year Treasury bond is used as the benchmark, which is now yielding approximately 3.3%, one would need to invest a principal amount of about $3m. Of course, I am simplifying the model and leaving out actuarial factors.

Implications

This analysis highlights and suggests a whole different paradigm of job behaviors.  Jobs are incredibly valuable.  Perhaps, the new American employee might want to work harder, they also might want to emulate the Japanese custom (oseibo/ochugen) of thanking their supervisors for being employed and bringing them gifts.  Second, this illustration explains why employers are unwilling to hire.  Zero interest rates do not exist in a vacuum, they signal a zero or negative growth economy.  It also signals very low returns on labor and capital.  Third, exacerbated by outsourcing and international wage arbitrage, it is not surprising to see employers actually reducing compensation.

Conclusion

The self reinforcing cycle of expanding credit, wages, corporate earning and GDP has come to an end.  The workplace is going to get a lot tougher before the good old days return, if the ever do.  Employees might want to be looking for that special gift for their employer.

‘Tis the season.

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13
Nov 09

The New Reality: Permanent Job Loss

On November 12, 2009, weekly initial reported jobless claims were announced as 502,000. While an improvement from last week initial jobless claims have remained over 500,000 per week for all of 2009.  In response to these continuing dreadful unemployment numbers President Obama announced a job summit to be held in December:

Obama said the White House forum will gather CEOs, small business owners, economists, financial experts and representatives from labor unions and nonprofit groups “to talk about how we can work together to create jobs and get this economy moving again.”

“We all know that there are limits to what government can and should do, even during such difficult times. But we have an obligation to consider every additional, responsible step that we can take to encourage and accelerate job creation in this country,” he said.

Marketwatch, November 12, 2009

By employing classic Keynesian remedies, the White House hopes that the right level of stimulus will overcome economic realities and persuade employers to resume large scale hiring. But, the President and his advisers have missed the basic structural changes in the job market.

Breakfast with Dave

In his letter Breakfast with Dave, David Rosenberg one of the most perceptive practicing economists currently writing, discusses the new labor market paradigm:

There are serious structural issues undermining the U.S. labour market as companies continue to adjust their order books, production schedules and staffing requirements to a semi-permanently impaired credit backdrop. The bottom line is that the level of credit per unit of GDP is going to be much, much lower in the future than has been the case in the last two decades. While we may be getting close to a bottom in terms of employment, the jobless rate is very likely going to be climbing much further in the future due to the secular dynamics within the labour market that need to be discussed

The Big Picture- US Unemployment Rated Headed for 12-13%

Rosenberg points out the unique aspects of this recession.  There has been a structural change where 6.2 million jobs have been permanently eliminated.  The workweek has been reduced to 33 hours per week.   Employers will avoid hiring well into the future, choosing instead to lengthen the workweek.  In a slow top line growth environment, this trend will be exacerbated as companies will be forced to continue slashing labor costs.

Rosenberg is validating the basic thesis in my prior blog entry, Why This May Be Worse than the Great Depression:

The government is still stuck in a 1950’s employer mentality.  Can we implement New Deal-type of public improvement efforts such as road repair or retrofitting government buildings?  How many credit derivative specialists have the ability to perform road paving or asbestos removal?

Similarly, the government is banking on new industries to be engines of growth. Is banking on this type of job growth realistic?  High growth industries such as biotechnology and solar cell companies employ few and highly specialized employees.  Even the modern US military needs fewer soldiers, as technology has revamped war.

The Great Depression ended when large numbers of employees were recalled by auto, steel, chemical and rubber companies to support the war effort.  There is no massive recall or even new industry on the horizon to absorb the unemployed.

Politicians Continue to Fight the Last War

Government intervention has its limits.  The Administration has not convinced banks to lend in the face of poor credit conditions.  To maintain profitability, companies have focused on controlling labor costs. Despite the upcoming jobs summit, the Administration will be equally ineffective in fighting the tide of this new reality: basic structural unemployment.

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