Tuesday, April 16, 2013

Thinking About Employment: Why Aren't Employers Hiring More People?

I want to return to this chart from MacroBlog:

Here is an explanation of the above chart from Macroblog:

The circle at the perimeter of this chart represents labor market conditions that existed just before the recession. We have dated this as late 2007. The inner circle represents the state of affairs when payroll employment reached its trough in late 2009. The oddly shaped red figure inside the perimeter depicts where each of the indicators was in March 2011 relative to the benchmarks. The purple figure depicts the state of the labor market in March 2012. Finally, the blue figure shows where the indicators were as of March 2013. All of the indicators are scaled so that outward movement represents improvement. The progression of these point-in-time snapshots provides us with a picture of how labor market conditions have evolved over the past four years.

As you can see, substantial improvement has arguably been achieved in the leading indicator series. As a group, these data points are approaching their prerecession levels. Employer hiring behavior and confidence are slowly moving outward but remain quite weak relative to their prerecession benchmarks. Finally, the labor utilization measures are very weak and, notably, have hardly improved at all over the past two years.

As I previously mentioned, I think this is the best chart on employment out there, largely because it shows how complicated this concept is.  Unfortunately, we (Bonddad Blog included) tend to only focus on two employment statistics: weekly unemployment claims and the monthly jobs report.  And the monthly jobs report has become subject to a fair amount of political skew at the expense of actual analysis.  In contrast, the above chart recognizes there are numerous factors and statistics that go into a full interpretation of the jobs market and what is actually happening. 

As the writers at MB note (see above), the leading indicators in the above chart are good.  Temporary hires are rising and initial claims are dropping.  These two numbers are a big reason why many people (myself included) have been bullish about the jobs market.

However, there is a fair amount of data that suggests that bullishness is not warranted -- or at least, should be pretty severely tempered.  The reason for this is twofold with the first number being employer behavior as measured in the JOLTs survey.  First, let's get an overview for what's involved with JOLTs:

The Job Openings and Labor Turnover Survey (JOLTS) produces monthly estimates of job openings, hires, quits, layoffs and discharges, and other separations. JOLTS data help measure the demand for labor (employers' need for employees) and track the health of the economy.

So, as the MB graph notes, this survey shows what employers are doing (not what they're saying) on the employment front.  In short, it shows us demand for labor.

Consider this chart of total job openings:

First -- there isn't a lot of data here to compare the current totals to.  While that is a shortcoming, at least we have something.

Second, here's a definition of job opening (the variable being measured above) from the BLS Glossary: A specific position of employment to be filled at an establishment; conditions include the following: there is work available for that position, the job could start within 30 days, and the employer is actively recruiting for the position.

As the chart shows, the total openings dropped sharply as a result of the great recession, with total openings falling to ~2 million.  This is 800,000 below the lowest level of the previous expansion, which was preceded by a fairly mild recession.  (It should also be noted that the jobs market in the previous expansion was also pretty weak; for the first few years it too was also referred to as a jobless recovery). 

The number increased from the end of 2009 to 2012.  However, the number didn't hit the 2.8 million level (the lowest point from the previous expansion) until midway through 2011.  So, the current expansion was far weaker than the previous expansion (which was also very weak) for the first three years of the current recovery.

That leads to the question: why do we have this weakness in the JOLTs job opening survey?  For that answer, we have to turn to the National Federation of Business' small businesses monthy business survey, and most importantly, this chart:

I've drawn three vertical red lines: one that corresponds to the beginning of 2009, 2012 and 2013.  Notice that for three consecutive years -- 2009, 2010 and 2011 -- sales were the single most important problem facing businesses.  Also note that the level  for "sales" being the biggest concern among employers during this expansion was far higher than this statistic had been reading for the entire history of the data series going back to 1986.  Additionally, the current level for the sales response (which is the lowest for the current data series) is just below the highest it's achieved at other times (1992 and 2003).  This indicates that sales (or the lack of it) is still a huge concern for small business and provides a fairly big reason why job openings are low and why they stalled last year.  

In addition, we have this chart from the same survey:

First, the issue of regulation has been the "single most important problem" for businesses since 2010.  I would guess that a fair amount of this has to do with the Affordable Care Act.  However, let's add a few caveats to that observation.  First, only 20% of firms are citing regulation -- meaning for 80% of the companies out there (a big and vast majority) regulation isn't the single biggest issue.  Secondly, during the previous expansion (the early 2000s), the biggest concern was insurance -- or, more specifically, health insurance (for more information on this, please see the Kaiser Family Health Care Foundation's website).  Piecing this information together into a coherent picture, we see that health insurance in general has been the biggest issue for the last 10+ years, with costs dominating concerns in the early 2000s and the implementation of the ACA leading concerns over the last three years.

In addition, before the political right steps up with their typical health care hyperventilating, they should remember that the individual mandate -- which is at the heart of the ACA -- was actually their idea:

The mandate made its political début in a 1989 Heritage Foundation brief titled “Assuring Affordable Health Care for All Americans,” as a counterpoint to the single-payer system and the employer mandate, which were favored in Democratic circles. In the brief, Stuart Butler, the foundation’s health-care expert, argued, “Many states now require passengers in automobiles to wear seat-belts for their own protection. Many others require anybody driving a car to have liability insurance. But neither the federal government nor any state requires all households to protect themselves from the potentially catastrophic costs of a serious accident or illness. Under the Heritage plan, there would be such a requirement.” The mandate made its first legislative appearance in 1993, in the Health Equity and Access Reform Today Act—the Republicans’ alternative to President Clinton’s health-reform bill—which was sponsored by John Chafee, of Rhode Island, and co-sponsored by eighteen Republicans, including Bob Dole, who was then the Senate Minority Leader.

So, returning to the complexity of the job market, we see employers holding back from hiring because of weak sales, and to a lesser extent, the ramifications of the ACA. 

Let me add a few points. 

1.) Lack of sales is still a big issue for businesses.  The readings for this statistic are still very high, especially when considered relative the peaks of this statistic in other recoveries.  Put another way, concern about sales was the highest its been since 1986 for the years 2009-2011, and is still elevated by historical standards.

2.) The issue of health care is interesting.  It has clearly been one of the dominant concerns of businesses over the last 10-15 years and for understandable reasons.  The situation before the ACA was unsustainable; prices were increasing to the tune of 8%+ per year.  But this level of increases is going to cause concerns for any businesses.  At the same time, change in the form of a solution to this problem brings with it an entirely new set of anxieties, largely centered around the compliance issue -- how will this law be implemented and how do I make sure I'm following the law?  And remember -- this is a complex law where regulations are still being written (and will be for the foreseeable future).