Understanding The Jobs Debate

Last week's terrible employment situation report has focused attention on jobs. It is a main topic for the GOP candidates as well as today's Presidential speech to a Joint Session of Congress.

Understanding this national policy debate requires a knowledge of the facts. Sadly, many of those engaged in making proposals do not understand the basics of labor economics and job creation. Let me illustrate.

The General Perception

There is a general sense of malaise that includes a number of ideas, including the following:

• The economy is dead in the water with no job creation.
• People are getting laid off in large numbers; everyone who has a job is holding on to it.
• No one can find a job.
• Employers will not hire anyone because of (choose one: health care, regulations, uncertainty, high taxes).

These misperceptions are not merely held by the public. The same message is repeated daily in financial media and then becomes part of the public policy debate.

The Reality

The basic problem is that everyone focuses on net job changes rather than on business dynamics. This is rather unique in public policy. When we discuss budget deficits, we consider both taxing and spending. When we look at a business, we consider both revenues and expenditures. [Jeff to readers -- I need a really good, graphic example of net change versus below the surface. Suggestions welcome.]

If you want to understand what is happening, you really need to study labor market dynamics. Here are some very relevant facts:

• The US economy creates jobs -- brand new jobs -- at a pace of 7 million per quarter. This is a pace of over 100K new jobs on every business day.
• The US economy creates jobs from new businesses at a pace of 1.3 million per quarter.
• The US economy is losing jobs at nearly the same rate of job creation.
• Of those leaving jobs, only 4! 3% are f ired or laid off. 50% quit and the rest retire, are disabled, or die.
• About 50 million job separations take place each year. Got that? 50 Million!
• Some businesses may respond to business-specific issues (Wall Street firms, hospitals), possibly including costs. Other businesses (entrepreneurs, railroads), respond to general economic conditions. Some (construction, retail) respond to both. There is no simple answer.

Implications

Think about the numbers that are viewed as "big news." Last week I saw pundits who gave a scale of market reaction calibrated in intervals of 50K. If net job growth had been 50K, for example, it would have been in line with expectations. 100K would have been better.

This is silly! In the first place, the jobs report has a confidence interval (sampling error only) of +/- more than 100K. Secondly, these 100K changes are very small, like the tip of a wave, when compared to the massive churning underneath the surface.

Here are four key points:

1. Understanding the jobs problem means analyzing both job creation and job loss. Both contribute. Both are important.
2. Claiming that "no one is hiring" because of various problems is simply not true. There may be an effect from regulation and taxes, but like most economic impacts it occurs at the margin.
3. Any plan must consider both the specifics of job creation (the popular public perception because it is easy to see) and the general economic envirnoment.
4. The public perception of distress is actually understated by the unemployment rate. There are about 130 million payroll jobs and we know that 50 million job changes take place each year. Very few people have "tenure" including many people who thought they did a few years ago. Twenty million or more of these changes are involuntary. Everyone has experienced a job loss, or knows someone who has.

! Investment Implications

This is a subject where understanding what is going on may not have an immediate investment payoff. No doubt the Obama speech will be criticized as unrealistic, ineffective, and something that will not be passed. The expectations bar is very low.

It would be a breath of fresh air if anyone actually showed a grasp of the principles discussed here, but it is not likely.

Here is one clue. Despite the criticism of stimulus and Keynesian policies, the market continues to react positively to any credible hint of stimulus.

A Final Thought

Here is what policymakers should really think about:

• If they could improve job creation by 10% (700K jobs per quarter) we would have robust net job growth.
• If they could improve job losses by 10% (700K jobs per quarter) we would have robust net job growth.
• Can't we find 10% either way? Or 5% on each?

The failure to think about policy this way contributes to the problem. Everyone sees it as impossible when the solution actually would require a modest change.

Sources

Background: Two relevant past articles here and here.

The BLS update using actual data from state employment agencies. No one pays taxes on phantom jobs, so we can trust this source. It is delayed by about eight months.

The BLS also reports on job openings and turnover. I was one of the first to popularize this report.