Archive for August, 2019

Benchmark Blues: BLS to Cut 0.3%, or 501,000 jobs, from 2019 levels

The extrapolation methods used by the Bureau of Labor Statistics in producing their monthly estimates (their word) of nonfarm payroll growth can obscure cycle turns, which is why it is important to pay attention to the annual benchmark, derived from the Unemployment Insurance filings mandated by federal law that cover 97% of the NFP universe.

The rule of thumb at the BLS is that if the benchmark falls between +/-0.2%, the average of the last 10 years, everything is copacetic, but if it exceeds that there is real information there. This morning the BLS released the preliminary benchmark for 2019 and, unfortunately, there is information there. The overall employment level is slated to be taken down by -0.3% or 501,000 jobs when it is made formal in January 2020, and in the private sector -0.4%, or -514,000 of the jobs previously estimated will be benchmarked away.

Largest losses are in logging & mining, -2.2%, or a scant -16,000 jobs, leisure & hospitality -1.1%, a not-so scant -175,000 jobs, retail trade -0.9%, or -146,400 jobs, professional/business services, -0.8%, or -163,000 jobs, and wholesale trade, -0.6%. Transportation & warehousing will be revised up 1.4%, or about 80,000 jobs, information 1.2% or 33,000 jobs, and government 0.1%, or 13,000 jobs. That’s it for the plus signs.

As you can see on the table, this is both out of trend, and the largest negative benchmark since the 2010 decline in the aftermath of the great recession.

Dwindling Labor Share

Here we revisit a familiar topic: the decline in the labor share of national income. We were prompted to revisit by a recent post to the St. Louis Fed’s website with the provocative title “Capital’s gain is lately labour’s loss” (Anglo spelling in original). It draws on the work of Loukas Karabarbounis and Brent Neiman (KN), which we’ve also discussed, though mostly in passing. KN’s data runs only through 2012; the St. Louis Fed post draws on their in-house FRED database to update it through 2017 for five major economies.

The declining labor share is interesting for several reasons. For decades, most economists assumed the share to be constant, which makes it far easier to develop economic models of production functions and economic dynamics. But the labor share is not constant. In their examination of 59 countries with at least 15 years of data between 1975 and 2012, BN found 42 with a declining labor share, measured against corporate value-added. A major reason is the declining cost of investment goods; the St Louis researchers present a series showing a near-relentless decline in the price of capital goods vs. consumer goods since 1948, with an acceleration in the 1980s. (The average decline from 1948 through 1979 was 1.6%; from 1980 to 2016, 2.6%.) That makes it easy to substitute capital for labor, to the detriment of labor’s share.

The extension of the data for the five years doesn’t change the fundamental story. The labor share in the five economies shown in the graph on the top of p. 7 was little changed between 2012 and 2017, despite sharp declines in the unemployment rates in most. You might think that a tightening labor market might boost labor’s share, but that hasn’t happened.

As the graphs above show, the declines happened to different degrees and over different intervals for the five countries shown. The declines range from 3 percentage points in the US to 8 in Canada; expressed as percentage (not point) declines, they range from 5% in the US to 11% in Canada (with the other four countries not far behind). Remember, it had been a well-established axiom in economics that this was not supposed to happen.

BN find that most of the decline in the labor share has happened within industries, so it can’t be explained by compositional changes such as the shift from manufacturing to services, which, among other things suggests things other than globalization are at work (given the varying exposure of different industries to international competition). And they also find a decline in the labor share within China, which makes it an unlikely culprit for the decline in the labor share in the richer countries.

They conclude that the decline in the price of investment goods accounts for about half the decline in labor’s share. An interesting question is what accounts for the other half. They don’t examine the effect of labor market deregulation and the declining power of unions, but those seem like worthy avenues of investigation, as they have been in other research pieces.