Employment & Productivity

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 (NFP) growth can obscure the magnitude of 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.

Longview: ECI

You might think a sub-4% unemployment rate would be nudging the employment cost index (ECI) higher, but it’s not.

In the first quarter, private sector compensation costs were 2.7% at an annual rate and were also up 2.7% for the year. That yearly gain was the lowest since the end of 2017. The softening was led by benefits, up 2.1% in the quarter and 2.4% for the year. Wage growth accelerated some, but still isn’t much above where it was at previous lows on the graph. And growth in overall compensation costs is also around the level of earlier lows. Wages remain the dog that didn’t bark.

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NIPA review

There were some huzzahs over the first quarter GDP number. The 3.2% quarterly rate, while still below two of 2018’s quarters, was at the upper end of its recent range. And the yearly rate, also 3.2%, was the best in almost five years. But the quarter’s numbers do nothing to close the gap with the long-term trend, and the composition of growth was unimpressive.

As the graph below shows, actual GDP remains well below its 1970–2007 trendline, which is based on an average of 3.2% growth. Since 2019Q1 just matched that average, the trendline remained just as distant. GDP is now almost 17% lower than it would be had the 3.2% average prevailed after the Great Recession. That gap works out to a deficiency of almost $5,000 in per capita terms, which, given long-term relationships, works out to about $3,800 in after-tax personal income. Consumption is 16% below trend; nonresidential fixed investment, 15% below; residential investment, 40% below; and government, 20% below.

And important components of GDP sagged badly in the quarter.

Consumption contributed just 0.8 point to real GDP, less than half what it did the previous quarter, and well below the average for both this expansion and the average of all expansions between 1949 and 2007. The contribution of goods consumption was negative. Nonresidential investment was weak, with both equipment and structures contributing nothing, and only intellectual property making any contribution. Residential investment was a drag on growth. Imports were weak, which is actually a positive contribution to growth, since they’re counted as a subtraction from GDP, but it’s not a sign of strong domestic demand. Inventory investment—which was 0.6% of GDP in nominal terms, twice the average since 1980—contributed a hefty 0.7 point to the headline growth number.

But the headline number did look pretty decent.

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Comments on December employment

Back when John Liscio was alive, we used to joke with him about using a New York Post style headline, “Job shocker!” This month’s report would qualify.

• Employers added 312,000 jobs in December, 301,000 of them in the private sector. The headline gain was 122,000 above the average of the previous three months, even after the upward revisions to October and November. Though it looks giant by recent standards, the monthly gain in percentage terms was only at the 60th percentile of all months since 1950. It looks better if you start the clock at 1980: then, December’s gain is at the 73rd percentile. Over the year, total employment was up by 1.8%, the highest since 2016. It had been sagging through 2017 and early 2018, but has largely recovered.

• Gains were widespread across sectors. Mining and logging were up 4,000 (slightly below the sector’s average over the last year); construction, 38,000 (well above average, with heavy/civil unusually strong); manufacturing, 32,000 (a third above average, with nondurables in the lead); wholesale trade, 8,000 (slightly above average); retail, 24,000 (three times its average, with a large contribution from general merchandise); transportation and warehousing, 2,000 (way below average, with hard-to-adjust couriers down 5,000); finance, 6,000 (a third below average); professional and business services, 43,000 (a bit below average); education and health, a boffo 82,000 (the health subsector was half again above its average, but private education, apparently enjoying its liberation from federal investigation, up over five times its average); leisure and hospitality, 55,000 (more than twice its average, enjoying a boost from the returning Marriott strikers and a strong performance by bars and restaurants); and other services, 8,000 (somewhat above average). The only major sector in the red: information, down 1,000, in line with its average. Government added 11,000, well above average, with more than all the gain coming from state and local; federal employment was down. (This was all before the federal government shutdown.)

• November’s gain was revised up by 21,000, and October’s by 37,000. The combined total of 58,000 largely came from concurrent seasonal adjustment distributing December’s “surprise” backwards. Before seasonal adjustment, the combined gains in October and November were revised up 12,000; adjustment pushed that up to 58,000.

• Unsurprisingly, diffusion indexes were strong, with all intervals up to levels not only above their 2017 averages, but above the mighty 1995–2000 averages as well.

• The workweek rose 0.1 to 34.5, its level for eight months of 2018.

• Average hourly earnings were up 0.4% for both all workers and nonsupervisory workers. For the year ending in December, the all-worker series was up 3.2%, matching October; the latest readings are the highest we’ve seen since 2009. No major sector showed a decline, and a couple were quite strong, notably retail, up 1.1% for the month and 5.0% for the year.

• The household survey was less exuberant. Total employment was up 142,000. When adjusted to match the payroll concept, household employment was up a more modest 180,000. On a yearly basis, which is a much better way to look at this volatile series, adjusted employment was up 1.8%, exactly in line with its payroll counterpart. Employment growth lagged the increase in the labor force, which was up 419,000. Consequently, the participation rate rose by 0.2, to 63.1%, its highest level in nearly five years, but the employment/population ratio was unchanged at 60.6% for the third consecutive month. Part-time employment was up by 159,000, though all of it came from the willing, up 305,000; those working part-time for economic reasons fell by 146,000. Unwilling part-timers accounted for 3.0% of employment, which is pretty much where the share has been since June.

• The number of unemployed rose by 276,000, and the rate rose 0.2 to 3.9%, its highest level since June. Because of separate seasonal adjustment, the component of the unemployed don’t add to the total, but voluntary leavers, a proxy for the quit rate, accounted for a big chunk of the increase, though the strong message of that number was countered by a relatively large number of permanent job losers. All durations of unemployment showed an increase except the very shortest, less than five weeks; the median and mean durations both rose 0.1 point, though they’re still at the low end of their recent ranges. The broad U-6 rate was unchanged at 7.6%. It’s up 0.2 since August.

• The age distribution of employment gains is curious. Given the volatility of the month-to-month figures in the household survey, we’ll look instead at changes for the year ending in December. Of the 2.9 million jobs gained over the year, nearly half, 49%, came from workers aged 55 and over, over twice their share of the workforce. Prime-aged workers, those aged 25–54, who account for nearly two-thirds of the workforce, or 64% to be precise, accounted for less than half the gains (45%). Their contribution was dragged down by the older group within that cohort, as the number of those aged 45–54 actually declined. Those aged 35–44 showed gains slightly smaller than their share of the workforce, while the youngest subgroup, 25–34, were up strongly. Also over-represented in the gains: older teens, those aged 18–19; just 2% of the workforce, they accounted for 11% of the year’s gains.

• Job flows numbers lacked drama, with all categories showing little change. One bright spot: the three-month month moving average of the share of the unemployed dropping out of the labor force—a lingering blemish on the expansion—fell to just 1.1%, matching the series all-time lows, set in late 2000.

Strong employment gains (at least in the establishment survey) and strong wage gains would normally excite some trigger fingers at the FOMC, though recent financial market turmoil might calm the itch (as Powell’s speech this morning suggests). With aspects of this expansion that look quite long in the tooth, you can’t not be impressed by these numbers.

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