Job Market Dynamics: A Continued, But Slow, Recovery

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Jobs, employment, new hiring, job separations, net job creation, January 2006 to March 2012


employment, jobs, total separations, layoffs and discharges, quits, January 2006 to March 2012This post is an update of one from January of this year, with more recent data and to reflect revisions that have been made in the earlier figures.  The numbers are from the Bureau of Labor Statistics, and this spring it issued new figures for the last several years, reflecting methodological improvements in the system it uses to go from its survey results to its national estimates.  What is shown above and will be discussed below are jobs in the private non-farm sector.  Government jobs have been falling, as has been noted in this blog, but follow a different dynamic than private jobs.  Hopefully government jobs will now stabilize and preferably grow, rather than continue to act to depress the economy.

The story on the private job dynamics is the same as before, and the more recent numbers (through March in the figures above, vs. through November 2011 in the January posting) confirm the trend that was noted before.  That is, the job market is recovering, but at too slow a pace given the still high level of unemployment.  At such a slow pace, it could easily go into reverse should the economy slow.  As has been noted before in this blog, US GDP growth has been slow due to the continued fiscal drag as government expenditures have been cut back.  There is also the threat of a European collapse, with negative impacts on the US, as Europe has failed to address the Eurozone problems with any policy other than increased austerity.  Growth in Europe is already at zero.

There is now the additional threat made recently by Speaker of the House John Boehner, to hold hostage the Congressional approval required for the debt ceiling later this year unless Republican demands of further government expenditure cuts are met.  Without this Congressional approval, the United States would be forced to default.  Economic chaos would result.

Among the points to note from the figures above:

1)  There were major net job losses in 2008 and 2009 (the curve in red in the top figure), but not because more people were leaving their jobs, due to layoffs or other reasons.  Rather, it was because the pace of new hiring slowed.  At the peak of the housing bubble in 2006, new hiring was being done at a pace of roughly 5 million jobs per month.  This started to fall, but slowly, in late 2006 / early 2007.  It began to fall at a rapid rate in 2008 (the last year of the Bush administration), and then stabilized and began to recover within a few months of Obama taking office, as the stimulus package and other measures began to have their positive effect.  From a trough of about 3 1/2 million new hires per month in mid-2009, new hires has slowly grown to a pace of a bit over 4 million per month currently.  That is, there has been some recovery, but the pace is still well below the 5 million new hires per month seen when the economy is at full employment.

2)  Total job separations, whether from layoffs or quitting or anything else, actually fell in the downturn.  People often believe that unemployment shot up in the downturn because of massive layoffs, but that is not really the case.  Unemployment went up not because of more people being fired or otherwise leaving their jobs, but rather because the pace of job separations did not fall as rapidly as did the pace of new hiring.  In normal times, more people separate from their jobs because they quit (usually to take a new job elsewhere) or voluntarily leave for some other reason (e.g. retirement), than leave because of being laid off.  The pace of layoffs and discharges did indeed go up in 2008, the last year of Bush, from roughly 1.7 million per month before the downturn, to a peak of 2.5 million in the last month of Bush.  But this was less than the fall in the number of people who voluntarily quit, so total separations actually fell.  And layoffs then soon started to fall in number under Obama, and is currently below 1.6 million per month, i.e. less than the pace seen when the economy was near full employment.

3)  Since late 2009, the pace of new hiring has risen under Obama, as noted above, from roughly 3 1/2 million per month to a bit over 4 million per month currently.  Quits also started to rise with the improving job market, from about 1.5 million per month to 2 million per month most recently.  This is a good sign, and an indication that people are voluntarily leaving their jobs as the pace of new hiring has improved.  And layoffs and discharges has slowly fallen over this period as well.  The result is that the pace of total separations have been below that of new hires since early 2010, with net new jobs thus being created.

But the pace of net new job creation has been slow, at only about 200,000 net new jobs per month over the last half year (other than 300,000 in February).  With unemployment still at 8.1%, it would take years to reach full employment at such a pace of net job growth.  That is, at a pace of net job growth of 200,000 per month and assuming growth in the labor force of about 0.65% per year (the rate seen in the past decade, as it depends on population growth and demographics), it would take over two more years for the unemployment rate to fall below 6%, and almost three and a half years to fall below 5%.  At 300,000 net new jobs per month, unemployment would fall below 6% in a more reasonable 15 months, and would hit 5% in about two years.

A pace of net new job growth of 300,000 per month is not at all impossible, but will require a sufficient growth in aggregate demand in the economy so that the goods and services these workers would produce could be sold.  As has been noted before in this blog, fiscal drag largely explains the slow growth in aggregate demand in the US:  Had government demand been allowed to grow during the Obama years at the pace it had during the Reagan period when the economy was recovering from the 1981 downturn, we would now be at close to full employment.

Although Improving, Still Many More Unemployed Than Job Openings

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Number of unemployed as a ratio to job openings, US data, December 2000 to march 2012

There are many conservatives who argue that the unemployed need not be unemployed if they were only willing, perhaps with a cut in wages, to take one of the many jobs they assert are available.  Help wanted signs are seen, and thus these conservatives believe the unemployed could get a job if they wished.  They believe the unemployed are unemployed by their own choice, either out of laziness or due to an unwillingness to accept a lower wage.  In terms economists would use, they believe that the markets for labor would always clear if only the workers were willing to accept a lower wage.

The problem with this view is that it is not consistent with the fact that in economic downturns there are many more unemployed than job openings.  Even if every single one of the job openings were immediately filled, there would be many unemployed workers seeking jobs still left.  And since it in fact takes some time to fill any job, and since there is also constant turnover in jobs, one will see the help wanted signs posted for a while.

Data for the US on this is now gathered by the Bureau of Labor Statistics of the US Department of Labor, in a monthly survey of private establishments (which includes non-profits) and government entities.  The survey is a relatively recent one, having started only with data from December 2000, and gathers data on labor turnover (hirings, quits, firings, and other turnover) in addition to job openings (and is called JOLTS, for Job Openings and Labor Turnover Survey).  The labor turnover side of these numbers was discussed in a post on this blog in January, which used the numbers to look at the dynamics of the job market.  The post today will consider the job openings side of this survey.

The graph above, based on the JOLTS data from the Bureau of Labor Statistics coupled with the BLS unemployment figures (from its separate monthly survey of households), shows the ratio of the reported number of job openings to the number of unemployed.  For the most recent month available, the ratio of the number of unemployed to the number of open jobs was 3.4.  That is, there were 3.4 unemployed workers in the US for each open job that employers were seeking to fill.

This ratio of 3.4 is significantly better than the approximately 6.5 ratio of unemployed to open jobs when unemployment was at its peak following the recent economic collapse.  It is interesting to see in the graph the close to straight line downward trend since it hit that peak.  But there are still many more unemployed than available jobs, and the labor market is healing only slowly.  It still has a long ways to go.

Note that when the economy is close to full employment (as in December 2000, at the end of the Clinton presidency, or in late 2006 / early 2007, at the peak of the housing bubble), the ratio is around 1.0 to 1.5.  Note that there is no reason why the ratio necessarily has to be greater than one, as one could in principle have a situation of few unemployed and many open jobs seeking workers.  But in practice, it appears that in the US the ratio will always be greater than one, even when the economy is at full employment.  There will always be some unemployed and some unfilled jobs, and at full employment these are in rough balance.

But the current ratio of 3.4 unemployed for every job opening, while better than the 6.5 ratio seen when unemployment was at is peek, is still well above the 1.0 to 1.5 ratio one sees when the economy is close to full employment.  The unemployed cannot be blamed for being unemployed because they are lazy, or unwilling to accept a lower wage.  They are unemployed because there are too few jobs out there.  And there are too few jobs because there is not sufficient demand for the goods these workers could produce.

As was discussed in postings on this blog on March 3 and on March 12, this insufficiency of demand in the aggregate for what American workers can produce is largely explained by fiscal drag, compounded (although of lesser importance in the aggregate) by the collapse of housing investment following the bursting of the bubble.  Government (mostly at the state and local level) has cut back in this downturn.  This is in contrast to the expansions of government spending and hence government demand seen in other downturns, and very notably in contrast to the strong expansion in government spending during the Reagan period (despite the myth).  As the March 3 post estimated, if government spending (including state and local) during the Obama presidency had been allowed to expand by as much as it had during the Reagan presidency, the economy would now be at full employment.

Republican Tax Plans, Part 4: Romney Goes for Even Larger Tax Cuts, Mostly for the Rich

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Average tax rates by household income level, Republican tax proposals, Romney tax plans
Mitt Romney, the now all but certain Republican nominee in this year’s presidential race, presented not one, but two, comprehensive tax plans this campaign season.  Romney’s original plan was released in September, 2011, and the implications for who would pay lower taxes (the rich, and especially the very rich), and in a few cases higher taxes (poor people with income up to about $30,000, in comparison to what they would pay if the Bush tax cuts were extended), was discussed in a blog posting on January 7.  It was noted there that while the rich would see very large cuts in their taxes (leading to an increased federal deficit of $600 billion per year by 2015), Romney’s tax proposals were in fact the least extreme of those of his competitors in the Republican primaries (see the analysis at the postings on December 26, 2011, and on January 25, 2012, in addition to the January 7 post).

Faced with these competing proposals for even deeper cuts in taxes, Romney felt compelled to announce a revised tax plan on February 22, which was even more right-wing than the one he had proposed the preceding September.  This was consistent with Romney’s history of changing positions based on what is politically opportune at the moment.  For completeness, it is of interest to add this second Romney plan to the analysis of the other tax proposals, including his own earlier one, to see how they compare.

The average tax rates under Romney #2 that would be paid by households at various income categories has therefore been added to the standard graph above.  As with the earlier blogs, this presents graphically the careful calculations done by the Tax Policy Center, using their tax microsimulation model (based on actual tax return data) to determine the taxes that would then be due for households of various income categories as a result of what was being proposed.  While the diagram has now become fairly cluttered, hopefully it is still clear enough to follow.  I wanted to present the two Romney plans in the context of both each other and of the other Republican plans.

Compared to the other Republican plans, Romney’s new proposal would still generally leave taxes higher than the others would for most households (Cain is an exception, with his hugely regressive tax proposals, and Perry would have left taxes higher than Romney for those making up to $200,000 but would have cut them by even more for the very rich).  But compared to his earlier proposal, Romney would now cut taxes by even more, especially on the rich and very rich.  Compared to current law (under which the Bush tax cuts are scheduled to expire in 2013), Romney would now provide those making more than a $1 million per year in income an average reduction in their taxes of $390,000 each year, vs. a reduction of “only” about $290,000 in his earlier proposals.

The Romney #2 proposals lead to greater benefits for the very rich not simply because with their higher income they pay more in taxes, but also because he now focuses his proposed tax reductions even more heavily on the rich.  Whereas in Romney #1, those making more than $1 million each year would see their taxes reduced by 26%, under Romney #2 he would reduce the taxes of his wealthy colleagues making over $1 million by 35%.  In contrast, poor households with total household income in the range of $40 to $50,000 would see a tax reduction of 13% under Romney #1 and only 19% under Romney #2.  There is no rationale for why the super rich should see not simply a larger absolute reduction in the taxes they would need to pay, but also a greater proportional reduction in their taxes.

And if one is worried, as the Republican candidates say they are, about the fiscal deficit, then one must not ignore that these major tax cuts will lead to a huge increase in the deficit.  The Tax Policy Center estimates that if implemented, the Romney # 2 plan would reduce fiscal revenues by $900 billion in 2015.  This is 50% more than the loss of an estimated $600 billion under Romney #1.  And of the $900 billion lower revenues, well over half ($505 billion) would be a transfer to those making more than $200,000 per year, and over a quarter ($236 billion) would be a transfer to households making over $1 million per year.

Romney insists he will not cut defense expenditures.  Indeed, he says he will increase defense spending over what Obama would.  But total non-defense discretionary government expenditures in 2015 are only projected to be $572 billion in 2015 according to the baseline projections of the neutral Congressional Budget Office (January 31, 2012, report).  Even if all such government expenditures were cut to zero, the deficit would still rise under Romney #2 by $330 billion.  The only alternative would be to cut Social Security, Medicare, Medicaid, and other such programs, which primarily benefit the poor and middle class.  If so, Romney is proposing to cut such programs in order to benefit primarily the rich and super-rich.

To be fair, Romney does say he would also propose to close some tax “loopholes”, but he refuses to say which he would propose to close or reduce, and by how much.  He has said openly it would not be politically expedient to be clear on this before the election.  But he has said that he would keep certain of the more common tax deductions, such as the exclusion for home mortgages for primary homes, and would actually increase certain of these tax expenditures, by cutting further the already low taxes on capital gains and dividends, and by extending further certain corporate tax breaks (such as on overseas income).  If one does this, it is impossible to raise anything close to $900 billion a year by cutting or reducing other tax expenditures.

Romney has presented himself as the serious, businessman, candidate.  Yet he chose to revise his initial tax plan and propose an even more radical plan focused on tax cuts for the rich as part of his (ultimately successful) campaign to secure the Republican nomination for the presidency.  While consistent with Romney’s history of adopting positions based on what is politically expedient at the moment, a plan that would increase deficits by $900 billion a year by 2015 cannot be seen as serious.