Tag Archives: job creation

The Dynamics of the Job Market: The Decline Started in 2006, with a Partial Recovery Under Obama

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The most closely watched jobs number reported each month, aside from perhaps the unemployment rate, is the figure normally referred to as “new jobs created”.   For example, on January 6, news reports on the Bureau of Labor Statistics release that day stated that “200,000 new jobs were created” in December.  But many people may not fully realize that that number is a net figure, and the news reports often speak as if it is all new hiring.  Actually, around 4 million people are being hired each month right now in the US, while close to that number are also leaving their jobs for various reasons (mostly quits to take some job elsewhere).  It is the net figure between these two that is the 200,000.

To understand what is going on in the labor market, it is important to disentangle the figures.  The graph above shows the numbers since January 2006 (and up to November 2011, the most recent figure available) on total private sector hires each month, total private sector separations for whatever reason (this will be broken down below in this post), and the net between the two.  One could also include government employment, but I have left it out to focus on the private sector labor market dynamics.  Government employment is much smaller (government employment is less than 17% of total employment in the US, and 87% of government employment is with state and local governments).  It is also generally more stable and has been, other than a blip due to temporary hiring at the time of the 2010 census.  And government employment has been trending downward during the Obama period (mostly due to falls in state and local government employment, as I discussed in a December 6 post).

The first interesting point to note is how much churn there is in the labor market.  This is not commonly appreciated in the discussion surrounding the monthly figure on “new jobs”.  Hiring is always going on, and people are always leaving their jobs for various reasons (whether quitting to take a new job elsewhere, or retiring, or being laid off, in both good times and bad – this will be reviewed below).  This churn is high.  For example, over the twelve months leading to November 2011, 48.6 million people were hired, while 47.2 million left their job for whatever reason, leaving a net job growth of 1.4 million (these figures include government).

And such hiring continues in both good times and bad.  Hiring fell from around 5 million a month before the downturn, only to around 3 1/2 million per month in the worst of the economic collapse in 2008 / 2009.  The unemployment rate peaked at over 10%, but even in this period, new hiring was being done at around two-thirds the rate it was before.  Yet many Republican critics asserted that “no one” was being hired due to Obama’s regulatory policies.  In fact, the fall in hiring largely came before Obama entered office, stabilized within a few months of his inaugeration, and since has risen, although not by enough.

With this break-down, it is also interesting to see that the deterioration in the labor market began as early as 2006, when private new hiring began to slow.  Housing prices had also reached their peak in 2006, and then began to fall.  While the collapse in the economy was in full swing only in 2008, in the last year of the Bush Administration, the deterioration in conditions had in fact started two years earlier.

With new hiring starting to slow from 2006, the number of people leaving their jobs for whatever reason (“total separations” in the graph) started to slow in 2007.  As labor market conditions deteriorated in 2007 with the lower new hiring, fewer people would choose to quit.  They did not have a new job to go to.  With both hiring and quits down together, net jobs (hiring less separations) generally remained positive in 2007.  But by 2008, new hiring was falling fast, and while total separations also fell, hiring was now less than separations, so net jobs fell fast.

Things then began to turn around within a few months of Obama taking office, due to his stimulus and other policies.  New hiring stabilized at about 3 1/2 million per month, while total separations continued to fall.  Fewer people were being laid off than they were when Obama took office (see below).  Net job losses stabilized (the trough was March 2009) and then began to improve.  While Republicans continue to assert that Obama’s policies have harmed job creation, the turnaround occurred exactly as soon as his policies could start to have an effect.  And the job situation has continued to improve since then, although not by enough given the depth of the hole the economy was in when Obama took office.

As noted above, the Total Separations figure is the total separations due to people quitting voluntarily (normally to take a better job elsewhere), people being involuntarily discharged either due to layoffs or due to poor performance, and other separations (mostly due to retirement).  The figures since 2006 are shown below:

It is interesting that while involuntary discharges and layoffs rose with the 2008 economic collapse, the increase was all in the second half of 2008, and was from 1.7 million per month in “normal” times, to a peak of just 2.4 million per month.  That is, there are always involuntary discharges and layoffs for various reasons, but in the worst economic downturn since the Great Depression it increased by less than half.  And since the end of 2009, monthly discharges and layoffs have been lower than they were prior to the downturn in 2006 and 2007.  One cannot say that Obama’s policies have led to more workers being laid off.

As noted above, quits started to fall in 2007, as labor market conditions started to deteriorate with the fall in new hiring.  They reached a trough in late 2009 / early 2010, and since have risen a bit, as labor market conditions began to improve.  But they remain well below what they were in 2006, as labor market conditions, while better than in 2008/2009, still remain poor, with 8 1/2% unemployment.  But people still do quit, at a rate of about 1.8 million per month, vs. quits of close to 3 million per month at the peak of the housing bubble.

Labor market conditions remain weak, with unemployment far too high.  It is unfortunate that political pressures are keeping the Obama administration from doing more to bring unemployment down, and indeed are forcing measures (such as cuts in fiscal spending) which are making the situation worse than it would otherwise be.  But the labor market turned around within a few months of Obama taking office, and has improved since.  There is still much more that needs to be done to bring down unemployment, but the charge that Obama’s policies are the cause of the high unemployment, is simply not backed by the facts.

Regulations Under Obama Cannot Be Blamed: Productivity and Profits Have Gone Up

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The Republican Presidential candidates, and especially Mitt Romney, have repeatedly asserted that burdensome regulations imposed by the Obama Administration are to blame for the disappointing performance of the economy during the recovery, and especially the disappointing job performance.  The evidence points to the opposite:  productivity has in fact performed quite well and profitability has sky-rocketed.  If regulations were a problem, one would have expected productivity to have declined and profitability to have suffered, and they haven’t.

The disappointing performance of the economy in recent years can rather be attributed to slow growth in aggregate demand.  Households have had to scale back consumption after the housing bubble burst, while conservative fiscal policies forced by a Republican Congress have not allowed government expenditures to fill in the resulting gap.

The chart above shows how labor productivity, unit labor costs, and unit profits have performed in recent years (for non-financial corporations), each indexed so that the 2005 average equals 100.  Labor productivity (in green in the chart) is the amount of output produced per unit of labor.  It was basically flat prior to Obama taking office, rising by just 2.2% total in those four years, but then jumped by 8.6% total in the subsequent 2 1/2 years.  If regulations imposed by Obama were a major hindrance, productivity would not have gone up like this.

But while labor productivity improved, labor compensation (not shown in the chart to reduce clutter) was basically flat.  Indeed, hourly wages in real terms have declined slightly since Obama took office (by 0.8% total).  This is consistent with a slack labor market, with high unemployment depressing wages.  With higher productivity and wages not increasing, the result was falling unit labor costs (labor costs per unit of output), as shown in blue in the chart.

What did shoot up after Obama took office was unit profits (profits per unit of output, in red in the chart).  This is much more volatile, but it is interesting to note that it peaked in the third quarter of 2006 and then fell sharply well before Obama took office.  If someone is to be “blamed” for this, it would have to be Bush.  Unit profits then reached its low point in the second quarter of 2009, as the recession came to an end, and then skyrocketed by over 75% up to the third quarter of 2011 (the most recent data available).  This is of course all consistent with what has been observed at the level of the aggregate National Income accounts, which was reviewed in an earlier post (see here) on this blog.

Mitt Romney and the other Republican candidates assert that burdensome regulations under Obama have stifled the ability of business to make a profit, and with that, businesses have been unwilling to employ more workers.  But productivity has improved and profitability has soared.  The evidence simply does not support their assertions.

Contracting Government Has Hurt Job Growth

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(change, in thousands of jobs) Jan 2001 to Jan 2005 Jan 2005 to Jan 2009 Jan 2001 to Jan 2009 Jan 2009 to Nov 2011
Total Employment -16 +1,110 +1,094 -1,855
Private Sector -916 +263 -653 -1,262
Government Sector +900 +847 +1,747 -593

Obama has repeatedly and emphatically been charged by Republican politicians as fostering  a huge expansion in government job growth, with this a major cause for the weak recovery in private job growth.  The facts do not support this.  The government sector has in fact been contracting sharply during the Obama period, in distinct contrast to the expansion during the Bush presidency, and it is this contraction which indeed can explain a significant share of the drop in overall jobs in the economy.

The table above, drawn from Bureau of Labor Statistics (US Department of Labor) figures on employment levels by the major sectors, shows the change in the number of those employed, for the periods between January 2001 and January 2005 (the first Bush term), between January 2005 and January 2009 (the second Bush term), between January 2001 and January 2009 (the two Bush terms together), and between January 2009 and November 2011 (the most recent figures, for the Obama term so far).

In the first Bush presidential term, overall job growth was basically zero.  But it is striking that it only comes to zero because a decline of 916,000 private jobs is almost fully offset by a nearly identical rise in government jobs of 900,000.  Note that while the time periods we are examining are the presidential terms, government job growth is largely affected by changes at the state and local level, as these account for about 87% of government jobs.

During the second Bush term, private sector job growth became positive, by a modest 263,000 for the period (with growth early on offset by the downturn in his final year), while government job growth continued at a roughly similar positive rate as during his first term.  With both positive, total job growth was then about 1.1 million.

For the Bush presidency as a whole, it is then interesting to note the overall job growth of about 1.1 million (all in his second term), only came about due to a growth in government jobs of about 1.75 million:  Private jobs in fact fell by about 650,000.

During the Obama presidency so far, government job growth went into reverse, with a decline of almost 600,000 jobs.  It is interesting that the pace of the decline for the first 34 months of Obama’s 48 month term (that is, through November 2011), matches almost exactly the pace of the increase during either of the Bush terms.

Suppose government job growth had increased during the Obama period at the pace it had during the Bush terms.  There would then have been a growth in government employment of over 600,000, rather than a decline of almost that amount, for a swing of 1.2 million jobs.  Assuming the same decline as now of over 1.2 million private jobs, overall jobs would have still fallen, but by only about 600,000 rather than over 1.8 million.

Of course, with such a different policy on government job growth, one would not expect private job growth to be the same.  Conservatives might argue that the government job growth would “crowd out” the private sector, leading to even an even larger fall in private jobs.  But there is no evidence to support this, in an environment where unemployment is high and interest rates on government borrowing are close to zero as the economy suffers from a liquidity trap.

Indeed, the basic insight of John Maynard Keynes is that in such a situation, government job growth (and its accompanying spending) will not only not displace private job growth, but will add to it at a multiple of what is spent directly, as the newly employed by the government will add to demand for privately produced goods and services as they spend their wages.  A reasonable estimate of this government employment multiplier would be at least two, and many would argue higher.  At a multiplier of two (that is, each additional government job leads to one additional private job, for two total), the swing in government employment of 1.2 million (that is, a rise of 600,000 rather than a decline of about 600,000), would have led to 1.2 million additional private jobs, and total employment growth would then have been a positive of 600,000 rather than a negative of over 1.8 million.  This is a swing of 2.4 million jobs.  With current unemployment in the US of 13.3 million, and a civilian labor force of 153.9 million, the unemployment rate would then be 7.1% rather than the current 8.6%.  It was 7.8% when Obama took office.

One can quibble with the specific figures, and what multiplier to assume.  But the basic point is that the contraction in government employment in recent years (primarily at the state and local levels) is a major reason why the overall job picture is still so bad.  If government employment had continued to expand at the pace it had during either of the Bush terms, rather than contract at a similar pace, then under quite plausible estimates, unemployment would be less now than when Obama took office.