RESEARCH REPORTS. AMERICAN INSTITUTE for ECONOMIC RESEARCH. The Employment Puzzle. Published by

Transcription

1 Published by AMERICAN INSTITUTE for ECONOMIC RESEARCH RESEARCH REPORTS Great Barrington, Massachusetts Vol. LX No. 24 December 20,1993 The Employment Puzzle Despite the recent surge in employment, this expansion has been characterized by extraordinarily slow job growth. Productivity growth has been cited as the reason for this, but productivity always surges after recessions. Faced with high and uncertain add-on costs, especially health insurance, employers have been reluctant to hire more workers. The employment picture brightened considerably in November. The unemployment rate decreased to 6.4 percent from 6.8 percent in October, the largest 1-month decline in 10 years. Employment in the manufacturing and construction sectors, which had been stagnant for months, increased for the second consecutive month. It is too soon to say whether these changes mark the onset of a sustained and broad-based trend, or a temporary improvement in what has otherwise been an extraordinarily slow and uneven recovery in employment. The current upturn in the business cycle, now more than 10 quarters old, differs from previous business expansions in a number of ways, but perhaps none more notable than the slow growth of employment. The contrast between the current recovery and a "typical" one is illustrated in Chart 1, which shows the cumulative percentage change in nonagricultural payroll employment during the first 30 months of this recovery (i.e., March 1991 through September 1993) and the average change during comparable periods of the recoveries that began in 1961, 1970, 1975, and (The recovery, which lasted just 12 months, is excluded from the comparison.) During the first year of the earlier recoveries, employment increased more than 3 percent, but during the current recovery it actually decreased. Through the first 30 months of this recovery, the number of jobs increased just 1.9 percent, far below the average 8.5 percent increase during previous recoveries. Job growth has been weak across the major sectors of the economy. Chart 2 shows the percentage change in employment in various industries during this recovery and earlier ones. Employment in the highly cyclical manufacturing and construction sectors usually rebounds sharply during recoveries, but it has decreased for the past 10 quarters and is now lower than when the current recovery began. In the less cyclical service sector, where even during recessions employment generally continues to increase, a number of industries lost jobs during the recession. During the subsequent recovery, employment in service industries has continued either to decrease or to increase slowly with the single exception of health services. Ironically, this is the very industry whose "out of control" growth President Clinton wants to curtail. The mining industry has recently lost a larger percentage of jobs than any other, as shown in Chart 2, but this decrease seems to reflect a coal mining strike. In any event, the mining industry is relatively small. In terms of the number of jobs lost, the largest losses have occurred in the manufacturing sector, where employment has decreased by over 700,000 during the past 2 years. This shrinkage is evident in the table at right, which lists the 20 industries with the largest decreases and increases in employment during the 2 years ended in September Five of Chart 1 Nonagricultural Payroll Employment Cumulative Change from Recession Trough Average of Four Previous Recoveries- Current Recovery Months from Recession Trough the "top 10" job losers are manufacturing industries, and none of the top job-creating industries is in manufacturing. Manufacturers of transportation equipment top the list of job losers. Most of the 200,000 affected jobs were in the aircraft and aircraft parts industries, which have been hurt by defense spending cuts and the well-publicized problems of commercial airlines. Payroll has also shrunk substantially in the "instruments and related products" sector, which includes makers of medical instruments and supplies, photographic equipment, watches and clocks, and measurement devices. The largest job loss in this sector has been among makers of search and navigation equipment, another industry dependent on defense outlays. Large job losses also have occurred outside the manufacturing sector. The construction sector (specifically, general building contractors) and two servicesproducing industries the financial sector (specifically, banks and thrifts), and the Federal Government collectively employ 200,000 fewer people than they Top 10 Employment Decreases and Increases by Industry, Sept Sept (In thousands, except percentages) Decreases Industry Total # % Transportation equipment 1, Aircraft & parts Instruments & related prod Industrial mach. & equip. 1, General bldg. contractors 1, Mining Electronics & related equip. 1, Federal Government 2, Communic. & public util. 2, Finance-depository inst. 2, Primary metals mfrs Industry Total Business services 5,899 Personnel supply 2,094 Health services 8,929 Retail eating/drinking estab. 7,068 Local government Social services State government Other retail* Engineering & mgmt. Amusement & recreation Wholesale trade-nondur. 11,283 2,080 4,434 12,849 2,524 1,255 2,638 Increases # % * Includes retailers of food, general merchandise, automobiles, apparel, furniture, building materials, and garden supplies.

2 Chart 2 Percent Change in Employment in Major Business Sectors (First 30 Months of Business Recovery) Construction Mining Durable Manufacturing Nondurable Manufacturing 1 Transportation* Wholesale Trade Retail Trade Finance, Real Estate & Insurance Business Servicest Health Servicest Other Servicest State & Local Communications & Public Utilities* Federal Government M Current Recovery H Average of Four Previous Recessions Average of three previous recessions, t Average of two previous recessions. did 2 years ago. For the most part, however, the service sector has been the source of the greatest job growth during this recovery just as it was during the 1980s. Employment has increased the most in the business services sector, a hodgepodge that includes computer and data processing, services to buildings, advertising, photocopying and mailing, credit reporting and collection, and detective and armored car services (an industry that employs nearly half a million people). Most of the new jobs, however, are in personnel supply services Kelly-girl type businesses that have increased employment by nearly a third in the past 2 years.* Finally, state and local governments also have been top job creators during this recovery. For all the talk of fiscal belt-tightening, the civil service remains a growth industry. Total government employment has been relentlessly increas- * It may be noted that, although these workers are counted in their own sector, business services, they serve other sectors. As a result, for example, if a manufacturing plant switches to a janitorial service, or hires a food service company to run its cafeteria, instead of using workers on its own payroll, the numbers reportedly engaged in manufacturing will decrease and those in business services will increase, even if the same tasks are being performed by the same workers. ing for decades, of course, while manufacturing employment has been stagnant since the 1960s and decreasing since These long-term trends converged in 1993, marking a watershed: for the first time in U.S. history, the public sector now employs more people than the manufacturing sector. The Role of the Laggard Recovery Constant-dollar gross domestic product has increased by a little over 6 percent since the recovery began in March This was roughly half the rate posted during comparable periods of previous postwar recoveries. With demand for goods and services increasingly weak, it is not surprising that many businesses have not been hiring. A number of unusual circumstances have dampened the recovery. First, consumers and businesses emerged from the recession carrying higher levels of debt, relative to their income and net worth, than they did in earlier bu siness expansions. They have been slow to take on additional debt, thus a major source of new spending has been missing, until recently. Consumer installment debt, which is used to buy cars, furniture, and other "big ticket" items whose sales typically contribute heavily to economic recoveries, did not begin to increase until August 1992, more than a year after the recovery began. Second, the lingering effects of speculation and overbuilding have depressed the real estate market. As reported in the November 1 Research Reports, the total market value of real estate in the United States at the end of 1992 was about $2 trillion, or 13.3 percent, less than it was 3 years ago. This 3-year decrease is unprecedented in the postwar experience. In the residential market, plunging home values have reduced actual and anticipated household net worth, a balance sheet shock that undoubtedly has restrained consumer spending. In the commercial real estate market, a glut of vacant and money-losing office buildings, shopping malls, and motels continues to keep new construction well below normal recovery rates. In turn, this has depressed the recovery in industries that supply fixtures and furnishings. Farewell to Arms and the People Who Make Them A third major influence on the sluggish economy and job market has been the cutback in defense spending. According to the Department of Labor, between 1987 (when defense spending peaked) and 1992, civilian employment in the Department of Defense decreased by 100,000. The military shrank by 188,000, and pri- 138 vate employment generated by defense spending decreased by roughly 600,000. The Labor Department estimates that if defense spending decreases as currently projected, between 1987 and 1997 a total of 2.8 million jobs will disappear. Taking into account the reductions already made, potentially 1.9 million additional jobs might be lost between 1993 and 1997,1.2 million of these in the private sector.! The industries hardest hit by defense cutbacks are those that benefited most from the buildup in the 1980s. These include manufacturers of aircraft and of high-tech instruments two of the industries on our list of major job losers as well as ship builders and repairers, manufacturers of guided missiles and space vehicles, and suppliers of other military goods and services. Less visibly, thousands of jobs among the businesses that provide food, transportation, storage, and so forth to these industries have been affected, and will continue to be. Is Higher Productivity to Blame? In 1992, productivity in the nonfarm business sector grew at the fastest pace in 20 years. When productivity increases, workers are able to produce more goods and services with the same amount of effort and resources. The recent surge in productivity, some media reports have suggested, has enabled businesses to "make do with less," thus discouraging them from hiring new workers. However, the increase in productivity during the whole of this recovery has not been unusually large. The rapid increase in 1992 followed a below-average increase in 1991, and the cumulative increase since the recovery began is well within the normal range. Thus, the prolonged period of slow job growth since 1991 cannot be explained by uncommonly large gains in productivity. More important, higher productivity historically has not been achieved at the expense of job growth. Chart 3 shows the cumulative increases in productivity and employment during the first 9 quarters of this recovery and during previous recoveries since Far from a negative trade-off, productivity increases have usually been accompanied by comparable or even larger increases in employment. In the three previous recoveries when productivity grew at rates similar to the recent increase (1954, 1958, and 1982), employment increased at a faster rate. An important question is why things are different this time. Why, with output and employment growing at below-average t "Employment effects of the rise and fall in defense spending," Norman C. Saunders, Monthly Labor Review, April 1993, pp

3 1080 PRIMARY LEADING INDICATORS <r- Ml Money Supply (1) M2 Money Supply (1) -> Month Percent Change in Sensitive Materials Prices (6) [7/93] New Orders for Consumer Goods (3) I.... I I.... f.... I.... >.,. I.... i - Contracts and Orders for Plant and Equipment (4) as revised (1987 dollars, billions) as previously published (1982 dollars, billions) [8/93] Index of New Housing Permits (3) (1967 = 100) '50 '90 60

4 Ifl PRIMARY LEADING INDICATORS (Continued) Ratio of Manufacturing and Trade Sales to Inventories (3) [8/93].56 Vendor Performance: v Slower Deliveries Diffusion Index (2) -»'12 (percent) V A [1O/93]_ Index of Common Stock Prices (2) (constant purchasing power)' *% HO/93] I.,.... I. >.... I I....»..... « Average Workweekin Manufacturing (3)«.(hours). m, I i HO/93] «- Initial Claims for State Unemployment Insurance (3) (thousands, inverted) 660. > \ Month Percent Change in Consumer Installment Del>t (4) '50 '55 '60 '65 '70 '75 '80 '85 '90 Notes: The number in parentheses next to the name of a series is an estimate of the minimum number of months over which cyclical movements of a series are greater than irregular fluctuations. That number is the span of each series' moving average, or MCD (months for cyclical dominance), used to smooth out irregular fluctuations. The data plotted in the charts are those MCDs and not the base data. The number in brackets is the latest month for which the moving average is plotted. The insets in selected charts show recent trends more clearly. These insets have arithmetic scales, even when the main chart is plotted on a ratio scale. 140

5 120 PRIMARY ROUGHLY COINCIDENT INDICATORS Noiiajgricultural Employment (1) (millions) Index of Industrial Production (1> (1987»100) :, ' id. i I,,, i I;,,,;,,, I I,,,, 15 Personal Income in Manufacturing (2) Manufacturing and Trade Sales (2) '91 ' I. I» I -* 75 - «- Civilian Employment as a Percentage of the Working-Age Population (2) Gross Domestic Product (1) *-» (quarterly, constant dollars, billions) '50 '55 '60 '65 ' '75 '80 '85 '

6 PRIMARY LAGGING INDICATORS Average Duration of Unemployment (2) (weeks, inverted) HO/93] 22 Manufacturing and Trade Inventories (1) Commercial and Industrial Loans (1) ' Ratio of Consumer Installment Debt to Personal Income Percent Change from a Year Earlier in Manufacturing tabor Cost per Unit of Output (2) Composite of Short-Teem Interest Rates (1) (percent) '50 '55 '60 '65 ' '75 '80 '85 '90 [11/93] 0

7 rates, has productivity increased at an average rate? Put differently, why have productivity gains contributed the lion's share Chart 3 Cumulative Percent Change in Employment and Productivity (During First 9 Quarters of Recoveries) 115!H Employment Productivity '49 '54 '58 '61 '70 '75 '82 '91 10 to output growth since 1991, whereas in previous recoveries employment and productivity gains contributed about equally to output growth? The ongoing revolution in technology and communications may have boosted productivity. At the same time, it may have created a greater mismatch between the skills required to take advantage of new equipment and procedures and the skills of the unemployed. The consequent need for retraining may have delayed new hiring more than usual. Businesses also have been reluctant to hire new workers due to the rising cost of providing training and benefits, especially health insurance. With the highly uncertain outlook for the latter, it makes sense for employers to work their current employees harder rather than hire new ones. For example, in the manufacturing sector the average workweek and overtime hours have been at historically high levels for months. A further disincentive to new hiring may be the growing restrictions on the freedom of employers to hire, promote, and fire at will. The legal definition of workplace "discrimination" has been steadily expanded, and employers face a growing risk of being sued for failing to offers jobs or promotions to the "right" people or for firing employees for the "wrong" reasons. One unintended consequence of such laws and judicial rulings is to discourage businesses from hiring. BUSINESS-CYCLE CONDITIONS The outlook for continued expansion is positive and improving, and the pace of economic activity is accelerating. There are few signs of factors that could impede further growth. With the expansion now 32 months old (as of November), the statistical indicators are showing gains of a magnitude usually seen during the first year of a recovery. Five of the primary leading indicators reached cyclical highs in our latest review. The Ml money supply (Ml and all other dollar-denominated series are reported in constant dollars) reached an alltime high in October, as did the moving average of the constant-purchasing-power index of common stock prices. The average workweek in manufacturing reached 41.7 hours in November, a postwar high, and its 3-month moving average also reached a postwar high, surpassing the 1966 peak for the first time. Ml, the stock price index, and the average workweek all are appraised as clearly expanding. The moving average of the index of new housing permits increased for a fifth consecutive month to a cyclical high, the highest level that series has reached since early Some analysts have attributed the recent strength in the housing sector to flood-related rebuilding in the Midwest, and the Census Bureau's regional tabulations of permit issuance and housing starts do show strong increases in the Midwest, but the statistics also show comparable increases in the South and only slightly less vigorous improvement in the Northeast and West. The housing permits index remains appraised as clearly expanding. Consumer installment debt outstanding rose $8.1 billion in October, which amounted to a remarkable 13 percent annual rate of increase. This surge in borrowing, paced by the growth of automobile loans, produced the strongest 3-month percentage increase since early 1989 and brought the moving average of the change in consumer installment debt to a new high for the cycle. These developments removed doubts about the cyclical status of the series as its appraisal improved from probably to clearly expanding. Initial claims for unemployment insurance, an inverted series, rose in October to reach its highest level since February. This change produced a third consecutive increase in the 3-month moving average of the series, raising further doubts about its cyclical status, which had been appraised as probably contracting. Similarly, the 3-month change in sensitive materials prices posted a solid increase in October, halting a 14-month downward trend in the 6-month moving average of the volatile series, which also had been appraised as probably contracting. The cyclical statuses of these two leading indicators now are indeterminate. Contracts and Orders Revised With the release of data for October, the Commerce Department revised its estimates of contracts and orders for plant and equipment, which remains appraised as clearly expanding. The revision updated the base year for the constant-dollar series from 1982 to In current dollars, contracts and orders is the sum of two series on construction contracts and a large number of series on manufacturers' orders for equipment, one for each type of equipment. To compute constant-dol- 143 lar contracts and orders, the Commerce Department divides each of the currentdollar series by the appropriate component of the producer price index (PPI). There is a PPI component to match each series on equipment orders. The revision involved rescaling each of those PPI components from a 1982=100 reference base to a 1987=100 base. As the chart on page 139 shows, the latest values for the revised series (in 1987 dollars) are roughly equal to those recorded for In contrast, the latest values of the previously published series (in 1982 dollars) exceeded the 1979 peak by 54 percent. The reason for this substantial flattening of the trend of contracts and orders appears to be that prices for computers, a major category of equipment, have been plunging since the late 1970s. Revision of current-dollar computer orders using much lower computer prices diminished the impact of growing computer orders on the growth of the total. Overall, 100 percent (7 out of 7) of the leaders for which a trend is evident are expanding, up from 78 percent (7 out of 9) last month. Our cyclical score, based on a separate analysis of the leading indicators, rose to 83 from the score of 79 reported last month. The latest available base data decreased for only three of the leading indicators. These measures suggest that continued expansion is highly probable, but there is some room for improvement in the outlook. During earlier expansions the cyclical score has reached peaks in the low 90s, for example. Also, the percentage of leaders expanding does not reflect the indeterminate status of five series. All but one of those five show recent increases, so further improvement in the economic outlook would not be surprising. Five of the six primary roughly coincident indicators reached new cyclical

8 Change in Base Data Aug. Sept. Oct. Nov. nc No change. ' Revised. Statistical Indicators of Business-Cycle Changes Cyclical Status Primary Leading Indicators Oct. Nov. Dec. M1 money supply M2 money supply +? + + Change in sensitive materials prices? -?? New orders for consumer goods??? Contracts and orders for plant and equipment Index of new housing permits Ratio of manufacturing and trade sales to inventories??? Vendor performance??? Index of common stock prices (constant purchasing power) Average workweek in manufacturing Initial claims for unemployment insurance (inverted) -? -?? Change in consumer installment debt +? +? + Percentage expanding cyclically Primary Roughly Coincident Indicators Nonagricultural employment Index of industrial production Personal income in manufacturing??? Manufacturing and trade sales Civilian employment to population ratio Gross domestic product (quarterly) Percentage expanding cyclically Primary Lagging Indicators Average duration of unemployment (inverted)? -? - Manufacturing and trade inventories +? + + Commercial and industrial loans Ratio of consumer installment debt to personal income +? +? +? Change in labor cost per unit of output, manufacturing Composite of short-term interest rates??? Percentage expanding cyclically Under "Change in Base Data," plus and minus signs indicate increases and decreases from the previous month or quarter and blank spaces indicate data not yet available. Under "Cyclical Status," plus and minus signs indicate expansions or contractions of each series as currently appraised; question marks indicate doubtful status when shown with another sign and indeterminate status when standing alone. highs in the latest reported month. All five remain appraised as clearly expanding. Manufacturing and trade sales reached an all-time high in September. The 2-month moving average of the series, which provides the basis for our appraisal, recovered from its 2-month downturn and also reached an all-time high. The index of industrial production reached an all-time high in October, as did gross domestic product (GDP) during the third quarter. As the previous article discusses in some detail, employment growth has accelerated in recent months. Nonagricultural employment, which reached an alltime high of million jobs in November, grew at an annual rate of 2.2 million jobs per year between August and November. This rate of increase compares favorably with the rate of 1.0 million jobs per year observed between May and August, and it approaches the average annual increase of 2.9 million jobs established between December 1982 and December As a result of these developments, the 2-month moving average of the civilian employment to population ratio posted its largest 1-month gain since 1987, rising to 61.9 percent of the population in October. The stagnation in personal income in manufacturing continues. The lack of growth in this series, which measures manufacturers' payrolls, reflects the recent waves of restructuring in the manufacturing sector. The latest spate of hiring produced some increases in current-dollar payrolls, but the increases did not outpace price inflation. If the hiring in the manufacturing sector continues, however, payroll gains in real terms are likely to be forthcoming. In the meantime, the cyclical status of personal income in manufacturing remains indeterminate. Overall, 100 percent (5 out of 5) of the roughly coincident indicators for which a trend is evident are expanding, unchanged Final fixing in London PRICE OF GOLD 1QQ1 yy i Dec. 19 $ from last month. Since July, only personal income in manufacturing has not been appraised as clearly expanding. Not only do the latest data show continuing economic expansion, they also indicate accelerating increases in production, sales, and employment. Some analysts recently raised their forecasts for real GDP growth in 1994 into the 4 percent range. Our procedures are not designed to forecast the growth rate of any indicator, nor do we set much store by others' forecasts. That said, the improvement in the economic outlook evident among the leading indicators, together with the demonstrable acceleration among the coinciders, suggests that the forecasts of 4 percent GDP growth are at least plausible. Among the primary lagging indicators, two series continue to reach recessionary lows: the percent change from a year earlier in manufacturing labor cost per unit of output and the average duration of unemployment. The average duration, an inverted series, reached its lowest level since 1984 in November. This decrease brought the 2-month moving average of the series back to the level of its previous recessionary low, reached last December. Appraised as probably contracting last month, the average duration of unemployment now is clearly contracting, as is the change in unit labor costs. Despite the deterioration in the average duration of unemployment, the percentage of laggers expanding for which a trend is evident remained unchanged at 60 (3 out of 5). Three of the lagging indicators now confirm that expansion is underway: manufacturing and trade inventories, which reached an all-time high in September, the ratio of consumer installment debt to personal income, and commercial and industrial loans. Of these, only inventories has surpassed its peak for the expansion, however, and the other three laggers show no such trend. Overall, the laggers show few signs of the factors that tend to retard further expansion. 1QQ? i yy*. Dec. 17 $ Dec. 9 $ C IQ? Dec. 16 $ Research Reports (ISSN ) (USPS ) is published twice a month at Great Barrington, Massachusetts by American Institute for Economic Research, a nonprofit, scientific, educational, and charitable organization. Second class postage paid at Great Barrington, Massachusetts Sustaining memberships: $16 per quarter or $59 per year. POSTMASTER: Send address changes to Research Reports, American Institute for Economic Research, Great Barrington, Massachusetts Season's (greetings and'best Wishes for the 9{$iu 144