Unemployment clouds will not go away after Labor Day celebrations

SERIOUS MONEY: The US jobless rate is attributed to extensive layoffs and not to a growing labour force, writes CHARLIE FELL…

SERIOUS MONEY:The US jobless rate is attributed to extensive layoffs and not to a growing labour force, writes CHARLIE FELL

AMERICAN WORKERS are back in the office after the rest and recreation enjoyed over the Labor Day weekend but the holiday mood is likely to have been decidedly downbeat for the almost seven million people that have been unfortunate enough to lose their job during the most severe labour-market contraction since the second World War.

The employment report released last Friday revealed, that payrolls dropped 216,000 in August and though this was the smallest decline in 12 months and only a fraction of the staggering monthly losses registered earlier in the year, it is still well above the average monthly drop seen in previous labour-market recessions. Indeed, the cumulative job losses since the downturn got under way, exceeds the total losses of the previous seven recessions combined, while the 5 per cent drop in non-farm payroll employment from the business cycle peak is unprecedented in the modern era. There has been no net employment gain since 2000.

The unemployment rate jumped from 9.4 to 9.7 per cent last month, the highest since June 1983 and the more than five percentage point increase in the jobless rate from its cycle low is unprecedented.

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Of concern is the fact that the surge in the jobless rate is attributable in its entirety to widespread layoffs and not to a growing labour force, which is actually declining year-on-year for the first time since the summer of 1962.

The state of the labour market becomes even more disturbing when a broader measure of unemployment is used. The so-called labour underutilisation rate, which, in addition to all unemployed workers, includes those marginally attached to the workforce and those working part-time for economic reasons, has more than doubled from a cycle low of below 8 per cent to a record high of 16.8 per cent.

In contrast, labour-market underutilisation was essentially flat at 9 to 10 per cent following the business-cycle peak of 2001. The level of slack in the labour market is far higher than that indicated by the standard unemployment rate during the current recession as compared with 2001. Not only has the US unemployment rate risen faster than during earlier US recessions but US workers unfortunate enough to lose their jobs are remaining unemployed for longer periods of time during this downturn.

The mean duration of unemployment has soared to a record high of 25 weeks as against a previous high of 21 weeks in August 1983.

Furthermore, the long-term unemployment rate, or the share of the unemployed, who have been out of work for more than 27 weeks has jumped to an unprecedented 33 per cent.

It is normal for the long-term unemployment rate to rise during an economic downturn as the number of new job openings falls. It is a lagging indicator and peaks several months after the economy has turned the corner. This is what is observed for the previous two downturns with the highest rate of long-term unemployment. The rate peaked seven months after the business cycle trough in 1982, at 26 per cent in June 1983, and 28 months after the economic recovery took hold in 2001, at 24 per cent in March 2004.

It is disturbing that the current rate of long-term unemployment is already well above the peak levels of all previous labour-market downturns and double the average peak of the previous nine downturns.

Long-term unemployment has been on an upward trend since the 1980s.

It is reasonable to conclude that the US labour market is becoming more inflexible and increasingly less able to create enough new jobs to prevent long-term unemployment from drifting higher.

The economic downturn has resulted not only in massive job losses, but also in reduced hours worked, for those who are fortunate enough to remain in employment. The average working week last month was only marginally higher than the 33 hours recorded in June, the lowest level since the series began in 1964. This suggests that a turnaround in the labour market is some way off. After all, businesses typically work their existing employees longer before they increase their headcount.

The continued labour-market malaise is corroborated by the trend in initial jobless claims, which has essentially been flat for the past eight weeks. The four-week moving average has been stuck at roughly 570,000 since early-July and, though this is much improved on the elevated levels earlier in the year, it is still higher than the peak levels of the 1991 and 2001 recessions, and consistent with monthly payroll losses of 250,000.

The evidence suggests that the unemployment rate could easily exceed December 1982s post-second World War high of 10.8 per cent sometime next year.

The cyclical trends in the US employment market are clearly of some concern but so too are the long-term trends. These show that labour force growth is slowing while the sectors exhibiting structural gains in employment such as education and healthcare, are among the least productive. This has negative implications for America’s sustainable economic growth rate and the warranted valuation multiple for US stocks. Cyclical and structural considerations combined means that it is hard to get excited about stocks at current levels.