Layoffs at a Low - Analyst Blog

The core problem in the labor market (and by extension the economy) is not a large number of layoffs, but rather a severe lack of new hiring. The number of jobs added or lost each month is one of the most significant economic numbers. On Friday, the market was severely disappointed when it learned that the economy added only 431,000 new jobs in May, almost all of which (411,000) were temporary census hires. That number, however, is a net number; the difference between the number of people finding a new job and the number that are being laid off, fired, retiring or quitting.

Even during the biggest of economic booms, there will be a sizable number of people getting laid off, and even in the darkest of economic hard times, there will always be some people getting hired. With a lag of a month, the Bureau of Labor Statistics (BLS) provides a more detailed breakdown. The data is for April, and April was a surprisingly strong month for job creation (even though at 290,000 it was well below the May level, but 218,000 of the April jobs were in the private sector).

As the graph below shows (from http://www.calculatedriskblog.com/), the number of people getting laid off (gold line) in April was at a near record low. The number of layoffs did spike to a record high at the end of 2008, but it fell rapidly throughout 2009 and has continued its decline in 2010. The problem is that the number of people getting hired also fell sharply. That decline actually started well before the recession really got underway, peaking in late 2006 (blue line). The number of net jobs in the economy continued to rise though as the total number of people leaving their jobs for what ever reason (red line) also declined slightly. The difference between the blue line and the red line roughly corresponds to the headline job creation number in the employment report. Notice that the difference is always very small relative to the levels.

Even in the darkest days of the meltdown of 2008 and its immediate aftermath, there were close to 4 million people finding new jobs each month, despite the economy losing on balance 740,000 jobs per month. In April a year ago, which was a pretty bleak time for the economy, a total of 4.182 million people were hired, including 3.795 million in the private sector. In the same month, however, a total of 4.651 million lost their jobs, including 4.396 in the private sector. A year later, there were a total of 4.304 million new jobs, including 3.946 million in the private sector. That’s a swing of 122,000 in total, including 151,000 in the private sector (in other words the government actually hired fewer people in April of this year than April of 2009).

While the net job losses had already started to abate by April of 2009, they were still downright ugly. April 2010 was a very nice month for net job creation, but it was mostly due to a decline in the number of job losses. Total job losses in April of this year were 4.000 million, including 3.706 million in the private sector, for a total reduction of 651,000 in job losses, including 690.000 in the private sector.

Only recently has the economy started to gain jobs on balance, with the blue line pushing above the red line. The job totals do include the census workers, so when the May data comes out next month, it will show a big upward spike in the blue line. The most encouraging sign in this report is the increase in the number of job openings, which are up by 603,000 from a year ago to 3.078 million at the end of April. That number however is still below the lowest point during the 2001 recession and its aftermath. Unfortunately this is a relatively new data series, and so it is impossible to see how the current experience looks relative to other deep recessions. The number of job openings does not look so great when you consider that there are 15 million unemployed, which means that there are, on average, five people looking for work for every job available. Still the sharp upturn is a very encouraging sign. The job openings (purple) line is a snapshot at the end of each month, while the hires and fires are totals for the month.

So what are we to conclude from this data? First, it is apparent to me that the economic stimulus package has done a much better job on the save side of “save or create millions of jobs”. The second thing I would conclude is that given the still huge imbalance between the number of job openings and the number of people looking for work, extended unemployment benefits are still needed. Saying “get a job” to someone who has no income is not really productive when there are no jobs to get. The problem is not really a lot of people getting pink slips, it is a dearth of handshakes saying “welcome aboard”. The decline in both hiring and firing could be pointing to something much more fundamental, sort of a hardening of the arteries of the U.S. economy.

Historically, one of the great strengths of the US economy has been its flexibility, particularly relative to Europe. An out-of-work American is, or at least was, much more likely to move from Detroit to Denver to find a new job than an out-of-work European was to move from Athens to Amsterdam. Language certainly plays a role, but even within European countries, migration from say Berlin to Bonn is much rarer than in the U.S. It is not clear if this is a permanent change, or something that happens only during recessions (another reason why it is unfortunate that the data series is not much longer).

I suspect that part of the reason is that so many people are underwater on their mortgages. Moving to a new job generally requires that one sell a home in one area and buy a new place somewhere else. However, if you have to show up at the closing with a $50,000 check to make up the difference between what you owe on the mortgage and what the house sells for, that new job might not look all that attractive, especially if you don’t have the $50,000.

We need steps to increase the number of jobs available. If that means running a budget deficit, then so be it. People without income do not pay any income tax, and require automatic stabilizer payments (unemployment insurance, food stamps etc). Thus, the cost of job creation is on balance much less than the “sticker price” of the program. If Congress appropriates $100 billion for job creation, the real cost is not going to be $100 billion, but more like $50 billion. As long as the jobs are not just digging ditches and filling them back up again, the economy will get something of value for the $50 billion net cost as well. The cost of financing for the government is at generational lows, so the burden it will put on the future is extremely modest.

Personally I would favor creating a “son (grandson?)” of the Civilian Conservation Corps. Those jobs would target teenage unemployment, which was running at 26.4% in May. If they were put to work cleaning up the Gulf Coast, the eventual cost to the government would be nothing, since the government could send an invoice to BP (BP) for the cost. Beyond that, there is plenty of productive work that could be done. Our infrastructure is crumbling and we need to replace water and sewage systems across the country (many of which were built during the great depression). It was not that long ago that a bridge over the Mississippi River collapsed, and there are still thousands of dangerous bridges in the country. If we are not going to fix them now, when will we fix them?. The disaster in the Gulf reminds us, as if we really needed to be reminded, that we need to move to a new renewable energy future.

I’m not a dreamer who thinks that we can generate overnight all of our energy needs from the wind and the sun, but we sure could be generating a lot more than we are today. In the process, we would create lots and lots of jobs. Moving towards more use of natural gas as a transportation fuel would also generate lots of jobs, as the reserves are on shore in this country. Both increased use of natural gas and renewable sources would also serve to reduce oil imports, and with it the trade deficit. Remember that each dollar of the trade deficit is a direct subtraction from GDP. Money that is not sent to OPEC (often eventually for nefarious purposes) is a dollar that could be circulating in the economy and in the process generating jobs.

A partial holiday on the employer part of payroll taxes would also be a potential way to generate more new private sector jobs. If it was tied to only incremental increases in an employer’s payroll, the cost would be relatively modest. The downside is that the reduction would come out of the Social Security Trust Fund and would hasten the day that it is exhausted. Offsetting the cost of the payroll tax reductions (and again there would be some natural offset since the trust fund would still be collecting from the employee side, and with more people working more dollars would flow in) with an increase in the gasoline tax, or a tariff on imported oil would also help on the oil consumption front.

Generating jobs has to be the first priority of the government. Yes, over the long term, the deficits and the debt need to be addressed. The long term structural deficits are different than the cyclical deficits we are dealing with now. The structural deficit is almost all due to the run away cost of health care. The health care reform bill did a little bit to bring down health care inflation, but not nearly enough, and further steps will be needed. Aggressively cutting spending (or raising taxes) now to try to bring the deficit under control is going to inflict a lot of economic pain, and will yield very little benefit in terms of bringing down the debt. Deficit reduction can wait, we need more jobs now.