Crime
in the Jobs Report
By John Mauldin
–
Calvin Coolidge, US president, 1923-29, in his role as Mr. Obvious
“Unemployment
is of vital importance, particularly to the unemployed.”
–
Edward Heath, UK prime minister, 1970-74
Every
now and then you get some good news. Economists had projected a good solid
185,000 new jobs, with the range of expectations running from a low of 150,000
to a high of 240,000. What we got was a boffo 271,000 jobs. Plus some green
shoots of potential actual wage-push inflation, the kind of inflation pressure
that most workers like, which means that, for a change, wages might start going
up faster than inflation.
The
unemployment rate dropped a whopping 0.01%, but that was enough to push the
rounded number down to a headline 5% unemployment (actual was 5.04%).
In
today’s letter, we are going to look briefly at the latest employment numbers.
Then we’ll explore some of the deeper, less understood facets of the employment
data. For some of you this may be a lot of detail, but for those of us who
think about employment (and you should, as it is THE ultimate driver for your
business and investments), understanding how the numbers work and what they
mean is important.
But
first, we are going to open registration for my annual Strategic Investment
Conference very soon. I’ll be hosting it in Dallas this year, May 24–27. It
will be over at noon on Friday the 27th so you can easily get back
home for the weekend. The airport is only about 25 minutes from the conference
venue, and Dallas is central, with nonstop connections all over the US, Europe,
Asia, and South America. You are going to want to register early, as there will
be several events with limited seating that will fill up on a first-come,
first-serve basis – your early registration will move you to the front of the
line. You can sign up to get advance notice by clicking here.
And
now let’s take a look at the unemployment picture in America.
Much Done
Let’s
rewind the tape from an email sent out by Philippa Dunne of the Liscio
Report so we can see where the new jobs came from:
Employers
added 271,000 jobs in October, all but 3,000 in the private sector.
Construction added 31,000 (well above its average of 19,000 over the last year,
though two-thirds of the gain came from nonres specialty trade, those who
finish buildings); wholesale trade, an above-average 10,000; retail, 44,000,
also well above average; finance, 5,000, less than half its recent average;
professional and business services, 78,000, well above-average; education and
health, 57,000, somewhat above average; and leisure and hospitality, 41,000,
also somewhat above average. Government added 3,000, all from state government;
local was unchanged, and federal, off 2,000.
Manufacturing
was unchanged.
This
employment report was all about gains in services industries, plus a little in
construction. Which squares with the data we have seen in recent months from
the regional Fed banks. Manufacturing is getting soft, and services are doing
well. Let’s look at a few charts that will help tell the story. The first is an
amalgamation of the regional Fed manufacturing indexes. The second is the
national manufacturing index, and the last one is the national
non-manufacturing (read services) index.
In
researching this piece I also came across a very useful chart that breaks down
unemployment by type. Let’s go straight to it and then add a few comments.
First,
the above graphs look at both the official unemployment rate and the broader
rate, which is called the U6 rate. The gap between the two measures is now
the smallest in more than seven years, a sign that slack in the labor
market is diminishing. And as the Fed weighs a potential rate hike, what may be
more important is the number of people working part-time who would prefer to
work full-time – that number posted its biggest two-month decline since 1994.
Janet Yellen has referred to this number as often as she has to any other
specific number. It is on her radar screen.
I’m
in Miami, where I’ll be speaking at a conference where my friend David
Rosenberg will also present. David has been predicting wage-push inflation from
a tightening labor market for over two years now. He kept talking about the
data, and I would look at it, but my old eyes couldn’t see the same trend or
interpret it the way he did. And I admit I may have teased him about the lack
of actual follow-through on that bit of data. Today’s data suggest that even
though it’s a little early to declare a trend, there is clearly a hint of
wage-push inflation in the air. David may even start taking victory laps. The
labor market is getting a little tighter; and for reasons we’ll go into below,
it may be even tighter than is apparent from the nonparticipation rate. So
David may very well be right. Finally.
As
my friend Joan McCullough writes:
Wage
growth: +2.5%. Can you smell the wage-push? That’s the intention, so
get used to it. So while extremely premature based on the metrics provided
yesterday, not the least of which is wage growth in the 3.5 to 4% range as
desirable to achieve 2% inflation, this is a start. And as you know, the
FED only needs a “start.”
When
we look at employment stats, we can easily forget that these percentages are
not just numbers. Each category includes real people. Some are happy with their
employment classification, but many aren’t.
The
BLS data don’t capture every nuance. Frankly, that would be an impossible task.
Laid-off factory worker Bob who sweeps floors at minimum wage 40 hours a week
while struggling to avoid foreclosure is “employed full-time.” Attorney Bill
with a six-figure income and two paid-for homes is also “employed full-time.”
Bob and Bill are in wholly different circumstances, but we don’t see that in
the data. We have no good numbers on how many of the 149.1 million employed
people look like Bob vs. Bill. Income statistics help, but plenty of
financially stressed people have above-average incomes. And the income data
used in “research” is often distorted by political agendas. Income data is one
example of the sort of statistics that you can torture to make the numbers say
what you want them to say.
The
BLS data does give us insight into some other employment categories, and that’s
what I want to discuss today. We will see how many people find themselves in
less-than-ideal circumstances and consider why they are there.
The
Labor Department’s monthly figures come from surveys of both households and
employers. Data from the household survey is what gives us the unemployment
rate.
The
October BLS summary table tells us the civilian noninstitutional population was
251.5 million. This is everyone age 16 and over who isn’t in the military,
imprisoned, hospitalized, in a nursing home, or otherwise separated from
society. That is out of a total population of some 319 million.
The
“labor force” is a subset of the civilian noninstitutional population. If you
are willing and able to work, you’re part of the labor force. The headline
unemployment rate is the percentage of the labor force not working when
surveyed last month. For October, 7.9 million unemployed in a labor force of
157 million gave us 5.0% unemployment.
Why
are these people unemployed? BLS actually gives us considerable detail, but the
media seldom dig that deep. Looking at the seasonally adjusted numbers in Table
A-11, we see six categories.
•
933,000 were on temporary layoff from permanent jobs.
•
2.1 million were “permanent job losers,” meaning they previously had jobs but
left them involuntarily.
•
899,000 had completed temporary jobs without finding new work.
•
789,000 were “job leavers” who voluntarily quit their last jobs.
•
2.4 million “reentrants” had left the labor force but were now looking for work
again.
•
807,000 “new entrants” had never worked but were now looking.
[Note:
I know the numbers don’t add up precisely. I think that’s because of a seasonal
adjustment.]
Now,
you can be unemployed without being “unemployed.” This is where it gets
confusing. Retirees, full-time students, non-working parents, and others not
working or seeking work are “not in the labor force.” They are neither employed
nor unemployed.
This
category has bedeviled economists since the last recession. The data is in Table
A-16 of the BLS report. What are these 94.2 million people doing if they
aren’t working? The number has been growing the last few years, but that might
be because baby boomers are reaching retirement age.
More
interesting is the subcategory of 5.7 million who say they want a job but are not
actively looking
for a job. How can those two things go together in the same person?
Last
month BLS classified 1.9 million of the not-in-the-labor-force people as
“marginally attached.” That means they want a job, have searched for work in
the last year, and would take a job if they were offered one, but haven’t
actively looked for work in the last four weeks.
Within
the marginally attached category are 665,000 “discouraged workers.” They didn’t
look for work (quoting BLS) “for reasons such as thinks no work available,
could not find work, lacks schooling or training, employer thinks too young or
old, and other types of discrimination.”
The
other 1.3 million in the marginally attached group didn’t look for work,
either, but “for such reasons as school or family responsibilities, ill health,
and transportation problems, as well as a number for whom reason for
nonparticipation was not determined.”
If
we were to move the marginally attached people into the labor force as
unemployed, the unemployment rate would look significantly worse. The size of
the labor force would go up from 157 million to 159.2 million, and the number
of unemployed would rise from 7.9 million to 10.1 million. That would make the
headline unemployment rate 6.3% instead of the 5.0% BLS reported for October.
Conversely,
if there were a way to address the issues that keep these people only
marginally attached, the number of employed people would go up, and the
unemployment rate would fall.
So
what barriers leave so many people marginalized? I’ll list three that I think
account for a significant part of the group. We have some hard data, but there
will also be some speculation on my part. I’ll be curious to know whether your
impressions match mine.
It
has been a very long time since I submitted a resumé or filled out a job
application (which is a good thing, because I think I’m essentially
unemployable). My adult children and their friends tell me that almost every
employer now wants to know if applicants have any criminal convictions in their
background. Some even ask if the police ever arrested you, regardless of the
outcome.
Thanks
to the Internet, employers can and do run background checks on applicants, even
if they don’t ask questions directly. Your odds of being hired drop sharply if
they find anything.
How
sharply? This is hard to pin down. Discriminating based only on a criminal
record is illegal in many places, so hiring managers won’t admit to doing it.
In any case, they can always find plausible reasons to put such applicants at
the bottom of the pile. The effect is the same.
This
is not a small problem. Pool data cited in a New
York Times story last February revealed that 34% of all
non-working men ages 25-54 had a criminal record. Is that the reason they
aren’t working? We can’t say for sure, but I would bet it is a huge factor.
Thinking
as an employer, I can understand why this happens. Legal liability is a big
concern. If you own a repair service and your workers go into people’s homes,
of course you don’t want to hire ex-thieves. If your workers drive business
vehicles, you would be nuts to hire someone with DWIs or drug convictions. When
you are looking at 10 applications for every job, it is easy to throw out the
34% that have felony charges. Boom. Gone. Look elsewhere.
At
the same time, does it make sense to arbitrarily rule out an otherwise
qualified applicant simply because of a youthful mistake? No, it doesn’t. The
problem is that a prospective employer doesn’t know the individual’s story and
doesn’t have time to find out.
I
happen to know more than one young adult who’s stuck in that employment
category. You probably do, too. They apply for jobs, get positive feedback… and
then the employer suddenly loses interest without saying why.
It
is extremely hard to stay motivated when this happens repeatedly. What can you
do? The conviction will follow you forever. I would bet this explains a big
part of the “marginally attached” group. They would work if anyone offered, but
they have little incentive to search. They fall back on crime, welfare, or the
kindness of family.
It
is not just jobs. Most of the nicer apartment complexes in Dallas will not
allow anyone with a criminal record to rent. My suspicion is that the situation
is similar in the rest of the country. What happens is that we end up creating
“ghettos” in certain areas where housing providers will rent to former felons
and those who were merely charged with a felony in the past. Getting those
records expunged is expensive and difficult.
And
while I’m on the topic, the way we treat ex-felons in the justice system is
criminal. I personally know of a gentleman who had a youthful drug issue, did
his time, got out of prison, and, because he was a jack of all trades, was able
to get work fixing things here and there. It was enough to put a roof over his
head and feed his two teenage daughters, who were trying to finish high school.
But the State of Oklahoma decided that he needed to pay $1000 in fines and
reincarcerated him for six months. (Which probably cost them, say, $15,000?)
There was no one to take care of his daughters, no one to pay the rent, and so
on. This story is repeated all over America every day. The criminal justice
system in the United States is more than broken, and it has gotten to the point
where it’s more than blind; it’s simply dumb. Three percent of the country is
either in jail, on probation, or on parole.
The
only solution I can imagine would be a much stronger economy accompanied by
labor shortages. Employers would then have incentives to accommodate
less-than-ideal applicants, who frankly might have more incentive than most to
work their derrieres off.
“Family
responsibilities” that prevent you from working are another way to land in the
marginally attached group. This can describe many situations, of course.
Childcare is a big one.
I
know families who still match the traditional pattern: Dad has a job; Mom stays
home with the kids. I know stay-at-home dads, too. They are the exception. Most
families seem to need two incomes to support even a modest lifestyle. If both
parents work, who takes care of the children all day? Especially if Grandma
lives across the country?
Decent,
professional
childcare isn’t cheap. I know people who spend $1,000 per month per child.
That’s for just a drop-off day care center. A full-time, reliable nanny costs
much more.
As a
strictly financial matter, paying that cost makes sense only if it allows one
parent to recover the childcare costs plus earn quite a bit more. The job
income will be taxable, too, while the imputed income from providing your own
childcare is tax-free.
Suppose
you have two preschool children. Mom has a $4,000/month job offer. To take it,
she must spend as much as $2,000 on childcare. She’ll spend probably $1,500
more on taxes, commuting costs, and work clothes. Should she take the job?
Probably not. Or she could cut back on the quality of the childcare she invests
in and deal with guilt and worry about her children.
On
the other hand, working when you break even or even lose a little can make
sense if you continue to accrue retirement, keep your health insurance, and
maintain an employment record that will lead to better-paying jobs in the
future. When you stay home with the kids for a few years, it’s hard to regain
that ground professionally. The economic impact of the choice to work or not to
work is not limited to the years when the kids need childcare.
Deciding
not to work puts the woman in the “marginally attached” category. She might
work if a much-better-paying job came along, but she doesn’t actively look for
one. I think this is a very common scenario that explains a substantial
fraction of the “marginally attached” category.
To
be in the labor force, you must be physically able to work. You have no doubt
seen stories about the sharp rise in disability claims since the last
recession. Are that many people really disabled? Fourteen million get a
disability check. About 57 million people – 19 percent of the
population – had a disability in 2010 (the latest statistic I could find),
according to a broad definition of disability, with more than half of them
reporting that the disability was severe.
Here
again, we don’t have good data. State governments and the Social Security
Administration have a process for investigating disability claims, and I’m sure
some people file false claims. The agencies probably do their best, but they
can’t catch every fraudulent claim.
People
who are legitimately disabled may or may not be in the labor force. They can
earn small amounts without affecting their benefits. I think this is a good
thing. The work gives them something to do and probably makes an otherwise hard
life a little more bearable. A story came out this week that fits right in
here.
Princeton
economist Angus Deaton and his wife, Anne Case, also a Princeton economist,
published a paper with surprising mortality data. Deaton, by the way, was
recently in the news as the 2015 Nobel laureate in economics.
Their
paper looks at death rates for middle-aged (ages 45–54) white Americans. They
found a sharp increase in mortality rates between 1999 and 2013 for this
particular group. The difference is stark and especially pronounced for those
with lower education levels.
Even
more surprising is what kills these people. It isn’t heart attacks or cancer.
The most common causes of death were suicide, drug overdoses, and liver
diseases linked to alcoholism.
Why
are middle-aged white Americans dying at higher rates now? I can’t even begin
to explain the racial aspect. Neither can Deaton and Case, apparently, but here
is their economic speculation. I added some paragraph breaks.
Although
the epidemic of pain, suicide, and drug overdoses preceded the financial
crisis, ties to economic insecurity are possible. After the productivity
slowdown in the early 1970s, and with widening income inequality, many of the
baby-boom generation are the first to find, in midlife, that they will not be
better off than were their parents.
Growth
in real median earnings has been slow for this group, especially those with
only a high school education. However, the productivity slowdown is common to
many rich countries, some of which have seen even slower growth in median
earnings than the United States, yet none have had the same mortality
experience.
The
United States has moved primarily to defined-contribution pension plans with
associated stock market risk, whereas, in Europe, defined-benefit pensions are
still the norm. Future financial insecurity may weigh more heavily on US
workers, if they perceive stock market risk harder to manage than earnings
risk, or if they have contributed inadequately to defined-contribution plans.
This
makes sense, but I still don’t see why the same factors didn’t raise death
rates for non-white Americans of the same age. But we certainly know that
middle-class workers have massively underfunded their retirement programs.
How
does this relate to employment? Among Deaton and Case’s cohort of 45 to 54 year
olds, there were probably many people who didn’t work. They were
chronically sick, addicted, mentally ill, or otherwise incapacitated. According
to the statistics, there were many fewer such people 15 years earlier, but the
apparent large increase calls into question much of our historical data.
Deaton
and Case drill into the problem:
Our
findings may also help us understand recent large increases in Americans on
disability. The growth in Social Security Disability Insurance in this age
group is not quite the near-doubling shown in Table 2 for the Behavioral Risk
Factor Surveillance System (BRFSS) measure of work limitation, but the scale is
similar in levels and trends.
This
has been interpreted as a response to the generosity of payments, but careful
work based on Social Security records shows that most of the increase can be
attributed to compositional effects, with the remainder falling in the category
of (hard to ascertain) increases in musculoskeletal and mental health
disabilities. Our morbidity results suggest that disability from these causes
has indeed increased.
Increased
morbidity may also explain some of the recent otherwise puzzling decrease in
labor force participation in the United States, particularly among women.
By
“morbidity” they mean sickness. The last line means they suspect people,
especially women, are leaving the labor force for medical reasons.
You
can read
the study online for yourself. It is only six pages. The paper is more
readable than most economic research. It really throws a wrench into some
common assumptions. Some 500,000 American workers who should still be with us
are now dead. What would the unemployment rate look like if they were still
alive and healthy? We can only speculate. Moreover, it seems like that millions
more in this group are very unhealthy. They are out of the labor force, as are
family members who care for them. They are also consuming healthcare and other
resources. That’s not positive for anyone. We would all be better off if these
people were healthy and working.
There
are a lot of other factors, some of them anecdotal, that may contribute to the
large number of people who are not participants in the labor force. I hear a
lot about age discrimination against older workers – people who are 50+ but not
yet of retirement age. Job coaches actually tell people not to go back more
than 10 years on their resumés or to include college graduation dates. I
imagine it’s easy for older job seekers to give up the search and try to live
on their savings or under-the-table work until they can get Social Security.
Another
subcategory in the “marginally attached” group might be those with specialized
skills that aren’t in demand where they live. The factory closed, but you can’t
move because your house won’t sell. Learning to do something different in the
latter part of your work life can be challenging.
Then
there are people who are in a gap between jobs. You quit job A and have job B
lined up, starting next month. You aren’t employed now, but you aren’t looking
for work, either. Thousands of folks probably fall in that group at any given
time.
And
as I mentioned, there are many people who are recovering from illnesses or
caring for relatives. “I’ll start looking for work as soon as the doctor lets
me.”
There
is also the growing phenomenon of young people simply opting to stay home and
not work. This from Pew
Research:
[L]et’s
look in particular at the youngest part of the eligible workforce. The share of
16- to 24-year-olds saying they didn’t want a job rose from an average 29.5% in
2000 to an average 39.4% over the first 10 months of this year. There was a
much smaller increase among prime working-age adults (ages 25 to 54) over that
period. And among people aged 55 and up, the share saying they didn’t want a
job actually fell, to an average 58.2% this year.”
What
we may be seeing at last is that many people who have been classified as
“marginally attached” have already opted to go to work, along with many who
were initially “not looking for jobs” and many who finally opted to take jobs
at lower wages. So now, in order to entice additional workers, businesses may
have to think about paying more money.
That
is precisely what is supposed to happen in a tight labor market, and we have
been waiting for one of those since the end of the Great Recession. Maybe the
worker can finally catch a break. That would be good for everybody.
It
really is quite the sad thing. I seem to be the last man in America without
Uber. Not for lack of trying. I have downloaded the app so many times – and
updated it! – and I and my staff have on at least a dozen occasions
communicated with the staff at Uber, who have assured me that my account is
open; but every time I go to use it, it doesn’t work. My credit card is not
accepted; I’m holding my tongue wrong; someone or something has flagged my
account, and I can’t fix it until I talk the next day to somebody from Uber;
and that takes another day or two.
By
the way, when I say “talk,” I mean conduct an email conversation with an Uber
employee. None of us have ever been able to get an actual live person on the
phone. The irony is, there is someone else successfully using my credit card
(with my permission) for Uber.
Oddly
enough, my Uber app’s not working has saved me a good bit of money. I try to
use it and it doesn’t work, and my friends who are with me all feel so sorry
for me that they whip out their phones and get me an Uber car, and of course
they have to pay for it on their nickel.
I
find myself in Miami this afternoon, waiting for our rooms to open up, sitting
in a restaurant finishing this letter and listening to Danielle DiMartino Booth
and David Kotok at the next table. Jeff Saut and I will debate tomorrow morning
with host Todd Harrison at the T3
Financial Festival. David Zervos, Barry Ritholtz, Downtown Josh Brown, the
guys from Fast Money, and other friends are all here, which will make for fun
parties and good conversations.
There
was a fabulous article
about Danielle in the November issue of D
magazine. She told me the writer interviewed her on and off for a year, and the
only quote anybody will remember is the one in which she used the words delusional and Fed in the same sentence.
She was Dallas Fed President Richard Fisher’s speechwriter and go-to on Wall
Street research; but now that she has joined Philippa Dunne and Doug Henwood at
the Liscio Report,
she is free to speak her own wickedly razor-sharp mind. It will be interesting
to watch her career. Incidentally, I am trying to get her to introduce me to
her publicist!
I’m
essentially home for the next two months, except for occasional day trips that
will take me to Detroit, New York, and maybe a few other places. I really need
to hang around the apartment, work on my book, and get back into the gym
regularly.
Number-two
daughter, Melissa, is having her 35th birthday party tomorrow. She
has agreed to help me work on this book project, coordinating the some 100
volunteers who want to be involved plus consolidating a lot of the writing
work. She brings a great deal of enthusiasm, which we are all hoping translates
into results.
On a
side note, if anybody knows an executive at Nuance Software, I would really
appreciate an introduction. Now it’s time to hit the send button. Friends are
starting to show up, and I want to stop being the only guy having to work at
the bar. You have a great week.
Your
planning to stay in the labor force for a long time analyst,
John Mauldin
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