US (Un)-Employment

Dear readers,

In last weeks’ Givanomics we explained the New Normal. In summary the New Normal stands for much lower economic growth, higher public debts and unemployment rates compared to the levels we were used to before the Great Credit Crisis 2007-2009.

This week we will have a closer look at some data of the US labour market in specific. The data we use is obtained by the Bureau of Labour Statistics, the Federal Reserve and research company Millennium Wave Investments run by John Mauldin.

Last month US unemployment hit 9.7%, getting close at the levels of the 1980-1983 economic recession. In real numbers, based upon a total labour force of 154,577,000 people available for the labour market, almost 15 million are out of a job right now. Over the last two years the US economy lost around 8 million of jobs.

This number is actually even worse if one takes into account the number of people who lost their full time job and have to accept a lower level part-time job. When this group is taken into account the unemployment number would be around 16.8% (this is also known as U-6 unemployment). Then we are not taking into account those who still would like to work but are not available anymore to the job market. Bear in mind in order to be part of the US labour market one needs to be registered. Those who lost all hope because of disappointment fall out of this database. Despite the fact that this is percentagewise a very small group, it would bring the unemployment number closer to 20%.

Reverting to the old normal would mean that 8 million people would need to be put back at work. On top of that one needs to take into account that the US labour market needs on average between 125,000 and 150,000 new jobs every month to accomodate newcomers to the job market. This comes from migration, people who graduate and/or women who are still entering the labour force.

Like there is subordination in a debt structure there will be a hierarchy in the job market to put all these people back to work. This will work out as follows:

The first signs of recovery in the labour market will be seen in the numbers of hours worked on a weekly basis. The first thing an employer usually does when demand is dropping, is to slow down the production process. Job lay offs are the last drastic measure to rationalise the business. From the moment that economic activity is picking up again the average hours worked in a week will start rising again. This fell from 34 hours a week to a record low of 33 hours last June.

Before there will be a substantial recruitment wave in the unemployed labour force, employers will ask part-time workers to work a bit longer, driving up the weekly hours worked. So these will be the first who will turn back to full employment. Then, if we get back to pre-recession levels of 33.8 – 34 hours worked a week, companies will hire back out of the available labour pool of fully unemployed people. The newcomers on the job market however will be the group who will find it most difficult to find a decent job.

When we extrapolate this group for the next 5 years this means that the US job market will need to add 150,000 or 125,000 * 12 * 5 or 7.5 and 9 million jobs. This comes on top of the 8 million people that lost their jobs during the current crisis.

This is the challenge the US economy will face: creating between 15.5 and 17 million jobs over the next 5 years. If we use the lowest number this still would mean that the US job market should grow on a monthly basis by 258,000, and this every month for the next 5 years.

This is a performance that the US economy not even matched during the “Old Normal”. During the booming years this average was around 230,000. If this is averaged out over the last 10 years the average was only 50,000. This was of course with a recession incorporated, but during the prosperous times of the Clinton years the US economy created only 150,000 on average every month.

We can almost guarantee you this will not happen in the absence of a Shadow Banking system that was the driving engine of cheap credit and overconsumption. As far as unemployment is concerned this is the New Normal. The US economy will have to adjust to a new environment of much higher unemployment rates which will have, in turn, a severe impact on spending.