Tag Archives: wages

Between Jobs

Are we working hard, or hardly working?

Man shoveling at construction site. Photo: Igor Ovsyannykov. Source: Fancycrave

Both. The unemployment rate declined to its lowest level since 2001. Employers added jobs for the 80th straight month – the longest such streak on record. Wages are up 2.5% from a year ago – more than the 2% wage gains we were seeing last year, and significantly more than the 1.5% inflation rate.

But unemployment fell because people are leaving the workforce. The labor force shrank by almost half a million people in May, as baby-boomers retire and others leave the job market. Why are they leaving? That’s a good reason. The labor force participation rate for prime-age workers, aged 25 to 54 years old, has been falling for the last 20 years, and especially dropped off after the Great Recession, although it’s recently started to recover. But this last month didn’t help.

Source: St. Louis Fed

My biggest worry is the declining rate of job creation. Job growth in terms of the number of jobs seems steady, but the growth rate has declined modestly as a percentage of the total job market. Just two years ago the rate of job creation was accelerating, growing at more than 2.2% per year. Now it’s about 1.5%

Source: BLS

Maybe it’s the “retail apocalypse”: over the past four months, online sellers have added 12,500 jobs, while the rest of the retail sector has cut 92 thousand positions. Department stores have been especially hard hit. It’s worth keeping an eye on the retail sector. There are more than 16 million retail jobs in the US. Or maybe employers are just running out of people to hire. The number of job openings is still near a record level, even as the rate of hiring seems to be slowing.

While May’s employment report was disappointing, the job market isn’t in trouble yet. The unemployment rate is very low, and employers are creating more jobs than there are new workers entering the market. It’s really too soon to start worrying. But it’s not too early to start paying attention.

Douglas R. Tengdin, CFA

Follow the Money (Part 2)

Where do our wages come from?

Source: Wikipedia

As long as there has been work, there have been wages. Wages have been part of society from Ancient until the present. There are many references to wages in the Bible. Wages can be calculated by the task—a piece rate—or by the amount of time put in. Day wages were typical in the ancient world, but as soon as clocks were invented, hourly wages became more common.

Paying people by the hour has the virtue of being simple—if you don’t show up for work, you don’t get paid. But it also creates a conflict. It’s in the employer’s interest to get as much work out of a laborer as possible. But maximum effort isn’t always in the worker’s best interest. So wages always come with oversight—foremen and gang-bosses, usually paid a slightly higher wage—to keep the workers on-task and focused.

Still, wage-labor abstracts labor’s owners—the laborers—from the product of their work. When farmers cultivate a field of corn, the corn is a direct product of their work. It doesn’t matter how many hours they put in. What matters is that the job gets done. But with wages, businesses need to manage labor as one of many inputs into the production process. And they need to be sure they’re getting an honest day’s work for an honest day’s pay.

Because specialization brings benefits, most notably an increase in productivity. Ever since Adam Smith wrote about his famous pin factory in The Wealth of Nations we’ve understood that when everyone does what they do best—and trades their output for what others are producing—we’re all better off. It’s a win-win situation.

18th Century Pin Factory. Source: L’Encyclopedie

Wages create a conflict—perhaps the most basic conflict in economics—between those who own their labor—the workers—and those who use that labor—the managers. If firms want workers to act like managers, they need to find ways for them to share in the fruits.

Douglas R. Tengdin, CFA

Chief Investment Officer

Workforce Worries

Where have all the workers gone?

Photo: Doug Tengdin

Ever since the late ‘90s the labor force participation rate has been falling. There are now over 92 million adult Americans who aren’t working and aren’t looking for work. On its face, that’s a shocking number—almost a third of the population. And 20 million of these folks are in their prime working years. Where did they all come from? And what are they doing?

Source: St. Louis Fed

Actually, it’s not that big a mystery. When the Census Bureau conducts its monthly survey, it asks people what they’re doing. If they aren’t working or looking for work, they usually say why. By comparing their answers from fifteen years ago with now, we get a sense of what’s happening in the labor force, and why people aren’t working.

As with most large statistical trends, a lot of different factors are at work. The data show that young people are staying in school longer and getting more training. In addition, older folks are retiring earlier and living longer. And more middle-aged people have are receiving disability payments—most likely because screening criteria have been relaxed. In some cases, now, SSDI functions as extended unemployment insurance.

Source: Wall Street Journal

Our missing workers aren’t really missing. Young people eventually enter the labor pool. The economy demands more skills, and they need more training. A machinist may need to use calculus, now, to program a cutter tool along nine different axes. Older people are living longer, and many are retiring early. But changing our disability system would be a mess.

The workforce is constantly evolving, adapting to our changing economy. The low unemployment rate isn’t a false indicator. Eventually, companies will have to increase wages. And a new stage of economic growth will begin.

Douglas R. Tengdin, CFA

Chief Investment Officer

The Wages of Stagnation

Why are wages growing so slowly?

Source: Bureau of Labor Statistics

A couple of researchers at the Cleveland Fed have been studying this question. Why, at a time when unemployment has fallen from 10% to 5.5%, has wage growth been stagnant? In real terms, wages haven’t risen at all over the past five years—in contrast to how wages rose after previous recessions.

Cumulative change in compensation. Data for nonfarm business sector. Source: BLS and Cleveland Fed

Part of the answer has been low productivity growth. Over the past decade, productivity has only risen 1.4% per year. When productivity rises, labor is worth more, and employers compete for workers. So labor is worth less today. Combined with this is the effect of technology and cheap capital. With advanced software and ultra-low interest rates, it’s never been cheaper to borrow funds and buy a robot that can do the work of three employees.

Finally, globalization means that low-skilled and middle-skilled jobs are being outsourced. Firms can use temporary labor from developing nations to get clerical work done. This additional pool of labor may be depressing wages here. All this means that labor is getting a smaller and smaller slice of the economic pie.

Source: Cleveland Fed

Whatever the causes, there are signs that wages may start to pick up soon. Overtime is increasing—a process that can only go so far. Eventually, firms have to hire more full-time workers, which will put upward pressure on pay. Also, there is currently a record level of unfilled job openings. Filling those openings will push payrolls higher.

This means that profit margins may fall, even as total profit rises. Once we enter a virtuous cycle of rising wages leading to a stronger economy leading to more rising wages, the Fed should have no trouble returning interest rates to normal.

Douglas R. Tengdin, CFA

Chief Investment Officer

Employment, Wages, and the Fed

Don’t put the cart before the horse!

Source: Edublogs

That’s what I thought when I heard that the Fed is targeting wages as an economic indicator. Over the past several years hourly earnings have been stagnant. Some say the Fed shouldn’t raise rates until household income improves. And since real wages haven’t moved, Fed policy should stay where it is. Only in the past couple years have wages begun to outpace inflation.

Continue reading Employment, Wages, and the Fed

The Wages of an Oil Bust?

Could falling oil prices delay the Fed’s rate hike?

Source: Federal Reserve

Among economists the current consensus is that the Fed will begin to raise interest rates sometime in mid-2015. There’s discussion about their official statement which explains that they expect to maintain the current rate regime for a “considerable time” following the end of their asset-purchase program, which ran out in October. A change in the statement would continue to prepare the markets for higher rates—something the Fed wants to do. Gone are the days of Alan Greenspan’s creative obfuscation. Now the Fed wants to gradually guide the markets’ expectations. The best surprise is no surprise.

Continue reading The Wages of an Oil Bust?

Productively Growing

Why does productivity matter?

The textbooks tell us that rising productivity is essential to rising real wages. That is, as workers do more, they can be paid more. But why? Won’t employers just pocket the extra earnings? That’s what seems to be happening now. Rising productivity following the Great Recession has led to rising profits and stagnant wages, soaring stocks and a lagging labor economy.

In the short run, yes, when firms can expand production using the same number of workers, they will, and their own profits go up. But that money has to go somewhere—either into increased capital spending, or increased dividends, or even investments, pushing interest rates down. It doesn’t just sit in Scrooge McDuck’s vault. It cycles through the economy, increasing demand for goods and services somewhere else.

As technology makes older industries more efficient, businesses arise to build the new gadgets. These start-ups usually lose money to begin with, and some don’t survive. That’s part of the reason small-cap stocks are more risky that large-caps. They can fake it ‘till they make it, but some don’t make it. Eventually, though, some firms do, and an entire new sector is born—with its own labor needs and wage structure. Cart wrights become automakers become drone engineers.

Economic thinking separates short-run and long-run effects. In the long-run, we all may be dead, but rising productivity means our kids and grandkids will be better off.


Douglas R. Tengdin, CFA
Chief Investment Officer
Phone: 603-224-1350
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Athletic Madness

Are college athletes exploited?

With the NCAA Basketball tournament reaching the heights of hype and football players from Northwestern University trying to unionize, it’s a reasonable question. After all, the schools make a lot of money off these sports—TV rights, merchandizing, ticket sales—not to mention the cachet that comes from being a national champion. In an era of branding and name-recognition, it pays to be number one.

So the question is, should these athletes be paid—or paid more, since they do receive scholarships. First, let’s note that we’re talking about football and basketball. Other sports are money-losers for colleges, no matter how we may personally feel about our alma mater’s ski or swim teams. Those sports are part of the educational process, but there aren’t enough gate-receipts to pay for the equipment, trainers, coaches, and facilities necessary for a top track or soccer program.

But football and basketball are big business. And the schools treat them as such, booking tens of billions in revenues. We should note that the professional football and basketball don’t have their own farm systems—they use the NCAA. And the glamour and pressure of a national championship serves a high-visibility try-out for the pros. It did for Michael Jordan and Andrew Luck.

But all the cheating scandals, convoluted NCAA rules, and off-the-books booster outrages are indications that the simplest way to value labor—wages—is being suppressed. And the athletes at Northwestern aren’t necessarily looking for cash; they want scholarship-security and health protection if they suffer career-threatening injuries.

It’s hard to argue that these athletes don’t deserve better compensation. Without their labor, the schools have no TV-rights to sell to ESPN and CBS. Adam Smith noted 238 years ago that businessmen rarely meet together without contriving some scheme against the public. These workers should tell the schools: no pay, no play.

Douglas R. Tengdin, CFA

Chief Investment Officer

Double Trouble?

Should we double the minimum wage?

That’s what entrepreneur Ron Unz thinks. He proposes to increase the minimum wage in California $12 an hour. Some other folks want to increase it to $15 per hour. They claim that higher wages will lead to higher spending, and this will stimulate the economy. In addition, companies like Wal-Mart or McDonalds can afford it. Wal-Mart’s net profits were $17 billion last year; McDonalds made $5.5 billion. But those companies’ biggest expense is labor; if the minimum wage were doubled, profits would fall by about a third. Companies would respond by raising prices and eliminating jobs.

But that’s just what Ron Unz wants. He says that the low-pay, low-skill jobs are exactly what America doesn’t need. A higher minimum wage would eliminate the lowest-rung jobs that currently draw illegal immigrants. Manufacturers would relocate factories overseas, and entry-level services would be replaced by people doing things themselves. But these effects wouldn’t be limited to immigrants—everyone would suffer.

When you artificially raise the price of something you reduce demand and increase supply. Raising the price of labor will cause businesses to cut jobs and increase—not decrease—competition for the entry-level jobs that remain, hurting those that higher minimum wages were supposed to help.

You can’t change the laws of economics via legislation. What we need are more jobs. This isn’t the way to get them.

Douglas R. Tengdin, CFA

Chief Investment Officer