Data Inspired Insights

Tag: economy (Page 2 of 2)

US Labor Market Update – The Grind Continues

On June 5, the Federal Reserve released its latest Employment Situation Summary. The results were slightly better than expected – 280,000 jobs added in the month of May compared to an expected 226,000. There were also small upward revisions to the previously released numbers for March and April.

In terms of the long-term trends in the participation rate identified previously (see here), this update didn’t really change much. The participation rate has more or less stopped falling over the past 12 months, currently sitting at just under 63% (see Chart 1). The percentage of the civilian non-institutional population[1] that is employed continues to climb slowly back towards to 60%, but is still well below the peak of over 63% reached in 2007.

Chart 1 – Participation Rate vs. Employed as Percentage of Civilian Population

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The benchmark unemployment rate for May was 5.5%, a slight increase from 5.4% in April and was matched by a slight increase in the number of people unemployed, up to 8.7 million. Even though this goes against the general downwards trend in unemployment since 2010, Chart 2 shows how this slight uptick doesn’t really impact on the broader trend.

Chart 2 – Unemployment Rate

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Unemployed Breakdown

Looking at the breakdown of the unemployed (see Chart 3), the average period of unemployment continuing to normalize, with the number of people unemployed for 5-14 weeks now below the number unemployed for less than 5 weeks. The group of people unemployed for 15 weeks or more, although still large by historical standards, also continues to fall in both percentage and absolute terms. To provide some indication of just how far the size of this group has fallen, in mid-2010 there were over 9 million people who had been unemployed for 15 weeks or more. That number is now less than 4 million, a decrease of over 55%.

Chart 3 – Unemployed Persons by Length of Unemployment

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The improving situation for the unemployed is also evident in the average weeks people spend unemployed (see Chart 4).

Chart 4 – Average Period of Unemployment

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Industry Breakdown

In Part 4 of this series, we looked at what was happening to the number of people employed in various industries in the US economy. Chart 5 provides an update for some of the more interesting stories from that piece.

Chart 5 – Employment by Various Industries

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By and large we see long standing trends continuing. Manufacturing continues to undergo a renaissance, bucking a long downwards trend. Nearly 1 million jobs have been added since the low point in early 2010. Education and health services, and professional and business services continue to grow strongly, while the government sector is basically still going nowhere.

Previously, we also looked in some detail at the Information sector, in particular the technology related subsectors. Chart 6 shows the breakdown of the information sector and its various subsectors.

Chart 6 – Employment in the Information Sector

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What Chart 6 reveals is that the ‘Other information services’ subsector is clearly adding jobs at a fast pace, with data processing, hosting and related services also increasing employment. Chart 7 shows the employment growth rate in these two subsectors combined since 2006.

Chart 7 – Tech Subsectors Employment Growth

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Since 2011, these sectors have been adding jobs at an annualized rate of between 6% and 8%. In total this has led to a 35% increase in jobs in these sectors since the start of 2011 – which is fantastic growth. But these subsectors are starting from a very low base –a 35% increase only translates into an additional 139,000 jobs. By way of comparison, over that same period, professional and business services added over 2.6 million jobs, education and health services added 1.9 million and even manufacturing added 700,000 jobs.

One thing to keep in mind though is that the tech boom is causing jobs to be created in other fields that service the technology sector. Lawyers, accountants, talent recruiters and HR personnel, among others, all provide support to the technology sector. Most of these roles are likely to sit in the professional and business services, which we just saw has added a lot of jobs. A big part of that story could be the tech boom.

 

[1] Persons 16 years of age and older residing in the 50 states and the District of Columbia, who are not inmates of institutions (e.g., penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces.

Australian Housing Bubble – Further Reading

Over the past 2-3 months, the mainstream media coverage of housing prices in Australia has exploded. Every commentator appears to have had a piece on this topic and was waiting for the right time to publish it. That right time is apparently now. For those interested in additional reading on this topic, here are some of the better pieces I’ve come across:

The banks and real estate: a Ponzi scheme that could ruin us? – Ian Verrender | ABC News

The housing crash we had to have: A Gen Y perspective on the bubble – Matt Ellis | Rational Radical

Another interest rate cut will fuel a housing bubble in danger of bursting – Greg Jericho | The Guardian

It’s not Hockey’s job comment that should worry us most – Michael Janda | ABC News

Blowing bubbles: the tricky task of tackling Sydney’s property market – Amy Auster | The Conversation

4 charts of the ‘largest housing bubble on record’ – Wolf Richter | Wolf Street

The Sydney housing bubble to pop – but how? – Michael Pascoe | The SMH

The mother of all housing bubbles – Chris Joye | The Australian Financial Review

Australian Housing Bubble Redux

In the recent piece about the Australian economy we touched on the issue of the bubble in Australian house prices. Over the weekend, Saul Eslake, Chief Economist at Bank of America Merrill Lynch and one of Australia’s most respected economists, added his thoughts to the debate. A lot of his concern is around the longer term affects on people who are locked out of the housing market:

“I would say [rising house prices] are causing social harm because they are widening the gap between those who have houses and those who don’t, and freezing younger generations out of home ownership,”

In a country like Australia where, much like the US, owning your house is seen as a noble goal that everyone should be able to achieve, this could signal a cultural change. Home ownership in Australia is at its lowest level since 1950 as investors increasingly snap up properties, not for the rent/income they will generate, but for the assumed capital gains. In recently released data from the Australian Taxation Office (ATO) for the 2012-13 financial year, 1,967,260 (or just over 15% of all taxpayers) claimed rental income. Of those, 64% declared a net loss (i.e. they claimed deductions for negative gearing). Think about that for a second – almost 2 out of every 3 people with an investment property in Australia are actively losing money on that investment. What do these investors do if their expectation of further capital gains changes?

“2 out of every 3 people with an investment property in Australia are actively losing money on that investment.”

With all these statistics, why is there still an argument about whether a housing bubble exists? A big part of the problem is that there is no qualitative measure of a bubble. In hindsight they tend to be blindingly obvious, but one of the reasons bubbles occur at all is that most people don’t notice them as they are inflating. Adding to the problem is the reluctancy of politicians and commentators to call out bubbles or even use the word ‘bubble’ because of the negative connotations – bubbles tend to burst. The following was the response of Australian Assistant Treasurer Josh Frydenberg when asked about the possibility of a housing bubble on the ABC Insiders program on Sunday morning:

“I don’t think there is a housing bubble… In the early 2000s housing prices increased by 20 per cent for three years in a row and then were steady for a decade. And there wasn’t a bubble that led to a major correction.”

However, as the situation becomes more extreme, more and more respected commentators are starting to sound the alarm on this issue, even if they avoid calling it a bubble. Saul Eslake again:

“What I do say, without any hesitation at all, is that Australian prices of housing in most Australian cities, and particularly in Sydney, are, as [Reserve Bank governor] Glenn Stevens called them in September last year, ‘elevated’,”

So, leaving aside talk of bubbles, what are the facts?

  1. Australians have record levels of housing debt as a percentage of income
  2. Almost 2 out of 3 property investors are losing money on their properties
  3. The median house price in Sydney is now over AU$900,000
  4. Rates of home ownership are at their lowest levels in over 60 years

Whether or not you want to call it a bubble, that seems unsustainable to me.

Labor Statistics Part IV – The Employed

Previously in Parts II and III, we focused on two subsets of the population that are not employed – non-participants and the unemployed. In Part IV, we finally move on to looking at the population of employed people. However, in a slight change of tack, instead of focusing on the characteristics of these people, we are going to look at the changes in the employment market in general and more specifically at the changes at the industry level.

Declining Industries

Chart 1 – Industries with Declining Shares of the Employment Market 1939 to 2015

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Decline in Manufacturing

Looking at the data, the big story since the end of World War II (1945 for those who skipped History class) is the decline of the manufacturing industry. Manufacturing was far and away the biggest sector in the US in terms of employment at the end of the war, but has seen its share of the employment market decline to less than 9% as of 2015. The reasons for this have been the subject of a lot of discussion (see here for example), but if we look at the number of manufacturing jobs (see Chart 2), as opposed to the percentage of the non-farm employment market, we see there are two phases to this decline.

Chart 2 – US Manufacturing Jobs 1939 to 2015

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As Chart 2 makes clearer, manufacturing in the US was actually still adding jobs from 1945 through to the late 70s, it was just that the other sectors were adding more jobs, causing the manufacturing sector’s share of the employment market to decline.

From the mid 80s onwards though, the manufacturing sector started declining in both percentage and absolute terms. Increasing automation and the shift of jobs to low cost manufacturing countries such as China, India and other developing nations started what would be a long decline for the industry. There is one ray of light though, and that is that the US has actually been adding manufacturing jobs for the past 6 years. Although this looks like a positive change, it is hard to say whether this is the start of a new trend or just an aberration representing the recovery of jobs lost in the last downturn. The 90s boom saw similar gains before they were reversed very quickly in the new century.

Where is the Tech Boom?

The sector that you may be surprised to see in the declining chart is the Information sector. Information Technology (“tech”) seems to be the only sector that anyone is talking about right now – glitzy product launches, podcasts (the excellent Startup) and TV shows (Silicon Valley is fantastic if you haven’t seen it). So why don’t we see it in the employment data? To explain that, it helps to break the sector down into its component industries (see Chart 3).

Chart 3 – Information Sub Industries, All Employees 1990 to 2015

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The finer level data only goes back to 1990, but this is the key period we are interested in anyway. What we see is that despite the hype, the two tech related sub industries (Data processing, hosting and related services, and Other information services) are still very small, even within the Information sector. In terms of the number of people employed, these two sectors are drowned out by the traditional publishing industry and the telecommunications sector. So even though the two tech sub industries have been adding jobs, it has simply not been enough to outweigh the job losses in the larger sub industries.

The Telecommunication Boom

The other interesting point on Chart 3 is how much the tech boom in the late 90s impacted on the telecommunications sector. Despite the popular perception that this boom was a tech boom (it is called the dot com bubble after all), the boom led to far greater increases in job numbers (and job losses after the bust) in the telecommunications sector than in the tech sectors. The boom in telecommunications was primarily driven by telecom companies rushing to upgrade networks and infrastructure in response to exploding demand for the two hot new products of the time: the internet and mobile phones. After the bubble popped, some large companies went bust, others consolidated, but the net result was a lot of job losses.

Expanding Industries

Chart 4 – Industries with Expanding Shares of the Employment Market 1939 to 2015

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Moving on from declining industries, let’s look at the industries that have grown their share of the employment market over the past half a century. The clear winners here are the Education and Health sector, and the Professional and Business Services sector.

Professional and Business Services

Professional and Business Services cover a range of services that have gone from non-existent, or the domain of niche firms, to being the domain of some of the world’s largest firms. Additionally, being employed to provide services within this sector has become very prestigious (legal services and management consulting are good examples), allowing these firms to attract some of the top talent in the market place.

Overall, the growth in the number of people employed to provide these services is largely explained by the increasing complexity of doing business. Increasing complexity creates demand in several ways, including the need for:

  • People who are experts in one or a small subset of specific business functions
  • People who are experienced in navigating an increasingly complex regulatory environment, and/or
  • Agility to quickly respond to certain business needs that preclude hiring and training staff internally

In recent times there has been talk about larger businesses attempting to ‘in-house’ some of the services that professional services firms typically provide, particularly legal services and various compliance functions. As of yet, this does not appear to be impacting the employment growth of professional services firms.

Inexorable Rise of Education and Health

The Education and Health sector has shown the strongest and most consistent growth of any industry over the last 50 years. But what explains this strong growth? Chart 5 provides a breakdown of the subsectors within this industry.

Chart 5 – Education and Health Sub Industries, All Employees 1990 to 2015

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The first thing to note is that all the sub sectors have been adding a large number of jobs over the past 25 years, but there are two standouts:

  • Social Assistance (child care workers, personal and home care aides, social and human service assistants) has gone from easily the smallest sub-sector in 1990 to employing as many people as the Education sub-sector, tripling the number of people employed.
  • Ambulatory Health Care Services (outpatient medical services like dentists, GPs, diagnostic centers and so on) has become easily the largest sub-sector over the past 25 years, adding over 4 million jobs.

Generally this provides further confirmation of what we saw in Part II of this series – that there are larger numbers of Americans retiring and as they do, the demand for certain services, particularly health care is also growing.

Childcare Catch 22

One additional point to make on this subject is regarding the growth in childcare services, a key component of the overall growth of the sector. As the model of the family has changed to one with two parents in full-time employment, there has been a corresponding growth in demand for childcare services. For a lot of families this has presented a question – is it worth paying for childcare (does the parent earning the least still earn more than the cost of childcare?).

This causes a catch 22 for the childcare industry in most countries – childcare typically struggles to attract enough suitable employees due to a combination of parents’ (understandably) high expectations and generally low pay. However, if businesses in the childcare industry were to offer higher pay to childcare workers to attract more candidates, they would need to raise the cost of the childcare to parents, leading to more parents simply dropping out of the workforce to stay home and raise their children instead. Because of a parent’s ability to provide their own childcare services, without Government intervention, it will be difficult for the wages of childcare workers to ever significantly exceed the average income for parents in the area they service.

The Financial Sector Reflects the Market

The last sector I want to spend some time on in this section is the financial sector. One of the noticeable things from Chart 4 is, as a percentage of the total non-farm employment market, the financial sector hasn’t grown since the late 80s. This would seem to contrast with the general notion of an ever-expanding financial sector that is taking over the US economy. Again, the fact that we are looking at the data in terms of the percentage of total non-farm employees can be deceptive. Chart 6 shows the total financial sector employees from 1990 to 2015.

Chart 6 – Financial Sector, All Employees 1990 to 2015

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Looking at this chart, we see the Financial sector did add a significant number of jobs between 1990 and 2015, but the number of jobs in the financial sector is still relatively small compared to the economy as a whole. Additionally, the number of jobs in the Finance sector appears to change in line with with the economy as a whole. Does that mean the Financial sector doesn’t need to be reigned in or that it isn’t sucking talent out of the US economy into relatively unproductive industry? That is a topic for a separate article, but the one thing that can be said is that in terms of the number of people being employed by the Financial sector, everything looks very much like business as usual.

Stable Industries

Chart 7 – Industries with Stable Shares of the Employment Market 1939 to 2015

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The Government Sector

Despite there being observations we could make about both the other two industries on this chart, I am going to focus on the most interesting story on this chart – the Government sector. The basic story in the chart is the build up in the percentage of non-farm employees in the Government sector from 1945 to the mid 70s, and then a slow decline through to 2015. Again looking at the percentages can be deceiving, so let’s look at the number of employees in the Government sector (Chart 8):

Chart 8 – Government Sector, All Employees 1955 to 2015

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The period from 1955 to 2009 saw a pretty consistent build up in the Government sector – close to 15 million jobs were added in this time. But since 2009, ignoring census hiring in 2010 (you can also see corresponding spikes in all years ending with ‘0’ for the same reason), the number of people employed by the Government had its biggest decline since the early 80s. To help determine what is happening, let’s look at the Government sector broken down into its three sub-sectors, Local, State and Federal (see Chart 9):

Chart 9 – Government Sub Sectors, All Employees 1955 to 2015

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At first this would seem to show a slightly confusing picture. This decline from early 2009 through to late 2014 represents almost 6 years right in the middle of Barrack Obama’s presidency, but for all the noise about political stalemate in Washington, the sequester and the Government shutdown, there appears to have been minimal impact on the number of Federal Government employees. At the same time, Local Governments have been slashing payrolls and State Governments have essentially been in a hiring freeze. The explanation for this is largely due to:

  1. The nature of Local and State Government revenue sources – the three main types of taxes that Local and State Governments collect are income tax, forms of sales tax, and property tax. All three sources took sharp downturns in the recession, with property tax continuing to decline even as income and sales tax collections were recovering.
  2. Balanced budget requirements – many State and Local Governments have balanced budget requirements, which meant in the face of sharply falling revenues, they were forced to slash expenditures. In many cases this meant cutting payrolls, which unfortunately only exacerbated the effects of the recession locally.

The combination of sharply falling revenues and the inability to use debt financing led to large job losses at the State and Local Government level. On the other hand, it is well known that Federal Government does not have a balanced budget requirement (much to the chagrin to some on Capitol Hill) and, in contrast to the State and Local Governments, significantly increased spending going into the recession (the American Recovery and Reinvestment Act of 2009). The merits and impact of Government financed stimulus may be debated, but the impact on employment within the Government sector is pretty obvious.

A Strange Observation

The other surprising observation from Chart 9 is that the Federal Government has employed more or less the same number of people since the late 1960s – all the growth in the Government sector has come from the Local and State Government sectors. The growth in Local Government makes sense, the population of the US has increased significantly in that period and providing Governance for that population requires more employees. We also see growth in State Government for the same reasons – but nothing at the Federal level.

Technology and other efficiency gains should allow fewer people to do the same amount of work over time, and the productivity gains between now the 1960s have been huge. Additionally, the impact of these efficiencies would be greatest at the Federal level where the scale of the work is typically bigger and there is less need to maintain a physical presence all over the country/state in the same way that Local or State Government has to. But the efficiencies wouldn’t apply everywhere:

  • To audit the same percentage of businesses over time, the IRS would need to continually hire additional auditors to keep up with the growing number of people and businesses
  • For Social Security to continue to service a growing population, the number of locations (and the staff to keep them running) would also need to expand significantly

Even allowing for a more efficient work force, it seems unlikely that the Federal Government has been able to maintain the same levels of service, regulatory effectiveness and Government advisory when the country has grown so much in population and complexity.

From here it would be easy to launch into a diatribe about an understaffed Federal Government leading to issues like the financial crisis, the failure to detect various huge frauds (Enron, Bernie Madoff), and the generally poor quality of Government services (the torturous immigration process comes to mind[1]). I could then also go on to talk about how using the points above to argue for further reductions in the Federal Government seems crazily wrong-headed. However, linking all these events to a shortage of Federal Government employees is far too simplistic. These events were caused by a range of factors and simply adding more Federal public servants would not have solved the problem on its own.

All that said, not increasing staffing levels for 50+ years does have an impact. The next time you are forced to suffer through some unnecessarily archaic (Federal) Government process, read about another fraud that the SEC and/or FinCEN failed to pick up, or lament that lobbyists are writing a significant amount of legislation that gets put before congress, keep in mind that collectively the Government agencies providing these functions are today operating with the same number of people as they were when Neil Armstrong took his first steps on the moon.

 

[1] Please don’t tell me that this is done intentionally to discourage applicants – there are plenty of ways to discourage applicants without wasting huge amounts of time and money.

 

Have any thoughts on what impact constant levels of Federal Government staffing since the 1960s might have had? Please leave them in the comments!

Labor Statistics Part I – Setting the Scene

The unemployment rate: in western countries this tends to be one of the most discussed and politicized of the official statistics produced by Governments. In the US, the unemployment rate has been under a higher than usual level of scrutiny since the 2008 financial meltdown led to historically high levels of unemployment.

However, as of February 2015 the unemployment rate has fallen to 5.5%, meaning it is back within the normal historical range and is expected to keep falling. So everything is all good right? Maybe.

Chart 1 – US Unemployment Rate Jun 1976 to Feb 2015

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Before we get into that, first a bit more detail on how the unemployment rate is calculated. For such a well-known statistic, it appears to be relatively poorly understood outside of the world of policy wonks. Ask the average person to guess how the unemployment rate is calculated and they are likely to guess something along the lines of the following:

equation_1

Someone with a bit more time to think on it may consider the fact that not all of the population are of a working age and factor that into their guess:

equation_2

But even this more refined calculation would result in an unemployment rate well into the 30%-40% range. The reason for that is, as the Bureau of Labor Statistics (BLS) outlines, to qualify as unemployed, a person has to be part of the Civilian non-institutional population [1] and meet one of the following two criteria (emphasis mine):

  • had no employment during the reference week, were available for work, except for temporary illness, and had made specific efforts to find employment some time during the 4 week-period ending with the reference week, or
  • were waiting to be recalled to a job from which they had been laid off.

As I am sure you can imagine, this definition leaves a lot of people that many would consider “unemployed” in some third pool, neither employed nor unemployed as the BLS defines it. These people are actually in a pool labeled “not in the labor force”.

From Bureau of Labor Statistics data, in 2014, people in the labor force made up 62.9% of the Civilian non-institutional population, leaving just over 92 million people outside the labor force. But this percentage of people in the labor force (also called the “Participation Rate”) has changed significantly over time. Chart 2 shows the Participation Rate since 1947:

Chart 2 – US Participation Rate 1947 to 2014

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There are several interesting things to notice here.

Firstly, from the early 60s until the late 90’s, the percentage of people considered in the labor force surged – from 58.7% in 1963 to 67.1% in the year 2000. To give you an idea of how that translates into numbers of people, that increase meant there were an additional 17.8 million people in the labor force in the year 2000 than there would have been if the participation rate from 1963 had remained unchanged.

Who were all these extra people? Most of this increase represents the movement of women into the labor force over time and the rise of the two income household, both of which can be seen in the increasing participation rate for woman (see Chart 3). Although this indirectly led to a lower participation rate for men, the overall result was an increase in the participation rate in general.

Chart 3 – Participation Rate by Gender 1948 to 2014

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The other major trend we can see in the Participation Rate over time is the downwards trend since 2000. By the end of 2014 the US had returned to a Participation Rate not seen since 1977. The result is that even though the headline unemployment rate has dropped back down to 5.5% as of February 2015, once the lower participation rate is factored, the picture isn’t nearly as rosy, as shown in Chart 4:

Chart 4 – Participation Rate vs. Employed Population as a Percentage of Total Population 1947 to 2014

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This has not gone unnoticed (see ForbesCNN and Bloomberg for example), but what is the cause and what impact does this have for public policy going forward? This will be something we will explore over the next few weeks in a series of articles – watch this space.

In the meantime, keep an eye on the Datasets section of this website for downloads of the various datasets being used in these articles.

 


[1] Persons 16 years of age and older residing in the 50 states and the District of Columbia, who are not inmates of institutions (e.g., penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces.

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