Working Hard?

The financial media has been pointing out that employment is steadily improving.  A cursory look at the numbers seems to support that.  For example, the unemployment rate has declined to 8.2%, down from 9.1% last year.  Some will be quick to point out the decline was due to workers leaving the labor force, and not because of improving employment.  However, it’s difficult to say that no job-related measures have improved. Over the past year, the number of jobs created has certainly increased.  Figure 1 shows the monthly total non-farm payroll numbers since January 2011.

Figure 1
Source: Bureau of Labor Statistics, BCM

The trend is up, but there more be more to the story than meets the eye.  Job growth is important, but income growth is arguably more important.  If people (in aggregate) are working more but making less, then we’re not really making progress. It would imply that we are increasing the number of low paying (and likely low skilled) jobs.  That might be a welcome sign for a developing country, but not for an advanced one like the US.  Figure 2 shows the annual percentage change in real personal income since 1983.  It’s fallen off a cliff since 2009 and is near historically low levels.

Figure 2
Source: Bureau of Labor Statistics, BCM

Clearly, this doesn’t match the picture that job growth numbers are framing. We may be increasing the number of jobs, but real income is actually declining. Ultimately it is income that drives consumption, and as we all know, consumption drives about 70% of our economy. The point is that economic conditions may not be as robust as some indicators imply. Employment is one such example.  From one side it appears that more Americans are getting back to work, but from another, it looks as though the type of job creation is hardly working.

Victor K. Lai, CFA

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