Forecasting the 2011 Employment Market

Slalom Consultant Denis Farmer

Slalom Client Service Partner Denis Farmer helps clients in the financial services industry win on their most strategic initiatives.

We had a couple of requests for topics from our readers that we will cover with our next two posts.  Thanks for the feedback, and keep the ideas coming!

One of the requests was to address the issue of whether current unemployment is primarily cyclical or structural, which we will examine in this post. The other was to address inflation, which we will examine in our next post.

Cyclical vs. Structural Unemployment

Is the economy’s inability to generate enough new jobs to lower the unemployment rate a structural or cyclical issue?  This is the kind of question we love to work on!

First, the basics.  The structural camp proposes that some underlying factors of the market have shifted, and the labor force has yet to adapt.  That is, we have lots of people either in the wrong locations or with the wrong skills.  Anecdotally, this is a seductive argument.  One can imagine, for example, a crash in the bubbly housing market creating an excess of construction workers unable to find jobs in their trade.  One can also see a scenario where people are stuck in underwater houses, unwilling or unable to sell in order to go where the jobs are.

Slalom Consultant Andrew Houston

Slalom Consultant Andrew Houston is an experienced Finance and Strategy consultant with more than 15 years of experience working with leaders across a broad variety of industries to define and implement solutions to key business issues.

The cyclical argument puts the blame on demand’s doorstep, proposing that companies are cautious about expansion, and unwilling to put more people on the payroll until they see a demonstrable uptick in demand.

The backdrop is the on-going, elevated rates of unemployment that basically did not move in 2010 despite a reasonable amount of projected GDP growth.   The US needs about 150,000 new jobs per month just to keep our unemployment rate steady because of new entrants to the job market.  To begin to bring the number down requires around 300,000 jobs per month.  An unemployment rate is usually talked about as a percentage (9.8% for November, actually increasing from the October number), but that translates into a staggering 15.1 million people.  Over seven million jobs are needed to decrease the unemployment rate back to what many consider normal.  It is scary math to try to project growth rates necessary to make a meaningful impact on that number.  So do we have large pockets of people willing to work, yet structurally prevented from finding jobs?  Do we have employers unable to find properly skilled workers for key positions to support their plans?  Or do we have businesses unwilling to add people to the payrolls because of uncertainty in the future, content for now to support growth plans through increases in productivity (or happy to just tread water)?   Is it some combination of both?  What numbers can we look at to analyze this problem??

We spent some time reviewing the details of the employment reports provided by BLS to try and make sense of what’s really going on.   We talked about productivity in an earlier blog entry where the number of hours worked was essentially flat.  That would seem to indicate that those employed aren’t inundated with overtime because of an inability to fill open roles.  The jobs reports from BLS also don’t seem to indicate containment of unemployment to bubble categories.  For example, the retail sector lost 28,000 jobs in November.  Employment numbers have also dropped in stalwart categories such as information technology.

There is, not surprisingly, a curve named after an economist that attempts to quantify the relationship between open jobs and the labor force:  The Beveridge Curve.  For example, you can plot the Unemployment Rate on the X axis, and the Vacancy Rate on the Y axis.  High Vacancy and low Unemployment are generally associated with periods of expansion, while high Unemployment and low Vacancy would tend to indicate a contraction.

Beveridge curve of US economic data from 2004 through fall 2010. Data is from St. Louis Fed's FRED. Seasonally adjusted total nonfarm vacancy rate (JTSJOR) and unemployment rate (UNRATE). Made with OpenOffice.org Calc.

US beveridge 2004 through fall 2010, created by Wikipedia.org user Bkwillwm

One would expect, given our current situation, a combination of high Unemployment and low Vacancies; a buyers’ market for companies, awash in qualified candidates.  But what does the Beveridge Curve tell us about our current situation?  Well, like many things over the recent past, it’s not exactly following expectations.  The curve over the past 12 months shows an uptick in Vacancies in the face of persistent Unemployment.  Does this indicate a structural issue?  A handful of analysts have dove deep into the data with varying conclusions.  Some analysts conclude that this is a structural issue resulting from the housing problem creating friction in the labor force by preventing homeowners from moving to where the jobs are.  But other research points to noise in the job numbers from the bulge in employment caused by temporary hiring for the 2010 Census, and concludes that the shape of the curve is generally moving as expected during a cyclical recovery.  In this soup that is our economy, we believe that both components are contributing to the stubbornly high unemployment number.

In addition, as we discussed in last month’s post, unemployment is being impacted by discouraged workers being drawn back into the market. So while job Vacancies might be increasing, Unemployment will also need to work through an increase in those looking for work before it actually makes headway.

What do you all see in your businesses?  What would you need to see out there in order to increase hiring?  Or are you currently unable to find the right people to support your plans?
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About Denis Farmer
I am a Slalom Client Service Partner who helps clients in the financial services industry win on their most strategic initiatives.

2 Responses to Forecasting the 2011 Employment Market

  1. mike taveirne says:

    seems to be a tricky combo of both, but mostly structural to me. i don’t think we’ll be back down to 4% unemployment again any time too soon. consumers must deleverage their debt so that it’s not dragging on their economic participation; what money could instead be going to creating organic demand is instead being funneled away as interest payments on 300k mortgages for 200k homes.

    there’s over 600 billion in negative equity for those who are 20% or more underwater. this after the fed has been throwing money into the housing market. are homes really done correcting? it is hard for organic demand to grow while being a slave to debt, until it is wiped away through write-down or foreclosure.

    i also don’t know if we are really creating an environment today that encourages entrepreneurship or small businesses to start/thrive.

    on the macroanalysis site itulip they speculate those in green will still be able to maintain pricing power of their labor to some degree in the coming months of higher inflation. their forecast is for stagflation, and i think their case is pretty strong.

  2. mike taveirne says:

    ouch…

    mean duration of unemployment up to 40 weeks!

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