Employment Levels Stubbornly Unresponsive
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The big monthly Employment Situation Report just released this week showed growth in nonfarm payrolls, but no progress in reducing the unemployment rate. There was similarly no improvement in the data series shown in this week's chart, which examines the percentage of the overall population which is currently "employed".
This data series is never going to get to 100%, because newborn babies and 95 year olds do not typically have jobs. Since 1948 when the Labor Department first started publishing this data, it has ranged from a low of 54.9% to a high of 64.7%, and the average has been 59.2%. So the reading of 58.6% for December 2012 is just a hair under that long term average.
The composition of the work force has changed a lot since 1948 when this data began. More women are now working outside the home than in the days of Ozzie and Harriet. But now more Baby Boomers are reaching retirement age and leaving the active work force. Since the economic slowdown began in 2007, there have been other workers leaving the work force for reasons other than retirement, and the frustrating point for the politicians is that their efforts so far have not done much to bring those work force numbers back up.
The point in this week's chart is that the Civilian Employment-Population Ratio is remaining stubbornly low despite the stock market making back almost all of what it lost in the 2007-09 bear market. There is usually about a 1-year lag between important bottoms in the SP500 and corresponding bottoms for this measure of employment. Over the four decades preceding this most recent recession, that lag has ranged from as low as 9 months to as high as 14 months.
We did not really see a normal sort of bottom in this Employment-Population Ratio this time. It did stop going down, but it still has not started going back up again like it has done after past stock market recoveries. The implication is that if we see another stock market downturn, we could see civilian employment levels go down even further.
One other interesting observation about this data relates to the recent discussions in Congress about what the ideal tax rates would be for reducing the deficit. Those who argue for higher tax rates have noted that the higher rates which were in effect during the 1990s led to budget surpluses, and thus they must be a good thing. But what those proponents of higher tax marginal rates evidently fail to consider is that the percentage of the population which was working during the 1990s was at an all-time high, well above the long term average levels, so there were more workers versus non-workers then, and thus a broader tax base.
This was partly because the Baby Boom generation was in its peak earning years. Boomers were born between 1946 and 1964, so at the peak for this ratio in 2000 they were 36 to 54 years old. Now at the end of 2012, the boomers are 48 to 64 years old. As a group, they are now at an age when they are less interested in starting new businesses, and more interested in keeping what they have as well as playing with their grandchildren. So Boomers as a group do not represent the same sort of engine of economic growth that they did in the 1990s.
Coming up behind them is an "echo boom" generation, which saw its peak year for births in 1990. As those youngsters reach their own peak earning and entrepreneurial years, we should expect a renewed economic boom. But right now, those people born in 1990 are just 22 years old, and so most of them are not quite ready to start the next great corporation, and they are certainly not ready to buy up all of the Baby Boomers' stock portfolios and McMansions.
From a policy standpoint, unless we can collectively find a way to get more of the total population back into the work force, we cannot hope to have the tax base needed to fund lofty federal spending goals.
Editor, The McClellan Market Report
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