| BUSINESSWEEK ONLINE : OCTOBER 25, 1999 ISSUE | ||||||||
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| BUSINESS OUTLOOK
U.S.: Is Labor Demand Weakening or Is There a Shortage of Workers? Hurricane Floyd wreaked havoc on the employment data The September employment report was a real head-scratcher. Nonfarm jobs fell by 8,000, but wages ticked up by a large 0.5% from August, and the jobless rate stayed at a low 4.2%. Such contradictory data made it difficult to analyze what is considered the most comprehensive and timely set of economic numbers there is. It's best to look at the report from three separate angles. First, the demand-side explanation would suggest that businesses are scaling back their need for labor in response to a slowdown in economic activity. That could explain why payrolls shrank for the first time in 3 1/2 years (chart). Second, the supply-side argument would counter that, with a record number of people already working, the job weakness reflected a lack of able bodies to hire. Finally, given the effects of Hurricane Floyd and the notoriously large revisions that are typical for September data, perhaps the best handling of the report might be to toss it in the trash and hope that the October data give a clearer picture. That's what a lot of economists--and maybe even some Federal Reserve policymakers--are doing. Reading the job data correctly is crucial right now, because future Fed policy decisions will be based largely on the state of the labor markets. The Fed is concerned that tight job markets could push up wage growth far enough above the pace of productivity to generate price pressures. Policymakers would feel forced to hike interest rates again before that inflation risk flares up. SO WHAT'S THE ANSWER? First of all, given what other stronger economic data are saying, the demand-side explanation that the economy is slowing down looks weak. However, there may be something to the supply-side argument. The job data may be giving the first hint that the economy is bumping up against a severe shortage of workers. If so, then wage growth and attendant inflationary pressures will heat up. But more than anything, the weak numbers in the September job report simply look screwy. First of all, Hurricane Floyd wreaked havoc on the data. The Labor Dept. said that, excluding Floyd, payrolls would have risen by 50,000. True, that's still small, but keep in mind that September is traditionally a difficult month for the government to seasonally adjust, partly because of the timing of students leaving the job markets. According to economists at J.P. Morgan & Co., September payrolls are typically revised sharply higher. The Morgan analysts say that during the past five years, the average September payroll gain was originally reported at 121,000. But in the second revision, the average increase was refigured to 168,000. And by the time the Labor Dept.'s annual revisions were taken into account, the gain was 251,000--more than double the first estimate. That means that the September job loss could turn into a modest addition when the October report is released on Nov. 5. Plus, October jobs are likely to show a sizable rebound. Moreover, last month's data run counter to other recent job numbers. September payrolls, even adjusted for hurricane losses, were way out of line with this year's average job increase of 192,000 per month. And unemployment insurance claims gave no clue to the job loss. September filings were not significantly higher than the August average. Also, the labor report showed 21,000 more factory workers were laid off last month, but the purchasing managers' report and other industrial data show that factory activity is picking up. In a third-quarter survey, the National Association for Business Economics reported that 31% of the companies surveyed exported more last quarter. That was the highest percentage in two years, just before the Asian crisis unfolded. The employment data also show that retail stores laid off 49,000 last month, though retailers said that back-to-school shopping was solid. The large $10.8 billion gain in installment credit in August is another sign that consumers are still on a buying spree. Debt outstanding is up to a record 21.5% of aftertax income (chart). DOES IT SEEM PLAUSIBLE that businesses are not hiring because they cannot find qualified workers? Certainly, some of the data in recent months support this supply-side view: The jobless rate is at a 29-year low. A record percentage of people are already in the labor force, and labor-force growth has slowed. Moreover, with domestic demand still strong and foreign demand picking up, businesses should be hiring, not firing, and the workweek should be rising, not falling. If the shortage of skilled workers is becoming severe, though, the deficiency has implications for the economy. Businesses will have to raise salaries to attract needed workers. That will not be a problem as long as higher pay is met with commensurate gains in productivity. In its Oct. 5 policy statement, the Fed noted how productivity advances have fostered favorable trends in unit costs and prices. That trend may have continued in the third quarter as well. The total number of hours worked in the economy grew at a modest 2.2% annual rate, but economic output may well have grown about 4%, suggesting a strong productivity gain. However, keep in mind that hours worked dropped sharply in September due to Floyd, which could overstate the quarter's productivity growth. BECAUSE THE RELATIONSHIP between productivity and wage growth is so crucial to future Fed decisions, the 7 cents jump in average hourly pay in September, the largest gain in 16 years, was an eyepopper. Like the job loss, though, the wage gain looks odd. Hourly pay usually ticks up when there is a decline in low-paying jobs and the workweek, such as tourism-related losses from the hurricane. In the third quarter, average pay was up 3.7% from a year ago. While that means household buying power is still growing, the gain is below the recent peak of 4.3% hit in mid-1998 (chart). If, however, the supply of labor is dangerously low, then yearly pay gains could soon rise above 4%, putting upward pressure on unit labor costs. What about the argument that weaker demand is cutting hiring? Certainly, a few recent trends suggest some easing in the labor markets. For example, the number of discouraged workers is climbing again. And the quit rate--the percentage of unemployed who voluntarily left their last jobs--fell back in September, to 12.7% from a recent high of 14.5%. The potent data on consumers and manufacturing hardly show an economy slowing down, however. And demand must slow first before job growth does. Unfortunately, the apparent quirks in the September jobs report make it hard to say whether weaker demand or a supply constraint is the dominant influence in the labor market now. Luckily, the Fed will receive other reports--including the October jobs number and revised September data--before it meets on Nov. 16 to set monetary policy. By JAMES C. COOPER & KATHLEEN MADIGAN _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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RELATED ITEMS U.S.: Is Labor Demand Weakening or Is There a Shortage of Workers? CHART: September's Job Loss: Sign of a Slowdown? CHART: Busy Shoppers Are Borrowing Heavily CHART: The Rise in Pay Gains Is Not a Worry Yet INTERACT E-Mail to Business Week Online | |||
