Bloomberg News

Firing Fades Without Hiring as Obama Pushes Payroll Tax Cuts

December 22, 2011

Dec. 12 (Bloomberg) -- Joblessness in the U.S. has declined far less than firings since the recession ended in 2009, creating a record divergence that shows companies lack the confidence to hire.

At 8.6 percent in November, unemployment has fallen 1.5 points from a 26-year high of 10.1 percent in October 2009. By contrast, claims for jobless benefits, which track staff cuts, have decreased 40 percent since peaking at an average 652,500 in the four weeks ended March 27, 2009, to 393,300 in the period ended Dec. 3.

Scarce jobs represent a threat to household incomes that risks pushing the world’s largest economy into a self- reinforcing cycle of meager gains in spending and employment. That is one reason President Barack Obama is pushing to extend a payroll tax cut that he says will spur purchases and push employers to look for more help.

“The pace of hiring is just so much below prior norms,” said Julia Coronado, chief economist for North America at BNP Paribas in New York. “There’s just a lack of demand in the economy. That explains the wedge between the jobless claims and the unemployment rate.”

The number of people filing jobless claims per week on average every month dropped to less than 3 percent of the total number of unemployed Americans this year for the first time since records began in 1967, according to figures from the Labor Department.

Payrolls, Claims

Employers added 120,000 workers to payrolls in November after a 100,000 gain the previous month, Labor Department figures show. Initial jobless claims tend to fall as job growth -- measured by the monthly non-farm employment report -- accelerates.

Unless lawmakers act by Dec. 31, the Social Security payroll tax -- which was cut to 4.2 percent in 2011 -- will return to 6.2 percent. Republicans are split over whether the tax cut should be extended and, if so, how its $185 billion cost in forgone revenue should be covered. Senate Majority Leader Harry Reid, a Nevada Democrat, said Dec. 7 that his chamber won’t adjourn for the holidays until an agreement is reached.

Even with an extension of the payroll tax cut, the gap between unemployment applications and the jobless rate would narrow only slightly, according to Drew Matus, a senior U.S. economist at UBS Securities LLC in Stamford, Connecticut. Temporary tax reductions make it difficult for households to draw up budgets, and the government should also consider multiyear cuts for businesses to stimulate employment, he said. Employers pay a 6.2 percent payroll tax in the first $110,100 of a worker’s wages.

‘Cautious’ Hiring

Employers “are being extraordinarily cautious and they’re not doing a lot of hiring,” said Matus. At the same time, he said “absent some sort of significant further downturn, they’re unlikely to dramatically ramp up the firing process” because they have already made adjustments to headcounts.

Companies like Eaton Corp., the maker of products for industrial and construction markets, say they will limit hiring next year as they watch the financial crisis in Europe and talks to curb the U.S. budget deficit.

“Because of that uncertainty in the U.S., we are being cautious here,” Richard Fearon, chief financial officer at the Cleveland-based manufacturer, said in a Dec. 7 conference call with analysts. “You will see us offering very conservative headcount plans, conservative capital spending in Europe. And I think you will see most companies taking that course of action.”

Repairing Finances

Maintaining the lower payroll tax rate next year would help households repair finances sooner as the housing market struggles to recover. Net worth for households and non-profit groups decreased by $2.45 trillion to $57.4 trillion from July through September, according to a Federal Reserve report last week, as the European debt crisis depressed stocks and home values decreased.

The overall employment gap represents a divergence from 2002, when the U.S. was emerging from an eight-month economic slump.

“The amazing feature of the last recession was how well consumer spending held up,” BNP Paribas’s Coronado said. “We were in the midst of the housing boom. Well, consumer spending held up because we were taking out home-equity loans. Now we’re deleveraging.”

Failure to extend the tax cut would subtract 0.5 percent from gross domestic product in 2012, according to JPMorgan Chase & Co.’s New York-based chief U.S. economist, Michael Feroli.

Spending Forecast

Not extending the cut would cause consumer spending, which accounts for about 70 percent of the economy, to stagnate in the first three months of 2012 after expanding at a 3 percent annual rate this quarter, Feroli said.

Some economists said that while employers want to add to their payrolls, they just can’t find qualified help.

“What’s going on here is a mismatch of the skills of the unemployed and at least some of the positions that are becoming available,” said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York. “This seems to be slowing the pace of filling those job openings.”

Also contributing to the lack of hiring, according to UBS’s Matus: extending unemployment benefits diminishes the incentive to look for work.

The Labor Department’s November jobs report showed an increase in long-term unemployment. The number of people without work for 27 weeks or more rose as a percentage of all jobless, to 43 percent from 42.4 percent.

‘Generous’ Benefits

“If you increase or extend unemployment benefits, it tends to increase the unemployment rate,” Matus said. “People are staying unemployed for longer than they typically would have in order to continue collecting more generous unemployment benefits.”

Not all economists share that view.

“Spending of unemployment insurance benefits stimulates the economy and demand for goods and services and thereby generates jobs,” said Heidi Shierholz, a labor-market economist at the Economic Policy Institute, a research group in Washington that supports policies that help lower- and middle-income workers. “If the extensions of unemployment benefits are allowed to expire, the economy will lose over half a million jobs. That clearly will increase the unemployment rate.”

--Editors: Carlos Torres, Christopher Wellisz

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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