Productivity Unpuzzled

It is certainly the case that the recently reported NFP numbers were poor. Compared to a mean/median of 193k a month in private job additions over this past six years or so, June’s paltry total – of 65k after we add back the 40k Verizon strikers – was 1.9 standard deviations away from what we have become used to.

Indeed, taking the raw, 25k increment, this was the worst showing since early 2010, capping off a three-month run which has been the worst since 2012. If we compare instead aggregate hours scaled for population, it can be argued that the figure has been edging into a zone which has been typical of past recessions – though, with frequent short-lived spikes in the record, this indicator needs the confirmation of subsequent bad months ahead.

The NAPM surveys appear to corroborate this, with the employment indices for both the manufacturing and non-manufacturing sectors dipping below the 50.0 contraction/expansion threshold. If we roughly weight the two, using the total payroll count for manufacturing and service jobs as our multipliers, again we see that, in matching the lows of February this year and, before that, the one set in December 2011, we again have to go back to the latter stages of the post-Lehman rebound to find a weaker reading.

Conversely, however, both initial and continuing employment claims remain at multi-decade lows in outright terms (the former, for example, stands 1.9 sigmas below the 32-year mean) and at a new nadir in the 47-year series as a percentage of the population.

If we are to hope to find possible grounds for a reconciliation of these two, seemingly disparate sets of figures, one only has to listen to the latest business surveys. These seem to be sending a consistent message: namely, that the well of willing and able workers has effectively run dry.

Take the NFIB’s ‘Report on Business’ which had the following to say:-

‘53% (up 5 points) reported hiring or trying to hire, but 46% reported few or no qualified applicants for the positions they were trying to fill. Hiring activity increased substantially, but apparently the ‘failure rate’ also rose as more owners found it hard to identify qualified applicants. 12% of owners cited the difficulty of finding qualified workers as their ‘Single Most Important Business Problem’… a high reading for this recovery period. 29% of all owners reported job openings they could not fill in the current period, up 4 points, revisiting the highest level for this expansion.’  

At the other end of the scale, the Duke University-CFO Magazine quarterly survey revealed much the same problems, as Fuqua School of Business Professor Campbell R. Harvey noted.

‘Our survey shows the aggregate [payroll] umbers miss a crucial point. U.S. companies rate difficulty hiring and retaining skilled employees as their second biggest concern – while last year it ranked fifth… [they] plan to increase their workforce by 2% over the next year, which would reduce the unemployment rate to levels not seen since the late 1960s. CFOs are telling us that expected wage increases 3.3% will greatly outpace expected increases in product prices [of] 1.5%.’

Accomplishment and aptitude failings aside, it is also clear that business formation has been in deep-freeze in the US – something for which it is very hard not to lay the blame at the doors of the state capitols, as well as that of Congress itself, for the ever increasing burden of cost, legislation, and regulation that they impose upon businesses, large and small.

The official figures on business births and deaths come in several slightly different versions – with three different levels of topicality and a partial confusion between ‘firms’ – i.e., legal entities – and ‘establishments’ i.e. physically distinct workplaces, but each shows a similar picture.

Taking the BLS version – at only six months out of date, by far the most timely – and it becomes all too evident that while net job creation in this recovery has been passable, the numbers of firms both being formed and folded has slumped to a secularly low percentage. Corporate Darwinism is no longer quite so red in tooth and claw, it seems.

Thus, after moving only cyclically through the decade which stretched from the ‘credit crunch’ to the Tech bust, the change in the numbers of those employed at private establishments either opening or closing each quarter declined from around 1.65 million to  1.27 million in 2014/15 – a drop of 25%. If we note that the overall establishment count rose by a sixth from 320,000 to just under 400,000 (a gain due entirely to an increase in the service sector), we can quickly deduce that many of these additions were micro firms (predominantly, from the evidence of other reports, sole proprietorships) and also that the jobs per establishment average itself underwent a decline of some 35% – and as much as 55% in the most badly affected industry, namely, manufacturing.

Indeed, in the last-named sector, this shrinkage combined with a 30% reduction in establishment births and deaths to produce a swingeing 70% reduction in the jobs associated with such birth/death firms.

In this distributional shift, might we have something of an explanation for the so-called ‘productivity puzzle’ currently furrowing brows in Ivory Towers everywhere?

After all, when the latest sheaf of forms to fill, records to keep, and licences to obtain lands with a thump on the desk of some giant MNC, the extra hours involved in administering them represent a vanishingly small fraction of the total used, but when Bob the jobbing Builder has to forsake plasterboard and plumbline for pen and iPad, average useful output takes on a decidedly southward slant

In passing, we should also note that this rise of what the government officially terms ‘non-employment companies’ – i.e., self-owned enterprises – goes some way to explaining some of the supposedly weak growth in wage income by shifting it into the ‘proprietors’ income column’. Other influences are the sizeable rise in benefits, as opposed to pay, and the generally welcome drop in the proportion of government jobs.

One wonders also if the traditional survey questions adequately account for such a shift in status and thereby severely understate the participation rate, whose decline in this cycle is the source of yet more widespread puzzlement. Answers, please, on a postcard.

An elaboration of this same phenomenon of difficulty in hiring can perhaps be also found in the Economic Innovation Group think-tank’s recent report, ‘Recovery & Growth’ which showed that half of all net new company formation as did take place of late has been concentrated in just 20 metropolitan counties – a tally which represents one in fifty such jurisdictions, if a far less skewed one-third of the population. The lucky few were located principally in Southern California, New York, and Texas while would-be employers outside such metropolitan clusters have often been left high and dry.

With everyone who is not otherwise racking up crippling debts in an ‘If-they-can-borrow-it-they-will-come-pay-fees’, pop-up ‘university’ as part of their rush to get to the Big City – there either to sit writing near-identical apps of dubious added utility in a ZIRP-funded, reverse-Matryoshka doll, Puh-leeze-Facebook-buy-out-my-cyber-start-up-before-the-money-runs-out ‘incubator’, or else microbrewing the beer to sell from their pulled-pork, hipster Street Food, Airstream trailer conversion – it is perhaps no wonder that unsexy, but otherwise viable, businesses in the boondocks seem to be struggling to recruit diligent, much less adequately-skilled, workers.

Supply may be as much a problem in the labour market as demand, therefore, while the dead-weight of an ever-mounting burden of law and regulation is doubtless at fault in both limiting hiring and in suppressing company formation. Indefensibly low interest rates – by actively encouraging creditor forbearance – ‘evergreening’ and ‘zombification’ – may, conversely, be preventing markets, red in tooth and claw, from weeding out the sickly members of the species and so improving the evolutionary fitness of the survivors.

On the other side of the equation, the mismeasurement of output (especially its real component) may be combining – albeit in an opposite sense – with the inability of traditional surveys to reflect new modes of working (the ‘gig’ economy, q.v.) to degrade the quality of the estimates of the outcome in terms of productivity.

Amid such imponderables, of one thing we can be sure, however: that none of these is a matter for activist monetary policy, much less for crass, fiscal ‘shovel-readiness’.

Recovery and prosperity, as ever, is built, one profitable job at a time, from the bottom up. Accordingly, it is to the well-tried foundations of micro we should look  – as politically unpalatable as that may be to interventionists and intellectuals alike – and it is the vainglory of ‘unorthodox’ macro which we should eschew if we are truly to assist them along their upward course.