Tuesday, January 17, 2012

Is the Recovery Jobless?

Well … it’s not literally jobless … but job growth is pretty low.

Having said that, the narrative you hear commonly amounts to nothing deeper than “corporations are big meanies who are doing this … on purpose”.

Here’s one take on that story from the January 17 issue of The Wall Street Journal entitled “Man vs. Machine, a Jobless Recovery”. Here’s the chart (the right 6 panels are just the 2 panels on the left enlarged):

There are 3 things to think about: 1) the surface impression we get from the chart, 2) why business would behave that way, and 3) whether or not it’s a good comparison at all.

First, clearly businesses are investing more than in past recessions. That’s good. But, they’re not hiring as fast either. That’s bad. Having said that, they have to have priorities, they can’t do both, and so there must be some shifting going on from investments in labor to investments in capital.

Second, taken at face value, is that such a bad thing? The thing is, investments in capital makes labor more productive. Opposed to that is that if the objective was to make capital more productive you’d add more labor to use it.So, firms are not trying to get more out of the capital they have; rather they are trying to get more out of the labor they have. If all they were concerned about was their machines and how to make them as productive as they could, they’d be hiring like crazy to keep the machines running 24 hours a day. They’re not, so they must be concerned with something else.

Given that firms are not hiring much, they are clearly choosing to improve the workers they have, rather than bring in new people to train. This is a fairly clear statement that, in large, they are happy and supportive of the workers they have, and happy to leave alone the workers they don’t have or want.

So, there’s a very strong statement in this data about people who have jobs versus people that don’t. This isn’t a story you hear much in the legacy media.

But third, to what extent are we being gamed by the reporting in this article? I think we are, but given the data, I don’t have a really good substitute, so it’s possible the reporters are just using the best thing they have.

So, what’s the problem with this data?

Consider the blue line first. To get this, you have to go to your real GDP data.

Remember GDP comes in 3 flavors: expenditures (spending), income, and value-added (in production). The blue line is part of expenditures.

But, it’s not the whole thing. Remember that expenditures come in 4 flavors: private consumption expenditures (household spending, broadly called consumption), gross private domestic investment (firm spending, broadly called investment), government consumption expenditures and gross investment (government spending), and net exports of goods and services. The blue line is part of investment.

But again, it’s not the whole thing. This is divided into fixed investment (buying new stuff) and changes in private inventories (“buying” your own stuff on your books because you haven’t sold it yet). The blue line part of fixed investment.

But, for a third time, it’s not the whole thing. Fixed investment gets split into nonresidental and residential spending. The blue line is part of nonresidential investment.

But, for a 4th time, it’s not the whole thing. Nonresidential fixed investment gets divided into spending on structures and spending on equipment and software.

What the blue line is showing is just growth in the flow of spending on equipment and software.

Nothing I’ve said about the blue line makes it wrong. I’m just emphasizing that they’re tunneling down quite a bit, so we’re definitely skipping past a lot of other stories that the data might tell us to get to a very specific story that the author of the article wants to tell us. If you’re curious, you can find (easier to interpret) indexes that correspond to what’s in the graph by going to the Bureau of Economic Analysis and going to Table 1.1.3, or you can go and see the real/chained dollar values in Table 1.1.6. The latter emphasizes that they’ve tunneled down to focus on growth in about 7% of the economy.

And all this work is then compared to the orange line. This is private-sector jobs. Not jobs in any way related to nonresidential fixed investment in equipment and structures … just … jobs. If you’re curious, you can find this data by going to the Bureau of Labor Statistics page for employment statistics, clicking the green button for “One-Screen Data Search”, and choosing “All Employees”, then “Total Private”, and then clicking “Get Data”. This data isn’t even a flow — it’s a stock variable.

Comparing these is a bit of a stretch. Not a bad one necessarily — it’s just something worth pointing out.

As business students, you should be able to recognize at least part of the problem though. The sort of capital purchase they’re talking about here is something that would be reported as part of cost of goods sold on a firm’s income statement. You would certainly be able to compare this at the firm level to the portion of cost of goods sold that goes to workers; it would be even better to break it down into continuing versus new workers. But, we don’t have that sort of data at the aggregate level. Even so, there isn’t any anecdotal information around about specific firms that are diverting outflows from payroll to equipment purchases.

However, this might point us in a better direction. We could go back to the BEA site, and take a look at Table 1.12 instead. Then we could look at the part of compensation to employees, and then to the portion that is wage and salary accruals (which would miss quite a bit), and then focus on the quaintly named “other”. In this case, “other” is pretty much everything you’d normally think of when envisioning paychecks going out the door of private firms. And here, you see something interesting: “other” is up 6.9%, while government is up by 1.1%. That’s right, all that investment, while not putting wages and salaries through the roof, is pushing them up 6 times faster in the private sector than the public sector. It’s even better if you go down just a bit to Proprietor’s Income, which is up about 20% over this period.

Both of these occurred with very little job growth, so we now get a much better picture that firms are spending a lot on providing their existing employees with a lot of capital to help them do their jobs better, and blowing off hiring from the pool of the unemployed. The big policy question then is, why are those people so unemployable?

N.B. Table 1.12 is not in real terms, so all of what I’ve said above is making the not unreasonable assumption that inflation was pretty close to zero over the period in question.

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