EH EDGE: The "Other" Employment Report Explains A Lot

On the first Friday of every month, the Bureau of Labor Statistics (BLS) issues a report officially known as “The Employment Situation.” It is by far the most carefully watched release of economic data in the world because it provides the freshest look at one of the most important variables in the economy, in a great amount of detail. The report contains the most commonly cited headline numbers in the media such as the unemployment rate, the number of non-farm payroll jobs created, average hourly wages, and the number of people participating in the labor force. Over the past few years, the report has shown reasonably strong job growth, a steadily declining unemployment rate, and slow growth in wages. However, over the past three months the report has shown an alarming decrease in the number of jobs created, as well as a sharp decline in the number of people in the labor force. For the May report, expectations had been that the economy would create around 160,000 jobs, but the actual report showed only 38,000 jobs, which is a huge “miss.”

Now, another less widely watched employment report is providing an explanation for this “miss,” as well as for other economic phenomenon. The BLS’s monthly Job Openings and Labor Turnover Survey (JOLTS) contains details about the rate of job openings, hirings, firings and quits during the month. As shown below, the hiring rate normally exceeds the openings rate, largely because hirings are counted over the whole month, but openings are only counted on the last day of the month. However, since the end of the recession in 2009, the job openings rate has been climbing much faster than the hiring rate, and recently the job openings rate has actually exceeded the hiring rate for the first time. The data suggest that since the end of the recession there have been an increasing number of jobs available, but there have not been enough people available with the right skills to fill those jobs. Thus in the Employment Situation report, job creation has fallen off sharply in the past three months because there’s no one to hire. This skills mismatch, which can’t be readily resolved, is an impediment to both job growth and to the growth of the entire economy in general.

In April the job openings rate for all private industries rose 0.1% to 3.9% while the hirings rate fell 0.2% to 3.5%, resulting in a record gap of 0.4%. The skills mismatch is particularly significant in the trade/transportation and utilities industries where the gap has turned positive for the first time, and in the manufacturing industry where the gap has leapt to a record high of 1.1%. The New York Times recently reported that a major problem manufacturers and trucking companies have is finding potential employees with one skill in particular – the ability to pass a drug test. The increasing social acceptance of marijuana use is clashing head on with the requirements of the labor market, again creating an impediment to economic growth which can’t be readily cured.

The skills mismatch has already imposed a stiff headwind on the economy throughout the recovery because those people who were hired started their jobs with an imperfect set of skills to perform those jobs. As a result, productivity growth has been miserable, actually shrinking in Q4-15 and Q1-16, and growing at an annual rate of only 0.9% during this entire recovery, less than half that of the post WWII average of 2.3%. It’s no coincidence that GDP growth during this recovery has been below average by 1.2%, about the same difference as the productivity gap of 1.4%. Furthermore as wages have continued to grow and productivity has continued to fall, unit labor costs have increased at a stiff 3.0% y/y rate.

 What this means for your business

Companies that are having difficulty finding the right employees face an unpleasant combination of constrained growth and rising production costs because of poor productivity. In this situation, companies might accept orders for their goods, and then to produce those goods, might buy materials from their vendors which can’t be used for some time due to labor scarcity. In addition, goods which those companies do eventually produce are done so with poor productivity and ever increasing labor costs. Such companies are at risk of deteriorating cash flow, which in turn could cause them to slow payments to their vendors, or even go bankrupt. A trade credit insurance policy can help mitigate these kinds of risks.

What to watch for

The monthly Employment Situation (released on the first Friday of the month) is critical, particularly in terms of jobs created and the size of the labor force. The JOLTS survey (released the second Wednesday of the month) can help show the scarcity of skilled labor. If openings continue to outstrip hirings, then job creation and overall growth face stiff headwinds. Productivity growth (released quarterly) can confirm the effects of the skills mismatch with lower productivity and higher labor costs.

EH EDGE is a monthly e-mail bulletin researched and written by Euler Hermes North America Chief Economist, Dan North. This newsletter delivers a unique Euler Hermes perspective on key economic topics affecting your business.

Euler Hermes provides timely analyses on this and other subjects in our Weekly Export Risk Outlook (WERO), as well as monthly and quarterly analyses on the global macroeconomy and specific countries and industry sectors. Visit the Economic Research section of our website to learn more.