Labor markets are weaker than they appear, leading the Fed toward continued stimulus. Still, the central bank may find that weakness difficult to overcome, as much of it stems from serious long-term issues and not merely short-term lack of demand.
In recent posts, my colleague Russ Koesterich outlined why the U.S. labor market recovery will continue to frustrate the Fed, and Jeff Rosenberg examined one key reason why the central bank is set to keep rates low for some time. I agree with these points, and want to step back and talk about some of the long-term structural headwinds that labor markets face today.
First, let’s take a look at the official statistics. While headline unemployment has been declining for the last couple of years, looking at the official unemployment rate as a signpost for the overall health of labor markets is highly misleading. Indeed, both investors and the Fed itself are increasingly focusing on a broader array of labor market metrics. Chiefly, and unfortunately, much of the decline in the unemployment rate can be attributed to the fact that more and more people are dropping out of the labor force (shown in the chart below via the decline in the participation rate).
That is hardly the sign of a thriving employment environment.
To complicate matters, the labor market is struggling with some serious long-term issues that can’t be easily helped by conventional or unconventional monetary policy fixes. I would point to four factors:
1. Transition to Temporary Hiring: For many businesses today, hiring full-time workers (with the added benefits costs they bring) is simply too expensive. Indeed, for some time the growth in benefit costs has outstripped that of wages and salaries, so it is not surprising that we have seen an increased use of temporary workers throughout the recovery.
2. Demographic Challenges: Many members of the Baby Boom generation (roughly those 48 to 65 years old) are staying in the workforce longer. They are healthy, experienced, and in need of greater retirement funds. That has the effect of crowding out younger people from the workforce.
3. Technological Disruption: Prior to the Internet-era (pre-1990s), there was a positive correlation between productivity growth and hiring. Today, however, that relationship is negative, as web-based distribution models have tended to crush the margins and profitability of localized (people-heavy) companies. Simply put, greater productivity now tends to result in less, not more, job creation.
4. Skills/Jobs Mismatches: The pace of recovery in the jobs market has been highly uneven among sectors and in different demographic groups. Specifically, sectors such as financial, real-estate-related and state and local government have seen anemic jobs growth, while others have experienced better conditions. At the same time, there has been a sharp distinction between those with college degrees and those without, with the former group finding new employment much more quickly. It is extremely difficult to shift large numbers of workers from one industry to another, or to quickly retrain or educate those who are out of work—factors that are holding back the pace of job creation.
The upshot for investors? Regardless of who next heads the Fed’s monetary policy committee, or precisely when the tapering of quantitative easing begins, we think the Fed is likely to keep policy rates low and forward guidance dovish for a long time.
Rick Rieder, Managing Director, is BlackRock’s Chief Investment Officer of Fundamental Fixed Income, Co-head of Americas Fixed Income, and a regular contributor to The Blog. You can find more of his posts here
*Participation rate held at 66%