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Full employment can lead to stable GDP

It's all about jobs. The US Bureau of Labour Statistics for the US Department of Labor issued statistics on the employment situation yesterday. They were encouraging and trending higher. The employment statistics out of the United States are closely monitored and have become a monthly media event. This is because the stats are input into financial projections that provide support to the market values of stocks and bonds. The unemployment level will also direct the monetary policy of the Federal Reserve and is of immense political importance to those in power.

According to the February 2011 statistics, there were 192,000 jobs added in the US to tip the reported unemployment number down to 8.9 percent. This includes a drop in government employees, with private employment up by 220,000. The job growth in Services Industry expanded more than expected in February which is a positive, with 152,000 additions.

Employment Business Services and Health Care were up. Manufacturing and Construction sectors also demonstrated growth. Year over year, the total of net jobs added was purported to be 1.3 million. The current employment has been boosted by recent US monetary policy expected to cease in June.

Overall, the labour market is still far from robust. The gains were far short of the 400,000 per month or the 4.8 million needed for an economic expansion. Estimates of 'real unemployment', that factors out those working part-time or at temporary employment, still remains inordinately high near 16 percent. Average earnings were unchanged, meaning labour incomes are still flat. In addition, new jobless claims were 368,000. This is 20,000 lower since last month but remain significant. There are still an estimated six million people in the US that have been unemployed for more than a year. A movement to full employment is necessary to reach a stable economy.

Classical economic theory states that maximum potential GDP is achieved at full employment and full utilisation of the capacity to produce. This is predicated on flexible wages and prices for workers and materials in response to changes in supply and demand. Whereas, material prices respond quickly to changes, labour prices are considered “sticky” when downward wage changes are needed as a result of lower demand for labour. This diminished flexibility leads to lay-offs and under-employment. In turn it further reduces demand for goods and services, resulting in a negative feed-back loop of constriction.

To reverse the downward spiral and start a 'virtuous cycle' economies have to add workers. Statistics in 2009-10 indicated increasing productivity with declining labour costs and low to no job growth. How is this possible?

Current employees are worked harder and longer, which takes a toll on a sustainable recovery. This does not lead to higher consumer confidence nor a restart of the broader economic engine. Long-term economic stability requires full employment. Lay-offs do not achieve this. They may help profitability in the short-term, but if taken to extremes it can result in diminished capacity due to stress and strain on the remaining employees.

There are four types of unemployment in the economic nomenclature. Cyclical unemployment is due to contraction in business activity. Frictional unemployment happens when people are changing jobs and out of the market temporarily. This has run around five percent in the US. Structural unemployment is more problematic, as it means older skills are shelved and newer skills are demanded. A less mentioned type of unemployment is disguised unemployment, where productivity is low and there are too many people sharing too few jobs. It is important to note that full employment is not a lack of the unemployed. It means the majority of people who want to work can.

Employment figures are affected by the 'participation level', the percentage of people able to work who are still looking for it. In periods of long-term unemployment like we have seen, this participation level declines as people drop from the radar. Current participation levels are at 65.2 percent vs a 66 percent average. This small percentage of 0.8 percent still represents a large number of people on the side-lines. Another important statistic is the average hours worked. This stayed constant around 32.4 hours. The average earnings per hour was basically unchanged at $22.87, up a penny.

The curious thing about the recent attempts at an economic recovery is the lack of job growth. It has been called the 'jobless recovery'. Whereas corporate profits have improved, there hasn't been an increase in employment nor labour costs. This is a worrisome phenomenon in a period when the gap between the have and the have-nots is at a record high. At what expense have profits been generated, at the expense of a sustainable recovery? A move to full employment is required in order to achieve potential GDP. Companies need to rehire to start the virtuous cycle back to economic health.

Patrice Horner holds an MBA in Finance, a FINRA Series 7 Licence, and is a Certified Financial Planner (CFP-US). Any opinions expressed in this article are not specific recommendations, nor endorsements of any products. Individuals should consult with their banker, insurance agent, lawyer, accountant, or a financial planner for advice to address their personal situations.

Employment search: Job seekers wait in line to enter the Garden Grove Job Expo in Garden Grove, California, earlier this month

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Published March 05, 2011 at 1:00 pm (Updated March 05, 2011 at 1:37 pm)

Full employment can lead to stable GDP

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