America Proves Nothing Like Europe as Joblessness Dips
James Ensley of Rocky Face, Georgia, took a $10,000-a-year job last month as a school-bus driver after almost two years of unemployment benefits ran out. While that’s a third of his prior pay as a warehouse manager, the father of two says he’s content.
“It feels great to go to work instead of having somebody tell you ‘I can’t help you,’” said Ensley, 51, whose former employer went bankrupt in the wake of the U.S. housing slump. “I miss my old job, but it is not coming back so I have to get over it.”
A surge in long-term U.S. unemployment, which Federal Reserve Chairman Ben S. Bernanke has cited as evidence of a “far from normal” labor market, finally is abating. That’s good news for American companies, which are taking advantage of a pool of 5.2 million people whose career hardships have made them eager to return to work. Most of the re-employed have had to settle for reduced pay, allowing businesses to keep labor costs low while boosting profits amid sluggish sales gains following the deepest recession since the 1930s.
“The cost of labor is very cheap,” said James Paulsen, who helps oversee about $325 billion as chief investment strategist at Wells Capital Management in Minneapolis. “Nominal wage gains are very anemic,” so these costs “are down and will likely stay down for a while longer.”
The number of Americans out of work for 27 weeks or longer in July was 1.5 million fewer than the April 2010 peak, Labor Department data show. The total represented 41 percent of all jobless, the lowest share since 2009. The department will release August employment data Sept. 7.
Workers have become less selective after benefits of as much as 23 months expire. Fifty-four percent of the long-tenured unemployed have had to settle for lower wages to secure another job, according to a Labor Department report released Aug. 24. One in three said their compensation was at least 20 percent below what they made at previous employers.
This has helped to increase corporate efficiency and earnings. Seventy-one percent of companies in the Standard & Poor’s 500 Index reported profits that exceeded the consensus analysts’ estimates during the most recent quarter, even though 59 percent fell short of sales estimates, according to data compiled by Bloomberg.
Low labor costs will continue to boost results, said Charles Lieberman, chief investment officer at Advisors Capital Management LLC. Companies in the S&P 500 probably will earn more than $110 a share next year, which could boost the index to around 1,700, he said, from 1,404.94 on Sept. 4. The median estimate of 11 analysts in data compiled by Bloomberg for EPS in 2013 is $106.75.
Inflation near the Fed’s 2 percent target will give the policy-making Federal Open Market Committee flexibility to stimulate growth when it meets on Sept. 12-13, said Lieberman, former head of monetary analysis at the Federal Reserve Bank of New York and now in Hasbrouck Heights, New Jersey. The central bank’s preferred price gauge, which excludes food and fuel, rose 1.6 percent in July from a year earlier.
“Despite the decline in the share of long-term unemployed, it remains about double what it should be in a healthy job market,” said Mark Zandi, Moody’s Analytics Inc. chief economist in West Chester, Pennsylvania. This is “a key reason why the Federal Reserve remains on high alert and more than likely to engage in additional quantitative easing.”
Bernanke displayed a chart of duration as part of a March speech to the National Association for Business Economics, saying “the persistently high rate of long-term unemployment we have seen over the past three years or so is especially concerning.”
During his Aug. 31 presentation at the annual Kansas City Fed conference in Jackson Hole, Wyoming, he emphasized the “enormous suffering and waste of human talent” produced by “the stagnation of the labor market,” saying it “will wreak structural damage on our economy that could last for many years.”
The average length of joblessness fell to 39 weeks in July, a 15-month low, Labor Department figures show. That’s still about twice the level of the 1981-82 recession, when unemployment reached 10.8 percent, compared with a high of 10 percent in October 2009.
“I do find it encouraging that at least the number has trended down,” though it’s still “very, very high,” Atlanta Fed President Dennis Lockhart told reporters Aug. 21. Research from the San Francisco Fed indicates that people who’ve been displaced can overcome doubts about their abilities and don’t face “a lot of stigma” from hiring managers, Lockhart said.
Being fired or laid off makes a job search increasingly tough for about the first six to eight months, said Rob Valletta, research adviser at the San Francisco Fed, who has studied the issue. After that, “employment prospects do not vary that much based on unemployment duration.”
The persistence of long-term joblessness has raised concerns that the U.S. could face a form of “eurosclerosis” -- chronically high unemployment in a growing economy -- which Europe struggled with after recessions in the 1970s and 1980s. The ability of Americans to find work even after 18 months or longer off the job indicates the risk of “Amerisclerosis” is low, according to an October 2011 paper Valletta co-authored.
“Each month an average of nearly 11 percent of the long- term unemployed find a job,” the paper said. While this is “a historical low in the U.S., it is nonetheless slightly higher than the outflow rate of the French unemployed.” At this rate, “about half of the long-term unemployed in the U.S. will find a job within six months, and three-fourths will find a job within one year.”
The standard 26-week package of unemployment insurance was extended to 99 weeks in 2009, keeping “hundreds of thousands, if not millions” of workers in the labor force, said Gary Burtless, Brookings Institution senior fellow. Most of those benefits have been exhausted, and states with lower jobless rates have scaled back insurance, he said.
Just 5,400 people were receiving extended benefits as of Aug. 10, down from 1,034,700 in October 2010, according to the Labor Department.
The government will report later this week that the U.S. economy added 125,000 jobs in August, while unemployment remained at 8.3 percent for a second consecutive month, according to the median estimates of economists surveyed by Bloomberg News.
“Unfortunately, if you do not currently have a job, it’s still terribly hard to get a new one,” said Burtless, who formerly worked for the Labor Department. “Make no mistake, the recovery has been weak because public and private employers are not offering many new job openings.”
For companies, controlled labor costs are a help. Wages and salaries, which account for about 70 percent of total employment costs, rose 0.4 percent in the second quarter, after a 0.5 percent gain in the prior three months, the Labor Department reported July 31.
“Upward wage pressure was reported to be very contained” in July and early August as “employment was holding steady or growing only slightly,” the Fed said in its Beige Book survey of regional conditions released Aug. 29.
Host Hotels & Resorts Inc. (HST), operator of luxury hotels under the Marriott, Westin and Ritz-Carlton names, reported a 1 percent increase in wages and benefits per occupied room last quarter, and margins “benefited from better productivity,” Chief Financial Officer Larry Harvey of the Bethesda, Maryland, company said on an earnings conference call July 17.
At Toll Brothers Inc. (TOL), the largest U.S. luxury-home builder, “we’re not concerned about a labor shortage right now,” Chief Executive Officer Douglas Yearley said on a conference call with analysts Aug. 22. While lumber and concrete prices for the Horsham, Pennsylvania-based company have risen amid an increase in U.S. homebuilding, he said, “the local labor market pricing is flat.”
Wage losses have a cost for businesses, though, in weaker demand. The proliferation of “very distressed workers” hurts consumption, which is likely to increase just 1.5 percent in the next six quarters, forecasts Ethan Harris, co-head of global economics research at Bank of America Corp. in New York.
Consumer spending, which accounts for about 70 percent of gross domestic product, rose at a 1.7 percent annual rate last quarter, below the average 2.1 percent increase since the 18- month recession ended in June 2009 and less than the 2.9 percent annual gains during the past two decades.
“These are people who are going to be in a very conservative spending mode,” Harris said. “It is not just that pay is lower. Because of long spells of unemployment, they are much more cautious about saving for a rainy day.”
Savings as a percentage of disposable income was 4.2 percent in July, up from 3.2 percent in November, according to data from the Bureau of Economic Analysis.
Finding good-paying jobs is getting more challenging, according to a report released last week by the National Employment Law Project, a research and advocacy group in New York. Analysis found employment losses in the past recession were concentrated in middle-wage occupations, while lower-wage occupations constituted 58 percent of recovery job growth.
Ensley, who didn’t go to college, says he worked for the same Georgia carpet wholesaler for 25 years. While he has considered getting a job as a truck driver, which would pay higher wages, that would take him away from his family, including a daughter in high school, for six days a week.
“Do I want to make a living or make a life?” he asked. Instead, Ensley is cutting spending by eliminating meals out in favor of “peanut butter and jelly sandwiches” and driving less to save gas.
Brent Grimes, 53, a Columbus, Georgia, industrial engineer lost his sales job last September. His unemployment compensation of $1,100 a month will end no later than December, and he said he’s afraid his former salary of $60,000 discourages potential employers from considering him.
He’s applied for engineering positions as well as a science teaching job that would pay about $31,000.
“When you first get laid off, you set your sights really high,” he said. “I am going to have to accept it that I can’t get what I was making.”
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