Typically, the U.S. employment report dominates our commentary on the first Friday of the month. This time around, the release of other major economic reports in a short span of three days calls for a broader set of remarks. The employment report still gets the upper hand, given the Federal Reserves focus on the labor market in formulating monetary policy.
The unemployment rate edged down two notches to 7.4% in July, the lowest reading since December 2008. This is a significant improvement from the 8.1% jobless rate that prevailed when the Fed commenced the third round of asset purchases. A lower participation rate (63.4%) in July from 63.5% in the prior month is a flaw in this picture. A small increase in the participation rate would bolster the significance of a lower unemployment rate.
Other indicators from the household survey median duration of unemployment (15.7 weeks versus 18.2 weeks in August 2012), share of long-term unemployment (37% versus 40% in August 2012) and broader measure of unemployment (14.0% versus 14.7% in August 2012) suggest strengthening of labor market fundamentals.
Data from the establishment survey indicate a slight softening trend in hiring. Payroll employment advanced 162,000 in July, and estimates of the prior two months were lowered 26,000, putting the three-month moving average of payroll gains at 175,000 versus 224,000 in April. The 12-month moving average held at 190,000.
Factory employment rose 6,000 after four consecutive monthly declines. The level of factory payrolls held nearly steady from a year ago, an important detail that calls for close tracking. Retail, financial services, eating and drinking places, health care, and professional and business services posted gains in service sector payrolls. Overall, the pace of hiring in the private service sector is significantly stronger than that of the goods-producing sector in the past year.
Federal government payrolls excluding postal services rose slightly, after five months of visible losses largely due to sequestration. State government hiring slipped, while hiring rose 6,000 at local governments.
The average workweek decreased by 0.1 hour in July to 34.4 hours, while hourly earnings fell 2 cents. The tepid year-to-year gain in hourly earnings, at 1.9%, is worrisome. These numbers, combined with the slower pace of hiring in July, are not supportive of a strong increase in personal income.
We also must consider the other U.S. reports released this week before drawing conclusions about the Feds near-term monetary policy stance. Second-quarter real gross domestic product (GDP) rose a stronger-than-expected 1.7%, but revisions left the average increase in real GDP for the last four quarters at only 1.4%.
Although auto sales slipped slightly to 15.7 million units in July from 15.9 million the prior month, the recent trend is the best in nearly six years. The Institute of Supply Managements factory survey for July was robust, with the composite index matching highs seen two years ago.
Real consumer spending advanced 0.1% in June, but real disposable income fell 0.1%. Higher energy prices lifted the personal consumption expenditure price index 0.4% in July, with the year-to-year increase at 1.3%, a gentle ascent after the 0.9% increase in April. The core price gauge, which excludes food and energy, rose 0.2%, the largest gain since January. These inflation data must be reassuring for the Fed.
Pulling all this information together, the plan to taper asset purchases remains on the table, as none of the recent economic data are significantly weak. If the Fed plans to stop tapering when the jobless rate is around 7.0%, it is not too far.
Part-Time Employment A New Trend?
Labor market conditions remain challenging in most developed economies following the financial crisis of 2008. Lost jobs have not been recovered completely after more than five years, and there is a non-trivial increase in part-time employment to the extent that it now comprises between 15%-30% of total employment in eight major industrialized countries.
The United States, Germany, France, the U.K., Canada, Italy, Spain and Australia have each recorded an increase in part-time employment as a percent of total employment (see chart below) during the past five years. By implication, a noticeable reduction of full-time employment has occurred.
Part-time employment shares have increased not only in the last five years but also during the last 25 years in these economies. But this upward trend is not uniform; shares in Germany, France, Italy, Spain and Australia show a consistent upward trend compared with a more uneven situation in the United States, Canada, and the U.K.
Essentially, there are two separate phenomena that explain part-time employment trends in these labor markets: a long-term process that reflects structural factors contributing to higher part-time employment shares and short/medium term gains that stem from cyclical pressures.
Regulation has been supportive of part-time employment in the eurozone, with employment protection legislation encouraging firms to expand payrolls through part-time employment. In addition to circumventing rigid legislation tied to full-time jobs, global competition and economic uncertainty have encouraged firms in several countries to create part-time employment as a new job class along with temporary jobs.
Trade union attitudes are changing in an environment of elevated unemployment rates to the degree that work-sharing and part-time employment are seen as better options than a complete reduction of payrolls. Part-time jobs have helped integrate more women into the labor force and overcome cultural impediments.
These factors explain long-term trends in part-time employment. The recent increase in part-time employment appears to have its origins in cyclical forces and the inability of industrialized economies to establish sustained economic growth.
A 2.3 percentage-point gain in the part-time employment share in the United States during the five years ended 2012 stands out, particularly given the nearly flat performance during the 20 years ended 2007. The good news is that this share declined to 19.3% in the first seven months of 2013 from 19.4% in 2012.
The sharp increase in part-time employment shares in Italy, Spain and the U.K. suggests that the depth of the economic malaise is most likely playing an important role. By contrast, France and Canada have recorded relatively smaller increases in part-time employment shares in the post-2007 period, while Australia lies between the two extremes.
From a macroeconomic perspective, there are pros and cons to part-time employment. On the positive side, part-time employment can trim wages, reduce fringe benefit expenses of employers and improve labor market flexibility by allowing adjustment of production and costs. Part-time employment enables people otherwise unwilling or unable to work full-time to participate and raise an economys output.
On the negative side, employers could view training costs of part-time employees as unfavorable for the bottom line. Employee morale could be adversely affected if part-time employment prevents promotions and is not career-enhancing.
In sum, important differences in part-time employment trends across nations offer clues about the nature of developments in these labor markets.
Impact of the ACA on Employment
The Affordable Care Acts (ACA) employer mandate, which requires firms with at least 50 employees to offer adequate health insurance coverage, and the likely business response, have been debated since the ACAs passage in March 2010.
The main concern is that companies could cut work hours or cancel payroll expansion plans to reduce full-time staff below the magic number of 50 employees and thereby avoid paying a penalty.
Recognizing the regulatory burden of enforcing the mandate, the Obama administration postponed implementing the mandate for one year, to 2015. In the meantime, the government plans to re-evaluate and streamline reporting requirements for employers.
Some critics exaggerate the possible impact of the employee mandate on employment. Only about 10,000 businesses with at least 50 employees do not currently offer adequate health insurance coverage; in other words, only 0.16% of the almost 6 million firms in the United States are directly affected.
On January 1, 2014, the government-sponsored health insurance exchanges open for business. Each state must set up competitive exchanges for both individuals and small businesses with less than 50 employees through one of three administrators: the state, the federal government or a joint state-federal partnership. (The distribution of states is 16, 27 and seven, respectively.)
The purpose of the exchanges is straightforward: to simplify choices for consumers, ensure quality standards and expand coverage to individuals and small businesses that previously did not have viable insurance options.
In the individual market, there are significant subsidies for those with family income below 400% of the poverty line. Insurance companies are not allowed to underwrite applicants for health insurance. Easier access to medical insurance would increase labor mobility and career choices, and it could improve productivity and employment in the long run.
Businesses with fewer than 50 employees are not penalized if they do not offer insurance coverage. In fact, companies with less than 25 full-time employees (FTEs) earning an average of less than $50,000 a year and that offer affordable employee coverage will get a two-year tax credit. There are even greater benefits for companies with less than 10 FTEs. Some critics assert that the tax credits provide a disincentive to hiring, but these are temporary and eligibility is very specific, so a significant reduction in employment is unlikely.
Overall, even if some businesses move aggressively to avoid the penalty by limiting employment, the reduction would not be material from a macroeconomic point of view.
Perhaps the ACAs most important contribution could be a reduction in medical care costs that have grown at a substantially faster rate than the Consumer Price Index over the past three decades. Time will tell if health insurance exchanges provide a cost-effective mechanism through competition. If they succeed, benefits in terms of increased overall economic production and hiring should follow.