September 21, 2019

May Labor Report: Cause for Concern

Fed Chair Janet Yellen

In the month of May 2016, the employment situation continued its spring swoon with 664,000 people leaving the labor force. Over the last two months, 1,226,000 people left the labor force. In the six months prior, from October 2015 through February 2016, 976,000 were added to the labor force (leaving the Not in the Labor Force component of the Civilian Noninstitutional Population). The labor markets were looking positive for the first time in years and the bottom fell out yet again in April and May.

The net results of lethargic economic growth combined with a slack labor market is that we are probably around $1.5 trillion short on the real GDP side for 2015 and at least 9 million short on the workforce side based on a ‘normal’ Labor Force Participation Rate of 66% which was about the average from 2006 through 2009. Simply put, the economy is not growing at a fast enough pace to absorb the surplus labor.

Without the increased numbers of folks more fully participating in the job market, flat or lower wages are the norm. Why pay higher wages when there is excess capacity in the workforce? For that matter, as an employer, what justification would you have to raise wages in a situation where price increases spell doom in such a highly competitive sales environment? Keep in mind there are several million folks sitting on the sidelines waiting for an opportunity, any reason to jump back into the workplace.

Let’s also keep in mind that this is coupled with a less than robust, effective demand for your products in the first place? How can you have robust demand for products when you have several million people not working, who could be employed, but don’t have the financial means to purchase the products?

In conclusion, without substantial or at least adequate economic growth, there is no need to hire more people at any wage level. The irony here is that the Federal Reserve (the Federal Open Market Committee or the FOMC in particular) continues to discuss driving up the Fed Funds Rate (thus pressuring up at least short-term interest rates) and the Federal government continues to press for more regulations aimed at driving up the cost of doing business. Both the implied monetary (Fed) and actual fiscal policies (let’s not forget to point out the mad dash to implement executive orders in particular) only serve to increase uncertainty and burden the business sector. The thing to keep in mind is that the private sector is the engine for economic growth and by extension, jobs!

You may find an in-depth version of their analysis at: New Paradigm in Economics

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Written by
Edward Derbin

EDWARD DERBIN teaches online courses in economics at UC-Berkley and edits a popular website: EconNewsLetter.com. For years, he and Professor Donald Byrne (now deceased) have enjoyed bringing an increasingly relevant view of the American economic landscape to the public. Professor Derbin holds both M.A. and M.B.A. degrees from the University of Detroit Mercy. Professor Byrne earned his Ph.D. in economics from the University of Notre Dame.

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Written by Edward Derbin
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