Market Watch

Laboring for a Better Labor Market

4th Quarter 2016 Hotline

Market Watch
by Joe A. Hollingsworth, Jr.

After making the recent decision to keep interest rates down, Chairwoman Yellen cited an improving labor market specifically noting that labor force participation was improving off multi-decade lows. Her interpretation is that improving wages are drawing more Americans into searching for (and hopefully securing!) work.

Talking with many distributors and manufacturers across the southeast, this interpretation does not jive with the anecdotal evidence we hear. For many managers and owners, securing productive labor is their number one issue constraining them from taking advantage of market opportunities, but higher wages aren’t drawing in new workers off the sidelines.

The slight bounce of workforce participation rates off lows set in the 1970s is likely more a reflection of a higher proportion of graduating kids obtaining work. For illustration, if overall workforce participation is at 62% but each year, for the last few years, 85% of graduating students are getting into the workforce, then the workforce participation rate will creep up even without a single discouraged worker getting back into the labor force.

From what I hear from employers, this explanation is more likely for a few reasons. First, with today’s pace of rapid change, skills are decaying quickly while a worker is unemployed; employers might elect to hire a newly-minted graduate at an entry-level position over trying to retrain a worker into a mid-level position that might have antiquated skills. Second, to generate the need for mid-level managers and skilled employees, more dynamic economic growth is needed; you don’t need a supervisor until after you’ve hired several or many entry-level employees. There hasn’t been the growth necessary to reach the capacity constraint requiring new mid-level employees.

The concern for America – and many employers – is that this will result in longer bouts of unemployment for discouraged workers leading to further skills erosion, such that it’s not a question of wages that could draw them into the market but rather an unsolvable skills gap. Yellen’s optimistic view for workforce participation doesn’t reflect the significant challenge employers face today in attracting long-absent discouraged workers, something a skills gap might prevent at any wage price.

This extended so-called “recovery” has created many legacy problems that call out for a huge directional change in our country, not more of the same. Quite possibly, the government coddling and the P.C. Revolution might be exchanged for individual effort and initiative – the American way!

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