A Red Hot Labor Market? Don’t Believe It!

We’ve been seeing headlines screaming about low unemployment rates and a red hot job market.

I’m not seeing any of this.

The people I know still struggle along, looking for a decent job and taking any short term low wage job they can get. I’ve got a gig at a community college and don’t see any of my adjunct colleagues quitting the part time adjunct grind for jobs demanding graduate degrees and specialized knowledge — even though that is what they all have because it is required by the college.

An increase in the availability of good jobs would be reflected throughout the economy, but does not seem to be happening.

Historically, inflation increases when economies come out of recession and hiring picks up. That is because people are making more money and catching up on the buying they have deferred wile unemployed, creating demand.

But that’s not happening.

Inflation is edging up just a little, but that might because the Federal Reserve has been increasing interest rates just in case inflation increases.

If people were getting hired and making more money we would also expect a rise in home sales, but that isn’t happening. In fact just the opposite is happening. Since 2017 home sales have been sliding down and seem to be accelerating over the last six months or so.

We would also expect auto sales to increase, but nothing dramatic is happening there either, although there has been a slight uptick since August of 2018.

Real labor shortages also change the way employers hire.

When employers need workers they start lowering barriers to employment like credit and background checks, unrealistic demands for education and experience and start offering training programs.

Most significantly wages start increasing.

Although some of that is happening it isn’t what we could consider an economic trend.

The latest Employment Situation form the Bureau of Labor Statistics is not showing dramatic changes in any of its common measures of labor.

Long term unemployment, discouraged workers and those no longer in the labor force are all tracking steady. The only thing changing are the number of people who hold multiple jobs. That group has risen by about 25% since the beginning of 2014 and although progress has been jittery this seems to be a long term trend.

Quite possibly the rise in employment is mostly attributable to an increase in low paying part time jobs. This would explain the lack of impact in the rest of the economy that we would expect if well paying full time jobs were being filled. It also explains the increase in multiple job holders.

So, no, claims of a red hot job market are not supported by BLS statistics, the Federal Reserve or the National Association of Realtors.

Most likely this is just hype coming from people and organizations with an agenda who spread economic fantasies in hopes they will come true.


U.S. Bureau of Labor Statistics, Multiple Jobholders, Primary Job Full Time, Secondary Job Part Time [LNU02026625], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/LNU02026625, November 12, 2018. https://fred.stlouisfed.org/series/LNU02026625

National Association of Realtors, Existing Home Sales [EXHOSLUSM495S], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/EXHOSLUSM495S, November 12, 2018. https://fred.stlouisfed.org/series/EXHOSLUSM495S

U.S. Bureau of the Census and U.S. Department of Housing and Urban Development, New One Family Houses Sold: United States [HSN1F], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/HSN1F, November 12, 2018. https://fred.stlouisfed.org/series/HSN1F

U.S. Bureau of Economic Analysis, Light Weight Vehicle Sales: Autos and Light Trucks [ALTSALES], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/ALTSALES, November 12, 2018. https://fred.stlouisfed.org/series/ALTSALES

Central Bankers Don’t Know Any More Than the Rest of Us

“Your faith that central bankers know “where they are” is a little surprising (“Central banks correctly go their separate ways”, editorial, June 16). Since the crisis nadir, inflation and growth outcomes have consistently fallen short of what was expected by the central bankers of major market economies despite an unprecedented period of low policy rates alongside outsized balance sheets. Current policy may be moving in different directions for reasons that seem logical today but the reality is that no one knows how smooth or bumpy the path will be from this point forward.”

Quin Casey, Letter to the Editor, Financial Times, June 22, 2018


Jerome Powell, our new Federal Reserve Chairman replacing Janet Yellin, delivered a revealing speech to the European Central Bank Forum in Portugal recently.

The speech is illuminating and important because it shows how out of touch our central bankers are with the economy. It is stunning to see statements of purported fact followed by another that contradicts it. Equally baffling, the Chair does not seem to be aware of the information released in the most recent Employment Situation, the official government report on employment released monthly by the Bureau of labor Statistics, (BLS)

For example, first statement:

“Today, most Americans who want jobs can find them.”

Next statement:

“High demand for workers should support wage growth and labor force participation–the latter a measure on which the United States now lags most other advanced economies.”

Yes, high demand for workers should promote wage increases, but it wages have barely increased in the last decade. The BLS data contained in The Employment Situation tells us that wages have risen only 2.7% in the last year.  According to Trading Economics, wage growth has been declining since 1979 and now is about as low as it ever has been. There does not seem to be any pressure on wages at all.

So, no, there hasn’t been any wage growth, bringing into question whether there really is a high demand for workers.

What about labor force participation?

Trading Economics shows that labor force participation is now about what it was in the late 1970’s when women were just beginning to enter the labor force. Again high demand for workers would draw people back into the labor market, but that does not seem to be happening. Powell seems to have some understanding of this because he points out that our labor force participation rate is lower than other industrialized economies with which we compete.

A little later in the speech, another contradiction…

First sentence:

“As is often the case, in the current environment, significant uncertainty attends the process of making monetary policy.

Note the term “significant uncertainty”.

The economy is not recovering. Saying that it does implies that we are going back to something like what we had before, Things have changed so much that it is more accurate to say that we are building a brand new economy. That is why there is “significant uncertainty” – old concepts and metrics don’t work in the emerging economy as they did in the old industrial economy.

For example, there is the “Phillips Curve” that measures the relationship between employment and inflation. As people go back to work following a recession, they have more money, creating demand, which causes prices to increase. That is why a little inflation is a good thing.

However, unemployment is at 3.8% and there is little sign of inflation, implying that people don’t have enough money to create a demand strong enough to fuel inflation, even though they count as employed. That might be because of low wages in the gig economy.

Contingent workers make a lot less than people do in traditional jobs. We don’t know what the effect of contingent labor market has on other parts of the economy because we haven’t figured out a way to measure contingent employment.

Second sentence:

“Today, with the economy strong and risks to the outlook balanced, the case for continued gradual increases in the federal funds rate remains strong and broadly supported among FOMC participants.”

Powell sounds very confident in light of his previous comment about the significant uncertainty supporting monetary policymaking.

Finally, this:

“Unfortunately, with the passage of a half-century and important changes in the structure of our economy and in central bank practices, in my view the historical comparison does not shed as much light as we might have hoped.”

Here he mentions “structure”. Structural changes in the economy mean permanent change, not just normal cyclical changes.

Examples of this might be the end of mass employment in industry. It’s not that industry has left the United States; there is more than ever right now. It’s just that robots and software do most of the work.

The shift of traditional well-paying 40 hour a week jobs to low paying contingent employment is another example. Now we have to remember that just because someone has a job does not mean they can afford food and shelter.

So why is Powell running in circles? Reading between the lines, as we have been doing here, reveals a much different picture than taking the speech at face value.

I’ve been a little harsh on him, really. He’s in a tough position. The integrity of the banking system has as much to do with perception as reality. When people stop having faith in the financial health of a bank, they withdraw their money. When people see others withdrawing money the safety of their deposits come into question and they are inclined to withdraw as well. This is what a “run on the bank” is – panicked withdrawals that may or may not be necessary.

When this happens to one bank, people tend to lose faith in all banks. This is what social psychologists call “social proof”. This is one of many heuristics, or shortcuts to decision making. When we see many other people doing a particular thing we tend to trust their judgment and join in, usually without thinking.

James Surowiecki has written a wonderful book about heuristics in economics and finances, (and many other settings), in his book Wisdom of Crowds. I highly recommend it.

It may come as a surprise, but banks do not have enough cash on hand to cover all their debts to customers. Deposits go out the door in the form of loans, or during the collapse of the industrial economy in 2008, in the form of loans to other banks buying blocks of risky home mortgages. This is where the Federal Deposit Insurance Corporation (FDIC) and central banks, like the Federal Reserve come in.

The FDIC insures consumer deposits for up to $250,000 and central banks stand by to infuse troubled banks with huge amounts of cash to forestall a run and maintain faith in the banking system.

This is why Chairman Powell has to be so careful about what he says. On the one hand, he can’t just make outright falsehoods about the economy because the first time someone catches him in a lie will be the last time anyone believes him. He can’t be brutally honest about the economy, either, without undermining faith in the future.

So you have to listen carefully, take note of what he does not say, and examine exactly what he does say. Powell is saying that things are better than they were, we aren’t sure why, and we’ll move ahead cautiously.

But bank customers aren’t the only ones for whom Powell is designing his messages. He is the Chair of the Federal Reserve and one of 11 members of the Feds Board of Governors. The Federal Reserve consists of 12 of the largest banks in the United States.

The Board of Governors are the presidents of those banks and they creates monetary policy as a group. Most of their influence lies in inter-bank standards, like how much interest these banks charge one another, and agreements on length and volume of bond sales.

Remember Qualitative Easing? That was when the Fed was buying back bonds. Bonds are debt instruments – when you buy a bond you are loaning money to the bond issuer. Buying back Treasury bonds – like savings bonds except a lot bigger—is a way for banks to shed debt, but it also a way to pump money back into the economy.

For more than a year following the crash of 2008, the Fed was pumping $80 billion a month into the economy. It was the only thing keeping the economy solvent.

Yes, things were that bad.

You can read all about it in Mohamed El-Erian’s detailed and very readable account of the 2008 financial crisis, The Only Game in Town.

The challenge for Powell as Chair of the Fed is to get all 12 members of the Fed to agree on monetary policy. It sounds like dull and boring issues to most of us, but members of the Federal Reserve are passionate about economics – they all have PhDs from leading universities – and they are very ambitious and driven.

Powell has to get these all people to agree on specific and detailed monetary policy. Think about the last time you tried to get a few of your friends to decide on where to go for lunch or dinner. That’s hard enough.

Getting intelligent, personally ambitious and driven people to agree with one another is a herculean task. Getting them to agree on something the President supports and Congress might tolerate compounds the challenge, but this is at the core of Powell’s job description.

So no, the Fed chair can’t just make outright lies, but he can’t be brutally honest either. He has to construct a narrative that fits the facts and doesn’t get anyone upset while using data that is incomplete and uncertain.

That is why it is so important to listen carefully to what he says, and look for nuance and veiled meaning. It is also important to remember that the Federal Reserve doesn’t know everything. As Powell tells us repeatedly, we are in an entirely new emerging economy and there is “significant uncertainty”.

After all central banks don’t know any more than anyone else.


Sources used in this article:

El-Erian, M. A. (2017). The only game in town: Central banks, instability, and avoiding the next collapse. New York: Random House.

Surowiecki, J. (2004). The wisdom of crowds: Why the many are smarter than the few and how collective wisdom shapes business, economies, societies, and nations (1st ed.). New York: Doubleday.


Why, Exactly, Should We Pay You?

ObamaCare was watershed legislation for the health industry. The infusion of taxpayer money enriched companies and their executives almost beyond comprehension. When the median income of Americans was less than $30,000 annually many CEOs made more than that daily — before lunch!

To cite just one example, John Martin, made $863 million during the ObamaCare years as CEO of the pharmaceutical company Gilead Sciences.

Read the details here.

(I never know what to think about people who, in one breath, excoriate “greedy” pharmaceutical companies and in the next advocate government funding of health care.)

The rationale for these exorbitant pay scales is that aligning compensation with stock value incentivizes the CEO to focus on corporate financial health. That sounds good – tying compensation to the value of the company will keep the CEO focused on growth and productivity, but it simply doesn’t work.

For one thing, it encourages what Rana Foroohar calls “financialism” in her book Makers and Takers. Foroohar does a great job of making complex financial shenanigans understandable and explains how laying off employees or taking on debt benefits stock valuation, at least in the short run.

Leadership focusing on stock valuation often results in losing sight of the distinctive competencies that made the corporation successful. Companies fail to “stick to the knitting” and drift into banking, real estate and insurance ventures instead of their areas of long-term expertise. Read my recent blog Financialism leads to agony for GE and Sears for examples.

In his landmark book, Good to Great, Harvard business professor Jim Collins examined the role of CEOs in eleven companies that overcame challenges threatening their existence, yet survived to outperform the stock market for at least five years. He identified five CEO traits pivotal to the survival and success of these companies, naming them Level Five Leadership Traits:

  1. Humility cloaking hard edged resolve
  2. Ability to articulate threats and vision to win the support of an entire corporation
  3. Superior organizational skills. “Get the right people sitting in the right seats on the bus to success.”
  4. They are willing to join subordinates toiling in dull non-glamorous tasks.
  5. Contributions spring from talent, knowledge, skills and traditional work habits.

None of these sound like traits shared buy CEOs of Sears, General Electric or General Motors, all venerated American companies facing uncertain futures. To the contrary, the CEOs of each of these companies succumbed to the temptation of financialism and now find themselves managing a slow motion train wreck.

Collins gives examples of Level Five leaders turning away from lucrative stock options and instead taking on the arduous task of turning large companies away from disaster. Why do some CEOs chose this path, while others focus on running up the value of their company by any means possible, then cashing in stock options and leaving a mess for bankruptcy attorneys?

Adam Smith was a Scottish economist who established fundamental rules of economics in Wealth of Nations in 1776. Smith came up with the idea of Supply and Demand, stating that rational people work only in their own interests, but by doing so create an economy that benefits everyone. This is the concept of the famous “invisible hand”.

That might be fine for economists, but modern psychologists are challenging the notion of rational actors acting in their own interests. After all, sometimes people work very hard, but have no expectation of reward.

Why do we put effort, and sometimes a great deal of money, into hobbies? Why do we work for free and call it volunteering? Or donate to social causes that benefit people we will never meet?

These are questions the emerging field of behavioral economics addresses.

Pioneered by Daniel Kahneman and Amos Tversky in the 1970’s behavioral economics is now a field attracting social psychologists and neuropsychologists. Kahnemans’ thick tome Thinking Fast and Slow is a summary of his life’s work.

Dan Ariely is a social psychologist with an unshakable interest in exploring why we do things that do not generate rewards that should motivate us. His interest began when a former student visited him with an intriguing question.

The student had graduated and accepted a job with a prestigious investment bank and recently worked on a presentation his boss was to give on a merger and acquisition deal the bank was engaging in. The student worked very hard on the project for a number of weeks. He produced a beautiful presentation with engaging pictures, informative graphs and convincing text.

The boss was elated with the quality of the project and promised the young man a bonus for his efforts, but gently broke the news that the M&A deal was off and the presentation no longer needed.

The question the former student poised for Ariely was that even though he was compensated for the work, received a bonus and praise from the boss, he felt empty. Suddenly he didn’t care about the project he had worked so hard on. He realized he didn’t care much about the other things he was doing for the bank, either.

From a functional perspective, nothing had changed; he was still being well paid, the job gave him enviable social status, and the company paid even his laundry bill. The only thing that changed was that his work would not see the light of day. Why would this cause so much disappointment?

Many years ago, I was a behavior analyst working with intellectually disabled clients. At one point, I was asked to create a behavior plan for a client who was exhibiting sudden violent behaviors at his vocational setting. He had been in the vocational program for some time without incident, but lately would suddenly destroy property and assault staff for no apparent reason.

It took only a few minutes to see what the problem was.

The staff placed a large flat box in front of the client with dozens of little square compartments, each with a picture of a nut, bolt or washer, on the bottom of the compartment. This was a training device for the client to practice sorting parts. The client began pulling nuts, bolts and washers from a large coffee can, examining them closely and then searching for the compartment with a matching picture.

So far so good.

The client was slow and methodical, clearly being very conscientious about his work. However, he was a little too slow and the staff urged him on, making sure that he did not forget about the kitchen timer ticking away on a nearby shelf.

Soon the timer’s loud bell went off, and the client reluctantly leaned back so the staff could examine his work, making a few notes on a clipboard. Then, right in front of the client, she upended the box into a funnel and back into the coffee can. All the nuts and bolts the client so intently sorted were in the same place they were when he started sorting. Then she put the empty box in front of the client and reset the timer for the next trial.

And what do you suppose the client did?

He looked at the empty compartments incredulously, then at the staff. He shot to his feet, grabbed the box, lifted it over his head and smashed it onto the table. Then he went after the staff.

The client had the same experience as Ariely’s former student. Both had worked hard only to see their efforts summarily erased. In both cases compensation was not an issue, and the actions of others was devastating.

Ariely and his colleagues investigated this question at length in dozens of ingenuous experiments documented in Arielys book, The Upside of Irrationality.

One of the first things Ariely found out was that when a task is simple and physical incentives worked well to increase performance. However, when a task was even minimally cognitive higher incentives led to lower performance.

Ariely concluded that higher incentives became a distraction when cognitive tasks are involved. Students often have much higher scores when taking practice SAT tests compared to actual SAT tests, for example. We call it “choking” – when the pressure to perform well undermines our ability to do so.

These results are not exactly earthshattering, but they led Ariely to think about the nature of work. Why do we volunteer or work hard at hobbies that don’t have incentives associated with them? Is there some sort of natural incentive that rewards us for working?

Back in the 60’s animal studies found that rats trained to press a lever for food would continue to press the lever occasionally even when food was freely available. Researchers found that 44% of rats would manually deliver more than half their daily food intake.

Subsequent experiments found this was common in all sorts of animals. Why would an animal prefer to exert effort to get food rather than just allow it to be delivered? Is there something inherently rewarding about work?

It seems there is.

In his book Satisfaction: Sensation Seeking, Novelty, and the Science of Finding True Fulfillment, Gregory Berns tells about an fMRI experiment by researcher Cary Zink.

Zink instructed volunteers press a button when particular shapes appeared on a computer screen. During the trial, a dollar bill would materialize on the screen. In one condition, the dollar was automatically deposited into a virtual bank, and in another, the volunteer had to push a button to make the deposit.

As the subjects were performing these tasks, their striatums were monitored. The striatum is a small structure at the base of the brain associated with the reward system. When the striatum is active, we are pleased.

The interesting thing about Zink’s experiment was that when the subjects were required to press a button to deposit their money their striatum indicated more pleasure. In the Spartan context of the experiment, this constitutes work. Zink concluded that doing something – working – in order to receive a reward was more satisfying than passively accepting a reward.

Much like the animal experiments, Zink’s research suggests that humans experience happiness when earning rewards rather than being given them.

Berns found out something else about the striatum in his experiments on motivation. It reacts to novel information. We feel a sense of pleasure when we run across new things we have not experienced before. No only does the striatum reward us for making an effort, it also reacts to the results of that effort – something new and different from before.

This implies that we are inherently motivated not only to explore novel experiences, but to create them as well. The reward of work is not just the money we receive, but the experience of work as well. That is why we forgo pay to volunteer and spend money on hobbies.

So what is going on with our highly compensated CEOs?

Two things.

First, when compensation is tied to corporate stock value CEOs are detracted from the  distinctive competencies that have driven past successes, and focus instead on stock price. This encourages financialism, which is often the death knell of a company.

The other thing that happens is that like most other animals and humans, the CEO has a drive to change the world in some way. Given the size of his or her compensation, big changes are expected.

By tying large compensation to stock price, Boards are not only distracting the CEO from “tending the knitting”, but also priming them to make these distracted changes in a big way.

It is doubtful we will see any reforms to corporate compensation in the near future, but talking about what needs to happen will make that day come just a little sooner.


Books used in this article:

Ariely, D. (2010). The upside of irrationality: The unexpected benefits of defying logic at work and at home. New York: Harper.

Berns, G. (2005). Satisfaction: Sensation Seeking, Novelty, and the Science of Finding True Fulfillment (1st ed.). New York: Henry Holt.

Collins, J. C. (2001). Good to great: Why some companies make the leap–and others don’t (1st ed.). New York, NY: HarperBusiness

Foroohar, R. (2016). Makers and takers: The rise of finance and the fall of American business (First edition. ed.). New York: Crown Business.

Kahneman, D. (2011). Thinking, fast and slow (1st ed.). New York: Farrar, Straus and Giroux.

Smith, A. (2015). The wealth of nations. New York: Fall River Press.




How are we going to manage the growing and invisible gig labor market?

The Industrial Economy finally sputtered out in 2008, but the chaos of a faltering international banking system on the verge of collapse obscured the consequences of that historic event.

In case you don’t remember or are too young to recall that agonizing slow motion train wreck, here is how Mohamed El-erian characterized those days in his fascinating examination The Only Game in Town:

“In the last three years plus, central banks have had little choice but to do the unsustainable in order to sustain the unsustainable until others could do the sustainable in order to restore sustainability.”

We now live in a new economy, one in which the old rules and way of doing things no longer work as they once did. The way we measure economic output and activities no longer works like it once did. I recently wrote about this in a blog article, Why the Fed is playing with fire when it increases interest rates.

The same challenge is happening in management, and recruiting.

(See this recent LinkedIn post from a forward thinking recruiter for new ways to address this problem.)

One of the most prominent examples of the move from the past to the future is happening in the education industry. Colleges and universities are replacing traditional full time faculties with part time adjuncts. The trend is not included in strategic planning, but seems to be a gradual piecemeal move towards an all-adjunct faculty. The Chronicle of Higher Education recently published a good overview here.

At the community college where I teach, adjuncts outnumber full time instructors by about 3 to 1, and teach the majority of courses and carry the majority of credit hours offered by the school. The college pays us about one-third the hourly rate of full time professors, but we are limited to about two thirds of the hours. Like most gig work, this is not produce a living wage, has no benefits and offers no job security.

That is typical of higher education and other occupations as well.

How do recruiters include these people in their networks? Is it even realistic to think gig workers might ever hold a traditional full time job?

Probably not, but I hope recruiters address the issue.

If all this seems like it is a relatively minor problem – that 3.8% unemployment number misleads many people – look to the current news on suicide trends. It’s not just fashion designers and celebrity chiefs taking their own lives.

According to CDC statistics, the highest increase in successful suicides over the last fifteen years – roughly spanning the time the economy has been in upheaval – is among men 45 to 64 years old. This is the generation whose most lucrative working years happened to coincide with the collapse of the Industrial Economy and the nightmare of the Great Recession. Those numbers represent the ongoing struggles of people left behind even by the gig economy.

Jessica Bruder chronicles the lives of older people living a life right out of Grapes of Wrath in her book, Nomadland. (Click here for the C-SPAN interview.)

From this perspective, gig workers in the education industry aren’t doing so badly. Questions remain, however.

These highly educated gig workers will likely never afford to pay their student loans; consequently, taxpayers will increasingly foot the current $1.5 trillion student loan bill. This debt is from students to the government, but the government has already transferred this amount to the educating industry. Taxpayers are now reimbursing the government.

(The University of Arizona here in Tucson is a very nice campus.)

How big is the gig economy? How many people are shifting into this labor market?

The short answer is that we don’t know. A 2015 Government Accounting Office (GAO) report estimated about 40% of people classified as employed by the Bureau of Labor Statistics (BLS) as employed were actually gig or “contingent workers”.

A 2018 report from the Federal Reserve Board of Governors puts the number at 31%. Other estimates are from about 10% to 15%.

The confusion stems from the same measurement challenge facing economic analysis examined in the blog post noted above. We have not settled on a uniform way to define and measure the gig economy. Economists are working on the question, (see here and here), but there will likely be no answers any time soon.

The important take away for the recruiting industry is that the first to figure out how to exploit the huge emerging gig labor force could well dominate the industry for decades to come. This is why new ideas such as moving from the existing recruiting model to a networking model holds such promise.

No matter how the recruiting industry addresses these changes one this is certain:

We are living in exciting and interesting times.