Chapter 9
Unemployment versus New Employment

Employment figures may be one of the most important economic data points. It is not only an incredibly valuable indicator of the economy but employment levels can be vitally critical to the sociology and political stability of a country. Two famous economists that wrote about revolutionary economic change, Karl Marx and Joseph Schumpeter, focused on prognostications of how labor markets would change over time and would eventually result in the collapse of the capitalistic structure. How and where people work has changed dramatically over time and it appears that the freedom of most capitalistic societies has created more prosperity and allowed for more flexibility and choice for labor than those economic theories anticipated. Technology and changing attitudes and approaches of many millennials are changing work trends and the types of employment more than in the early twentieth century when Marx and Schumpeter were writing. However, the methodologies to measure labor have not changed that much over time and may be missing many of the changes that are occurring in the labor markets, understanding this can help you decide how to best use the abundance of employment data that gets released. This data often drives near-term trading in securities markets in part because of how regularly it is released and in part because the data can have far reaching effects on political and central bank actions.

The “big” report in employment in the United States is the Employment Situation. It is put out by the Bureau of Labor Statistics, which was established in 1915.39 Even though it is a report that appears to be increasingly flawed, as the constructs of employment change, it has an incredible amount of data worth looking at. The focal point is often on the payroll figure that shows the number of people employed and how many were hired in the latest period. The full report beyond the headline numbers should be looked at. Subsectors include significant data on wages and segments like unemployed persons and reasons, as well as a similar report by duration of unemployment and employment data by industry.

There is a seemingly endless list of other employment related releases, beyond the Employment Situation and comparable reports in most countries. In the United States there is a Weekly Claims for Unemployment that is widely followed. This is an attractive data point to use as it is a relatively factual data set (as opposed to a survey or sentiment report) and it is released weekly. However, this should not be looked at in a vacuum and at the very least it should be compared to the labor participation figures. There is also a monthly report from a company known as Automatic Data Processing (ADP) that releases the ADP National Employment Report, which can be a harbinger for payroll figures. Another report in the United States, made popular by former Federal Reserve chair Janet Yellen, is the Job Openings and Labor Turnover report (JOLT). All of this data should be looked at relative to the labor participation rates and reports on income.

The data in these reports may have some weaknesses relative to the actual economy as the population has changed their communication and work habits. The key parts of the report are based on a household survey and an establishment survey. The household survey gets a very high response rate. The concern is whether it is reaching the right people, as younger people have different levels of usage of landline communication, cohabitating and appear to be generally living more mobile lifestyles. The establishment survey focuses on businesses with more than 1,000 employees.40 If employment growth is being driven by demand for traditional workers that have homes, phones, etc., this data may be reasonable. However, if the employment factors are being driven by an independent operator with an Amazon store or Airbnb properties, or even, by six young people working at a start-up and sharing an apartment, this type of survey is likely to miss much of the actual employment activity. As these types of “jobs” become a larger part of the economy, traditional data can become more flawed until methodologies are adopted to address these changes.

How companies employ people and how people choose to work changes over time. There are points in history where these changes are more dramatic and can cause seismic shifts in the labor market. When major changes occur, whatever data was being used in the previous employment paradigm is probably not measuring employment correctly. For these reasons trends in labor data, while important, may not be the best ways to examine shifts in major economic trends. Anecdotal information is helpful in understanding how some changes are occurring, but be cautious when too many anecdotes are used it probably means there are not enough facts or data.

Understanding how much employment has changed over time can be helpful. In many countries that underwent rapid industrial development, corporations become the dominate employers (corporations were a relatively new concept back then). This occurred as societies tended to move away from agrarian economies and corporations became repositories of capital, starting to replace the construct where capital was almost solely stored in land. In early corporations there were many cases where workers were forced to endure dangerous and excruciating work environments in order to earn just a subsistence wage. Over time unions were formed, in many places, as a means of consolidating the value of human capital and bringing a more even balance of power between employers and employees. Any casual reading of economic or social history will show how dramatically the labor movement changed how people work and the employer–employee relationship in countries like the United States and the United Kingdom. In a truly free market economy the formation of corporations and of unions make perfect sense and is another way market forces can solve problems, as long as regulators and lawmakers maintain a consistent and level playing field for all groups involved.

For many years in Japan when an employee was hired by a company there was almost an implicit contract stating the employee would be loyal to the company and never want to leave for a better opportunity and in return the company would have the employee as part of the company for his working life (because it almost exclusively was a “he” in most cases at that time). Economic struggles and a more global economy forced this to change. This has affected social attitudes and some have theorized that the move to a more uncertain employment market has caused the birth rate to drop and the population demographics to age more rapidly. Generally, economic history has taught corporate leadership that it is beneficial to keep the best employees and not have constant employee turnover. The result has been that greater employee–employer interaction and employee ownership has occurred. In Germany, as an example, many companies have governing boards on which employee representatives have a right to sit. All these cases highlight how employment relationships can vary and how the labor market evolves over time, it is not a static economic constant. In many cases technology has been a key force in changing employment constructs.

In developed countries there are new types of “blue collar” factory workers. These are the computer coders. They toil a way usually as part of a large team working on large projects or maintaining systems and their work structure often resembles modern assembly lines. This is not a statement on their skill level or value, they are certainly skilled and specialized labor, just like a high quality machinist. However, they are also not always given the fairest treatment. They are frequently given a temporary contract, as opposed to being hired as full time employees. This limits any benefits and many employee protections they would get and certainly limits their job security. These workers are also under constant threat of their skill set being rendered obsolete as new languages and skills are developed, and younger coders coming out of school may know these systems better and will work for lower wages. This uncertainty can change spending and savings habits, though these types of changes are not easily gleaned from macroeconomic data points released about the employment market.

Employment is going through another major change in the technological age and it is devaluing the value of analytical work using historical employment data. In areas like Silicon Valley the increased flow of information, the competition for specific skill sets, and a relative abundance of a certain type of “venture” capital have led to changes in employment. Wages are less of a factor. Lifestyle is often more important. Flexibility for telecommuters or allowing people to bring dogs to work is part of employment compensation. There is more of an emphasis on giving equity ownership in the firm than wages this creates an opportunity for employees to capture the upside if the company is sold. Employees in this environment often have less company loyalty because they know the corporations may be more fleeting, and in some cases companies are being formed just to be sold. Workers may also work several jobs part time. This may be particularly true for the digital world’s blue color factory worker, the computer coder. This is all changing the value of data on wages and hours worked.

There is also a new type of self-employment that is harder to capture in labor data, this can include internet businesses run from someone’s home on a full or part-time basis or other part-time peer-to-peer employment. Think of a car owner in Los Angeles that has chosen to utilize their “excess capital” to drive for an on-line car service like Uber or Lyft (the excess capital would be their car sitting parked and unused). Think of an entrepreneur mother of three young children in North Liberty Indiana who buys used baby clothes at flea markets and swap meets, repurposes them, and resells them in her “store” on eBay. These examples indicate that the potential for gaps in employment data is large.

Part of the attraction of labor data to investors is that it theoretically gives indications into several other key areas that can impact the economy in many ways and over several years. The reach and impact of employment data includes (a) insight into what major corporations and the government are doing (more employees implies growth in corporations and costs in the government); (b) it is a major influence on central banks decisions about interest rates as it would be politically tenuous to raise rates dramatically with increasing unemployment, and in the United States full employment is part of the central banks mandate, and; (c) it can be a huge political barometer as employment levels can have an impact on elections and economic policy.

While employment data is somewhat flawed it may be the most important economic factor in political and policy decision making. Healthy levels of employment bring untold societal good, such as lower crime, higher levels of citizen’s sense of self-worth, more household and business formation, more consumer spending, and a lower need for transfer payments. It is an incredible hot button for politicians, and good employment numbers should favor incumbents. When comparing cross-border investments the employment environment can be a factor in trying to handicap political stability.

There is the constant fear that technology will always replace labor, this has been in society since at least the Luddites, who destroyed factory machinery in protest in the early nineteenth century. Technology is more likely to change labor than replace it. Think about a cycle where employee headcounts rise for a period of time, labor costs start to rise and instead of hiring more people or raising wages, employers choose to invest in cheaper labor-saving technology, thereby driving the employee headcount down as a substitution effect occurs. This type of rotation keeps employees off balance about job security and likely limits job growth. However, at the same time, technology is creating new jobs and allowing employees to have multiple careers as they can telecommute to a job and “face-time” in the office may be less important than it was.

Employment data can be an indicator of economic growth rates and inflation. Employment gains within a business sector may be a harbinger of growth and success in that industry, but just as easily could be a signal of over hiring and inefficiencies leading to pressures on profits. Recognize that markets react heavily to employment data; however, technology and societal changes are leading to an increasing disconnect between traditional data points on employment and the reality of the employment market. Therefore, employment figures may increasingly move along their own trend lines and not have the same correlations with other economic data points as they once had.