Buried deep within Federal Reserve Chairman Janet Yellen’s cloud of possible outcomes for the labor market outlined at Jackson Hole was one that weakens the link with monetary policy and which would suggest the unemployment rate levels out above its previous level of full employment regardless of what the Fed does.
“Significant structural factors have affected the labor market,” she said, “including the aging of the workforce and other demographic trends, possible changes in the underlying degree of dynamism in the labor market, and the phenomenon of ‘polarization,’ that is, the reduction in the relative number of middle-skill jobs.”
Although under a heading of “Interpreting Labor Market Surprises,” a structural – and so relatively permanent – outcome of less “dynamism” in jobs creation would be, in fact, what a number of studies have already suggested is happening.
A Cleveland Fed study published a few days before Yellen spoke confirmed fewer job-creating establishments are being brought into existence and a Bureau of Labor Statistics long-term projection updated in December saw monthly job creation averaging about 150,000 a month for the decade of which two years are already gone.
A lower labor participation rate and employment/population rate have been trends which, Yellen repeated, began long before the financial crisis.
According to several other studies, demographic changes will have slowly changed the U.S. labor market in major ways long before robots are theorized to usurp massive numbers of jobs, or when humans are occupied buying and selling imaginary goods and services within multi-participant worlds on line.
In her speech, that has been described as data dependency but with more footnotes, Yellen’s own footnote No. 7, in the section on ‘surprises,’ warns that in reality it is not so easy disentangling cyclical forces – subject to remediation – from structural changes that have deep roots and resist short-term remedies.
“The line between the two may be indistinct,” the footnote said. “Moreover, what begins as cyclical weakness may evolve into structural damage,” as examined in a Fed study contained in the reference.
For policymakers the word “structural” has come to mean something in the realm of the impossible to change, given the way Congress has found itself paralyzed in the consideration of even medium-term measures like a highway bill, and unable to conceptualize fundamental restructurings.
Yellen’s mention of “polarization” is one aspect of a phenomenon that viewed one way, sees middle-skill jobs disappearing faster that either highly skilled or lower skilled jobs, a trend observed not only in the United States but across the Western world.
Viewed another way, the “polarization” discussion has become intertwined with the politicized subject of income inequality, where high-end incomes increase at a faster rate than those below, exacerbated in periods of lower labor demand.
“It has been well documented that the share of the working-age population employed in ‘middle-skill’ occupations has been falling for some time, while the share in lower- and higher-skill jobs has been rising – i.e. “polarization” of the labor market,” a Fed working paper authored by Christopher Smith said last year. “The dynamics and related mechanism behind these employment trends are not fully understood.” it continued, “nor is it well understood what happens to workers who are displaced from middle-skill jobs.”
Fundamental factors, such as the aging of the American population, have been used to explain why certain levels of labor participation are under pressure to decline. Harder to explain has been why the growth of payroll establishments has been slowing.
Last week’s Cleveland Fed study, by Ian Hathaway, Mark Schweitzer and Scott Shane, found that new business establishments, which chase changing markets and business patterns, are increasingly created by the owners of existing businesses, not entrepreneurs creating from scratch. New-business formation is now at half its rate in 1978.
They found that as familiar as that is for retail establishments, the trend holds even more true outside of retail in the general industrial sector. Manufacturing and the oil industry were the two that have not been affected. Of the seven remaining sectors, retail was affected the least.
“The decline is troubling because new companies have historically played an important role in job creation-recent estimates put the number of new jobs created by new firms at 2.9 million annually on average,” the study said.
The difference is hardly trivial. Said the researchers, “At the 1978 rate of new firm job creation, new firms would have produced an additional 2.4 million jobs in 2011, or 90 percent more.”
But even more to Yellen’s point, in the process of establishing that three-and-a-half decade trend of a diminishing number of new firms, the study also confirmed that the overall context remains, that the U.S. economy is creating fewer businesses overall, either those that maintain existing jobs or those small enough to play a major part in creating new jobs.
“While highlighting the increasing rate of new outlet formation, the researchers caution that the growth of new outlets does not totally offset the declining trend in new firm formation, noting that the overall rate of new establishment formation is still declining,” the Cleveland Fed said.
The update of the Bureau of Labor Statistics’ long-term projections, sees 15.3 million non-farm additional jobs from 2012 though 2022. Although faster growth than the preceding decade, hit by the Great Recession, it is still only a 1% annual growth rate on average, accounted for wholly by population growth.
By sector, the strongest growth rates, more than 2%, are seen in health care and construction. Federal government employment and that related to agriculture are seen shrinking.
“The Bureau of Labor Statistics projects that the next 10 years will bring about an aging labor force that is growing slowly, a declining overall labor force participation rate, and more diversity in the racial and ethnic composition of the labor force,” the outlook document said.
Based on the analysis of participation rates of 136 separate demographic slices, the national participation rate will be at 61.6% by 2022, the BLS said. In July it was 62.9%, steady since April.
Yellen, in raising more than two dozen questions in her speech about factors influencing unemployment, said the “assessment of labor market slack is rarely simple and has been especially challenging recently.”
For those second guessing Fed policy, she illustrated the complications, including cyclical and structural factors some of which may have experienced “unprecedented” shifts since the Great Recession.
Yet one of her messages seemed to be that underlying it all are demographic shifts over generations and business formation trends evident for decades that are much slower to change. These alone continue to suggest a less dynamic U.S. jobs picture, separate from any aftereffects of quantitative easing.