Wednesday, February 1, 2012

Why is the Employment Situation Dragging? It's the Economy Stupid...

Bloomberg outlines the latest employment news coming from ADP ahead of this Friday's official details:
Companies added 170,000 workers in January, reflecting job gains in services and at small businesses, according to a private report based on payrolls.

The increase was less than forecast and followed a revised 292,000 rise the prior month that was smaller than previously reported, the report from the Roseland, New Jersey-based ADP Employer Services showed today. The median estimate in a Bloomberg News survey of economists called for an advance of 182,000.
Better than nothing? No doubt. But, what do we need for jobs to really bounce back? Easy.... economic growth (the question lies in whether jobs need to precede economic growth to spur consumption or growth itself will cause firms to hire).

The below charts outline the relationship / importance.

The first chart below shows (in yellow) the ratio of the change in number of those employed over a five year period over the change in real GDP over that same five year time frame. If the yellow line is over 1, that means more people were hired over that time than the increase in the population (very rare). Over the past 60 or so years, the ratio has been a bit more than 0.60 (i.e. 60%), which is basically another way of saying the employment-population ratio has been roughly 60% (we can clearly see how bad the latest recession was).

The next chart shows the same data, but makes the relationship even clearer. You want to add jobs at the "normal" 0.60 rate? Grow the economy consistently by more than 3%. You want to grow the economy by more than 3%? We need people to work.

Source: BLS / BEA

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