We examine the possibility for higher normalized joblessness, the concerns over long-term unemployment, changes in job-sector composition, and what can possibly catalyze job growth.
Jason Stipp: I'm Jason Stipp for Morningstar.
Friday's employment report for the month of September beat a lot of analysts' expectations, but the numbers in an absolute sense were still far from being stunning, as the employment markets still face several headwinds.
Here with me to talk about some of the bigger picture things that are happening in the employment market is Morningstar's Vishnu Lekraj; he's an equity analyst covering the employment sector.
Thanks for being here, Vishnu.
Vishnu Lekraj: Jason, good to be here.
Stipp: So we did in a separate video discuss that employment report. It was positive on the upside, but when you look at it in isolation, 103,000 jobs added isn't going to really stun anyone in a broader sense.
So I wanted to talk about some of the issues that are still continuing to face the employment market, and I think one of them that has concerned a lot of folks is this idea of a structural unemployment rate that might be higher. So, we've been stuck at 9.1%. We've seen elevated unemployment for a while, even throughout the recovery. Is it possible that in the future we're going to just have to get used to high 8%, low 9% unemployment rate?
Lekraj: I don't think that's going to last over a 10-year period, but it may last over a three- to five-year period. Now when you look at some of the Fed projections they've made in terms of where they believe long-term structural employment is going to end up, it's about 5%, which is typically in line with past expectations. However, to get there, it may take a longer time, for the very fact that we lost a lot of jobs from a lot of sectors that probably will not grow robustly for a while.
Stipp: One of the things that I think about in terms of the employment market is the idea of supply, the number of jobs that are out there, and demand, the number of people who are looking for jobs. One thing we know is that a lot of retirees who have taken a hit to their portfolios are probably going to be working longer out there in the workforce. That could be more people looking for perhaps the same number or a smaller number of jobs. Could that be a headwind that we have to face for a while?
Lekraj: Definitely that, in combination with some workers that don't have skills that match some of the jobs that are available. So, you have older workers that may stay in the workforce a little longer. However, I have seen some stories ... where companies may be looking to downsize some of their older workers for the very fact they make more money. So they can get a same worker who does the same job that's younger that's going to make lot less money and save them on that side.
In addition, again, the skills mismatch could be something that could be a lingering problem. We have a lot of workers that had a lot of skills that are construction-related, manufacturing-related, that probably won't be in demand here over the next five to 10 years.
Stipp: So, if we have some companies preferring the younger workers for those jobs that maybe an older worker had, what does that imply for the wage story? Could it be that we don't see a lot of wage growth because of that?
Lekraj: Everyone looks at that wage number in isolation and says wage growth hasn't happened. But if you take a look at what's going on ... as the baby boomers start to retire more and more, and start to see businesses move their workforces to more of a younger-type workforce, you may see wages stay stagnant or even come down on a relative basis. And that's not necessarily a huge negative. What that means is there's going to be more optimization in terms of cost structure for businesses, which could be a positive for the economy.
Stipp: Another headwind that a lot of folks write about and worry about is the long-term unemployed, and you mentioned that there are some workers who might not have the skills for the jobs that are available. This is probably a big part of that group of folks who haven't been able to find work for a quite a long time. How much of a headwind and a concern is that long-term unemployed?
Lekraj: That is a concern. If people are not getting jobs and they want to work, that means they are going to spend less, which means the economy is going to grow less, which is not good for anybody. And the long-term unemployed, I look at it from a rational point of view without any emotion in there. The skills mismatch is there, and it seems to me that the U.S. economy is morphing and changing more toward an information-type, service-oriented economy, which means a lot of workers may be unemployed and their skills may be outdated, and they may not even find work for a long time, which is unfortunate for them, and our hearts go out to them, but that's just the nature of the game right now.
Stipp: So you mentioned how we might see a shift in the types of jobs that are available. So, I want to talk to you about differences that you might see in the sectors of the employment market compared to what we've seen in the past. So, you mentioned information there. I also think about temporary labor and whether that might play a bigger role in the future, and also whether we might see shifts into some sectors that might gain some jobs that maybe hadn't had them before. What's you take on what the composition of the employment market might look like going forward?
Lekraj: Health care, health care, health care. Health care is going to be a huge driver for growth. Retirees, the population is getting older, so health care is going to be a huge one.
The temporary worker dynamic is interesting, because businesses are going to look to build more flexibility into their cost structure, into their labor force as that becomes a greater percentage of what they are doing on a daily basis in terms of operations. So that's going to be ... key--they'll do more temporary work, more contract work, which is not necessarily a negative, again, that's just going to mean they are going to have more flexibility during recessions or during economic cycles.
Stipp: Another sector that's gotten a lot of attention is the construction sector and the housing sector. A reader had posted a question on one of our videos earlier this week about that. The housing market still really hasn't seen anything that you could call a robust recovery, certainly. Can we have an employment recovery without a housing recovery? How much of employment depends on construction of those homes?
Lekraj: The construction market as a whole is about 4% of the total labor market, when you take a look at it from that point of view.
Now in the past, you've seen the construction market really be a good catalyst for growth, but this time around it's probably not going to be that way, and that may extend the recovery or extend the time it's going to take us to get back to a normalized level.
You're going to see some good job growth [in construction] from the nonresidential commercial side more than the residential side. There's a plethora of homes in the market that are not occupied right now, new and existing ... --there's just no growth out of the residential construction sector because of that.
Stipp: So turning that conversation to discuss solutions: So you mentioned there could be, for example, a lot of workers whose skills are outdated. This has been the topic of a potential policy response. We've heard our politicians talk about this problem and the need to address that. We have a jobs bill that's been floated out there. We've also had the Fed, who is stepping back in and doing this Operation Twist to try to help the economy out. I want to get your take on what you think could be a potentially effective policy response, and if you've seen anything floated out there that you think could really help us get some traction in the employment market.
Lekraj: What you need is a mix of both government spending and tax cuts if you want things done over the near term, and you need them done in the right way, and given the right incentives that could happen.
However, you've seen a lot of jumbled mess coming out of both the federal, state, and local governments. They haven't really got their act together, and it's not because they don't want to, I just don't think there's a coherent message right now out of anybody--either party or either branch of government as to what they want to do.
Now when you look at what they are trying to do with the Operation Twist from the Fed side, from a bank side, that's more of a near-term thing. Over the longer term, you're probably going to see the U.S. workforce become more and more educated as workers and younger people recognize the fact that they need higher education to get these jobs that are out there in the economy. So, overall, over a longer term, 10-year, 20-year period, it's actually going to be a positive.
Stipp: So, I want to talk to you about some of the policy responses that are kind of stuck in gridlock right now. What else could be a catalyst for the job market? So if we can't necessarily depend on policy and legislation to help get us out of this, are there any bright spots that could give us a push in the near term or even over the next five years?
Lekraj: You need business confidence. You need businesses to become a lot more confident in what's going on in the economy from a demand side. Consumer spending drives a lot of what's going on. If the consumer starts to spend, businesses start to become more confident, and then they'll start to hire a lot more. Until we see that happen, it's just not going to come back around. I mean, this retail hiring seasonal factor that's coming up is going to be key to watch for that very reason.
Stipp: All right. Vishnu, thanks for taking a step back with me to take a look at the employment market in a big-picture way, and for joining me today.
Lekraj: No problem, thank you.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.