Cut Me Some Slack: The Real Concern in Today’s Economy

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Christopher Thornberg, PhD
Christopher Thornberg founded Beacon Economics LLC in 2006. Under his leadership the firm has become one of the most respected research organizations in California serving public and private sector clients across the United States.

As the tech sector continues its robust expansion, concern over whether the economy is in another bubble and speculation about when the next recession will hit, has deepened. However, today’s much more prescient question is how we cope with and maintain the growth the nation continues to experience. How do we meet our growing demand for labor? The recent release of the Job Openings and Labor Turnover survey (JOLTs) by the U.S. Bureau of Labor Statistics – along with headlines about the trials and tribulations of recruiters trying to fill positions – indicate that labor availability is a mounting problem for the U.S. economy.

This concern is particularly relevant in California for two reasons. First, California has been one of the fastest growing states in the nation from a jobs perspective since the ‘Great Recession’ ended in 2009. The state ranks 4th in terms of overall job growth since the recovery began and has added more jobs than any other state in the nation—including Texas (that state is growing at a faster rate but has added almost 500,000 fewer jobs than California).

California has partly been able to maintain such a rapid pace of expansion because there was a lot of slack in the state’s labor markets – available for firms to absorb. Unemployment went up more in California during the recession because the state was essentially ‘ground zero’ for the housing meltdown and also because consumer spending, which took a severe hit, is a large part of California’s economy. As production bounced back, firms were able to pull many of these formerly unemployed workers back into the labor force without displacing jobs or production from other sectors. In other words, there weren’t many tradeoffs in growing any one individual sector as there was ample available labor.

Today, California is in a much different economic environment than the one of the past 5 years. As the economy has healed, the labor markets have become tighter and tighter. Not only has headline unemployment declined faster in the state than in the U.S. overall (to just 5.9% in the most recent data from September 2015), but the number of available/unemployed workers in specific segments of the workforce is even tighter than the headline number implies.

According to recently-released data from the American Community Survey, Californians with a Bachelor’s Degree had a 5.3% unemployment rate in 2014, compared with the statewide average of 7.5%. For workers with advanced degrees (Master’s, Ph.D’s, and other graduate credentials), things are even more stretched: just 3.6% of these Californians were out of work. Despite well-used rhetoric about the current cycle’s failure to create “good jobs,” the data indicates that skilled workers have been a huge part of this recovery. The question shouldn’t be about when the next recession is coming, but how we can maintain the growth the economy is now producing with a labor market that has been pulled taut again.

Certain sectors are likely to feel the strain more immediately than others. For example, there is currently a dearth of Healthcare Practitioners in California. Just 2.4% of these workers report unemployment. Not only was Healthcare one of the sectors that was relatively unaffected by the recession, it has continued its upward trajectory during the recovery, straining the supply of available workers. However, this is a common theme across many high-skilled job categories. The state’s Architects, Engineers, Computer Scientists/Programmers, Mathematicians, Scientists, Business/Financial workers, and Lawyers all maintained unemployment rates below 5% last year—and the economy has only continued to grow since then.

In some specific occupations, the low levels of unemployment point to more than just a reduction in “slack.” Economic theory dictates that when supply outstrips demand, prices for those goods or services will increase the most. This is exactly what we are seeing among many of the occupations with below-average levels of unemployment. For example, Computer/Mathematical, Business/Financial, Legal, and Management occupations experienced some of the fastest median wage growth between 2010 and 2014. These were also some of the high-skilled occupations with the lowest levels of unemployment, suggesting that the economy has not only absorbed the supply of available workers created by the recession, but that the demand for these types of workers continues to grow. Architects/Engineers also saw their median wages rise by 6.3% over the same time period, and had the 3rd lowest levels of unemployment of any occupational group in the state.

On the flip side, some lower-skilled workers, who also maintain relatively high levels of unemployment, saw virtually no wage growth or experienced a reduction in their median wages over the past 4 years. These include occupations such as Arts/Entertainment, Food Preparation/Serving, Office/Administrative, and Personal Care.

It is worth noting that these patterns do not necessarily hold across the board. Some occupations, such as Construction, still face relatively high levels of unemployment but have also seen robust wage growth over the past 4 years, while other occupations such as Healthcare Practitioners, who maintain the lowest levels of unemployment in the state, have not seen significant increases in pay. But in cases where occupational groups buck the broader pattern, it is generally because they include a diverse mix of individual occupations within a larger category. As such, the growth in median wages (or lack thereof) is likely due to a shifting mix of workers within the bigger groups rather than an abundance or absence of wage growth.

For example, the Healthcare Practitioners group includes occupations from doctors and surgeons to physical therapists and dental hygienists and licensed vocational nurses. The lack of wage growth doesn’t necessarily imply that physicians are overly abundant in today’s market, and may be representative of a shift whereby this group includes a heavier mix of lower skilled workers (based on the American Community Survey). Like all survey-based statistics, researchers must be cautious about buying into any individual number wholesale, but a clear pattern has emerged of a tightening labor market at the high-skilled end. This is expressing itself in the form of very low unemployment and rising wages. It also suggests future difficulty in growing California’s economy in these sectors if the state is unable to generate commensurate supply through either training or recruitment.

Economic prognosticators love to speculate about how many years it will be until the next dip—and another recession is inevitable. However, inevitable does not mean impending and there is little on the current horizon in terms of economic fundamentals that would actually precipitate the next downturn. The harder part, especially for states like California that rely so heavily on high-skilled workers, is to keep the momentum going when there is no slack in the system to draw from. Not only will education be a critical area of focus, but the state’s employers will also have to recruit skilled workers from other parts of the nation and world.

And, as Beacon Economics has pointed out for some time, that will require addressing the chronic under-supply of housing and keeping home price growth in check.

The following two tabs change content below.
Christopher Thornberg, PhD
Christopher Thornberg founded Beacon Economics LLC in 2006. Under his leadership the firm has become one of the most respected research organizations in California serving public and private sector clients across the United States.

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