Remember last week’s jobs report–the one that started the market buzzing about a V-shaped recovery? Well, according to Harvard economist Jeff Frankel, it wasn’t so great, after all.
Instead of focusing on changes in actual jobs to measure the strength of the labour market, Frankel focuses on “hours worked.” He does this because companies under pressure often reduce hours and overtime before they cut jobs. Similarly, when the economy turns up, companies often start adding hours and overtime before they start hiring. Thus, total hours worked provides a more real-time view of the state of the economy.
And how did total hours worked look in May? Lousy. Specifically, according to Frankel, they did not suggest any sort of a turn in the labour market.
Total hours worked is equal to the total number of workers employed multiplied by the average length of the workweek for the average worker. The length of the workweek tends to respond at turning points faster than does the number of jobs. When demand is slowing, firms tend to cut back on overtime, and then switch to part-time workers or in some cases cut workers back to partial workweeks, before they lay them off. Conversely, when demand is rising, firms tend to end furloughs, and if necessary ask workers to work overtime, before they hire new workers. (The hours worked measure improved in April 1991 and November 2001 which on other grounds were eventually declared to mark the ends of their respective recessions.) The phenomenon is called “labour hoarding” and it is attributable to the costs of finding, hiring and training new workers and the costs in terms of severance pay and morale when firing workers.
Unfortunately, as reported by Forbes, pursuing this logic leads to second thoughts about whether the most recent BLS announcement was really good news after all. The length of the average work week fell to its lowest since 1964 ! The graph below shows that, not only did total hours worked decline in May, but the rate of decline (0.7%) was very much in line with the rate of contraction that workers have experienced since September. Hours worked suggests that the hope-inspiring May moderation in the job loss series may have been a monthly aberration. If firms were really gearing up to start hiring workers once again, why would they now be cutting back as strongly as ever on the hours that they ask their existing employees to work? My bottom line: the labour market does not quite yet suggest that the economy has hit bottom.
Read Frankel’s full post here >
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