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WebMemo #2051 on Economy

September 5, 2008

High Energy and Food Prices: Driving the August Employment Report Slowdown

By

On Friday, September 5, the Bureau of Labor Statistics released its employment estimates for August 2008. Government data shows that employers continued to shed jobs for the eighth consecutive month, while the unemployment rate rose to 6.1 percent, a five-year high. The manufacturing sector experienced particularly large job losses, mostly in automobile manufacturers. Temporary employment services also experienced large job losses.

Given such statistics, economic concerns are understandably weighing on the minds of many Americans. However, these economic concerns must be considered in the proper context. Job losses are largely confined to sectors affected by the collapse of the housing bubble or the high cost of energy. Although the job security of American workers has deteriorated over the past year, workers still have much greater job security in this downturn than a generation ago. Workers are significantly less likely to lose their jobs now than during the downturns of the early 1980s or 1990s. The economy faces significant challenges, but it is not in a recession.

August Jobs Report

The Bureau of Labor Statistics August jobs report shows a weak economy. The household survey shows that the unemployment rate jumped 0.4 percentage points to 6.1 percent. The establishment survey shows that employers shed 84,000 jobs during the month. The manufacturing (-61,000), retail trade (-20,000), and professional and business services (-53,000) sectors experienced the largest job losses. Education and health services employment rose by 55,000 jobs.

Examining employment numbers in greater detail shows that job losses were largely confined to a few sectors of the economy: automobile manufacturing and sales and employment services. The high cost of energy has decreased the demand for automobiles, causing employment in that sector to fall-45,000 of the manufacturing jobs lost were in transportation equipment, and 14,000 of the retail jobs lost occurred among motor vehicle and parts dealers' employees.

Employment losses in the professional and business sector were almost entirely confined to employment services jobs (-62,000), especially temporary help services (-37,000). Other fields within this sector, such as computer systems design (+6,000), showed modest job gains.

These figures are in accord with other data showing that companies are not laying off employees in large numbers but are retrenching by slowing hiring and cutting back on temporary help. Workers are less likely to leave their jobs than a year ago, but employers are much less likely to hire new workers.[1] Unemployment jumped so sharply in part because 250,000 new workers entered the labor force but did not find jobs.

The jobs report confirms that the economy faces significant challenges. It does not support the claim by many in the media that the economy is in a recession.[2] Nor does it support the claim by some Members of Congress that the promise of the American dream is in doubt.[3] The economy rises and falls with the business cycle. The current challenges facing workers are serious but less severe than in past downturns.

Economy Growing

The economy is not in a recession. Economists define a recession as when the economy shrinks for two consecutive quarters. The economy has not shrunk over the past year. It grew at a weak 0.9 percent rate in the first quarter of the year and at a robust 3.3 percent rate in the second quarter.[4] The economy faces challenges, but it is not in-or close to-a recession.

Earnings Growth Masked by Energy Costs

Average hourly earnings rose 0.4 percent in August to $18.14 an hour. Over the past year average hourly wages have risen 3.6 percent. However, after adjusting for inflation, wages have fallen 1.3 percent over the past year.[5] The rising costs of energy and food have caused this decrease in workers' spending power. Adjusting for inflation using a measure that excludes food and energy prices shows that real wages have risen 1.2 percent over the past year.[6] Wages are rising-but not fast enough to keep pace with the prices of energy and food. Congress can boost workers' real wages by taking steps to address these problems, such as repealing the ethanol mandate and allowing more oil drilling in the United States.

More Job Security Than in Past Downturns

Any time the unemployment rate rises, workers' concerns about job security increase. After all, newspapers and other media outlets usually only highlight the actual unemployment numbers, and considering the figures contained in the August 2008 Employment Report, employees may be tempted to assume a pink slip is imminent. Such concerns are valid, but they, along with any other economic pronouncements stemming from the August report, must be considered in context.

Job security rises and falls with the business cycle. However, contrary to the popular impressions, job security has increased substantially over the past generation.[7] Workers today are substantially less likely to lose their jobs than in the downturns of the early 1980s and early 1990s.

Chart 1, WM2051

Chart 1 shows the probability that workers will be laid off or fired from their job from one year to the next between 1975-1976 and 2006-2007.[8] These figures end in 2007, the last year for which data is available. Nonetheless, it shows that in the 2001 recession workers were much less likely to lose their jobs than in past recessions. Since then, job security has increased further.

Controlling for changes in education, age, and marital status, employers are 46 percent less likely to lay off male employees and 29 percent less likely to lay off female employees than in the mid-1970s.[9] Employees understandably do not want to lose their jobs, but they are less likely to lose their jobs today than when the economy was growing strongly in the 1980s.

Challenges for Congress

The economy faces serious challenges. Unemployment rose to 6.1 percent last month, and employers shed 84,000 jobs. However, the American dream is not on life support. The economy is growing, workers are more secure in their jobs than in previous recessions, and workers earnings would be rising but for the high costs of energy and food. Job losses are largely confined to temporary help services and the automobile sector.

To get the economy back on its feet, Congress needs to address energy and food costs. Congress should increase the domestic supply of energy by allowing offshore oil drilling and the development of the oil shale in Colorado. These actions will increase the supply and reduce the cost of energy in the United States in the long term. Congress should also repeal the ethanol mandate that turns large portions of the U.S. corn crop into expensive auto fuel. Repealing the ethanol mandate would make gasoline less expensive. It would also make food more affordable. Researchers at the World Bank estimate that ethanol mandates account for three-quarters of the recent increase in the cost of food.[10] Congress can take immediate steps to shore up workers earnings and get the economy back on solid footing.

James Sherk is Bradley Fellow in Labor Policy in the Center for Data Analysis at The Heritage Foundation.


[1] Department of Labor, Bureau of Labor Statistics, "Job Opportunities and Labor Turnover: June 2008," August 12, 2008, at http://www.bls.gov/news.release/jolts.htm (September 5, 2008). In June 2008 (the most recent month for which data is available) monthly job opening rates were 2.6 percent, down from 3.0 percent a year earlier. Monthly job separation rates were 3.1 percent, down from 3.3 percent a year earlier.

[2] Burton Frierson, "Economy Faces a Recession, Probably in Q1," Reuters, March 12, 2008, at http://www.reuters.com/article/ousiv/idUSL114531
7920080312
(September 5, 2008).

[3] See Sen. Joseph Biden (D-DE), "Acceptance Speech of the Democratic Party's nomination for Vice President," address delivered at the 2008 Democratic National Convention, Denver, Colorado, August 27, 2008, at http://www.npr.org/templates/story/story.php
?storyId=94048033
(September 5, 2008).

[4] Department of Commerce, Bureau of Economic Analysis, "Gross Domestic Product and Corporate Profits: Second Quarter 2008," August 28, 2008, at http://www.bea.gov/newsreleases/national/
gdp/gdpnewsrelease.htm
(September 5, 2008).

[5] Heritage Foundation calculations using data from the Department of Labor, Bureau of Labor Statistics/Haver Analytics. Inflation adjusted using the Chained Consumer Price Index for all Urban Consumers. Note that inflation adjusted earnings are from July 2007 to July 2008 because August inflation data is not yet available.

[6] Ibid, inflation adjusted using the core C-CPI-U.

[7] James Sherk, "Job-to-Job Transitions: More Mobility and Security in the Workforce," Heritage Foundation Center for Data Analysis Report No. 08-06, September 2, 2008, at http://www.heritage.org/Research/Labor/cda08-06.cfm.

[8] Workers are defined as being involuntarily laid off or fired if they left their employers in the first year and spent more than two weeks unemployed between their old and new jobs. See the CDA report for full details.

[9] Sherk, "Job-to-Job Transitions," table 1, at http://www.heritage.org/Research/Labor/cda08-06.cfm.

[10] Donald Mitchell, "A Note on Rising Food Crisis," The World Bank Development Prospects Group, Research Working Paper No. 4682, July 2008, at http://www-wds.worldbank.org/external/default/
WDSContentServer/IW3P/IB/2008/07/28/000020439_
20080728103002/Rendered/PDF/WP4682.pdf
(September 5, 2008).

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