WASHINGTON, September 6, 2014 — The Bureau of Labor Statistics just reported that the economy added 142,000 jobs in August. This figure was about 100,000 below economists’ expectations and about 80,000 below the average gains in the last five months. Is this a trend, or just a one month fluke?
The consensus view is that the August number represented a one-month problem and that, based on a number of factors, the economy should quickly return to generating more than 200,000 jobs per month. But the data do not necessarily support the consensus.
Job creation depends on growth in the economy. The faster that the economy grows, the more jobs will be created. The economy grew by about 1 percent in the first half of this year. During that time about 1.3 million jobs were created, which is about 217,000 jobs per month. The problem is that with a labor force in excess of 155 million and with population growth about 1.5 percent, the economy must add nearly 200,000 jobs per month just to keep up with the population growth.
In order to significantly reduce unemployment and to encourage workers to re-enter the job market, we need to create an average of at least 300,000 jobs per month. After the more severe (in terms of depth) 1981 recession, more than 300,000 jobs per month were created. We even had two months with nearly 1 million jobs created as the economy rapidly recovered. The Reagan administration created an environment that led to growth by reducing tax rates and reducing burdensome regulations.
Most economists are forecasting economic growth of about 1.5 percent for the second half of this year. That should mean an average of about 250,000 jobs per month. We will, however, likely see less than that and many of the jobs will be part-time. Why?
Labor costs, while not rising significantly over the last few years, are still relatively high. So with the slow growth, businesses will be reluctant to increase full-time hiring. This is especially true for small businesses that provide the vast majority of new jobs. The reason is that small business cannot afford to pay health care costs that are now required by law if they employ more than 50 people who work more than 30 hours per week. The businesses either hire workers on a part-time basis or try to expand their output by using capital goods where ever possible to replace labor.
Another problem is that there is currently a big push to raise the already too high minimum wage. While it is true that the overall unemployment rate has fallen to 6.1 percent, mostly because of fewer people seeking jobs rather than more jobs being added, teenage unemployment continues to hover at 20 percent.
The president wants to raise the minimum wage from the current $7.25 per hour to $10.10. Fast food works are protesting for a minimum wage of $15 per hour. Either action will result in higher labor costs for business, fewer entry level jobs available for those unskilled workers just entering the job market and pressure to raise prices.
Also, the Obama Administration raised the income tax on capital gains and dividends. This reduces the amount as well as the incentive to invest, putting an additional drag on economic growth. Under the current administration with their tax policies and increased regulations, it is difficult to see the economy growing much faster than a 2 percent rate for the foreseeable future.
What Americans really need is a high growth economy, free of excessive regulation and a tax environment that raises sufficient revenue while encouraging business to expand and individuals to enter the job market. The current administration is doing just the opposite and as a result the economy has been stuck in a slow growth, high unemployment positon since the recession officially ended more than five years ago.