Thursday, December 2, 2010

High Labor Productivity = More Jobs

Financial FAQs

Why are we seeing more job creation? All the indicators—from Challenger and Gray’s corporate layoff and ADP private payrolls surveys, to the U.S. Bureau of Labor Statistic’s (BLS) unemployment report—point to a big pickup in hiring, in spite of government downsizing.

This is because it is becoming too expensive for the existing workforce to produce more as demand grows, hence small businesses in particular are beginning to hire to keep their production costs down. I.e., workers are demanding higher wages and more overtime, says the Labor Department’s Nonfarm Productivity Report.

Companies have been squeezing out as much output as possible from the current workforce instead of adding to payrolls, which is why productivity for the third quarter got a boost. Nonfarm business productivity for the third quarter was revised up to a 2.3 percent gain from the initial estimate of 1.9 percent.


The key is unit labor costs (ULC), which have been rising steadily since late 2009. Labor makes up two-thirds of production costs, so any upsurge in those costs is a red flag to businesses. The higher hours worked is also a sign that demand for their goods and services is picking up.

Productivity is up largely due to a 3.7 percent rebound in nonfarm business output after a 1.6 percent rise in the second quarter, as demand for their products and services grew. Also, hours worked continued to grow at a 1.4 percent increase from 3.5 percent in the second quarter. Compensation rose an annualized 2.2 percent after a 2.9 percent boost the quarter before.

ADP employment services, a payroll processor for private businesses, estimates November private payrolls rose by 93,000 vs. a rise of 82,000 in October (revised from plus 43,000). It tends to closely mirror the Labor Department’s November’s nonfarm private payrolls unemployment report, since it represents roughly 500,000 U.S. business clients. During the twelve month period through June 2010, this subset averaged over 340,000 U.S. business clients and over 21 million U.S. employees working in all private industrial sectors, says ADP.


Challenger's count of layoff announcements totaled 48,711 in November, up from October's 37,986. Announcements were up in the government/non-profit sector as well as consumer products and pharmaceuticals. Retail and computers showed a dip in layoffs.


And initial weekly claims for unemployment insurance, the best forward looking indicator of job losses, has been falling sharply of late. Initial claims fell 34,000 in the November 20 week to a far lower-than-expected level of 407,000 (prior week revised slightly higher to 441,000). The four-week average is down 7,500 to 436,000 for a nearly 20,000 improvement in the month-ago comparison.


More good hiring news came from the Institute for Supply Management’s November manufacturing survey, the best indicator of domestic manufacturing activity. New orders came in at 56.6, indicating solid month-to-month growth that's only slightly slower than October's very strong growth of 58.9. The pace of production slowed noticeably but, at 55.0, is still strong though less strong than the prior month's 62.7. And ISM's survey shows businesses are continuing to add employees. The 57.5 index level for employment is very strong for this reading, says Econoday.

We have to remember, though, that all this depends on a continuing demand for goods and services, which in turn needs readily available credit. Banks are only now beginning to lend again to small businesses, as various small business sentiment surveys indicate. Such optimism must continue to grow for the hiring to continue.

Harlan Green © 2010

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