The Costs and Incentives of the Labor Market

Today, we’re faced with continued high unemployment and slow economic growth. The unemployment rate dropped slightly to 8.6%, but considering the holiday season and influx of temporary workers this drop is only temporary not to mention that the real unemployment is much higher than 8.6% the government reports.

The problem with the high unemployment is that there is an abundance of labor but the demand for labor is still quite low. There are a few reasons for such a high and persistent unemployment rate. The cost of labor is just too high for employers. Not only has the government made low-skilled workers artificially more expensive but certain policies have contributed to additional costs that make employing people in general more expensive. Another contributing factor is that unemployment has been made more financially attractive to individuals causing them to have unreasonable expectations in their search for employment.  

If we break it down to the basic economic principles of supply and demand we can see that our nation has a surplus of labor due to a low demand for it. Demand is always a function of price. The higher the price, the lower the demand. These principles apply to the labor market just as much as any other industry.

Unemployment Hits 9.2%...Thanks Stimulus!

The employment numbers for June were released today, and unsurprisingly, they aren’t pretty. The unemployment rate rose to 9.2%, the highest it has been since last December, with only 18,000 new net jobs added last month. According to the Bureau of Labor Statistics, this figure shows that nearly 14.1 million active job-seeking Americans can’t find work, despite nearly 275,000 Americans choosing to leave the labor force to either go back to school or have just stopped looking.

The main reason behind the weak job numbers comes from the loss of nearly 39,000 government jobs at all levels, as federal, state, and local legislators are (finally) finding ways to shrink their budgets amidst record deficits. Private sector jobs actually grew by 57,000, which might be the only bright spot from an otherwise dismal month of June.

A potentially relieving piece of news in response to the jobs numbers could be the Federal Reserve’s reluctance to use the numbers to pursue another bond-buying program, especially since it just concluded its last one only a week ago, valued at nearly $600 billion. Called “quantitative easing,” it was intended to put more money into the system to stimulate the economy, but resulted in a devalued dollar and little change in economic growth.

Stock Recovery: Real or Fake?

Economists often discuss the health of the economy in terms of how many ounces of gold the Dow or S&P 500 is worth . What does that mean exactly and why is it important? 

Below is a series of charts that I hope will help explain the situation. 

The first thing to remember is that stocks are valued in DOLLARS, and just like any other good valued in dollars, this means that distorting the dollar will also lead to distortions in stock prices.  

You may have heard recently about the great run up in stocks since the 2008 crash and how this is a sign of a general recovery. Below is a chart of the S&P 500 Index (which I believe is a better indicator than the Dow Jones) since 2008. As you can see, there has indeed been an over 100% rise in prices since the low of the crash in March 2009.  (You can right-click and open the charts in a new window for a better look.)

Now, if this recovery is due to the increase in the worth of the companies and a general recovery, as many economists/traders say, you would expect to see the price of stocks to also increase in terms of other valuations. 

Below is a chart of the S&P 500 divided by the price of gold. This is the chart that people refer to when they talk about the value of the S&P 500 in ounces of gold. It is important to remember, when looking at this chart, that the exact price is not what’s important, since it’s just a ratio, but the percent change over time.  As you can see, in terms of gold, the S&P 500 has actually been down since September 2009.

If you look at the S&P 500 in terms of silver, the picture is even worse. 

Startup Fever

As the economy continues to suck, more and more college students are turning to entrepreneurship to provide extra income and offset mounting tuition debt.  Max Raskin in Bloomberg Businessweek reports:

Inspired by Mark Zuckerberg, who founded Facebook as a sophomore at Harvard University, in Cambridge, Mass., and stymied by the shortage of jobs in the recession, college students are launching businesses  before they graduate. They're entering industries that previously required large investments, thanks to websites that offer help with manufacturing, inventory management, and accounting, says Dane Stangler, a project manager with the Kauffman Foundation, a Kansas City (Mo.) nonprofit organization that promotes entrepreneurship....

"If you start a company tomorrow, you can be global your first day," Stangler says. "You can have international suppliers, you can have international customers. Just compared with a decade ago, it's unbelievable how fast barriers to entry have fallen to starting a business from your dorm room."

Read the rest here.