It's the Lack of Job Creation, Stupid!

With the release of the Automatic Data Processing (ADP - Snapshot Report) numbers this morning and the BLS jobs report due out on Friday (and initial claims tomorrow), jobs -- or the lack of them -- is clearly front and center.

Normally when people talk about job losses or gains, they are talking about net job creation. After all, even in the biggest booms, there are still some people who are losing their jobs, and even in the deepest darkest recessions, there are some folks who find new jobs.

There is an interesting article today by Andy Harless of Atlantic Asset Management posted on Economist View that disaggregates it into the rate of job destruction and the rate of job creation. It is a long and interesting article and is worth reading.

The key trends are shown in the graph below. If the blue line is above the pink line, it means that on-balance the economy is adding jobs, and when pink is higher than blue, we are losing jobs. It is the difference between the two lines that people usually talk about.

It turns out that the key problem is that the rate of job creation has fallen rather dramatically since 2000, from about 8% where it hovered in the 1990’s to 6% today. The rate at which jobs are going away jumped during the dot.com related recession of 2001, but then fell back. The rate at which the economy is dropping jobs is actually significantly less than it was at any time during the boom of the 1990’s.

Think about that for a minute -- during the Clinton Administration, when the economy added a net 22.5 million jobs, the rate of job destruction was actually higher than it was during the second quarter of this year! The difference is that back then there were lots of new jobs being created. If you lost your job in 1998 or 1999, it was not a big deal, there were plenty of new jobs being created. It is a very different story if you lost your job in 2008 or 2009, when the rate of job creation is 25% lower.

One of the key selling points of the huge tax cuts put into place in 2001 and 2003 -- tax cuts that were overwhelmingly targeted at the very top of the income distribution -- was that they would lead to entrepreneurs creating all sorts of new jobs. That clearly did not happen. The job growth that we saw between the middle of 2003 and the end of 2007 was almost entirely a function of the rate of existing jobs disappearing leveling out, not from any increase in the rate that new jobs were being created.

I think we can now safely put supply-side economics to bed -- it clearly does not work as advertised, at least when you are talking about the top marginal tax rates being below 50% (currently 35%, scheduled to go up to 39% when the Bush Administration tax cuts expire).

The theory may still have some validity when you are talking about the reduction in tax rates from over 90% in the 1950’s to under 50% by the early 1970’s. Clearly the part of the theory about lowering tax rates raising more tax revenues did not pan out too well, either.

High rates of job creation and destruction are signs of a dynamic economy, with old outmoded jobs being phased out -- often due to technological productivity improvements -- but new industries being created that more than make up for it. An economy where no one has lost their job and no new jobs were created would be static and hidebound.

Clearly we need to get the rate of job creation back up above the rate of job destruction, but for the long-term health and dynamism of the economy, we really need to see the rate of job creation increase more than we need to see the rate of job destruction brought down.

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