One of the big themes in the current presidential race is how decades of free trade have dealt a heavy blow to the American worker as millions of jobs were shipped overseas to take advantage of cheap labor.

One of the big themes in the current presidential race is how decades of free trade have dealt a heavy blow to the American worker as millions of jobs were shipped overseas to take advantage of cheap labor.

That’s even turned some pro free trade Republicans into protectionists. As a result, the candidates are promising to bring these jobs back to the U.S. – whether by lowering taxes (Donald Trump), improving skills (Hillary Clinton) or building infrastructure (Bernie Sanders).

However, can all these manufacturing, service and knowledge-intensive jobs that were outsourced or offshored to China, India and other places really be “brought back,” as the candidates seem to believe?

In short, no. Our own research suggests that many of those jobs are pretty much gone for good. In addition, it has a lot to do with how the global economy works. Instead of hoping that firms eventually bring jobs back, the focus should be on developing a new type of worker with a skill set that takes advantage of the needs and reality of our increasingly globalized and networked economy.

History of offshoring

Offshoring of manufacturing took off in the 1980s, followed by offshoring of business services and knowledge work in the 1990s and 2000s.

Labor-cost advantages, increasing availability of qualified personnel abroad and advanced information and communication technology have made it attractive to create more jobs abroad rather than at home. Free trade agreements and the collapse of the Iron Curtain have also played a huge role. For example, estimates suggest that since 2001, jobs have been offshored from the U.S. to China alone.

Especially larger businesses in the U.S. and Western Europe have shifted a large proportion of their operations – from manufacturing to call centers, tech support, accounting and even innovation – to emerging economies where labor is still a fraction of the cost at home. In business services, for example, initial labor cost savings are reported to average between 20 percent and 40 percent.

Ten years ago, this trend led many U.S. economists, including Princeton’s Alan Blinder, to fear the loss of millions of jobs, in particular in technology and services, to developing countries. Maybe they were right about that. However, is the trend reversible?

India is the undisputed leader of emerging markets to which developed economies are outsourcing high-technology jobs. Sherwin Crasto/Reuters

Reason for hope?

The presidential candidates aren’t the only ones who think it is.

The so-called “Reshoring Initiative,” launched in 2010 by entrepreneur and manufacturing expert Harry Moser, aims to encourage American companies to do just that: “reshore” jobs that were offshored – specifically in manufacturing.

In addition, it claims the tide is already turning. About 67,000 manufacturing jobs were added in the U.S. in 2015, compared with only 12,000 in 2003, according to the Reshoring Initiative. Of course this is only half of the story, as companies also continue to create new jobs outside the U.S. For example, while Apple recently moved up to 2,000 jobs back to Arizona, it will keep investing “as aggressive as ever” in China.

Still: reshoring appears to be happening.

Why? According to the Reshoring Initiative, wages in emerging economies are rising, which reduces cost advantages of going abroad. In addition, many U.S. businesses are increasingly caught by serious offshoring challenges. Often, so-called hidden costs add up, such as unexpected quality problems and delays, language difficulties and coordination costs. For example, having encountered substantial delays and language issues with its Indian offshore tech support centers, Dell Inc. decided in 2003 to bring these activities back to the U.S..

If more companies took account of those hidden costs, the group argues, a vast number of jobs could be brought back.

Companies are global

However, here’s where the argument runs aground.

While it’s true that many companies do encounter hidden costs when they ship jobs abroad, reshoring has been only one, rather rare response companies have used to mitigate them.

Instead, we find in our own studies that many businesses take those hidden costs as an opportunity to learn and develop more effective global coordination structures and capabilities that ultimately reduce them and make the companies more nimble as a result.

For example, several U.S. tech companies offshored tech support to Egypt in the 2000s. When the Internet broke down during the Arab Spring in 2008, these companies experienced serious delays. Clearly, this unforeseen cost could seriously hurt the bottom line by worsening customer service and leading to defections to rival businesses. Rather than reacting by reshoring those jobs in the U.S., where such a problem wouldn’t have occurred, these companies invested heavily in cloud technologies and other infrastructures that now allow them to swiftly move operations to other locations in case of disruptions.

In other words, companies like these doubled down on their global footprint while reducing their dependence on any one location, whether it is Egypt or the U.S., thus increasing their flexibility to deal with unexpected problems. This makes it even less likely they’ll bring those jobs home.

Tech companies that moved some jobs to Egypt faced disruptions during the Arab Spring. Asmaa Waguih/Reuters

Global mindset

In addition, this global mindset means U.S. locations have become less central for the operations of U.S.-based companies. In fact, companies from Cisco to Google now operate multiple global centers with rotating and flexible workforces.

Global outsourcing service providers, such as Accenture, IBM Global Services and Infosys, have been at the forefront of this development. In our recent study, we found that these firms have established global networks of operations that not only give them access to talent pools around the world but also allow them to process client requests 24/7 by shifting work overnight to operations in a different time zone.

On top of that, face-to-face communication – both inside the firm and with external clients – is needed less and less thanks to advanced communication technology. For example, many firms today use videoconferencing tools such as telepresence, which creates virtual meeting rooms with multiple participants who, in reality, sit in offices around the world.

Jobs of the future

So what does this all mean for the U.S. and claims that a future president could bring these jobs back?

First, it’s best to accept that most jobs that were once offshored are gone and instead focus energies on preparing the workforce to get ready for the new global economy and take advantage of the jobs that will be up for grabs in the coming years. For example, significant technological advancements in robotics and 3D printing will clearly offer opportunities for domestic manufacturing and job growth.

Yet, to reap such opportunities, education and training are key – though in a different way than most people think. In today’s economy, generic STEM skills – in science, technology, engineering and math – can be easily replaced in emerging economies thanks to the increasing standardization of knowledge work and tech jobs around the world. What is needed instead is a unique blend of qualifications combining local and global expertise, technical and interpersonal skills.

Certainly, U.S. workers need to be technically trained at the highest standard. However, this is not enough as emerging economies are catching up fast. Thanks to population growth and improving education, India and China produce more than 10 times as many science and engineering graduates as the U.S..  That is why U.S. workers also need to be equipped with strong interpersonal and leadership skills as well as local expertise to remain competitive.

More specifically, they need to learn to work in international and intercultural teams, lead local and remote staff and become intimately familiar with both local and global client needs and supplier expectations, so they cannot be so easily replaced.

Therefore, old recipes, such as lowering corporate taxes, investing in infrastructure and technical training, will barely help the U.S. bring back old jobs. Nor will “building new walls” make the U.S. less dependent on foreign talent pools and expertise.

The focus instead needs to be on preparing a U.S. workforce for an economy that is increasingly globally connected.

Trump and Clinton want to bring back millions of outsourced jobs – here’s why they can’t is republished with permission from The Conversation

The post Putting Outsourcing in Reverse Strips a Gear appeared first on Economy Watch.

The presidential campaigns deserve some credit for finally voicing some of the deep frustrations and anger felt by American workers who have lived for decades in an economy that works for those at the top but not for them and their families.

Thirty years of wage stagnation, the loss of one-third of the nation’s manufacturing jobs since 1970, a failure to generate enough quality jobs and career opportunities for young workers and unacceptable levels of income inequality are now coming home to roost.

The presidential campaigns deserve some credit for finally voicing some of the deep frustrations and anger felt by American workers who have lived for decades in an economy that works for those at the top but not for them and their families.

Thirty years of wage stagnation, the loss of one-third of the nation’s manufacturing jobs since 1970, a failure to generate enough quality jobs and career opportunities for young workers and unacceptable levels of income inequality are now coming home to roost.

It is not surprising that the angriest voices are coming from working-class men and young people who have entered the workforce in the last decade, the two groups that have lost the most ground and feel they have no one standing up for them and no control over their future.

In addition, one of the main reasons for these trends is largely missing from the campaign trail: the loss of bargaining power and any means of having a voice at work.

Unions now represent only about seven percent of the private sector workforce, and recent attacks on public sector unions are now leading to their decline as well. The Supreme Court will soon decide whether to further weaken public employee unions by eliminating rules requiring nonmembers to pay their fair share of the costs to represent them.

However, angry rhetoric will not put the economy on a path that works for the disaffected and disenfranchised. Instead, we need to address the root causes of workers’ frustration and their economic decline. In addition, to do that, I would argue, we need to fix our broken labor policy.

Workers are increasingly demanding higher minimum wages after decades of stagnation. Reuters

Decline of unions

Recent studies estimate that 20 percent or more of the current wage inequality is due to the decline of unions and worker bargaining power.

However, perhaps because of the public’s ambivalence toward unions, none of the candidates has laid out a strong and positive vision or strategy for rebuilding workers’ bargaining power in ways that fit what they want, or that can be successful in today’s economy.

Any strategy for rebuilding bargaining power has to start with fixing a broken labor law that no longer provides workers access to collective bargaining. Today, if management resists worker efforts to organize (and they nearly always do), less than one in 10 union organizing efforts results in a collective bargaining agreement.

The odds are so stacked against workers and unions that few see trying to organize as a viable option.

The ways to fix this aspect of labor law are well known: strengthening penalties against employers or unions that violate the law, shortening the time required to hold an election to determine if a majority votes for union representation and having a neutral arbitrator set the terms of the first contract if one party or the other stonewalls the process.

Ford’s partnership with its workers, led by Chairman Bill Ford, center, helped it recover without taking a bailout. Reuters

Labor management partnership

However, these reforms have been impossible to get through Congress in the past, and as stand-alone proposals will be equally difficult in the future.

They need to be combined with provisions that promote the forms of worker-management relations that have demonstrated their value in generating and sharing productivity and economic growth. It’s also important that they support the new ways workers are finding a voice.

The labor-management partnership in place for nearly two decades at health care provider Kaiser Permanente, for example, is a model for the type of modern labor management relationship. It both promotes improvements in patient care and organizational performance and ensures workers share fairly in the economic savings they help generate.

Our research group tracked the evolution of this partnership from its inception. We found that Kaiser Permanente is a leader in use of union-management sponsored front-line teams that focus on improving health care delivery, a leader in use of electronic medical records to keep people healthy and out of hospitals, and pays industry leading wage and benefits.

Ford, the only U.S. car company that avoided a government bailout, has a similar partnership, which helped it recover from losing US$17 billion in 2006 to making $7.4 billion and paying each union member $9,300 in profit sharing in 2015.

A modernized labor policy should encourage such partnerships fitted to the needs of different industries and occupations.

Modernizing labor law also will require extending protections against discrimination and opening it up to people working in the diverse array of organizational settings today, not just the nonsupervisory employees in traditional employment relationships currently covered by the 1935 vintage labor law.

A growing number of workers are employed in subcontractor or franchised arrangements (think McDonald’s) in which the employer who controls their work and future is unreachable. Those classified as independent contractors in the so-called platform or “gig” economy (think Uber drivers) are likewise excluded and have no legally protected means of organizing or engaging the executives who set their fares and control their access to customers.

All these groups need protection from discrimination if they try to mobilize and seek to negotiate with whoever sets their terms and conditions of employment.

Efforts to organize Uber drivers are at the forefront of the future labor movement. Reuters

Keeping up with the times

A forward-looking labor policy will also need to recognize and support the many innovative initiatives under way that are attempting to help workers who prefer to move to a better employer when faced with unfair or unacceptable practices at their current workplace.

Indeed, a growing number of “apps” are coming along that support worker mobility. Examples include those being incubated through the Workers Lab, Turkopticon for those choosing who to work for on Amazon’s Mechanical Turk and Sherpashare and other groups providing drivers comparative information on earnings opportunities at Uber, Lyft and other platforms.

Further experimentation with these innovative efforts will test the viability of using information and transparency as new sources of worker power. Those experimenting with these new approaches deserve to be protected from discrimination for raising their voice.

I would go further and open up the law to encourage experimentation and evaluation of these emerging efforts. Let these worker entrepreneurs show us new ways to harness technology in support of today’s workforce.

Shaping the future of work

I believe that American workers are thirsty for a positive vision and strategy that restores workers’ ability to have a constructive voice at work and that provides enough real power to regain a voice in shaping their future.

Therefore, it is time for those who seek their support to abandon the divisive and negative rhetoric that feeds their frustration and instead propose a viable way forward. Perhaps the best way to invent the next generation labor policy is to listen to workers themselves talk about what they want, need and are trying to do to regain control of their destiny at work.

How to transform workers’ campaign rage into better jobs and wages is republished with permission from The Conversation

The post Fixing a Broken Labor Policy appeared first on Economy Watch.

More job openings are being posted as companies look for new workers, yet job growth in the private sector remains weak and wholesale goods sales begin to decline.  The Department of Labor saw 5.6 million job openings in the month of December, versus expectations of 5.4 and 5.3 in November. The 4.9% rise month over month in job openings is above the historic growth rate, while the total number of job openings remains far above the post-recession average.

More job openings are being posted as companies look for new workers, yet job growth in the private sector remains weak and wholesale goods sales begin to decline.  The Department of Labor saw 5.6 million job openings in the month of December, versus expectations of 5.4 and 5.3 in November. The 4.9% rise month over month in job openings is above the historic growth rate, while the total number of job openings remains far above the post-recession average.

Although more job openings are materializing, this does not mean there is more hiring activity. In a trend that has remained steady since 2013, the hiring rate has changed very little, even as companies look for more workers. In total, there were 5.4 million hires in December, “little changed from November,” according to the Labor Department.

While the number of hires has eclipsed the pre-crisis peak of 5 million in December 2007, a 3.7% hiring rate in December is below many analysts’ expectations. Confidence in a strengthening economy, seasonal demand, and renewed strength in a tightening labor market were all supposed to drive hiring rates higher.

The Skills Debate

Economists continue to disagree on why there is an unexpected divergence between job openings and hiring rates has continued.

Some point to weakness in some industries, such as utilities and construction, while other industries, accommodation and food services, saw the biggest job gains (93,000 total new jobs added). Higher paying industries saw lower hiring rates overall.

Two camps interpret this trend, which has carried on for several years. According to one school of thought, there is a lack of highly skilled, educated workers in America that can fill the jobs required by modern, technologically sophisticated companies. They argue that Americans are unqualified for the jobs companies need, and that foreign labor should be imported to fill in the gap.

Others argue that the skills gap would evaporate if companies offered higher pay. They point to the fact that Americans are more educated now than at any point in history, while wage growth is at its lowest point in history.

Despite skyrocketing tuition costs, the college education rate is higher than it has ever been. Yet companies continue to complain that workers are not as qualified as they require. Economists counter that on-the-job training and higher compensation would eradicate these concerns, and they dismiss companies’ complaints as attempts to negotiate down pay.

Weak Sales and Inventories

Economists argue that the decline in higher-paying job growth has seen a significant negative drag on demand. They cite this as the reason industrial production indicators have fallen in recent months expect to grow weaker.

A report by the Census Bureau on wholesale trade seems to confirm this hypothesis, as December’s wholesale trade fell 0.3% from November’s level, after seasonal adjustments. Total wholesales fell to $440 billion, while wholesale inventories fell 0.1% to $582 billion.

The post Job Openings Strengthen Despite Labor Decline appeared first on Economy Watch.

The US created fewer jobs than anticipated and the December gain was revised lower.  However, the other details were favorable–better than expected.  The unemployment rate ticked down to 4.9%, a new cyclical low, despite the rise in the participation rate (62.7% from 62.6%). 

The US created fewer jobs than anticipated and the December gain was revised lower.  However, the other details were favorable–better than expected.  The unemployment rate ticked down to 4.9%, a new cyclical low, despite the rise in the participation rate (62.7% from 62.6%). 

Average hourly earnings were stronger than expected at 2.5%.  The consensus expected a 2.2% year-over-year pace.  The December pace was revised to 2.7% from 2.5%.  The average weekly hours also ticked up to 34.6 from 34.5 hours.  It does not sound like much, but with over 150 mln workers, a 6 minute a week increase translates to around 400k full-time equivalents.

The income increase bodes well for consumption, and this will likely be seen in next week’s retail sales report.  We already know that auto sales increased sequentially.  The 29k increase in manufacturing jobs was the largest increase since November 2014.  The consensus expected a 2k decline.  The December rise was revised to 13k from 8k.  This bodes well for manufacturing output.  Construction added 18k jobs.  December had added 48k, perhaps helped by the unseasonable warm weather.

Although there is more talk of recession in the US, this is still not the kind of data one associated with an economic contraction.  That the US economy hit a soft patch is indisputable.  However, this is not the same thing as a contraction.  While we have doubted the Fed’s four hike call, we think the market is similarly extreme in not fully pricing in a single hike this year.

Separately, the US trade balance was reported in line with expectations.  The Atlanta Fed’s GDP tracker says the US economy expanded by 1.0% in Q4 and 1.2% in Q1 16. 

Canada’s employment report was disappointing.  The unemployment rate rose to 7.2% from 7.1%.  The economy shed 5.7k jobs, but this was all part-time work.  Full-time jobs grew by 5.6k.  Canada’s trade deficit was a quarter of the size expected and the November deficit was revised a quarter smaller. 

The US dollar has strengthened in response and US rates are firming.

Employment Details Better than the Headlines is republished with permission from Marc to Market

The post It’s in the Details appeared first on Economy Watch.

Education and skills are important policy levers for sustainable socioeconomic growth. With the right economic fundamentals, a highly educated population with the appropriate skills is a powerful tool for economies to move from the low-income to the middle-income status, or for those already in the middle-income category to avoid the middle-income trap and move to the high-income category.

Education and skills are important policy levers for sustainable socioeconomic growth. With the right economic fundamentals, a highly educated population with the appropriate skills is a powerful tool for economies to move from the low-income to the middle-income status, or for those already in the middle-income category to avoid the middle-income trap and move to the high-income category.

Skills shortages are a pressing issue as they limit the growth of output in the short term and limit the possibility for diversification and innovation in the long term. At the individual level, under-education or a lack of skills can undermine wages and career prospects. Mismatch—an undersupply of skills in some areas but an oversupply in others—signals a lack of efficient use of resources and affects the employment opportunities of graduates in oversupplied areas.

Making skills work

While there has been much progress in the last decades, many countries in Asia are still struggling to respond to the need for the skills required for competitiveness, productivity, and jobs.

Countries such as the Philippines, Malaysia, Indonesia, Thailand, and Vietnam have crafted policies to address the skills issues, but are still found wanting mainly due to implementation issues, and perhaps still being in the midst of implementing the major policies. Factors driving the identified major sources of the skills issues are:

* capacity constraints in both human capacity (not enough numbers of highly qualified teachers or trainers) and physical capacity (lack of infrastructure, outdated curricula, pedagogy, and training materials)

* weak coordination in the system to link skills supply and demand, or limited involvement of employers and social partners in the provision of relevant training

* a lack of reliable and readily accessible labor market information

Making skills work for the economy requires cooperation and support from various stakeholders, such as employers, schools, universities, students, and parents. As the World Bank’s Vietnam Development Report argues, “Firms and universities need to build close partnerships. Parents need to become more involved in their children’s schooling.

Students need to expose themselves to the world of work even prior to their graduation. In rural areas, all parties need to ensure that children from disadvantaged backgrounds have the opportunity to meet their full potential. The role of government is to facilitate this change in behavior by helping to ensure a better information flow between all the actors, to address capacity constraints including financing capacity, and to set the right incentives by freeing up universities to partner more effectively with businesses” (World Bank 2013: 9).

What are good jobs?

The concerns and efforts related to skills and employability all over the world only show how important it is to be prepared for jobs and how jobs are important to development. In fact, research shows that income from work is the greatest contributor to poverty reduction (World Bank 2012, 2014).

Increasing income from work is what matters in escaping poverty (World Bank 2012), as there are still many workers, especially in developing countries considered working poor. The World Economic Forum Global Agenda Council on Employment confirms that, “job creation is key to tackling high and increasingly persistent unemployment in many countries. However, promoting jobs without paying due attention to their quality and to the skills required may only buy time and ultimately prolong the crisis” (World Economic Forum 2014: 5).

Good jobs, through sufficient earnings and other benefits, affect who we are, our well-being, expansion of our choices, social identity, networks, and sense of fairness; and through these outcomes, jobs become conduits for higher income and economy-wide productivity, and enhanced social cohesion (World Bank 2012, 2014).

The World Development Report 2013: Jobs (World Bank 2012) has indicated that good jobs for development are not the same everywhere, as they depend on the level of economic development of the country. As such, for agrarian economies, such as Thailand and Viet Nam, good jobs mean more productive smallholder farming and urban jobs connect to global markets.

For urbanizing economies (e.g., Indonesia, Malaysia, and the Philippines), good jobs mean jobs that provide opportunities for women, jobs that move the country to the export ladder, jobs that do not lead to excessive congestion, and jobs that integrate rural migrants.

For countries with high youth unemployment (e.g., Tunisia), good jobs mean jobs that are not allocated based on connections or special privileges. For countries that are formalizing (e.g., Malaysia and Viet Nam), good jobs mean jobs with affordable social benefits, and jobs that do not create gaps in social protection coverage.

For aging economies (e.g., Indonesia, Thailand, and Viet Nam), good jobs mean jobs that keep the skilled active for longer and jobs that reduce the cost of services to the elderly.

Other context for skills strategy and good jobs creation

In addition to the economy, other socioeconomic details need consideration.  For example, as the path to prosperity in agrarian economies comes through higher productivity of smallholder farming (via access to important production resources).  In addition, access to non-farm opportunities and migration of family members, the skills strategy for those living in rural areas needs to include, in addition to farming-related skills, skills improvement in entrepreneurship and personal development for non-farm employment and for better emigration prospects.

Another context to consider is the source of job creation. For example, surveys show that small and medium-sized enterprises account for most employment creation in East Asia and the Pacific (Packard and Nguyen 2014).

However, the lack of strong growth and further employment prospects is an issue and it is worth researching on how education, skills, and economic strategies would be able to support small and medium-sized enterprises in sustaining their contribution to the economy and in creating good jobs.

The post Moving an Economy from Low to Middle Income Requires Skills appeared first on Economy Watch.

There is nothing good about the US jobs data.  It was simply dreadful. Every metric disappointed, and the August series which so often experiences upward revisions, came in lower.  This will raise fresh doubts about the US economy and the ability of the Federal Reserve to raise rates, not just this month, but this year. 

Nonfarm payrolls rose by 142k, well below expectations for a 200k increase.  With the downward revision in August to 136k, it is the second consecutive month below 150k, a trend not experienced since May-June 2012. 

There is nothing good about the US jobs data.  It was simply dreadful. Every metric disappointed, and the August series which so often experiences upward revisions, came in lower.  This will raise fresh doubts about the US economy and the ability of the Federal Reserve to raise rates, not just this month, but this year. 

Nonfarm payrolls rose by 142k, well below expectations for a 200k increase.  With the downward revision in August to 136k, it is the second consecutive month below 150k, a trend not experienced since May-June 2012. 

The unemployment rate itself was unchanged at 5.1%.  However, the decline in the participation rate to 62.4% marred the rate, a new cyclical low.  The fall in the participation rate also takes some of the gloss over the fall in the wider measure of (U6) fell to 10.0% from 10.3%. 

Average hourly earnings were flat.  The consensus expected a 0.2% increase.  This kept the year-over-year pace unchanged at 2.2%.  The consensus was for a cyclical high 2.4%.  The upward revision in August to 0.4% from 0.3% is next to meaningless in this context. 

Adding insult to injury, the average workweek slipped six minutes to 34.5 hours.  This is where it has averaged in recent months, reversing the tick up to 34.6 hours seen in August. 

The market’s response has been sharp.  The dollar sold off across the board and US yields have fallen dramatically.  The euro rallied to almost $1.1325, which is retracement target.  A move above could spur a move toward $1.1450.  The dollar has broken out of the symmetrical triangle pattern against the yen to the downside.  A close below JPY119.20 would confirm the breakout. The 10-year bond yield has approached the 1.90% level, last seen in the mayhem on August 24.  The S&P 500 futures have tumbled, with opening losses in excess of 1.0%.  

The shockingly poor data will make the numerous Fed official comments, including Fischer all the more important.  Most did not expect an October move in any event.  Officials may reassure that the Fed is looking at the larger picture, but it will take firmer employment data to convince a skeptical market.

Simply Dreadful US Jobs Report is republished with permission from Marc to Market

The post When the Employment News is all Bad appeared first on Economy Watch.

Cognizant that the initial estimate of August nonfarm payrolls habitually disappoints, market participants, and presumably policymakers will look past the low 173k increase, and instead focus on the favorable internals.  These include a drop in the unemployment rate to 5.1%, which is into the band the Fed regards as full employment.  In addition, the workweek rose to 34.6 hours, matching the cyclical high from a revised 34.5 hours in July.  Average hourly earnings rose 0.3% to a 2.2% year-over-year rate. 

Cognizant that the initial estimate of August nonfarm payrolls habitually disappoints, market participants, and presumably policymakers will look past the low 173k increase, and instead focus on the favorable internals.  These include a drop in the unemployment rate to 5.1%, which is into the band the Fed regards as full employment.  In addition, the workweek rose to 34.6 hours, matching the cyclical high from a revised 34.5 hours in July.  Average hourly earnings rose 0.3% to a 2.2% year-over-year rate. 

Job growth in July revised to 245k from 215k, while the June estimate revised up by another 9k also to 245k.  While most sectors added jobs, manufacturing shed 17k jobs, which is the most since July 2013.  We note that the gap between the service ISM and manufacturing ISM is the widest in several years.  Moreover, the frustratingly lowflation is a function of deflation in goods prices and above 2% inflation the price of services. 

There were a couple of mitigating factors, besides the loss of manufacturing jobs and weakness in the headline nonfarm payrolls, which are worth mentioning.  The participation rate failed to rise, and instead remained stuck at 62.6%.  The consensus expected a small increase.  In addition, part of the increase in hourly wages may be a function of survey period ending on August 15, when bimonthly payroll checks are often distributed, which could skew the data.   Nevertheless, on balance the report appears broadly consistent with recent trends, showing the US labor market continues to heal and slack continues to be absorbed. 

Canada also reported its August jobs figures.  Although the unemployment rate rose to 7.0% from 6.8%, the other details were favorable.  Rather than lose a net 5k jobs as the consensus expected, 12k jobs were grown.  The details are even better, with 54.4k full-time positions created.  There was a loss of 42.4k part-time jobs.  The rise in unemployment reflected a rise in the participation rate to 65.9% from 65.7%. 

There was a dramatic kneejerk reaction in both directions for the US dollar.  The euro rose to almost $1.1190 before falling to $1.1090.  The dollar fell to JPY118.60 and quickly recovered to JPY119.60.  Sterling rose to about $1.5275. It then sold off to $1.5210.   The Canadian data was not sufficient to protect it from the selling pressure on the dollar-bloc currencies that have taken the Aussie and Kiwi to new lows. 

On balance, even the precise timing of the Fed’s lift-off is elusive and the divergence theme remains intact after the US employment report.  Talk of QE4 in the US and/or a recession remains wide of the mark.  The ECB has signaled its willingness to do more, and the BOJ may downgrade its economic assessment shortly.  The dollar bull market, which saw the Fed’s real broad trade-weighted index make new cyclical highs in August, continues.

Headline Disappoints but Doesn’t Conceal Constructive US Jobs Report is republished with permission from Marc to Market

The post Reaching “Full” Employment appeared first on Economy Watch.

The key issue today is whether the ADP estimate of US private sector employment growth in April will be sufficient to fuel a dollar recovery.  Yesterday’s trade balance blowout prompted downward revisions to Q1 GDP into negative territory.  In addition, although the services ISM was better than expected, including an uptick in employment, many investors and the media focused on the Q1 implications.

The key issue today is whether the ADP estimate of US private sector employment growth in April will be sufficient to fuel a dollar recovery.  Yesterday’s trade balance blowout prompted downward revisions to Q1 GDP into negative territory.  In addition, although the services ISM was better than expected, including an uptick in employment, many investors and the media focused on the Q1 implications.

The consensus is for the ADP estimate to be around 200k, a small improvement from the March report of 189k.  It had over-estimated the initial BLS report by 60k.  The March ADP report was the weakest since January 2014, and a 200k rise now would be the second weakest report since then.  We suspect that an ADP report in line with the 6- and 12-month averages (235-238K) would help put a floor under the dollar.

However, the divergence theme that is the mainstay of the dollar bulls has been eclipsed by other developments.  Chief among these is the fading of the deflation threat, especially in Europe, helped by the continued recovery in oil prices and many other industrial commodities.  This in turn has helped spark a major unwind of macro trades, which were long European bonds and stocks and short the euro. 

Evidence that the Eurozone recovery in Q1 is continuing into Q2 can be found in the PMI data.  The service PMI rose to 54.1 from 53.7 flash reading and practically no change from the 54.2 in March.  The March reading matched the July reading from last year, which is the high for this short time series.   This followed a small tick up in the manufacturing PMI reported last week from the flash reading as well.    The composite was essentially unchanged at 53.9 from 54.0 in March. 

Turning briefly to the country breakdown, Germany’s report was shaved from the flash while France was revised higher.  More interesting is the improvement in Spain and Italy.  Spain service PMI rose to 60.3 from 57.3, which is an eight-year high.  Output is the best since November 2006.  New orders are the highest since June 2000.  Employment also stood at multi-year highs.   Italy’s reading rose to 53.1 from 51.6.  This is the highest since last June and follows the stronger than expected manufacturing survey out last week.  

The UK had reported weaker than expected manufacturing and construction PMIs but avoided the trifecta by reporting stronger results for the service sector, which is the largest part of the economy.  It rose to 59.5 from 58.9.  The consensus was for 58.5.  It is the best since last August. 

The election is tomorrow.  Participants are reluctant to extend positions.  Over the past week, sterling has been one of the worst performing of the majors, losing 1.7% against the dollar, second to only the New Zealand dollar’s 2.5% fall (on a more dovish central bank and disappointing data).  Gilts have out-performed.  The 10-year yield has only risen 13 bp over the past 5 sessions, compared with 15 bp in the US and 25 bp in Germany.  The FTSE has fallen about 1.0% over the same time, which is also among the smallest declines over the period.

The ECB meets today for a non-policy meeting.  There are two main issues.  First is the haircut or discount given to Greek government bonds that Greek banks use for collateral.  There is some push among to rec-consider this in light of the price erosion and deterioration in negotiations.  Despite a better tone since Greece reshuffled its team, a deal as early as next week still seems to be a stretch.  Remember, the Troika did not cut Greece off aid on the election of the anti-austerity Syriza government, but around six months earlier.   Increasing the haircut would reduce the amount of collateral Greek banks have and bring closer the day that they run out.

The second issue is the ELA.  Here there is room for misunderstanding.  The ECB’s repeated increase in the ELA ceiling is a function of its estimate of the real need of Greek banks.  It seems like it is largely a technocratic decision.  If the ECB decides not to increase the ELA this week, which is a possibility, the market may initially take this as a sign that the ECB was cutting Greece off and poses headline risk.  However, this may be the wrong interpretation.  It should be taken as a signal that Greek banks have sufficient liquidity for the next week. 

The euro rose to about $1.1270 but it was sold in front of last week’s high that was just shy of $1.1300.  It found support near $1.1200, waiting for the US data and North American participants.  The 100-day moving average comes in today just below $1.1260. It has not closed above this moving average since last May.

With Japanese markets still closed for the Golden Week holidays, the yen is largely sidelined.  The backing up of US Treasury yields (the 10-year is flirting with its 100-day moving average near 2.19%) has not be as supportive for the dollar-yen as many would have expected.  Weaker equity markets and the unwinding of positions against Europe may be taking a toll.

The Australian dollar is extending yesterday’s post-rate cut recovery and approached $0.8000.  The apparent shift in monetary policy stance from an easing bias to neutral outweighs the mildly disappointing retail sales report.  Retail sales rose 0.3% in March rather than 0.4% expected.  It is the smallest rise in Q1.  More important will be tomorrow’s employment report.  In March, Australia reported a 31.5k rise in full-time positions.  This is followed a nearly 42k rise in February.

The RBA noted in its statement at the policy meeting that the labor market had improved.  The risk is for some payback with the April report.  That said, with softer New Zealand data and more dovish guidance, the New Zealand dollar is losing ground to the Australian dollar.  The cross had neared parity twice in April.  The Aussie is moving above NZD1.06 for the first time since early February.  The next target is near NZD1.08, the high for the year.

Will a Strong ADP Report Stabilize the Dollar? is republished with permission from Marc to Market

The post The Back Story on Today’s ADP Miss Plus the International View appeared first on Economy Watch.

Why do some people earn more than others? Research backs up the idea that workers with higher educational levels and more experience have higher salaries. And economists would typically explain higher salaries with the argument that these workers are more productive.

Why do some people earn more than others? Research backs up the idea that workers with higher educational levels and more experience have higher salaries. And economists would typically explain higher salaries with the argument that these workers are more productive.

But there’s more to it than this. Two workers with identical education, experience, gender and even IQ levels are still quite likely to earn substantially different wages. Personality has a role to play too, with a growing body of research showing how personality is connected to productivity and so-far unexplained wage differences.

For instance, studies have shown that more emotionally stable workers earn more money. But do they earn more because they are really more productive or because of other reasons such as being better at negotiating a higher salary?

We recently carried out a study which shows that personality traits such as conscientiousness and neuroticism are significantly related to workers’ productivity. We found that more conscientious and emotionally stable people were more productive and therefore earned more for the task they were set.

We put together an experimental study with 350 participants who were given a task of adding strings of two-digit numbers under a time limit of 20 minutes. Correct answers were rewarded and incorrect ones punished so that earnings reflected mere productivity and not the negotiation skills or the quality of the supervisor. They then completed a carefully designed questionnaire for us to reveal some of their personality traits.

Controlled conditions

The study was performed under controlled conditions in order to rule out other channels through which personality can affect wages, such as the occupational choice, ability to bargain for a raise, how a supervisor evaluates performance or even how you relate with your co-workers. This distinction is important. For instance, we know that workers who are more agreeable earn lower wages. But given that more agreeable individuals tend to be more trusting, empathic and altruistic, they might earn less because they are worse negotiators rather than because they are indeed less productive.

The result of this study though shows that the relationship between earnings and productivity is linked to personality. More conscientious and more emotionally stable participants earned a higher payment, as conscientious and emotionally stable workers do with wages in real life.

There were remarkable differences by gender. Women tended to be more neurotic than men – they were less stable emotionally, had more anxiety or mood changes. But it was their openness to new experiences – and not neuroticism – that hindered women’s performance compared to men. These women, who tend to be imaginative, artistic and intellectually oriented, obtained a lower payment in our experiment.

Finally, more extroverted women were also less productive, while the opposite was true for men. This is probably due to the fact that being an extrovert means different things for men and women and that each personality trait has different facets. For instance, extroverted men are usually more ambitious and assertive, whereas extroverted women tend to be sociable and gregarious.

Personality recruitment

Why it is important to know what makes certain personalities more productive? As many of us will have experienced, personality has become increasingly important in personnel recruitment. As a matter of fact, employers in both the US and UK often cite personality and attitude as two of the most important factors in hiring.

Public policies can also affect personality. Interventions aimed at shaping personality at an early age are becoming very attractive to policy makers. Parents and educators in general can influence intelligence and cognitive skills during a relatively short period of time. But, once children reach age ten, any cognitive intervention in school or elsewhere is much less likely to have a significant impact.

By contrast, personality is malleable for a longer period of time. To inform these policies properly, we need to understand better what are we achieving with them: are we creating more productive workers? Or just better wage negotiators? It is good to know whether we are making a larger pie or just splitting it somehow differently.

How your personality relates to your productivity – and salary is republished with permission from The Conversation

The post Your Personality May Help Get You a Good Job, and More Money appeared first on Economy Watch.

With news swirling of the footwear factory strike in Vietnam over the past few weeks it begs the question: Who is ultimately hurt when workers go on strike? The answer: Everyone.

With news swirling of the footwear factory strike in Vietnam over the past few weeks it begs the question: Who is ultimately hurt when workers go on strike? The answer: Everyone.

Strikes are not something we hear a lot about these days. We occasionally read about “action” at a factory in Vietnam or Bangladesh on page 10 of the newspaper, but here in the US, they are much less frequent than they were even 25 years ago. What has caused this reduction? In the developed world, we have entered a new age of capital, an age where financial capital has supplanted human capital or labor. Visit any modern factory being developed in the US and you will find it’s one part human and ten parts machine. It was the exact opposite 50 years ago. This shift has dramatically reduced the collective power of the workers and their ability to strike. Union membership is telling. It has dropped from 20.1 percent of all employees in 1983 to 11.1 percent in 2014. The Bureau of Labor Statistics calls out there are 3.1 million fewer union members today than in 1983, even though 43 million more people are now employed.

We do have pockets where labor has managed to maintain its stronghold and can use collective power to strike for better wages. One such example are the longshoremen who, by using the leverage of control of an important global trade choke point at the US west coast ports, extracted better pay through a work slowdown for several months. This work action took a big bite out of the bottom line of a number of businesses and hurt many more workers than it helped. Truck drivers and ship workers waited for days at the ports to drop off or pick up goods, assembly lines slowed down, perishable foods become spoiled, and so on, but it could have been worse. In fact, research from global management consulting firm Kurt Salmon estimated that a complete shutdown of the ports would have caused shipping delays that cost retailers up to $3.8 billion this year.  According to The National Retail Federation and National Association of Manufacturers, a 10-day shutdown would have cost up to $2.1 billion per day on the overall economy as 50% of international imports come from the west coast, with 33% coming through LA and Long Beach alone.

Lower Cost Brings Higher Risk

The transition from a human capital-intensive economy to a financial capital focused economy is only in its infancy in the developing world, as cheap labor rates allow factories to remain worker-focused instead of capital/machine-focused. Why add robots when you can just add more cheap labor?  As we have seen across the developing world, however, this dependence on cheap human labor has led to a greater risk of strike or disruption. Every factory worker has a smart phone and Internet access. Workers can no longer be kept in the dark. Workers in Bangladesh can see what workers in Vietnam earn, and workers in Vietnam can see what workers in China earn. This level of transparency will accelerate wage rate growth in low wage countries as workers demand wages that workers in other countries have and speed the transition to capital driven economies. This transition will not be smooth or without pain. In addition to strikes, technology-enabled workers can document and expose on social media what they believe to be unfair or unsafe conditions in near real-time, creating massive disruption and reputational risk for brands. The irony is, the same labor cost arbitrage that is driving companies to build ever-more complicated supply chains that extend across the globe searching for cheap labor, is creating more risk of exposure to unsafe or unfair conditions – and greater risk of strike or disruption.

Betting on Technology & Transparency

It is no longer best practice or a sustainable model to operate sweatshops of the past. Social media – as well as pressure from the media and public – raises the transparency bar immediately. Customers have no patience for unfair labor treatment. Rana Plaza and other recent disasters have heightened the awareness of these issues. Today’s economy – in both the developed and developing world – is more about investment in technology, innovation and smart use of resources. Rather than operating low cost supply chains, those that operate best run supply chains focusing on innovation, cutting-edge resources and green practices will attract the attention of the big global buyers. Those will be the keys to winning. It is no longer about low cost labor or labor as a differentiator. It is about customer service, innovation and making a difference. More and more manufacturers are beginning to see suppliers as extensions of their brand. As this continues, higher wages and better factory conditions become higher priorities. This ultimately drives down the likelihood of labor strikes.  

Avoiding the Inevitable

Looking at the big picture, strikes and work stoppages cause more harm than help. Individual workers are unpaid. Businesses lose money. The people and companies that rely on those businesses suffer. Brands erode. We saw this in the recent US West Coast port strike. Unfortunately, they do happen.

No matter how closely a manufacturer monitors suppliers or implements rules there will always be issues. There will always be labor problems. Moreover, there will always be strikes. Transparency and visibility into the factories and facilities embedded in the supply chain are essential. Just as important is the ability to mitigate the risks of a work stoppage or disruption in the global supply chain.

Businesses must balance between low cost and high cost, between capital and labor, between low risk and high risk. No matter what you do, they cannot build a risk-free supply chain. There is simply no such thing. The best you can do, and should do, is to view suppliers as partners. Invest in the relationship. Be prepared and ready to act when issues strike. As we learned with the West Coast slow down, a small group of workers with the right amount of leverage can hit the bottom lines of a large number of businesses.

The post When Labor Strikes Occur, Nobody Wins appeared first on Economy Watch.