Multiple factors keeping unemployment rate high

19 Apr 2013

By MaryBeth Matzek

When looking at the economy, it seems everything is headed in the right direction: the stock market is up; the housing market is the strongest it’s been in years; and corporate profits are skyrocketing. Despite all that good news, unemployment still remains high – 7.6 percent nationally.

Financial experts say that’s because this recovery is unlike one ever seen before in the United States. “To see a shift in employment, you really need to see the economy to grow at least 3 percent and right now we’re consistently at 2 percent,” says David Francis, vice president of investment and equities with Thrivent Financial for Lutherans, a financial services organization headquartered in Minneapolis.

While doing better – the annual pace of new housing starts rose past 1 million in March for the first time since June 2008 — the housing market still remains on the weak side and Francis says as that continues to grow, jobs should follow.

“We are still far below normal construction activity. If we get a stronger recovery in housing, the labor numbers should start doing better,” he says.
During March, the economy added 88,000 jobs – the lowest level since June 2012. At the same time, an estimated 500,000 people dropped out of the job market during March either because they decided to retire or just gave up looking for work.

Brian Jacobsen, chief portfolio strategist in the investments group for Wells Fargo Funds Management, says employers are able to do more today with fewer employees.
“There are significant obstacles to job creation for smaller employers. Rising health care costs and the mandate to provide qualifying health insurance or pay a penalty is a barrier to growth for smaller businesses,” he says. “While the mandate doesn’t kick in until 2014, the penalties and determination of how many full-time equivalent employees an employer has is based on 2013 payroll figures. If it’s more expensive to hire someone, you’ll get less hiring. It’s basic economics.”

The GDP is higher now than it was in 2007 so the economy is considered to be in expansion mode, but that doesn’t mean companies are eager to hire right now, Francis says. During the recession, companies learned to do more with less, increasing productivity, he adds.

Benjamin Artz, an economics professor at the University of Wisconsin-Oshkosh, says workers’ increased productivity puts a damper on hiring additional help.
“Some feel that workers are more productive in efforts to keep otherwise insecure jobs. Technology has also made labor more productive or even redundant in some cases. Either way, companies don’t have the incentives to hire large numbers of workers,” he says.

Another factor is that a large employer – the government – let go of a lot of workers during the recession and haven’t been quick to hire them back as budgets remain tight, Artz says. “That holds the unemployment rate higher than it should be,” he says.

Businesses are still wary about the outlook for growth and that is keeping many on the sidelines when it comes to hiring, Jacobsen says. “Hiring someone is an investment and it is costly. It’s tough to justify hiring someone if you don’t think you’ll cover the costs of doing so,” he says.

As for why the rising stock market hasn’t equaled a surge in new jobs, Jacobsen says it’s simple mathematics – the companies that are on the exchange don’t account for most of the nation’s employment. “That’s one reason you can see a disconnect between the stock market and the labor market,” he says, adding that a 2007 study found that companies on the exchange only accounted for 47 percent of the nation’s employment, which means more than half of all U.S. jobs are created by companies not on the stock exchange.

While the unemployment rate has been slow to decline, Artz says it will eventually do so.

“The energy revolution here in the US and increasing wages overseas will work to grow production in the U.S. again,” he says. “And once the unemployment rate gets down to around 6 percent or lower, wages will start to increase again.”