What is holding back hiring? Is it weak demand, or perhaps uncertainty about government regulation and taxes, or maybe restrained access to credit? It might be easy to say "all of the above," and for some businesses that may be true. But when we need to find the most important factors that explain, economy-wide, the reason for the large employment losses and weak hiring gains, we need to do a bit more research.
In that regard, the San Francisco Federal Reserve recently published its analysis of which of these factors was most associated with the unemployment problem. It determined that a lack of demand is the principal problem. Neither a lack of financing nor government-induced uncertainty played much of a role in explaining the unemployment woes, at least from a statistical analysis perspective. Thus, the corollary is that unemployment might fall when demand returns, not necessarily when uncertainty ends.
Here's how the San Francisco Fed did the research. It used survey data from the National Federation of Independent Businesses (you may have seen my columns on the NFIB's surveys). Each monthly survey includes a question about the biggest obstacle businesses see impeding growth. The top three responses have been, in varying degrees, "poor sales," "regulation and taxes" and "financing and interest rates." Regulation and taxes generally ranked the highest on businesses' concerns. But everyone wants fewer regulations and lower taxes, so is that really the cause of layoffs and subsequent weak hiring?
The researchers went into other data, drilling deeper in unemployment, household debt and consumer spending at the levels of individual states and counties. They also correlated measures of consumer spending to both unemployment and household debt. They found that those counties that have the highest consumer debt levels -- generally those that were hit hardest by the housing bust -- had the weakest consumer spending patterns and the biggest increases in unemployment.
In particular, the researchers focused on employment in "non-tradable" sectors, which are jobs and businesses in which a good or service cannot be exchanged in a different region. (You can't export a restaurant meal, a visit to a department store or a haircut across the country.)
By comparing responses among different locales, the researchers determined that there wasn't any statistical relationship to government-induced uncertainty. However, they added the caveat that it is not possible to determine that there was no relationship, just that there is no statistical relationship using the methods they employed, to paraphrase roughly.
Also, perhaps surprisingly, the number of respondents to the NFIB surveys who cite a lack of access to credit as their main problem has been low throughout the past several years. And the researchers did not find that this was the proximate cause for job losses and weak hiring.
So if the biggest problem is lack of demand, what can or should be done about it? I am firmly against fiscal stimulus at this point, since every dollar we spend now has to be repaid later, with interest. Scaring the markets by issuing more debt to fund deficit spending would surely raise our borrowing costs, especially as some members of the Fed are growing wary of endless bond-buying. And monetary policy seems to lack the potency it once had.
What we probably need – and what would be most difficult to engineer – is the next productivity shock. That is, in other words, the equivalent of the next Internet. This would allow the economy to grow faster and provide both more corporate profits at the same time that companies give their employees pay raises.
Consider this graph that shows the trend between productivity gains and the share of the economy going to labor – a proxy for consumers' purchasing power to fuel consumer spending. Here we see that stronger economic growth and greater consumer incomes are generally associated with high and rising productivity gains. When productivity gains are low or falling, employers tend to seize the gains from what little productivity there is, sharing less with workers, resulting in higher unemployment and lower wage gains.
How do we get the next big productivity event? If we knew that, we wouldn't even need to ask the question, would we? Easier said than done.