There’s no profession more intricately connected with the state of American labor than the investment banking world. Billions hang in the balance on judgements about the state of the American and the global labor markets. Most in the investment banking community think the labor market has lots of room to grow before any discussion of employment peaking is warranted.

Are they right?

Here are a couple of graphs that may make you double think the state of American labor (with some counterarguments as well).

A Look at the Labor Picture Right Now

Here’s a look at the American labor market as it stands today. Overall, the past year has been quite good to workers in the U.S.

Since seeing employment growth “bottom” in March 2014, month-over-month employment growth has been above 200K every month except two. The strong performance begs the question – is the labor market peaking?

Here are two arguments that suggest such a question is warranted.


Year-over-Year Employment Growth

The first graph looks at year-over-year growth in employment. The labels on the high growth points are the employment growth rates during the respective business cycle peak.

In 1973, employment growth peaked at 4.63%.  In 1978, 5.43%. In 1981, 1.96%.  In 1984, 5.44%.  In 1988, 3.28%. In 1995, 3.47%.  In 2000, 2.55%.  In 2006, 2.16%.

The 2.34% for 2015 is February 2015.  This is the strongest growth rate we’ve seen so far during the current expansion. Interestingly, since February 2015, employment growth has declined to 2.11%. It is this deceleration that suggests the labor market might be peaking (or perhaps already has peaked).

The deceleration from peak occurs in every business cycle.


The Part-Time/Full-Time Picture

The second area signaling perhaps that the labor market is peaking is the part-time/full-time employment view. The top graphic in the following figure is the month-over-month growth in employment (absolute net new jobs). The middle graphic is the month-over-month growth in full-time employment.  In June 2015, it came in at a healthy +370K. The bottom graphic is the month-over-month growth in part-time employment.  In 2015, it came in a -147K.

What does this picture have to do with the labor market?

The answer is that when there’s a trend in shifting from part-time to full-time employment, it’s generally a signal that the labor market might be peaking. As corroborating evidence, take a look at the 2000 to 2003 experience and the 2006 to 2009 experience.


As indicated by the black boxes, prior to the prior two recessions, part-time employment dropped before the employment picture peaked, fairly similar to what we’re seeing today.



Counterargument: Why Might the Labor Market NOT Be Peaking?

There are, of course, lots of good reasons to argue that the American labor has a long way to go before peaking.

Factors that are nowhere near peaking include wage growth (Average Hourly Earnings are stuck around 2%, well below the overheating 3.5% experienced in 2006), lack of inflation, depressed labor force participation, and an unemployment rate still above peaking level.


Overall, job growth in the U.S. continues to be quite strong. The strength, of course, raises the question on how long it can continue to go on.

Some point to various indicators that suggest jobs could continue to grow another five or six years. These points are certainly valid, as are the counterpoints addressed here.

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Unless you’ve been away from the financial industry for some time, you’re likely aware that the Federal Reserve continues to give indications that it will hike the federal funds target rate fairly soon. If you believe recent statements from Fed Chairwoman Janet Yellen, the Fed may even raise rates later this year.

A pending Fed rate hike poses the question: what will a Fed rate hike mean for investment banking employment?

Looking at the Empirical Connection

One way to speculate on how a Fed rate hike might affect investment banking employment is to look at what the historical connection between the two has been. The following graphic is just such a look.

On the vertical axis is the percentage change in investment banking employment for each of the past 4 Federal Reserve tightening cycles (starting in 1990). On the horizontal axis is the number of days the tightening cycle lasted.  Interestingly, rate movements by the Fed have become more stable over the past couple of decades, with “high” rate hikes having virtually disappeared.

Each colored line represents the respective Federal Reserve rate hike cycle. The label for each line is the month and year in which the Fed started raising rates

.Investment Banking Job Growth During Federal Reserve Tightening Cycles (Past 4)

Discussion of the Empirics

Interestingly, employment in the investment banking industry may not be as sensitive to Federal Reserve rate changes as some might think. The gray-scaled vertical and horizontal bars are the inter-quartile range for either the growth in jobs or the length of time the rate hiking cycle lasted.

The median investment banking job growth during a rate hiking cycle is 3.3%, with a range from 1.1% and 5.3%. The median length of time for a Fed rate hiking cycle is 229 days, ranging from a low of 89 to a high of 432.

What does the investment banking job growth picture during Fed rate hiking cycles mean?

Essentially, although there’s reasonable concern that a Fed rate hike may hurt to U.S. economy, past experience would indicate that investment banks continue to hire during rate hiking cycles. Every investment banker is well aware that the Fed may, for the first time in eight years, actually raise the federal funds target rate.

Federal Funds Target Rate

Such a raise may put downward pressure on investment banking business, although, in looking at the connection between Fed rate hiking cycles and employment in the investment banking industry, a Fed rate hike probably won’t hurt hiring in the industry.

That is, if past experience is any indication of what might happen this time around.

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Many investment bankers and the economists that advise them are well aware of some version of the following graphic which captures the percentage of the population with a job. As shown, since the 1960s, employment as a percentage of the total population has been on an upward trajectory.

The long-term trend towards more individuals working met a strikingly massive drop from May 2008 to December 2009, declining from about 62.7% of the population to about 58.7% of the population. The American population’s desire to work stayed around 58% for more than four years, only recently experiencing some strengthening.

Employment to Population Ratio, U.S.

The Financial Employment Picture

Given that picture of the economy as a whole, we now ponder what the picture looks like for the financial sector.  Here’s that look.

Interestingly, as with the previous employment to population picture on the whole, financial employment as a percentage of the total population has been on a long-term upward trajectory and has been this way since the 1950s.  And yet even though the financial industry experienced some terrible effects from the global financial crisis of 2008, employment in the industry held up relatively well.

Employment in the financial industry as a percentage of the total population is about 3.5%, only 0.1% below the all-time high of 3.6% in April 2010. If the trend continues, we may soon again see a new all-time high for financial employment as a percentage of the total U.S. population.

Financial Employment as a Percentage of the Population

What’s Behind the Stronger Picture for Finance?

With this background in mind, why is employment in the financial industry holding up so well? Among the many possible explanations, three come to mind.

First, the world is becoming increasingly financialized. With American financial firms still operating as the leaders in the globalized financial world, this increases demand for American workers.

Second, the American population is aging, and with that aging population comes a demand for financial services.

Third, entrepreneurship is high among Americans, at least when compared to other western countries.  This entrepreneurship needs financial resources and advice.  Many businesses across the globe turn to U.S.-based financial companies to fill this need.


Overall, in looking at the employment to population picture, there’s been a long-term trend towards more and more individuals taking part in the labor force. This trend stopped from 2008 to 2009, and has only marginally started to increase again, with the employment to population ratio still about 4% below where it was before the onset of the global financial crisis.

In looking at the financial picture, financial industry employment as a percentage of the total population is surprisingly strong, only about 0.1% below its all-time high of 3.6% reached in April 2010. If the current trends continue, we may soon see financial industry employment as a percentage of the total population reach a new all-time high by the end of 2015.

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