From the monthly archives:

December 2015

One of the brightest stars of the American economic recovery and boom (if you can call the past couple of years a boom) is the American labor market.

Here’s a look at 5 charts on how the American labor market did in 2015 and where it might be heading in 2016.

#1: Jobs Created

The headline employment measure is the number of jobs created.  The following graphic has this view.

Interestingly, compared to what we’ve seen this century, 2015 is a fairly strong year.  With the exception of employment growth in 2014, the 2.308 million jobs created in 2015 place this year in second place behind 2014’s 2.787 million through the first 11 months of the year. Certainly, the economy has come a long way from the terrible 2008/2009 recession years.

The strength in the jobs market in 2014 and 2015 presents some concern for the 2016 outlook.  One generally safe observation is worth noting. Prior to the 2008 and 2009 global financial recession, American job growth began decelerating two years before the recession occurred.  Job growth peaked in 2005 at 2.5 million.  In 2006, job growth dropped to 2.1 million, and then further decelerated to 1.1 million net new jobs in 2007.  Macroeconomic conditions became unhinged in 2008, with net job destruction taking over.  The total number of jobs lost in 2008 was 3.6 million.

With this as the background, job growth in 2016 is likely to come in somewhere around 1.5 million, which would be a hefty drop from the 2014/2015 experience, although still positive, averaging 125K net new jobs per month.

Jobs by Year, 2000-2015

#2: Wage Growth

Next in importance to job creation is wage growth.  Here’s a look at American wage growth on a year-over-year basis.

The current 2% figure is incredibly weak after 6 years of recovery and boom. The weakness is probably going to fade somewhat in 2016, with the upward drift becoming somewhat strong.  Overall wage growth may accelerate to somewhere around 2.5% to 3.0% by the end of 2016.

YY Wage Growth


#3: Labor Force Participation

The third indicative labor market measure to watch in 2016 is the Labor Force Participation Rate. In the past couple of months, the rate has ticked up marginally, from 62.4% in September to 62.5% in November (the most recent figure). With job growth likely to decelerate further in 2016, Labor Force Participation is likely to only marginally move from where it is right now, perhaps reaching 63% by the end of 2016.  That’s a big perhaps.

Labor Force Participation Rate

#4: The Unemployment Rate

Perhaps the most well-known labor market indicator to watch, and number 4 on our list, is the 2016 Unemployment Rate.

The current unemployment rate, 5%, is strong enough for the Federal Reserve to start raising rates. During the technology bubble of the late 90s/early 2000s, the unemployment rate bottomed out at around 3.8%. In the housing boom of the mid-2000s, the unemployment rate bottomed at 4.4% in 2007. Both suggest that there’s a good deal of improvement in the unemployment picture before any concern of an overheating economy is warranted.

In 2016, the unemployment rate is likely to continue to drop, perhaps to around 4.5%.

Unemployment Rate

#5: The Industry Picture

The last point here is the industry makeup of job growth.  In 2015 (through 11 months), Education & Health and Professional & Business Services accounted for almost half of all job growth. This dominance can’t go on forever.

Part of the reason job growth is likely to slow in 2016 is due to some saturation in employment growth in these two sectors.  Teachers, nurses, and doctors can’t continue to grow faster than the populations they serve for too long. In 2016, it will be interesting to see how strong retail employment grows, as well as finance and natural resources.

Employment Growth in 2015 by Sectorr


Overall, how the many facets of the American labor market will perform throughout 2016 will be something worth watching. Of the many intriguing story lines, perhaps the five most interesting are net job creation, wage growth, labor force participation, the unemployment picture, and the industry makeup of job growth.  Each factor provides a glimpse at the evolving American labor picture.

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If there’s something investment bankers like to talk about outside of money, it’s policy.  In particular, economic policy.  And within the economic policy world, it’s hard to find a more hotly debated topic among financial professionals (investment bankers chief among the policy-minded ones) than the minimum wage.

The issue brings up notions of the free market, slave labor, class warfare, and a host of other philosophical issues.  These broad philosophical issues are not addressed here.  Rather, this is simply a look at what has happened to retail employment growth in states that imposed higher minimum wages in 2014 and/or 2015 compared to states that left the labor market as is.

The Minimum Wage

First, a look at the minimum wage rate by state since 1980. As shown, over time the minimum wage across states has slowly ticked up from the initial 25 cents per hour in 1938.

The minimum wage varies widely by state, with the highest state minimum wage in the country at the end of 2015 in Washington at $9.47 per hour. The most common minimum wage rate is $7.25, which is the federal minimum wage rate.

Minimum Wage


The wide variation in the minimum wage rate poses the obvious question: are states with higher minimum wage rates missing some retail jobs or do they experience lower overall employment growth?

The next section takes a look at the most recent experience.

Retail Employment Growth

If the minimum wage is adversely affecting employment growth, it would most likely show up in retail employment first. Here’s a look at retail employment by state for 2014 through 2015. The chart is divided into two groups – states that imposed higher minimum wage rates in 2014 and/or 2015 and states that did not. On the left are states that left the labor market as is.  On the right are states that imposed higher minimum wage rates.

Looking first at the laissez-faire states.  In 2014, states that left the labor market to itself were (on the median) seeing retail sales employment growth of 1.40% per year.  In 2015, that jumped to 1.55%, an acceleration of 0.15%.

Switching to states that imposed higher minimum wage rates in the current or previous year, in 2014 retail employment growth was slightly higher at 1.61%.  In 2015, that dropped to 1.21%, a drop of about 0.40%.

So interestingly, perhaps the common sense view is correct.  Higher minimum wage rates are pushing down on retail employment.  Of course, it’s still early, but perhaps Bill Gates does know what he’s talking about when he talks about higher minimum wage rates encouraging automation and other adverse employment effects.

min wage1


In looking at what has happened with retail employment growth in states that imposed higher minimum wages in 2014 and/or 2015 compared to states that left the labor market as is, the initial evidence looks like what most would expect – retail employment grows slower.

The total job growth differential is about 0.55% (0.15% + 0.40%) for retail employment growth.  This recognizes that there are a plethora of other factors that affect the labor market situation in a given area…but that notwithstanding, retail growth appears to have been slowed in states that imposed a higher minimum wage rate compared to states that left the labor market negotiation up to the (potential) employee/employer.

It’s still early, of course, to know exactly what the long term impacts will be.  Only time will tell the full story.

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