(What’s Left of) Our Economy: Industries Claiming Labor Shortages are Productivity as Well as Wage Laggards

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compensation, Labor Department, labor productivity, labor shortages, productivity, restaurants, trucking, wages, {What's Left of) Our Economy

The labor shortage claims from American businesses keep filling the media (even though wages, which are supposed to rise sharply in such circumstances, are improving only sluggishly). So it was more than a little interesting to look over the latest statistics on labor productivity released by the Department of Labor.

After all, companies and industries really facing dire labor shortages, and unwilling or unable to raise wages, are supposed to boost their productivity (generally by introducing labor-saving devices and practices). But the new Labor Department numbers show that they’re doing surprisingly little on this front, either.

Let’s examine two sectors of the economy that say with special vigor that they’re running out of workers: trucking and restaurants.

According to a typical account (from yesterday’s Washington Post), American trucking companies are facing “an extraordinary labor shortage” and their CEOs (including industry veterans) are saying things like “I’ve never seen it like this, ever….It doesn’t matter what the load even pays. There are just not drivers.”

The sector does appear to be raising pay. But not until the last two years have its overall employment costs been rising faster than those for the private sector overall – and the latter’s increases have hardly impressed. These data cover the entire transportation and warehousing sector, but after shooting up from a 2.1 percent annual pre-inflation pace to four percent (between the fourth quarters of 2011 and 2012), total compensation advances slowed to 2.3 percent annually during the next two years, and then to 2.2 percent in 2015 before accelerating.

Moreover, trucking industry productivity growth hasn’t been world-beating, either. The Labor Department reported last week that its overall gain in labor productivity (the narrower of two productivity growth measures tracked by Labor, but the one whose data is more up to date) in 2017 was 0.8 percent. A comparable figure for services industries in general isn’t available, but the Department does track labor productivity for non-farm businesses and for manufacturing.

Since labor productivity productivity for the former increased by 1.3 percent in 2017 and only 0.4 percent in manufacturing, it seems safe to conclude that services sector labor productivity grew by more than 1.3 percent – and therefore much more than trucking’s 0.8 percent. Nor does this picture change much going back to 2013.

Further, a remarkably similar pattern emerges upon examining the restaurant business. Labor shortages are widely claimed and reported, along with examples of the industry starting to improve compensation practices. New technologies are also apparently being tried to improve efficiency in the sector. But according to the data, these responses to the purported shortage of workers have been belated at best.

For example, as with trucking, annual total compensation gains in the accommodation and food services sectors (no restaurant-specific numbers are available) trailed those for the overall private sector for several years until 2016. And their owners and lobbyists have been making labor shortage claims for at least that long.

Data for restaurants (and bars) specifically are available for their labor productivity, and their performance here is only roughly comparable to the dreary results for non-manufacturing non-farm businesses.

Industries like trucking and restaurants may indeed not be able to choose their employees from as many applicants as they would like, or from numbers to which they’ve become accustomed. But if they haven’t been doing anything special, at least until recently either to hike pay, improve productivity, or both, then several explanations are possible. Maybe they’re waiting for another wave of wage-depressing legal and illegal immigrants to save their days without the need to fatten paychecks of invest in new plant and equipment. Maybe they’re don’t know how to improve productivity in particular, in which case, their businesses simply may not be viable, or they’re simply lousy managers.

But unless the Labor Department figures are completely off-base, one explanation we can rule out completely is that, as groups, they’re utterly desperate for workers.

(What’s Left of) Our Economy: Why Illegal Immigrants Look Like U.S. Productivity Killers

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automation, construction, illegal immigrants, immigrants, Immigration, labor shortage, Marketwatch.com, productivity, restaurants, Steve Goldstein, The Wall Street Journal, wages, {What's Left of) Our Economy

Steve Goldstein of Marketwatch.com (an excellent business and economics site for which I’ve been pleased to write) has just done a good job of indicating why you can’t trust everything you read – even when it comes from a fancy-dan economic consulting firm. Check out how he threw some cold water over a new report contending that illegal immigrants have been partly responsible for America’s recent productivity slowdown. As Goldstein notes, for example, this conclusion seems to proceed at least to some extent on a misunderstanding about whether illegals are counted in certain key government economic data.

At the same time, we’ve just gotten additional evidence from The Wall Street Journal suggesting that the notion that illegals exert a drag on productivity growth is on target after all.

The first comes from a Journal article that spotlights a study from another fancy consultancy. It found that heavy use of illegal immigrants is one factor that’s held back productivity growth in the American construction industry. In the words of the Journal piece:

“The sector’s fragmentation makes it hard to adopt industrywide standards. Much of the construction industry relies on volatile government contracting, which makes it difficult for firms to plan very far ahead. Regulatory requirements can also reduce incentives to invest in productivity-boosting improvements. And much of the construction sector relies on low-skilled workers—including undocumented immigrants—who tend to be lower-paid and less productive than their skilled counterparts.”

To be fair, the article notes that lagging productivity performance is a worldwide, not simply an American, phenomenon. And it’s not obvious that the construction sectors of other countries rely as heavily on illegal workers as does America’s.

Nonetheless, this analysis might also understate the productivity-killing role played by illegal construction workers in one important sense. It fails to mention that the availability of so much cheap labor greatly reduces construction firms’ incentives to buy labor-saving machinery, or figure out other ways to manage their operations more efficiently.

This article does note the sector’s sluggish adoption of automation – and attributes it to its characteristically tight profit margins, which supposedly make such expenditures inordinately risky. But I can’t help but wonder if the article has causation backward. Maybe its low degree of automation – and the resulting inefficiencies explain some of construction’s weak productivity growth.

The second Wall Street Journal example underscoring the connection between illegal immigrant employment and the productivity slowdown came in a report on a new trend in the restaurant industry: offsetting the impact on their bottom lines of mandated minimum wage hikes by adding “labor surcharges” to checks. Evidently, the idea is that customers will be more willing to pay this extra fee than higher prices for menu items.

I have no idea whether this is true. But I do know that restaurants rely heavily on illegal immigrant labor, that the abundance of these workers has helped keep the wages they pay very low, and that the sector has a long history of crying “Labor shortage!” to justify keeping the legal immigration floodgates wide open and the border porous – thereby ensuring that its potential workforce will in fact remain in surplus. I also know that restaurateurs like to insist that their sector’s profit margins generally are “razor thin,” which means that containing labor costs is especially important.

Add all of these factors and their influence up, and you have a classic portrait of an industry that’s skimped on productivity-enhancing, labor-saving devices because illegal immigration helped it keep labor costs at rock-bottom levels. Indeed, a senior executive at the National Restaurant Association has all but acknowledged this sorry situation: “Productivity growth in the restaurant industry has really been quite minimal over the past decade. Sales per employee in the industry is still low not only compared to other retailers, but it’s low compared with other industries.”

Finally, here’s more indirect confirmation for an illegal immigrant-productivity connection in these two sectors. For all its illegal immigrant usage, construction is a relatively high wage industry. Its average hourly wage ($28.52 according to the latest government data) exceeds that of the typical private sector job ($26 even). Therefore, it’s not vulnerable to the recent minimum wage hikes – and there’s no reason to think that its productivity-enhancing investments are on the rise.

Restaurants, on the other hand, are not only relatively low paying – with average wages of $13.69. They employ lots of minimum wage workers, and are very worried about the spreading movement in states and localities to raise minimum wages. So even though their major illegal immigrant employers, too, the prospect of higher payrolls is generating considerable new interest in automation.

Imagine how much more such investment would be made by both industries if their illegal immigrant crutch was removed, or greatly shrunk, as well. And since productivity growth is widely viewed as the most important key to raising American living standards on a sustainable (as opposed to bubble-ized) basis, imagine how welcome that development would be for the entire economy.

(What’s Left of) Our Economy: Links Between Low U.S. Pay and Low U.S. Productivity Growth

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compensation, construction, finance, government, healthcare, manufacturing, productivity growth, restaurants, retail, services, {What's Left of) Our Economy

It’s long been clear to me that one big reason that Americans give lousy grades to the current economic recovery is that it’s been dominated by employment gains in lousy jobs. So it was great late last week to see strong confirmation provided by the Financial Times‘ Matthew Klein – who in the process showed that the problem has much deeper roots than my work has suggested. Klein also makes clear that this discouraging job creation pattern deserves much blame for lagging American productivity growth – which is crucial for the sustainable improvement in the nation’s living standards.

In a September 8 post, Klein demonstrated that since 2000, 94 percent of the net new jobs created by the U.S. economy came in education, healthcare, social assistance, bars, restaurants, and retail stores. When you weight these industries by their sizes, you find that their hourly pay has averaged 30 percent lower than in the rest of the economy – as per this chart he provides:

But the low-pay story hardly stops there. To add insult to injury, since jobs in retail, restaurants and bars typically involve shorter hours than in other sectors, weekly pay in these parts of the economy is fully 40 percent lower than in other industries. And these low-pay industries have been become such important American job creators that their relative growth has depressed the entire workforce’s weekly pay by three percent since 2000.

Further, in case you’re wondering, the employment trends have accelerated during the current recovery.

Even worse for the U.S. economy, especially over the longer term, the sectors producing all these lousy jobs have been sectors with big productivity problems. According to Klein, 96 percent of the net new jobs created in America since 1990 have come in industries known for low productivity (like construction, retail, and bars) or where low productivity is simply suspected, but understandably so, since they don’t feature much competition. (Healthcare, education, government, and finance fall into this category).

And of course, this evidence demonstrates the converse proposition, too – job creation has lagged during both these periods (and nosedived since 1990) in manufacturing, historically the economy’s productivity growth leader. And since it rebounded strongly after a recessionary crash dive, manufacturing output has stagnated at best.

As I’ve written, productivity is the subject economists generally regard as the most difficult to study, especially because it’s so hard to measure in services (which comprise most of the economy on a standstill basis), and especially when those services and their development are based on emerging technologies.

But one aspect of the productivity growth slump does seem to be rendered much less mysterious by Klein’s analysis: When an economy lets so much of its most productive sector stagnate at best, that’s sure not going to help its productivity.

(What’s Left of) Our Economy: About that American Shopping Revolution….

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consumer spending, consumers, consumption, goods, Great Recession, holiday shopping, hotels, recreation, restaurants, services, shopping, spending, {What's Left of) Our Economy

The final figures for the last holiday shopping season are in, and they seem to confirm a trend that students of the retail industry – and lots of retailers themselves – claim is becoming dominant: Shoppers are spending more and more of their dollars on services – especially those that offer “experiences” – and fewer and fewer on goods.

This Washington Post article handily sums up the evidence – both the data and the views of various retail executives and consultants. Even more telling, it describes the very substantial store closings recently announced by like companies like Macys. Nonetheless, if you look at the U.S. government figures on how Americans spend their money (as opposed to what’s sold by stores), the only significant increase visible in that “experience” spending has come over the last year. And so far, there’s no sign that it’s come at the expense of goods purchases.

The spending figures are found on the Commerce Department’s Bureau of Economic Analysis website, and they’re not only broader than the retail sales numbers (which are kept at the separate Census.gov). They also come adjusted for inflation. They show that, through the third quarter of this year, spending on restaurants and hotels and other forms of accommodation rose by more in real terms (4.45 percent) than overall after-inflation personal consumption (3.15 percent). But spending on “recreation” was up only 1.49 percent. And purchases of goods increased a relatively healthy 3.91 percent – also considerably faster than purchases as a whole.

But maybe the shopping priorities shift only becomes apparent if you look at the entire economic recovery? Not according to these statistics. Since the last recession ended in mid-2009, restaurant and hotel spending has risen by 17.45 percent in real terms – faster than the advance in total personal consumption (14.85 percent). But recreation services spending has increased by only 12.76 percent. And real consumption of goods beat them both – up 23.21 percent.

Nor is there much reason to think that the Great Recession ushered in big change in American consuming away from goods. If anything, quite the opposite. Since it began, in December, 2007, all real personal spending has risen by 11.71 percent, with goods spending leading the way with an increase of 14.94 percent. Restaurant and hotel spending is higher by just 10.54 percent – barely better than the increase in after-inflation overall services spending of 10.17 percent. The figures for recreation services? A mere 7.28 percent improvement.

And revealingly, the growth disparity between goods and the other spending categories is wider still since the start of the century. Between 2000 and 2014 (the last full-year data available), adjusting for inflation, restaurant and hotel spending increased by 25.51 percent, recreation spending by 27.67 percent, while goods spending jumped by 44.16 percent. The goods rise was also much faster than that for services overall (27.60 percent).

These numbers, in fact, challenge not only the claims about changing shopping tastes in the United States. They challenge claims about the entire economy being dominated by services. It turns out that that’s mainly true on the production side – where measured by real value-added (a different but comparable gauge) inflation-adjusted services output was up 31.87 percent between 2000 and 2014. That’s nearly three times faster than the real goods production increase of 10.98 percent. That is, Americans still buy huge and smartly growing quantities of goods. But more and more of them come from abroad.

(What’s Left of) Our Economy: Low-Wage America’s Surprising New Face

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Employment, fast food workers, hotels, Jobs, minimum wage, recovery, restaurants, retail, wages, Walmart, {What's Left of) Our Economy

One of the biggest lessons taught by yesterday’s September U.S. employment report is that if you want evidence that the current jobs rebound contains too many lousy jobs, don’t look mainly at the numbers in retail, or leisure and hospitality.

Both of those sectors still pay poorly, and are full of positions with few or no benefits – when the jobs are even full-time or permanent in the first place. And of course retail and leisure/hospitality are highly visible to all of us – or at least all of us who shop, go to restaurants, or stay at hotels.

But as the September jobs figures revealed yet again, their prominence in the recovery has been dwarfed by the abstract-sounding administrative and support services sector.

Part of the reason for this category’s neglect is the tendency of its jobs to stay in the background. They’re non-management positions in offices, like secretaries and personal assistants and receptionists and mail clerks, and especially in job placement and temporary help companies. Another part of the reason is that these jobs are lumped into a super-category called “professional and business services” that also includes lawyers and management consultants and architects and computer systems designers and info-tech consultants and other unquestionably good jobs.

So when most analysts looked at the September jobs figures, they saw that the professional and business services category created 81,000 of the 248,000 net new positions generated by the economy, and no doubt felt pretty encouraged. The problem is that 58,900 of these new professional and business service jobs were administrative and support jobs, and their outsized growth has been a major feature of the employment scene since its recession bottom in February, 2010.

That dreary month, administrative and support services jobs represented 12.77 percent of all U.S. non-farm jobs (the U.S. employment universe according to the U.S. Labor Department, which compiles and published the jobs data). As of last month, this share had risen to 13.92 percent. In other words, the administrative and support services sector generated fully 29.26 percent of the total jobs created in America since the jobs low point.

Unfortunately, though, whereas the typical private sector U.S. wage last month was $10.22 per hour adjusted for inflation, the typical real wage in administrative and support services was only $7.69.

That’s just slightly higher than inflation-adjusted pay in retail and in leisure and hospitality jobs — $7.13 and $5.79 per hour, respectively. And as shares of total employment, changes in these categories have been smaller, at best, than that of administrative and support services. Since February 2010, the retail share has actually dipped by .05 percentage points, from 11.10 percent to 11.05 percent, and the leisure and hospitality share has increased from 9.97 percent to 10.53 percent.

As a result, retail and leisure have accounted for only 10.39 percent and 17.93 percent of American jobs created since the bottom – considerably lower than the nearly 30 percent administrative and support share.

So if you want to understand fully the realities of low-wage America, think less of WalMart greeters or even the fast-food workers and hotel employees whose minimum wage campaigns have made so much news recently. Think more about the typical office worker – especially in employment firms focused on finding other low-quality jobs for their countrymen and women.