The 29-Hour Work Week

The Bureau of Labor Statistics released its April employment numbers last Friday.  Most of the media played the story as "good news" noting that the unemployment rate dropped a notch to 7.5%.  However, beneath the surface, the numbers tell a more troubling story.  This is especially true in looking at the data within the Household Survey which provides a more comprehensive look at the employment situation.

• The labor participation rate remains at 63.3%.  This is the lowest percentage of Americans working since 1979.
• The headline in the BLS Establishment Survey data was that 165,000 jobs had been created.  However, in looking at the Household Survey, which takes a deeper look at the jobs situation across the economy, total employment rose by 293,000. This was composed of the addition of 441,000 part-time jobs offset by the loss of 148,000 full time jobs.  In effect, part-timers are replacing full-time positions.  That might make the unemployment rate lower but it is making the workforce poorer.
• The FTE ratio (the number of full time equivalent workers per 100 working age Americans) declined for the fifth month in a row to 53.09.  FTE is calculated by taking full time jobs + .50 x part-time jobs.  This also indicates that full time workers are being replaced by part-timers.

What does this tell us?  I think you can draw several conclusions from the data.

First, there is still a lot of uncertainty about the economy. Part-time workers allow employers to hedge their bets.  If things are softening, an employer may reduce the work hours of an employee before letting her go. They also will be cautious about bringing on full-time help.  It is better to hire someone for 30 hours a week than a full 40 hour week.  This also provides a cushion against having to pay overtime pay at time and a half if business picks up.

It also makes the unemployment rate look better than it really is.  After all, if two people work part-time jobs at 20 hours each that is twice as many workers as one working a full-time job at 40 hours.  The most recent BLS data shows that there are 7.9 million men and women working part-time jobs involuntarily because their hours have been cut back or they had to take a part-time job because they could not get a full-time position.

Second, Obamacare appears to be starting to affect the behavior of employers. Part-time workers (those working less than 30 hours per week) don't have to be offered insurance under Obamacare and employers are not subject to the $2,000 penalty per employee they are for full-time employees.  The Wall Street Journal explains the incentives to employers to hire part-time workers with Obamacare.

The savings from restricting hours worked can be enormous. If a company with 50 employees hires a new worker for $12 an hour for 29 hours a week, there is no health insurance requirement. But suppose that worker moves to 30 hours a week. This triggers the $2,000 federal penalty. So to get 50 more hours of work a year from that employee, the extra cost to the employer rises to about $52 an hour—the $12 salary and the ObamaCare tax of what works out to be $40 an hour.

Moving to 33 hours a week costs the employer about $10 an hour more in ObamaCare tax. Look for fewer 30-35 hour-a-week jobs. The law that was sold as a way to help business and workers is thus yanking a few more rungs from the ladder of economic upward mobility.

Many franchisees of Burger King, McDonalds, Red Lobster, KFC, Dunkin' Donuts and Taco Bell have started to cut back on full-time employment, though many are terrified to talk on the record. Activist groups have organized boycotts against Darden Restaurants,  which owns Olive Garden and Red Lobster, for daring to publicly criticize ObamaCare. It's safer to quietly dodge the new costs and avoid becoming a political target.

But the damage won't be limited to franchisees or restaurants. A 2012 survey of employers by the Mercer consulting firm found that 67% of retail and wholesale firms that don't offer insurance coverage today "are more inclined to change their workforce strategy so that fewer employees meet that [30 hour a week] threshold." This week Nigel Travis, the CEO of Dunkin' Donuts, asked Congress to change the health law's definition of full-time to 40 hours a week from 30 hours so worker hours won't have to be cut.

Louis Woodhill of Real Clear Markets sees more ominous signs for the economy in the job report numbers. A sustained drop in the FTE ratio has historically been an early warning signal for a coming recession.

During April, the FTE jobs ratio fell for the fifth month in a row, to 53.09. The earliest warning signal for every recession since 1955 (the first year for which the data is available) has been a significant, sustained decline in this ratio.

As of April, the fall in the FTE jobs ratio from its local peak was only 0.11. This is not yet a strong indicator of an impending recession. Only one of the recessions since 1955 (that of 1970) was presaged by this mild a decline, and there were eight instances during the past 50 years where the FTE jobs ratio declined by this much over five months, and the economy did not fall into recession.

This having been said, there also has never been a case where the FTE jobs ratio fell for five months in a row and a recession did not follow. So the recent decline is definitely something to be concerned about.

Based upon the historical record, if the current decline in the FTE jobs ratio were to continue, and to reach a cumulative 0.60, renewed recession would become a virtual certainty.

In the case of the most recent recession, the decline in the FTE jobs ratio exceeded 0.60 five months before the recession officially started, and a full 15 months before the National Bureau of Economic Research (NBER) formally declared that a recession had begun in January 2008.

But wait! How can we fall into another employment recession when we haven't even gotten out of the last one yet?

It is simple.  We haven't had a President like Obama before.  We also have never had anything like Obamacare.  Anything is possible these days.  Even a 29-Hour Work Week.