“There is a very conflicting story being told by the data, as the falling jobless rate shrouds what is a still challenging labour market,” said Jim Baird, chief investment strategist for Plante Moran Financial Advisors. “Overall job creation remains very disappointing, despite the positive signs that the broad economy is once again picking up steam.”

(HT: FT.com)

I have no doubts that Jim Baird is a capable and intelligent human being. He has risen far in his chosen profession and probably deserves the fact that he earns a much bigger salary each year than your humble blogger. I think, however, that he makes this statement in error. Unlike many who work in the financial industry, he just isn’t enough of a mean SOB to get this one right. In the posting below, I’ll be that mean. It will be one of the nastiest, most unfair and unpleasant thing that I’ve ever written on a blog. But to understand today’s U3, and explain it intelligently to others, I pretty much feel I need to just; not fair. It’s time to go there.

What Baird should have said is this. “There is an unpleasant but logical story being told by the data, as the falling U3 jobless rate diverges significantly from the Street Level Reality where American Workforce Participation is at the lowest level since 1984. As employers reduce payrolls to leverage their ideal economies of scale, the broad economy is once again picking up steam.”

This would be true. It would get Mr. Baird fired from a high-velocity nozzle canon, but it would be truth. A significant subset of America’s economy is doing well, because they have cut ties with another significant portion that was holding it back. I posit this observation on three justifications: economies of scale, credentialism, and concurrency of worker skill-sets.

Economies of scale involve the inherent advantages or disadvantages to a firm that are gained from that firm being size X. If the firm has a higher profit margin at Size Y > Size X; as it it expands from X to Y and hires on more workers, it enjoys economies of scale due to the expansion. If the firm than expands to Size Z > Size Y, and then has a lower profit margin, it suffers from diseconomies of scale. It’s like the old folk aphorism – “Too many cooks spoil the broth.”

Every worker at an enterprise has a marginal utility. He/She/It adds productivity by being there up to a saturation point. When an enterprise has too many people on the books, they start interfering with one another, instead of helping to get product out the door. In an unregulated, free-market economy, the fix for this easy; retrain the clumsy ones, or show them the door.

The United States, like the rest of the world, does not have an unregulated, free-market economy. Very few people can be fired from a professional-level position without the employer showing cause and leaping through hurdles. From the employee’s perspective, this is decent. From the firm’s perspective it can lead to viscous drag in a competitive world.

The mistakes made by The Human Resources Department can haunt the firm for lo the years. Until, of course, they suffer a recession. Then, they need to let these people go. A large number of people, who have been out of a job for a long time, probably should not have gotten hired to the position they originally held. They were the last ones hired, and will certainly be the last ones rehired. It will be a cold, painful winter for people who fall in this category.

Another problem faced by firms is credentialism. People have figured out how to put lots of impressive “achievements” all over their resumes. Firms have a hard time installing high-pass Bravo Sierra Filters to keep unqualified credentialists out of their executive suites. When all of God’s children have engineering degrees, it gets really, really hard to choose which little tyke should be in charge of designing mankind’s suspension bridges.

This gets solved in two ways. First, they overwork the engineers they already have. People work longer hours, for smaller raises and complete more work. Hence, we get gains in worker productivity. Another method employed is to use the most difficult credentials to obtain as a GO/NO GO criterion to determine whether a perspective applicant is truly socialized and intelligent. In Business Insider, we see the current impact of that practice on US unemployment.

Like anyone who has ever served as military officer, I’ve known a few HS Graduates whom I would trust to save my @$$ far more than the faculty and staff of Harvard University. I don’t morally vouch for a BA/BS being a high –pass filter to test socialization and decency. However, the other weekend, I climbed a ladder in too big of a hurry. I fell off the 3rd rung and was fortunate that my posterior hit the hardwood floor instead of my skull. I wasn’t real big fan of gravity at that point, but it didn’t much matter to either my butt or the cold, hard floor.

Credentialism is both a necessary evil and a scourge to the people too poor and too unmotivated to get a college degree. America is not a decent country sometimes if you aren’t rich enough, smart enough and lucky enough to get a college degree. We may well have to change this or die as a nation.

Another anecdote convinces me further that credentialism is at work. Small businesses are hiring more than big ones out of a shrinking labor pool. This suggests that a lot of people are getting jobs at their fifth or sixth choice they applied to. The larger corporations, who receive a pretty steady flow of resumes, are more experienced at identifying which credentials are legitimate, and which ones are resume fluff. That they are unwilling to hire these people before smaller firms are willing, suggests to me that the current labor pool doesn’t have a high level of applicable talent.

To wit, small businesses hire when they have to have someone. They will fill the slot with the best available talent – even if that available talent isn’t ready for prime time. Everyone employed at a small business is needed and every slot they fill is done so because the job must be done. This leaves them vulnerable to having less talented rosters when good people are not available.

Larger firms will recruit talent sometimes without reference to immediate need. They can absorb unfilled slots more easily and stockpile high potential individuals more easily than a smaller firm perpetually up against the margin. People and firms that have first choice on the current unemployed workforce are increasingly choosing not to hire them. This is another sign that they will be out of a job for a long, painful period.

Finally, the skill-sets needed to work in modern America have changed radically from 1995. The people that are unemployed have not changed radically since 1995. These are decent people and deserve better. However, the fact that they have not changed with the times explains why they are unemployed and won’t be rehired anytime soon.

For example, people used to just play on The Internet. It is now a necessary tool in a lot of professions. Try being good at stock-brokering, real estate, industrial engineering, journalism or politics now without it. Actually, don’t try it. You probably can’t. A lot of people won’t adjust to the Internet or other technological innovations, and are now workers with obsolete skills. Even the employer who takes pity on them can only lose business by having a bunch of them around.

I’m reminded of a self-help guru who interviewed a heart-surgeon. The heart-surgeon told the guru that he admonsihed all his heart attack patients to eat different diets and get more exercise. He then told the guru that 90% of them ignored his advice and half his operations that year were repeat customers. The workers who have obsolete skills probably cannot be helped by society against their wills. They will only find jobs again when they decide to be the 10%; not the 90%.

So thus, beneath the radar and athwart the happy-happy, joy-joy meme of today’s GLORIOUS UNEMPLOYMENT NUMBER THAT LIKE TOTALLY AND UTTERLY KILLED!!!, we get the so-called “scariest jobs chart ever.” It shows us a discontinuity that we cannot ultimately survive. 500,000 more Americans fell out of our nation’s workforce. As the recession goes away for some, but remains eternal for others, we become increasingly a nation of Eloi and Morlocks. And that, like any other house divided, is one that ultimately cannot help but fall.


Tags: U3