unemployment | Jobenomics

Jobenomics U.S. Unemployment Analysis: Q2 2016

Jobenomics U.S. Unemployment Analysis: Q2 2016

By: Chuck Vollmer

Contact information: [email protected]

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Jobenomics U.S. Unemployment Analysis - Q2 2016 - 6 August 2016

6 August 2016

Jobenomics reports on U.S. unemployment and employment size, characteristics and trends. This Analysis focuses on how the U.S. government reports on unemployment and income statistics, why Americans who can work chose not to work, and the impact of 109.8 million non-working able-bodied citizens are having on the U.S. labor force and economy. The Jobenomics Employment Analysis focuses on the U.S. labor force, business and job creation, and transformative trends—with emphasis on 60 million workers in the rapidly growing contingent workforce.

Executive Summary

According to the U.S. Bureau of Labor Statistics (BLS), the U.S. labor force has three statistical categories: Employed, Unemployed and Not-in-Labor-Force. Understanding the dynamics between these categories is required to understand the American labor force and ultimately the U.S. economy.

From an unemployment perspective, policy-makers, decision-leaders and the American public must address three major trends: (1) growing voluntary workforce departures, (2) contingent workforce expansion, and (3) below average wage earner issues that are becoming more pervasive.

Sooner or later, the American public will figure out that it is theoretically possible for the United States to have a zero rate of unemployment while simultaneously having zero people employed in the labor force. The reason for this disquieting statement involves how government measures unemployment. To be classified as unemployed, one must be looking for work. Able-bodied Americans who quit looking and voluntarily depart the workforce are classified in a nebulous and obscure Not-in-Labor-Force category that few people comprehend.

Six unemployment categories (U1 through U6) are reported monthly by the BLS. Each category requires that an individual must be actively looking for work. These categories are calculated as a percent of the Civilian Labor Force (Employed + Unemployed). The BLS also calculates the number of able-bodied adults who can work, but are not looking for work, in a category entitled Not-in-Labor-Force, which is not part of the Civilian Labor Force (159 million), but part of the larger Civilian Noninstitutional Population (254 million), which is a subset of the entire U.S. population (324 million).

The latest BLS Employment Situation Summary[1] reports that 122.1 million Employed Americans work in the private sector[2] versus 109.8 million citizens who are Unemployed (U6, defined as total unemployed and underemployed people who are looking for work) and Not-in-Labor-Force (NiLF, defined as able-bodied adults who are capable of working but not looking for work for a variety of reasons). From 1 January 2000 to 1 July 2016, the working population (Private Sector Employed) increased by 11% compared to a 40% rise in the non-working population (U6/NiLF). The non-working population briefly exceeded the working population during the 2007-2009 Recession and is likely to outnumber the working population by 2024 if current trends exist, or earlier if an economic downturn occurs.

The U6 population includes the long-term unemployed (U1), job losers and temporary workers (U2), total unemployed workers (U3), discouraged workers (U4), marginally attached workers (U5) and underemployed workers who work part-time because they can’t find a full-time job. It is important to remember that a person must be actively looking for work to be counted as unemployed in any of the six BLS unemployment categories. In January 2000, the U6 population was 9,953,000. The height of the Great Recession, U6 peaked at 26,440,000 April 2010, an increase of 166% since the turn of the Century. Since peak through Q2 2016, the U6 dropped by 11.2 million people to 15,252,000 today. Despite all the political fanfare, 15,252,000 unemployed, underemployed and marginally-attached citizens still represent 53% more people out of work than existed 16 years ago.

Able-bodied adults who are neither employed nor unemployed are not in the labor force. Those who have no job and are no longer looking for a job are accounted by the BLS in the Not-in-Labor-Force category. From 2000 through Q2 2016, the Not-in-Labor-Force cadre grew from 68,655,000 to 94,517,000, an increase of 26 million citizens who more often than not are dependent on public/familial assistance.

Since the post-recession April 2010 U6 peak in Q2 2010, the Not-in-Labor-Force cadre grew by 11.8 million, which offset the 11.2 million people that were no longer part of the U6 population. Today, the Not-in-Labor-Force exceeds the U6 Unemployed cadre by 6-times (94,517,000 versus 15,252,480) and 12-times the number of people enrolled in the U3 Unemployment category that is generally referred to as the “officially unemployed”. This great disparity is rarely addressed by policy-makers, analyzed by decision-makers or mentioned by the media’s talking-heads, all of whom focus almost entirely on the “Official U3 Unemployment Rate” that is now at a post-recession low of 4.9%.

The ability to work should be the determining factor for unemployment as opposed to whether or not a person is looking for work. Jobenomics contends that all able-bodied Americans who can work, regardless if they are looking or not, should be considered “functionally” unemployed. Functional is defined as capable of working. An able-bodied adult who is capable of working but chooses not to work should be considered unemployed for the same reason that “discouraged”, “marginally attached” and “part-time workers for economic reasons” are included in the U4, U5 and U6 Unemployment categories.

This chart shows U3, U6, NiLF and the Jobenomics Functionally Unemployed numbers in relation to the Civilian Labor Force. The 4.9% U3 and 9.6% U6 are percentages of the Civilian Labor Force that consist of Employed and Unemployed workers who are currently employed or looking for work.

Hypothetically, if compared to the Civil Labor Force, the Not-in-Labor-Force cadre would equate to 59.5%, and the Jobenomics Functionally Unemployed (NiLF & U6) would be 69.1%, which gives one a sense of how large a challenge that the Not-in-Labor-Force cadre presents to the U.S. labor force and the American economy.

In order to achieve a sustainable economy and labor force, U.S. policy-makers and decision-leaders must shift their attention from an U3/U6 unemployment focus to understanding the reasons that able-bodied Americans who are capable of working are no longer looking for work and joining the ranks of those no longer in the U.S. labor force. When as many people drop out of the labor force as enter it, the U.S. economy cannot grow as it should.

Most economists believe that economic growth depends on job and GDP growth. The ideal rate for U.S. GDP growth is 2% to 3%. For the United States, a mature economy, sustained GDP growth significantly over 3% tends to led to overheating and bubbles. Anything below 2% is considered sclerotic growth and makes the economy vulnerable to financial downturns. During the post-WWII recovery, U.S. GDP grew at an average rate of 3.5% which created tens of millions of new jobs each decade. Since 2000, U.S. GDP averaged 1.76%. During the post-recession recovery period to today, U.S. GDP averaged 2.0% but is now slowing significantly. In Q1 2016, U.S. GDP grew by an abysmal 0.8%. Q2 2016 is estimated to be not much better at 1.2%. Consequently, the combined GDP rate for 2016 is only 1.0%—an alarmingly low rate of growth.[3]

As far as the future, many economists feel that a recession (two quarters below 0% GDP growth) is likely. The United States averages 3 financial downturns and 1.7 recessions per decade over the last 7 decades. This decade (2010s) has been recession-free largely due to government deficit spending, increasing money supply, low interest rates, stimulus packages, bailouts, buyouts and foreign investment. Now that the era of easy money is coming to an end, an anemic U.S. economy will have to operate under its own steam.

The period of frail GDP growth from 2000, has dramatically impacted the American middle-class and the U.S. labor force that gained 13,395,000 workers but lost 25,862,000 through voluntarily departures. To make matters worse, the U.S. population grew by 44 million citizens since year 2000, which places a greater burden on taxpaying workers. For most American workers, real wages (purchasing power) have not increased for decades and are not projected to improve soon.

Another alarming trend involves the dramatic rise in the contingent workforce, which now stands at 60 million employed workers, or 40% of the Private Sector Labor Force. The BLS defines the contingent workforce as the portion of the labor force that has “nonstandard work arrangements” or those without “permanent jobs with a traditional employer-employee relationship”. The Jobenomics U.S. Contingent Workforce Challenge Report estimates that the contingent workforce could be the predominant source (over 50%) of employed U.S. labor by 2030, or sooner, depending on economic conditions and seven ongoing labor force trends.[4]

The contingent workforce is comprised of two general categories: core and non-core. Core contingency workers include agency temps, direct-hire temps, on-call laborers and contract workers. Core workers generally represent low wage earners that have nonstandard work arrangements out of necessity, often subjected to exploitation, and usually not entitled to traditional employer-provided retirement and health benefits. The non-core category includes independent contractors, self-employed workers and standard part-time workers who work fewer than 35 hours per week. Non-core workers generally seek nonstandard work agreements as a matter of choice.

Jobenomics views the non-core workforce as a positive economic force that will grow significantly via the emerging digital economy. On the other hand, Jobenomics views the core contingency as a major labor force challenge as more and more citizens work for substandard wages, become frustrated, and seek alternative sources of income. The contingent workforce is addressed in this analysis from a Not-in-Labor-Force perspective and discussed in detail from an overall employment perspective in the Jobenomics Employment Analysis.[5]

Contingent work, low wages and the attractiveness of the U.S. welfare/means-adjusted earnings programs are fueling the rapid and increasing exodus of citizens from the U.S. labor force. In 2014, 86% of all Americans (including workers with earnings, Not-in-Labor-Force and those that cannot work, such as children, caregivers, disabled, elderly, etc.) made below average income. Out of a total of 160.1 million full-time and part-time American workers with earnings, 115.2 million workers (72%) make less than the U.S. mean (average) income of $54,964.

As shown, the demographics with the greatest need and potential are women, minorities, new workforce entrants and the growing cadre of poor white males. 96% of new workforce entrants aged 15 to 24, 85% of Hispanics, 82% of Blacks, 80% of Females, 68% White Non-Hispanics, 65% of Males and 60% of Asians earn below average wage. The good news is that both women-owned and minority-owned firms have been growing at rates far greater than the national average.

A major reason for Not-in-Labor-Force growth is due to the growing attractiveness of welfare and entitlement benefits. The U.S. federal government funds 126 separate programs targeted at low income people. State, county, and municipal governments offer additional welfare and public assistance programs. Combined welfare benefits pay more than minimum wage jobs in 35 states—in many cases, significantly more. 35 U.S. states offer welfare packages (not including Medicaid) more generous than the most lavish and liberal European countries. 39 states pay welfare recipients more than the starting wage for a secretary and in 11 states more than the first year wage for a teacher.

Once a person becomes dependent on welfare, transition to workfare becomes difficult. Loss of critical workforce skills increase proportionally to the length of time a person is not working. Most of the 5 million open employment positions in the United States are due to a deficit of skills and the capability to perform effectively in a working environment. Prolonged dependency generates anger, grievances, activism, violence and counter-cultural lifestyles.

In today’s consumption-based and market-driven society, there is never enough public or familial assistance to satisfy the financially disaffected. Consequently, those who need additional income often turn to temporary jobs, barter, the underground economy as well as illicit lifestyles (gangs, drugs and crime) rather than legitimate forms of long-term employment. Jobenomics contends that workfare is the only reasonable alternative to welfare. The problem is how to motive and facilitate this transition.

The solution to growing America’s economy, healing the middle-class and strengthening the labor force involves putting the U.S. small business engine into over-drive. Energizing existing businesses and creating new small and self-employed businesses could create 20 million net new jobs within a decade. To this end, Jobenomics is working with a number of cities to implement Jobenomics Community-Based Business Generators to mass produce startup businesses.

Jobenomics Community-Based Business Generators mass-produce startup businesses by: (1) working with community leaders to identify high-potential business owners and employees, (2) executing a due diligence process to identify potential high quality business leaders and employees, (3) training and certifying these leaders and employees in targeted occupations, (4) creating highly repeatable and highly scalable “turn-key” small and self-employed businesses, (5) establishing sources of startup funding, recurring funding and contracts to provide a consistent source of revenue for new businesses after incorporation, and (6) providing mentoring and back-office support services to extend the life span and profitability of businesses created by the Jobenomics Community-Based Business Generators.

Starting a notional pool of 10,000 candidates, Jobenomics will work with local civic organizations (churches, non-profits, sports teams, etc.) to identify and nominate the top 10% to 25% candidates, who they know, for the Jobenomics Community-Based Business Generator program. This is the first stage of the due diligence process to separate the proverbial wheat from the chaff. These nominees will then be subjected to standard aptitude and attitude tests in order to willow the list down to several hundred trainees who we believe that could become high-quality employees and business leaders. Approximately 10% would undergo business school training and certification (goal is to startup a locally-owned business) and 90% some form of skills-based training and certification that would be needed in our new startup businesses. If each startup employed 10 people, 20 to 30 new small businesses would be created.

While the overall goal is to mass-produce small businesses, the Jobenomics Community-Based Business Generator will help all people who enter the program to find meaningful employment. Many of the initial candidates are likely to prefer working for existing companies rather than going through the Jobenomics process. Anticipating this, Jobenomics will implement a “pipeline” to connect these individuals who have undergone some level of due diligence to companies that are hiring. A common complaint that Jobenomics often hears from companies is that they have a very hard time finding good people who want to work and who have the right attitudes/aptitude for work. Consequently, Jobenomics Community-Based Business Generators will utilize a nationally recognized pipeline system that has recently matched hundreds of thousands veterans with employers.

In summary, the U.S. economy cannot be sustained by only 35% of the population that is eroding in terms of size, wages and income potential.

The private sector labor force produces the majority of American jobs, goods, services and revenue needed to sustain economic growth. 112 million private sector workers support 32 million government workers and contractors, 95 million able-bodied people who can work but chose not to work, 70 million who cannot work and the 15 million unemployed and underemployed. Of the 112 million employed Americans in the private sector, approximately 60% are standard full-time workers and 40% are part-time and independent continent workers.

If American policy-makers and decision-leaders are serious about revitalizing the eroding middle-class, they must address the growing voluntary workforce departures, contingent workforce and below mean income issues. Jobenomics believes that the place to start is with demographics with the greatest need and potential (i.e., women, minorities, new workforce entrants and the growing cadre of poor white males). Jobenomics suggests that the 2016 Presidential candidates, in both parties, should make solutions to these labor force issues their top priority.

[1] U.S. Bureau of Labor Statistics, Employment Situation Summary, http://www.bls.gov/news.release/empsit.nr0.htm

[2] Government workers pay taxes just like private sector workers. However, government relies on tax revenue to pay salaries. Hence, Jobenomics often uses private sector figures when discussing the relative strength of the U.S. labor force and the economy.

[3] U.S. Bureau of Economic Analysis, Gross Domestic Product: Second Quarter 2016 (Advance Estimate)

Annual Update: 2013 through First Quarter 2016, 29 July 2016, http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

[4] http://jobenomicsblog.com/wp-content/uploads/2016/05/U.S.-Contingent-Workforce-Challenge-4-April-2016.pdf

[5] http://jobenomicsblog.com/jobenomics-u-s-employment-analysis-Q2-2016/

Jobenomics Community-Based Business Generators

Jobenomics Community-Based Business Generators

www.Jobenomics.com

By: Chuck Vollmer

15 August 2016

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Jobenomics Community-Based Business Generators - 15 August 2016

The way that government and big business can plan, manage and support small business and job creation is via community-based business incubators, business accelerators and business generators.

Business incubators tend to focus high-tech, silver bullet innovations that have extraordinary growth and employment potential. Business accelerators focus on expanding existing businesses in order to make them larger and more profitable. The Jobenomics business generator concept involves mass-producing small and self-employed business with emphasis on lower-tech but plentiful service-providing businesses at the base of America’s economic pyramid. Many cities have business incubators, usually located at or around universities or technology parks, and business accelerators that are associated with mezzanine financing institutions. Jobenomics is working with cities and states to create business generators to mass-produce startup small and self-employed businesses.

The process starts by using community leaders to identify high potential job seekers. Churches, non-profit institutions, schools, sports teams and veterans groups are a great source for identifying talent, desire and fortitude. These organizations provide the first phase of the triage process by screening and assessing high performance people who are known to them. The second stage is accomplished during onboarding that involves Jobenomics screening and assessing. The third stage uses aptitude and personality tests to determine potential career paths.

Once completed, candidates will be separated into a business leader group or a high potential employee group for training. The leader group will undergo management and startup business training. The employee group will undergo skills training based on the role that they will assume in the startup business (operational, technical, mechanical, financial, marketing, administrative, etc.). After the training is completed and certifications awarded, the team will commence startup operations under the guidance and assistance of the Jobenomics Community-Based Business Generator team. Jobenomics contends that Community-Based Business Generators could vastly improve the rate of startups and expanding businesses, and reduce the rate of contracting and closing businesses.

Starting with a notional pool of thousands of candidates, Jobenomics will work with local civic organizations (churches, non-profits, sports teams, etc.) to identify and nominate the top 30% to 50%, who they know, for the Jobenomics Community-Based Business Generator program. This is the first stage of the due diligence process to separate the proverbial wheat from the chaff.

These nominees will then be subjected to standard aptitude and attitude tests in order to identify and assist those (1) those that should be sent other educational (GED and postsecondary) or training (vocational) centers for career development, (2) those that are qualified and suitable for immediate employment with existing companies, and (3) those that desire and have an aptitude for starting a small or self-employed business. Jobenomics Community-Based Business Generator will help all people who enter the program to find meaningful employment and career paths.

Jobenomics envisions that 25% of the nominees would seek a traditional education and training path, 25% would be hired directly by existing business who are looking for quality workers, and 50% would seek a more independent and self-sufficient route offered by a small business startup or self-employment.

Of the 50% that choose the Jobenomics Community-Based Business Generator training and certification process, Jobenomics anticipates that approximately 25% will eventually implement a small business startup or incorporate as a self-employed business. The 75% that undergoes but does complete Jobenomics Community-Based Business Generator process will be certified (with empirical data by professional testing and evaluation) as high-quality candidates for immediate employment or traditional education/vocational training.

Many of the initial candidates are likely to prefer working for existing companies rather than going through the Jobenomics process. Anticipating this, Jobenomics will implement a “pipeline” to connect these individuals who have undergone some level of due diligence to companies that are hiring. Consequently, the Jobenomics management team includes a nationally recognized leader who developed such a pipeline system that has matched 250,000 veterans with companies. This system is ideally suited for matching Jobenomics candidates to local employment vacancies.

The overall objective is to mass-produce small and self-employed businesses, which makes the Jobenomics Community-Based Business Generator process unique as a traditional business and workforce development center. Traditional workforce development processes focus on preparing potential workers for employment by existing businesses—usually large corporations. For marginalized individuals at the base of the American economic pyramid (especially those in depressed urban and rural areas) the odds of employment at existing businesses are slim as evidenced by the long lines at traditional job fairs versus the low percentage of people hired.

The Jobenomics process focuses on preparing workers for starting a business, whether they actually start one or use the experience to be more competitive to get a job. In today’s world, gainful employment is difficult and oriented to those that are currently employed, credentialed or high-skilled. Conversely, a common complaint that Jobenomics often hears from companies is that they have a very hard time (1) finding good people who want to work, (2) who have the right attitudes and aptitude for work, and (3) who have workforce credentials, experience or related skills.

Every nominee that enters the Jobenomics process will setup a self-employed business, which can be incorporated in a matter of days, and undergo elementary business training. The reason for setting up a small business is to make them more competitive in today’s job market. Many employers prefer to “try before they buy”. An incorporated self-employed individual can position themselves for subcontract or contingent work (1099) as a prelude to standard full-time work (W2). Even if a self-employed individual never receives an income as a self-employed business, that individual can present themselves with credentials (Employer ID Number, website, business card and skills resume) that align with the business community. In addition, Jobenomics will provide additional credentials regarding the individual’s workforce aptitude, skills and suitability tailored to the specific hiring opportunity. Jobenomics credentialing, along with letters of recommendation from the nominees’ sponsoring organization, will greatly distinguish the individual from the masses of unemployed or new or returning workforce entrants.

Today, the United States does not have standardized national, state or local processes to create or mass-produce startup businesses. The U.S. startup process is largely ad hoc. By instituting a community-based (all jobs are local) standardized, repeatable and scalable process to mass-produce startup businesses, millions of new establishments could be created across America. By being part of a small business team, team members will be motivated to grow the business in order to make it more profitable, which facilitates upward mobility, higher wages, better benefits, potential equity positions, and, perhaps most importantly, a sense of camaraderie and purpose.

Job creation is the number one issue facing U.S. in regard to economic growth, sustainment and prosperity. Jobs do not create jobs, businesses do, especially small businesses that currently employ 80% of all Americans and created 80% of all new jobs since the end of the Great Recession.

Unfortunately, America is focused on big business and government employment solutions that have not been very effective growing the U.S. labor force. In fact, the U.S. labor force is in a state of decline as evidenced by the eroding middle-class and the transformation from standard full-time to part-time and contingency workers. With the next fifteen years, Jobenomics forecasts that the contingent workforce will replace traditional full-time workforce as the dominant force of labor in the United States—a trend that is largely unknown to policy-makers and the American public.

Jobenomics asserts that the four demographics with the highest need and growth potential include women, minorities, new workforce entrants, and the large cadre of financially distressed citizens who want to work or start a business. These demographics are ideally suited for the accommodating the growing contingent workforce and attracting new labor force entrants that often do not share the same employment dream of older generations.

Jobenomics believes that new small, emerging and self-employed businesses could create 20 million new jobs within a decade, if properly incentivized and supported. Notwithstanding filling the 5+ million open U.S. jobs positions, the emerging Energy Technology Revolution (ETR) and the Network Technology Revolution (NTR) could create 20 million net new American jobs within a decade given proper leadership and support.

Using the Jobenomics Community-Based Business Generator process of mass-producing highly repeatable and scalable “turn-key” small and self-employed businesses, America writ large could create tens of millions of jobs that would transform the U.S. labor force, middle-class and economy as well as providing hope and jobs for marginalized urban and rural American communities.

Jobenomics Baltimore City

Jobenomics Baltimore City

By: Dr. Alvin C. Hathaway, Commissioner of the Maryland Governor’s Workforce Investment Board, and Chuck Vollmer, Jobenomics Founder and President

23 June 2016

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Jobenomics Baltimore City Presentation - 23 July 2016

Jobenomics is pleased to announce a partnership with leading community leaders, led by Dr. Al Hathaway, Commissioner of the Maryland Governor’s Workforce Investment Board. Jobenomics Baltimore City’s goal is to restore the inner-city labor force by creating 100,000 net new jobs in Baltimore City within the next 10 years with emphasis on minorities, women, new workforce entrants and the contingent workforce. Jobenomics Baltimore City will institute local Community-Based Business Generators to mass-produce inner-city businesses in order to achieve the 100,000 new job goal.

Jobenomics Baltimore City’s New Job Framework is tailored to the demographics of Baltimore City. As shown, emphasis is being given to lower skill zones that tend to be more predominant in the poor sections of the inner-city. To date, the Jobenomics Baltimore City plan has been endorsed and lead by community leaders who are now getting endorsement and support from major corporations (Under Amour for manufacturing) and major medical institutions for the healthcare and social assistance programs. The team is also working with non-profits, the State and City managers to finalize and implement an actionable plan.

2016 State of the U.S. Labor Force

2016 State of the U.S. Labor Force

By: Chuck Vollmer

11 January 2016

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2016 U.S. Labor Force State-of-the-Union 11 Jan 2015

Executive Summary. To get a true picture of the 2016 state of the U.S. labor force, one must examine all three labor force categories reported by the U.S. Bureau of Labor Statistics (Employed, Unemployed and Not-in-Labor-Force) as opposed to focusing on the “official” Unemployed rate known as the U3 rate, which represents only 2% of the U.S. population or 5% of the U.S. civilian labor force. While Americans should be pleased that the U3 rate has dropped from its post Great Recession 10% peak to 5% today, America should concentrate on the combined non-working Not-in-Labor-Force and total unemployed (U6) population that encompasses 34% of the U.S. population.

From January 2000 to January 2016, the number of citizens Employed rose by 11%, Not-in-Labor Force by 37% and U6 Unemployed by 57%. Since the end of the Great Recession in 2010 through 2015, Unemployment dropped by 40% but voluntary workforce departures continued a steady exodus reaching a high watermark of 94 million able-bodied adults who choose not to work. If this trend remains unabated, Jobenomics forecasts that America’s able-bodied, not-working population could equal its working population by the mid-2020s, or sooner if the United States slips into recession.

By not including the able-bodied, not-working population in State of the Union deliberations, policy-makers play a statistical shell game with American citizens who cannot be expected to comprehend the intricacies of labor force statistics. Sooner or later, the American people will figure out that it is theoretically possible for the United States to have a zero rate of unemployment while simultaneously having zero people employed in the labor force. The reason for this disquieting statement involves how government measures unemployment. To be classified as unemployed, one must be looking for work. Able-bodied Americans who quit looking and voluntarily depart the workforce are accounted in the Not-in-Labor-Force category—a category that is generally never mentioned in politics or the media.

While Americans should be pleased that employment is gradually increasing and the unemployment rolls are dropped significantly from Great Recession highs, they should be alarmed by exodus of tens of millions of able-bodied American adults to the netherworld of public/familial dependency and alternative lifestyles that harm economic growth and place greater burden on working and taxpaying Americans.

Jobenomics 2016 State of the Union’s Labor Force Assessment.[1] As of 1 January 2016, out of a total U.S. population of 322,810,000[2], there are 70,874,000 citizens that cannot work (22% of the population consisting mainly of children, caretakers, retired, disabled, institutionalized and active duty members of the armed forces) and 251,936,000 citizens in the Civilian Noninstitutional Population (78% of the population consisting of all persons in the Civilian Labor Force and Not-in-Labor-Force categories that are 16 years of age and older and not inmates of mental or penal institutions or military active duty).

The Bureau of Labor Statistics (BLS) calculates the number of citizens in the Civilian Labor Force (persons classified as Employed or Unemployed) at 157,833,000 (49% of the U.S. population) and in the Not-in-Labor-Force citizens at 94,610,000 (29% of the population).

Within the Civilian Labor Force, the BLS reports on the total number Employed—currently 149,929,000 or 46% of the population—and six unemployment categories as shown below. The most highly reported unemployment category is the U3 “Official” Unemployment category of 7,891,000 unemployed Americans (5.0% of the Civilian Labor Force or 2% of the overall population). For this report, Jobenomics typically uses, for reasons explained herein, the U6 Unemployment category that consists of 15,625 000 citizens (9.9% of the Civilian Labor Force or 5% of the overall U.S. population).

According to BLS, the basic concepts involving the U.S. labor force are relatively straightforward:

People with jobs are employed.
People are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work. Marginally employed and underemployed personnel, who are actively looking for work, are reported as a subset of the Unemployed, and generally include part-time workers who work less than 35 hours per week.
Able-bodied adults who are neither Employed nor Unemployed are not in the labor force. Those who have no job and are no longer looking for a job are accounted in the Not-in-Labor-Force category that includes people (over 16 years and older), or so-called “discouraged” workers, who choose not to work.

From a Jobenomics perspective, Not-in-Labor-Force personnel should be classified as unemployed in the same manner that marginalized and underemployed citizens are included in the U6 Unemployment category. Determination whether a person is counted as unemployed should not depend on subjective, and often whimsical, survey questions used to appraise people’s employment intensions.

The four survey questions that government interviewers use to record a person as unemployed include (the bolded words are emphasized when read by the interviewers according to the BLS): [3]

Do you currently want a job, either full or part time?
What is the main reason you were not looking for work during the last 4 weeks?
Did you look for work at any time during the last 12 months?
Last week, could you have started a job if one had been offered?”

If a person answers yes to all four questions, that person is considered Unemployed. If the answer is no to any of these questions, that person is enrolled in the Not-in-Labor-Force category.

Jobenomics’ 2016 State of the Union’s Labor Force Assessment. To get accurate numbers in today’s labor force, Jobenomics uses a combination of Total Employed, U6 Unemployed and Not-in-Labor-Force obtained from the BLS Employment Situation Summary Report, Tables A-1 and B-1.

Jobenomics contends that able-bodied Americans who can work but don’t work, regardless if they are looking or not, should be considered unemployed for the same reason that “discouraged”, “marginally attached” and “part-time workers for economic reasons” are included in the U6 unemployment category. The reason why the Not-in-Labor-Force and U6 categories should be examined collectively is for governmental transparency and accountability. Sooner or later, the American public will figure out that it is theoretically possible for the United States to have a zero rate of unemployment while simultaneously having zero people employed in the labor force. The reason for this disquieting statement involves how government measures unemployment. To be classified as unemployed, one must be actively looking for work. Able-bodied Americans who are no longer looking are accounted in the obscure, under-reported and arbitrary Not-in-Labor-Force category. A combination of the two categories gives policy-makers and the public a truer picture of the “functionally” unemployed.

In terms of the President’s State of the Union Address on 12 January 2016 and the Republican response, it will be interesting to hear if the dialogue revolves around the U3 “official” unemployment rate and the rate of employment expansion during the post-recession recovery period. From a Jobenomics perspective, resolving the Not-in-Labor-Force challenge is a much more important issue regarding the state of our union, the health of our economy and vitality of our labor force.

Year 2000 Through 2015 U.S. Labor Force Gains/Losses. From the beginning of year 2000 through 2015, the net loss to the U.S. labor force totaled 18.7 million people.

Employment grew from 130.8 million to 143.2 million for a gain of 12.5 million workers.

During the same period, the combined cadre of unemployed and voluntary departures increased from 78.6 million to 109.7 million for a loss of 31.1 million potentially productive workers.

It is also important to note that the U.S. population grew by 40 million people since year 2000—a 15% increase from 2000 through 2015. To understand the effect of population growth, one must look at the BLS’ Employment-to-Population Ratio that is at its lowest level in 30 years. The Employment-to-Population Ratio would be much lower if not for working women who were not engaged in the U.S. labor force in the 1970s as they are today. For more information on this, go to http://Jobenomics.com.

The principle source of employment growth since the beginning of this century has been in the private sector that created 11.0 million new jobs (88% growth or 5.5% growth rate per year) followed by government that created 1.5 million new jobs (12% growth or 0.75% growth rate per year).

Within the private sector, the seven service-providing industries (professional and business services; education and health services; trade, transportation and utilities; financial activities; leisure and hospitality; information; and other services) produced 100% of the jobs growth during the period with 15.9 million new jobs, or growth rate of 1 million new jobs per year. The three goods-producing industries (manufacturing, construction and mining/logging) lost 4.9 million jobs during the period. Jobenomics forecasts that the goods-producing industries will not produce a significant amount of net new jobs in the foreseeable future regardless of amount attention it receives and political rhetoric. For more information why, see http://Jobenomics.com.

Year 2010 Through 2015 U.S. Labor Force Gains/Losses. From the beginning of year 2010 through 2015, the post Great Recession recovery period managed by the Obama Administration, generated a net gain of 13.8 million people in the U.S. labor force.

Employment grew from 129.7 million to 143.2 million for a gain of 13.6 million workers. During the same period, the combined cadre of unemployed and voluntary departures remained virtually the same (110.0 million in year 2010 versus 109.7 million as of December 2015) with reductions of the number of unemployed being replaced by voluntary departures.

The principle source of employment growth year 2010 through 2015 has been in the private sector that created 14.0 million new jobs (13% growth or 2.2% growth rate per year) followed by government that lost 0.5 million new jobs (a negative 2% growth or 0.37% growth rate per year).

Within the private sector, the seven service-providing industries produced 87% of the jobs growth during the period with 12.2 million new jobs, or growth rate of 2 million new jobs per year. The three goods-producing industries also generated 1.9 million new jobs during the period, or 13% of the new jobs generated during the period.

Private sector service-providing industries and small businesses have been work horses of the economic recovery and principle sources of new jobs. Today, private sector businesses employ 85% of the U.S. labor force, of which 100,590,000 Americans (70.9%) have service-providing jobs and 19,651,000 (13.7%) have goods-producing jobs. As reported by the ADP National Employment Report[4], which surveys 400,000 U.S. businesses each month, small businesses created over 3.5 times as many jobs as big businesses in the last six years, 10.5 million versus 3.0 million respectively.

Over the last six years, the highly publicized “official” U3 unemployment rate was cut in half, from 10% to 5%, with a lot of fanfare. Similarly, the “total” U6 unemployment rate fell by 43%, from 17.3% to 9.9%, with a reduction of 10.6 million people in the U6 category. However, many of these formerly unemployed simply quit looking for work and were recounted in the BLS Not-in-Labor-Force category that grew by 10.3 million people, essentially wiping out the positive U6 gains.

From a policy-making perspective, the 94.1 million Americas who are no longer looking for work needs significantly more attention than the 15.6 million Americans who are still looking or are underemployed. The current BLS Employment Situation Summary Report states that 95% of the Americans in today’s Not-in-Labor-Force “do not want a job now”.[5] Why should they? America provides generous welfare and means-adjusted programs that are not tied to workfare like the most generous European nations require. Rather than hiring, U.S. corporations are preoccupied using profits on mergers and acquisition, expanding overseas and relocating corporate headquarters in foreign countries as a tax-saving measure. Learning new skills to compete for 5.1 million open America jobs[6] takes lots of effort, making it much easier to drop out of the labor force, go on the dole and pursue alternative ways of living.

Year 2015 U.S. Labor Force Gains/Losses. In 2015, the U.S. labor force suffered a net gain of 3.3 million.

Employment grew from 140.6 million to 143.2 million workers for a gain of 2.7 million jobs, which was supplemented by a gain of 0.6 million in the combined U6/Not-in-Labor-Force cadre, which remained at relative the same level from the beginning of the year, 110.0 million to 109.7 million respectively. While the U6 unemployment rolls decreased by 1.9 million people, 1.2 million people quit looking for work and voluntarily departed the U.S. labor force. Private sector service-providing industries and small businesses continued to the dominant forces in labor force expansion producing 2.4 million (90%) and 1.9 million (70%) of the 2.7 new jobs created during the year.

From policy and economic growth perspectives, 2016 State of the Union deliberations should contain an order of magnitude more labor force programs oriented to service industry vitality, small business hiring incentives and small business creation than programs for big businesses and government jobs that are unlikely to create a meaningful number of new jobs. In fact, big business is likely to downsize even further in 2016 consider the historically high number and value of corporate mergers and acquisitions, international pursuits and corporate inversions—all of which have negative consequences for U.S. labor force expansion and prosperity. Small business expansion provides the most bang for the buck for strengthening the U.S. labor force and stemming the erosion of the American middle class.

[1] Labor force data in this document is taken from the latest U.S. Bureau of Labor Statistics (BLS) Employment Situation Summary Report unless otherwise footnoted. The majority of BLS data used is from Table A-1, Household Data, http://www.bls.gov/news.release/empsit.t01.htm, and Table B-1, Establishment Data, http://www.bls.gov/webapps/legacy/cesbtab1.htm.

[2] U.S. Census Bureau, U.S. and World Population Clock, http://www.census.gov/popclock/

[3] BLS, Who is not in the labor force?, http://www.bls.gov/cps/cps_htgm.htm#nilf

[4] ADP Research Institute, National Employment Report, December 2015, http://www.adpemploymentreport.com/

[5] BLS, Table A-38, Persons not in the labor force by desire and availability for work, age and sex, retrieved 10 January 2016, http://www.bls.gov/web/empsit/cpseea38.htm

[6] BLS, Job Openings and Labor Turnover Report, Table 7, Job openings levels and rates by industry and region, retrieved 10 January 2016, http://www.bls.gov/news.release/jolts.t07.htm

Jobenomics-New York City

Jobenomics launches New York City initiative to create 1 million net new jobs in New York City over the next decade. This initiative is lead by Rev, Michel Faulkner, a former New York Jets NFL player, who started the Institute for Leadership in Harlem to identify and train potential small business startups in association with Jobenomics. Michel Faulkner is also a candidate for Mayor of New York and a former candidate for the U.S. Congress. (Faulkner for NYC Mayor Website at www.faulknerfornewyork.com). The following white paper describes the Jobenomics-New York City initiative.

Jobenomics-New York City

By: Rev. Michel J. Faulkner

Candidate for Mayor of New York City

17 November 2015

Download PDF version: Jobenomics New York City 19 November 2015. Jobenomics New York City White Paper 19 November 2015.

Also see: Faulkner for NYC Mayor, http://www.faulknerfornewyork.com/.

After ten years of effort, hundreds of meetings with policy-makers, thousands of meetings with business and community leaders and an outreach effort to over two million people, many Americans believe that the Jobenomics Plan for America is the most mature and comprehensive business and jobs creation plan in the United States. Charles D. (Chuck) Vollmer, author and founder of the Jobenomics national grassroots movement, has joined my campaign for mayor of New York City. Together, we are developing an actionable plan to create one million net new jobs in New York City within the next ten years via implementation of community-based business generators that will mass-produce tens of thousands of startup businesses.

Jobenomics deals with economics of business and job creation. Jobenomics national grassroots movement’s goal is to facilitate an economic environment that will create 20 million net new U.S. middle-class jobs within a decade. The movement has reached millions of people via its blog, reports, TV/radio, social media, lectures and word-of-mouth.

Research. Jobenomics produces a series of comprehensive reports including quarterly employment and unemployment reports that address the U.S. labor force, business and economic conditions. Jobenomics provides advice and timely data to policy-makers and decision-makers regarding business and job creation trends.

Focus Areas. While Jobenomics addresses big business and government employment, its principal focus is on highly-scalable small and self-employed businesses that employ 80% of all Americans and have produced 80% of all new jobs this decade. Women, minorities, new workforce entrants and the growing cadre of poor white males represent future business owners with the highest need and growth potential.

National-Level Initiatives. Jobenomics is leading two national-level initiatives called the Energy Technology Revolution (ETR) and the Network Technology Revolution (NTR). These initiatives could create 20 million net new American jobs within a decade. The ETR plan addresses emerging technologies, processes, systems and services across the entire energy spectrum for electrical power generation, transportation, storage and energy-related services. The NTR is characterized by a “perfect storm” of advanced technologies including: cloud computing, semantic webs, ubiquitous computing, advanced networks, machine learning, robotics, credentialing, Internet-of-Things and artificial intelligence agents. The NTR plan addresses America’s transition from a traditional to a digital economy and the transformational impact that the NTR will have on the economy, institutions, businesses and the labor force.

Jobenomics New York City (J-NYC): The J-NYC team is currently operating out of the Institute for Leadership facilities in Harlem (http://www.institute4leadership.com/). The initial draft of the J-NYC plan will be completed by mid-2016, depending on ongoing consensus building activities and community participation, and will be a “living” document with actionable and measurable milestones built on the framework of Jobenomics Plan for America. The J-NYC plan focuses on (1) NYC demographics with the greatest need and potential, (2) mass-producing startup businesses via community-based business generators, (3) attracting new highly-scalable businesses to NYC with emphasis on the network-centric and e-commerce firms, (4) forming alliances with countries, cities, corporations and entrepreneurs and (5) identifying sources of investment in order to achieve the one million net new jobs goal.

The J-NYC Business and Job Creation Plan’s objective is to quadruple the historical rate of NYC new job creation (232,000 per decade) with a goal of one million net new livable wage jobs by 2026. The plan concentrates on (1) implementing community-based business generators throughout the NYC metropolitan area, (2) developing workforce skillsets to fill vacant NYC jobs, (3) exploiting employment opportunities with the largest and fastest growing NYC industries, (4) implementing new business and job creation initiatives tailored to the needs of New Yorkers and (5) positioning the NYC labor force for substantial opportunities generated by energy and network technology revolutions.

J-NYC Community-Based Business Generator (J-CBBG) Concept. The solution to growing the NYC economy and labor force involves putting NYC’s small business engine into over-drive. Therefore, the J-NYC team will work with borough leaders to implement community-based business generators that will mass produce startups, extend the “life span” of fledgling firms and accelerate existing businesses. J-CBBGs will (1) identify and train potential small business owners and employees, (2) implement highly repeatable and scalable businesses with emphasis on the service-providing industries, (3) establish sources of startup funding, recurring funding and contracts to provide a consistent source of revenue for new businesses and (4) provide ongoing mentoring and support services.

Filling Open NYC Job Vacancies. As of November 2015, NYC’s five boroughs had 44,790 job vacancies.[1] 40,240 or 90% of the open positions are related to ten occupations: management, computer services, business and financial, sales, office support, healthcare, entertainment, social services, transportation and food services. Corporations with the largest number of open vacancies were Capital One, JP Morgan Chase, Oracle, King Teleservices and Deloitte with a total of 6,129 open positions. J-CBBGs will work with companies and occupational associations that have a vested interest in fulfilling these vacancies via training or certifying viable candidates with a specific skillset, or starting new businesses that can provide tailored services as subcontractors. The J-CBBGs will work with selected non-profits, such as employment-related institutions and churches (three Harlem mega-churches with over 250,000 parishioners have already agreed to support the J-CBBG concept), to perform the initial candidate due diligence. J-CBBGs will conduct further evaluations (Jobenomics and The Institute for Leadership already perform testing of this sort) to determine if candidates are ready for employment and capable of starting their own small business (self-employed, home-based, e-commerce, contractor, franchise, etc.). J-CBBGs will also build teams of future employees and future startup owners to increase camaraderie, accountability and successful launches.

Exploiting Employment Opportunities with the Largest and Fastest Growing NYC Sectors and Businesses. When preparing a labor force for maximum employment, J-NYC will begin with the largest and fastest growing sectors. NYC employs 4,191,500 workers. 542,000 (13%) work for government and 3,648,900 (87%) for the private sector. J-NYC’s business and job creation effort concentrates, but not exclusively, on private sector service-providing industries that are the largest (82%) employers of New Yorkers and the fastest growing segment (2.1%) of the major employment sectors. While the goods-producing segment (manufacturing, construction, mining) are vitally important, J-NYC feels that there is sufficient attention already being given to this segment that has limit upside employment potential as compared to services.

Within the NYC service-providing sector, the largest and fast growing industries are: Education and Health Services (866 million employees, 2.5% growth in the last year); Professional and Business Services (687M, 2.1% growth); Trade, Transportation and Utilities (631M, 1.4% growth); Financial Activities (459M, 1.9% growth); Leisure and Hospitality (427M, 3.2% growth) and Accommodation and Food Services (340M, 2.3% growth).[2] As a result of this data, J-NYC will work with NYC-based associations and companies in each of these industries to determine the level of interest and support for the J-NYC plan and their desire to engage with J-CBBG sponsorship, employee training and business startups. From our initial conversations with various corporate leaders, there is a keen interest in “feeder” facilities that can provide certified job candidates and independent contractors. Many would prefer to subcontract than hire.

New J-NYC Business and Job Creation Initiatives. J-NYC’s outreach program has already started identifying potential stakeholders for business and job creation initiatives for those struggling to make a livable wage. Most stakeholders say that they are eager to support any viable workfare over welfare initiatives. As the J-NYC plan matures new initiatives and programs will be added to the ones currently being pursued by J-NYC. J-NYC’s top three job creation initiatives are The Leadership Training Program, Urban Mining and Direct Care Centers.

The Leadership Training Program is underway at the Institute for Leadership (IFL) and producing solid results. This program trains, empowers, and partners with leaders and organizations that are already in the community including church leaders, business executives, government officials, athletic coaches and others who function in positions of leadership. The program also is working with leaders on health reform, financial management and entrepreneur training. Perhaps, the greatest benefit of this program is that J-NYC has a solid base of community leaders willing and eager to support the maturing J-NYC plan.
Urban Mining involves monetized urban waste streams such as municipal solid waste (MSW), construction and demolition material, tires and electronic waste. Waste is comprised of organic and nonorganic materials that can be reclaimed as commodities. J-NYC advocates a zero landfill/export policy and programs that convert waste into fertilizers, energy, biofuels and valuable raw materials. Jobenomics created eCyclingUSA LLC (http://ecyclingusa.com/) to help communities reclaim high value metals from electronic waste and use profits (average $30 million per year) for jobs and business creation. A typical eCyclingUSA plant can produce $30 million in profit and employ several hundred people. J-NYC is currently pursuing efforts to locate multiple eCyclingNYC facilities throughout the NYC metro that will hire the disadvantaged and formerly incarcerated.
Direct Care Centers are oriented to training and starting home-based, self-employed businesses that provide in-home eldercare, healthcare and childcare services. Direct Care is ideal for struggling households run by women who are looking for work or supplemental income to support their families. One of the biggest reasons that single mothers are struggling financially is due to the cost of childcare. Direct Care centers can help free many single mothers to join the workforce by training and supervising other single mothers to care for a neighbor’s children for a fraction of the cost of other services. Direct Care Centers can also provide personnel and contract workers to large organizations, like New Partners, a subsidiary of Visiting Nurse Service of New York. The Direct Care Center concept is the next logical step in IFL’s health reform effort.

Energy Technology Revolution (ETR). The ETR will create hundreds of millions of jobs globally and millions for cities, like NYC, that embrace transformative energy technologies, processes, systems and services. Using Jobenomics’ comprehensive ETR report as a baseline, J-NYC is developing a strategy for the greater NYC metropolitan area in regards to the economic impact and employment potential of the ETR. For electrical power generation, J-NYC will evaluate the impact and challenges of cleaner fossil fuels, renewables, grid-level systems, point-of-use systems, greenhouse gas emissions, power density, storage, next-generation technologies, and investment. J-NYC also plans to form alliances with sister cities in California, Japan, China and Germany that are embracing their versions of the ETR. For example, Tokyo’s metropolis is similar to NYC in terms of power density and energy issues. Consequently, it would be prudent to take advantage of any Tokyo’s successful ETR pursuit that could fulfill a NYC energy need. For example, Tokyo Gas plans to install 2,500,000 energy efficient miniature point-of-use natural gas fuel cells in homes and apartments for power and heat generation. NYC can also learn from Germany’s Energiewende (German for energy transition) national initiative to transition Germany from fossil and nuclear fuels to renewable energy, California’s 2030 goal of having 50% of its electrical generation from renewables, and China’s extensive research in next generation ETR technology. In the transportation area, sister cities in these countries are leading the way in advanced vehicles, alternative fuels and advanced storage systems that could be applied to shaping the NYC energy ecosystem. In energy services sector, energy efficiency, energy conservation, energy security and Energy-as-a-Service (EaaS) businesses are growing at phenomenal rates and fertile areas for employment and startups. Over the last five years, the Institute for Leadership has participated in Jobenomics initiatives in the energy services sector including energy audits, weatherization and solar installation certification training. As a result, the IFL team believes that Jobenomics ETR plan is solid and will provide an excellent baseline for the J-NYC ETR plan, consensus building and collaborative engagement.

Network Technology Revolution (NTR). The NTR will create literally billions of new jobs globally as the digital economy takes root. Today, in terms of e-commerce, the overall U.S. economy is 5% digital and growing at 20% per year. The United Kingdom leads the world with a 12% digital economy followed by South Korea at 8% and China at 7%. China’s strategy to become the world’s leading digital economy is as breathtaking as it is comprehensive. China is attempting to replicate its manufacturing miracle of lifting 400 million people out of poverty in two decades by implementing a combined public/private e-commerce strategy to lift an equal amount of rural Chinese out of poverty by 2030. Alibaba Group, a Chinese conglomerate that recently (2014) had the largest Wall Street IPO in history, is positioning itself to be a global e-commerce leader by financing the creation of 10 million new Chinese network-centric microbusinesses. Other Chinese conglomerates and government institutions are pursuing similar efforts. J-NYC plans to collaborate with countries and companies like these, as well as U.S. corporate giants like Amazon, Google, Apple and Microsoft to help NYC create businesses and jobs in the rapidly growing digital economy. J-NYC is in the process of identifying hundreds of emerging companies that have the potential to create jobs and small businesses in the same way that Uber (cars for hire), AirBNB (rental accommodations) and WeWork (office space) has accomplished. Founded in 2010, WeWork is now the fastest-growing consumer of office space in 15 “high IQ” cities and is one of the largest office space providers in NYC. The NTR also has a very dark side. According to recent studies, computer automation can eliminate as much as 47% of the U.S. labor force in the next two decades. Automation has been replacing manual labor for years, but via the NTR cognitive skill jobs are increasing at risk. If there is any doubt just ask Apple’s Siri, Amazon’s Echo or IBM’s Watson. The J-NYC NTR plan will seek to mitigate potentially massive NYC labor force departures (due to automation or voluntary departures) by creating highly-scalable new jobs and businesses that can compete and prosper in the digital economy. The J-NYC NTR team will also work with existing businesses to adapt and harness the power of new NTR technologies, processes, systems and services to compete and prosper more effectively.

Funding. J-NYC will pursue various sources of funding. The Institute for Leadership has an initial bank pledge of $20 million for micro-business loans up to $50,000 for each new J-NYC small business created. Other potential sources of funding include government bonds, debt/equity financing, corporate sponsorships, crowd funding and impact investing. Impact investing refers to investments made to organizations that generate a measurable, beneficial social impact. Socially conscious investing has grown in popularity with family foundations, philanthropic organizations, endowments, pensions, hedge funds, mutual funds and other financial institutions like Blackrock and Bain Capital. NYC has a plethora of “top 1%” organizations and philanthrocapitalists (philanthropists who see themselves as social investors) that could be encouraged to underwrite J-CBBGs for their service to the public good as well as their public relations value to their organizations.

Contact. The J-NYC team is interested in community leaders that are interested in workforce and small business development as outlined herein. Please contact me or the J-NYC team at 212.690.7748 and the address is 245 W. 135th Street, New York, NY 10030.

[1] New York State Department of Labor, Labor Statistics, 9 November 2015, https://www.labor.ny.gov/stats/nyc/

[2] New York State Department of Labor, Current Employment Estimates, https://labor.ny.gov/stats/lscesmaj.shtm

Stock Markets and The Fed

Download PDF Version: Stock Market and The Fed 1 July 2013

1 July 2013

US stock market performance has been phenomenal since the depths of the Great Recession. Since March 2009, all three major US indices (Dow Jones, S&P 500 and NASDAQ) have experienced a 4 ½ year bull market as shown below—up as high as 163%.

The big questions facing economists, policy-makers, opinion-leaders and investors are whether (1) this bull market will continue, (2) can the stock markets operate under their own power, and (3) how chaotic will the markets become during tapering of US government subsidies to big business? To answer these questions, one must first consider the level of involvement of the US government, especially the actions of the US Federal Reserve Board—the single most important government agency in relation to stock markets.

The US Federal Reserve System’s, also known as the Federal Reserve or simply the Fed, engagement on monetary and credit policy has immediate consequences for financial institutions, investors and economic recovery. After 4 ½ year’s of aggressive engagement via printing money, buying securities and manipulating interest rates, an increasing number of investors fear that disengagement by the Fed may have dire consequences regarding the attractiveness of stocks vis-à-vis other investment opportunities, such as commodities, bonds or even cash. Moreover, many economists fear that stock market has been artificially inflated by government involvement and any tapering by the Fed likely to cause the stock market bubble to deflate, or burst, not only in the US but in fragile economies in Europe and Japan. Finally, policy-makers and strategic planners are worried that adverse consequences created by Fed cutbacks will have a domino effect on the global geo-political/economic balance of power.

The US government has been stimulating publically-traded financial institutions and corporations to the tune of $16.6 trillion since 2008. Federal Reserve programs totaled $10.9 trillion, mostly for banks, financial institutions, insurance companies and government sponsored enterprises (Fannie Mae and Freddie Mac—holders of 77% of all American mortgages). US Treasury programs totaled $2.9 trillion, mostly to individuals and the auto industry. Federal Deposit Insurance Corporation (FDIC) totaled $2.5 trillion, mostly for local banks. The US Department of Housing and Urban Development (HUD) totaled $306 million, mostly for homeowners via the Federal Housing Administration. Since the Federal Reserve is responsible for 66% ($10.9 trillion out of $16.6 trillion), it has been the most influential organization in regard to the US economic recovery as well as 4 ½ year bull stock market run. Consequently, it is important to understand the role of the Fed and its actions in order to anticipate the future of the US stock markets.

The US Federal Reserve System is the central banking system of the United States. The Fed is both the US government’s bank and the bankers’ bank. As an independent institution, the Federal Reserve System has the authority to act on its own without prior approval from Congress or the President. The Fed was created by Congress to be self-financed and is not subject to the congressional budgetary process. In this way, the Fed is considered to be “independent within government.”

The Federal Reserve System has a number of layers. The top layer is the 7-member Board of Governors, who are appointed by the President and confirmed by the US Senate. Ben Bernanke is the current Chairman of the Board whose term expires on 31 January 2014. The second layer is comprised of 12 regional Federal Reserve Bank districts, each with a board of nine directors, 3 of whom are appointed by the Fed’s Board of Governors and 6 are elected by commercial banks in the district. The third layer consists of approximately 4,900 member banks that are private institutions (mainly national and state-chartered banks). Each member bank is required to subscribe to non-tradable stock in its regional Federal Reserve Bank, entitling them to receive a 6% annual dividend. While not officially part of the Fed, the Federal Deposit Insurance Corporation is a sister institution with 9,500 members. The FDIC-insured lending institutions comprise the vast majority of all bank deposits in the US. A very small number of small banks are neither an FDIC nor a Fed-member bank.

The primary responsibility of the Fed is the formulation of monetary and credit policy in pursuit of maximum employment, stable prices, moderate long-term interest rates, and economic growth. The Fed normally accomplishes this by setting interest rates, controlling the money supply by printing money and trading government securities, and regulating the amount of reserves held by banks.

One of the first actions that the Fed initiated was lowering interest rates to almost zero to simulate the economy. As shown above, the Fed lowered the Federal Fund Rate to near-zero prior the end of the recession—the lowest rate in 60 years. Today, four and half years later, this rate remains at near-zero (0.11%). To understand the role that the Federal Funds Rate plays in the banking system, one must first understand the four layers of interest.

Federal Funds Rate. The federal funds rate (currently 0.11%) is the rate of interest at which federal funds are traded among banks, pegged by the Federal Reserve through its Open Market Operations.
Federal Reserve Discount Rate. The discount rate (currently 0.75%) is the rate that the Fed charges its depository banks and thrifts who need to borrow money from the Fed. The Fed directly sets the discount rate based on the economic/monetary policy it wants to achieve, as well as the underlying rates that banks charge one another.
Prime Rate. The prime rate (currently 3.25%) is the interest rate offered by banks to their most valued customers. The prime rate is based on the discount rate.
Bank Rate. Most consumers are familiar with the interest at their local bank when they apply for a mortgage, auto or other loan. The bank rate (currently 4% to 6%) is based on the prime rate.

Consequently, the Federal Funds Rate sets the baseline interest rate that all other rates are based upon. Since virtually every US bank sets its rates on underlying Fed rates, the magnitude of the Fed’s near-zero rate policy is profound. Unfortunately this near-zero rate has not produced a robust US economic recovery as anticipated. While stocks and corporate profits have soared, GDP growth, employment and lending have languished with dire impact on the American middle class.

When a near-zero Federal Funds Rate does not achieve the desired monetary effect (stimulating economic growth), the Fed turns to other measures since they are not able to reduce interest rates below zero. Normally, the Fed stays out of the private sector, but these are not normal times. As a result of the 2008-09 economic crisis, the Fed was compelled to enter the private sector in essentially three ways:

Printing money to increase liquidity to increase lending by banks,
Rescuing too-big-to-fail financial institutions, and
Buying mortgage-backed securities that are toxic to banks, major financial institutions and insurance companies.

After September 2008, the Fed launched a massive liquidity effort by pouring trillions of dollars in short-term lending into financial firms and corporations. A host of new programs was created, including repurchase agreements, term auction credits, commercial paper funding facility, liquidity swaps and various other loans and bailouts. This liquidity effort was designed to be temporary in nature with a minimum risk to inflation. The liquidity effort worked. It saved a number of banks and corporations (such as the automotive industry) from insolvency without creating inflation. This liquidity, coupled with near-zero interest rates, has also found its way into the US stock markets, which have now recovered their losses since the Great Recession.

Since 2008 to today, the Fed has purchased approximately $3.5 trillion in toxic financial instruments from the private sector. In essence, the Fed is now carrying the bad debt that formerly resided on the balance sheets of major financial institutions and corporations.

The Fed also launched an aggressive asset purchase program, called quantitative easing or QE. Quantitative easing involves buying securities, which increases the money supply, which promotes increased liquidity and lending. Over time, the Fed’s purchases of these assets was supposed to promote new business investment that, in turn, would bolster economic activity, create new jobs, and reduce the unemployment rate. While QE has bolstered the stock markets, it has done little for business investment or unemployment.

The effect of the Fed’s quantitative easing programs can be seen on the performance of the S&P 500 stock market, which is comprised of America’s top 500 publically-traded companies. As shown on the graph above, every time the Fed initiated a quantitative easing program the S&P 500 grew significantly. The opposite effect happened when the quantitative easing programs ended—the markets declined. The same effects happened with other US and foreign stock markets.

QE1 (Quantitative Easing #1) occurred between December 2008 and March 2010 and involved a total of $1.75 trillion dollars worth of purchases of toxic mortgage-backed securities ($1.25 trillion) and debt ($200 billion) from Fannie Mae, Freddie Mac, Ginnie Mae and the Federal Home Loan Banks, and $300 billion of long-term Treasury securities. The main purpose was to support the housing market, which was devastated by the subprime mortgage crisis.
QE2 (Quantitative Easing #2) occurred between November 2010 and June 2011 and involved $600 billion dollars worth of purchases of long-term Treasuries at a rate of $75 billion per month. Treasuries include treasury bonds, notes, and bills. The Fed buys treasury securities when it wants to increase the flow of money and credit, and sells when it wants to reduce the flow. In essence, after the Fed purchases treasury securities, it adds a credit to member banks, which increases the amount of money in the banking system and ultimately stimulates the economy by increasing business and consumer spending because banks have more money to lend at lowered interest rates.
QT1/2 (Operation Twist #1 & #2) occurred between September 2011 to December 2012 and involved a total of $667 billion. Operation Twist was a plan to purchase bonds with maturities of 6 to 30 years and to sell bonds with maturities less than 3 years, which pressured the long-term bond yields downward and extended the average maturity of the Fed’s own portfolio.
QE3/4 (Quantitative Easing #3/#4) started in September 2012 and continues today open-ended until the economy recovers and the official employment rate drops below 7%. QE3 provided for an open-ended commitment to purchase $40 billion agency mortgage-backed securities per month until the labor market improves “substantially”. QE4 authorized up to $40 billion worth of agency mortgage-backed securities per month, and $45 billion worth of longer-term Treasury securities.

This graph shows the relationship between the Dow Jones Industrial Average (top 30 US publically-traded companies) and the Federal Reserve’s balance sheet. The Fed’s purchase of toxic mortgage-backed securities from the private sector and Treasuries has bolstered stock markets worldwide, as well boosting US corporate profits to an all-time high as shown below.

Corporate profitability can be directly tied to the Fed’s involvement. First, low interest rates encouraged investors to buys stocks as opposed to traditional investments like savings accounts, certificates of deposits (CDs) and money market accounts since their rate of return was low due to low Federal rates. Secondly, corporate bonds (even those rated as junk bonds status) offering meager dividends (compared to savings, CDs and money markets) sold briskly allowing corporations to build up their cash reserves and profitability. Rather than hiring or recapitalizing, many corporations used this cash for mergers, acquisitions and buy-backs of their own shares that increased their own net worth as well as their investors. In most cases, these corporate actions were wise financially. Corporate officials knew that the “era of easy money” stimulated by the Fed would eventually end, and building up cash reserves was fiscally responsible until the US economy showed real signs of recovery, which has not happened.

What do we mean by the “era of easy money”? The above chart is an exploded view of corporate profitability from 2008 to today (April 2013) that is overlaid by money in circulation that is controlled by the Fed. During the period, corporate profits rose by $1.1 trillion versus a $2.2 trillion rise in money in circulation. While rising about half the rate of the money supply, corporate profits generally followed the same upward path. This generous supply of easy money allowed corporations to borrow at low interest rates for mergers, acquisitions and buy-backs. In addition, easy money depressed the value of the US dollar relative to other currencies, which made US exports (the domain of big business) more competitive.

The old adage “make hay while the sun shines” is applicable to corporations and their investors in the stock markets. The Fed Chairman has recently indicated that the era of low interest rates, excessive borrowing and quantitative easing are about to end. In other words, the era of easy money is about over and the markets will have to operate with less and less government subsidies. It is clear that the stock markets are addicted to these subsidies and are adverse to any withdrawal. On 20 June 2013, the Dow Jones and the S&P 500 had their biggest point losses in more than a year and a half after Federal Reserve Chairman Ben Bernanke hinted that the Fed could begin dialing back its economic stimulus later this year. After 4 1/2 years of Fed’s quantitative easing levitating stock markets and low interest rates, many investors are terrified by the prospect of market chaos without the underwriting of the Fed.

The probability of market chaos is a given. However, there are two views. The view that is held by most economists, policy-makers and opinion-leaders is that the markets will undergo a period of turbulence but will recover due to structural soundness and historical precedent. Jobenomics takes the opposite view. Jobenomics asserts that the US economy is structurally flawed because Americans, from Wall Street to Main Street, shifted emphasis from manufacturing and producing to investing and speculating over the last three decades. Three decades ago, the US was the largest creditor nation in the world and commanded the lion’s share of global GDP. Today, we are the largest creditor nation in the world and our share of GDP has diminished significantly—largely due emerging economies like China. Jobenomics also asserts that the $16.6 trillion spent by the federal government was not well spent as evidenced by the low rate of US GDP growth, high unemployment, exponential growth of people leaving the US labor force, our dwindling middle class, and a hundred million US citizens dependent on government handouts and welfare payments.

To grow an economy, a nation needs three essential factors: (1) sound monetary policy, (2) sound fiscal policy, and (3) private sector growth. The Fed is responsible for monetary policy. Under Chairman Bernanke’s leadership, the Fed has done an admirable job by keeping our economy from going over the proverbial fiscal cliff. However, the Fed cannot produce economic growth, it can only stimulate and incentivize. Congress is responsible for fiscal policy. Their failure to resolve debts and deficits, taxation and budgeting, as well as a host of other economic and employment issues are major obstacles to economic growth. Private sector businesses are ultimately responsible for economic growth. Unfortunately in this era of big government, private sector businesses have suffered. Moreover, many Americans and politicians view businesses as a necessary evil or as a check book for social programs. Until these negative attitudes change, American economic recovery will be tentative at best.

Jobenomics believes that the best prescription for economic prosperity lies with small business creation with emphasis on startup, emerging and self-employed businesses.

Since the beginning of this decade, small business produced 71% of all new jobs. This is an amazing statistic considering the adverse lending environment by financial institutions, mounting government regulation, and the pittance of federal government spending on small businesses. Equally important, is the lack of commercial lending to very small and startup businesses that have been starved for capital. Very small and startup businesses have traditionally been the primary source of employment for entry-level workers and the long-term unemployed. Had the US government paid more attention to small business rather than providing generous subsidies to big business, Jobenomics estimates that ten million more Americans would be employed today if government focused on key next-generation business initiatives. Jobenomics is working on three next-generation business initiatives that could potentially ten million new jobs. These initiatives include: (1) a national effort for Generation Y to monetize social networks via a modernized info-structure, (2) a national direct-care effort to accommodate the aging and children via substantially increasing the number of women-owned businesses, and (3) a national effort to monetize waste streams via waste-to-energy and waste-to-raw materials that could rejuvenate depressed inner cities and the financially disadvantaged.

In conclusion, stock market success may be more of an illusion than reality. At some point in time, US federal government subsidies to financial institutions and corporations will end. When that time happens, we will find out if the markets can operate under their own power. Until then, America needs to diversify its investment strategy starting with small business, the engine of the US economy. Now is an ideal time to implement a new investment strategy to replace the old one that Chairman Bernanke says is about to end.

Income Inequality versus Opportunity

PDF Version: Income Inequality versus Opportunity 26 November 2012

26 November 2012

There is a significant difference between income inequality and income opportunity. Income inequality represents a rearward view on how much money a person possesses at a given time. Income opportunity represents a forward view of wealth potential and upward social mobility. Jobenomics recognizes income inequality as a starting point, but focuses on income opportunity, via business and job creation, especially at the base of America’s economic pyramid.

Income Inequality. Income inequality is defined as unequal distribution of household or individual income across the various participants (regional, social, racial, gender) in an economy. Income inequality slows economic growth, reduces social mobility, causes financial conflicts and creates discord. A survey for the World Economic Forum identified growing income inequality as one of the world’s most pressing issues for the next decade. After a period of wane, income inequality is growing again in America. US income inequality is often associated with income fairness and is now a dominant issue for policy-makers, media and social activists.

Much of the $6 billion dollars spent on the 2012 US election process focused on income inequality, especially rich (top 1%) versus middle-class and poor (the bottom 99%). Inflammatory rhetoric and political attack ads offered few solutions but exacerbated our political divide. A recent New York Times article[1], entitled Look How Far We’ve Come Apart, addressed the severity of the political divide in our country. Polarization between our two main political parties (shown below) has grown to the point of political paralysis.

The article also indicates that the US public is similarly divided,
almost to the extent that America was divided prior to the American Civil
War. The media are also polarized. America has reached a crossroads where the left wing no longer believes anything the right as to say, and vice versa. Now that the 2012 elections are history, the world is anxiously watching to see if America can reverse course and unite as a nation to address our strategic challenges. If we continue to focus on income inequality, America will continue to divide politically, socially and economically. The word “inequality” is
divisive, implying inadequacy and disparity. We cannot unify by using words, slogans and data that create dissension.

Conventional wisdom asserts (1) that income inequality is always bad, and (2) the United States is one of the most inequitable distributors of income on the planet. Both of these assertions are not accurate.

Income inequality is not a condition that we should tolerate, but is a myth that it is always bad. Throughout history, income inequality has been a powerful motivator. The American Revolution had issues of income inequality at its roots. Today, many of the greatest American success stories are about people from humble beginnings. Some degree of income inequality can be tolerated as long as a corresponding degree of income opportunity exists. Individuals and businesses would not innovate without the opportunity to reap rewards. When opportunity exceeds inequality, people are generally optimistic and motivated to succeed. However, when inequality exceeds opportunity, people are unhappy and motivated towards discordance. Unfortunately, America has entered a period where inequality exceeds opportunity, which places the US economy at risk.

Regarding the assertion that America is inherently inequitable, let’s take a strategic view of income inequality using official US government data, which is footnoted for the reader. Household income is generally used as the standard measure of income wealth by US government agencies. US household income includes the income of the householder and all other individuals 15 years old and over in the household. Household income is defined as income received on a regular basis not including capital gains or non-cash benefits (food stamps, health benefits, subsidized housing, and most other forms of welfare or entitlement benefits). “Median” household income divides the total number of households and families (including those with no income) into two equal parts.

According to the US Census Bureau, 95.7% of US households (multiple incomes) make less than $200,000 and 49.8% make less than $50,000. $50,000 represents the median US household income. The US poverty line is approximately $15,000 depending on the number of people in the household. These groups are usually defined as “middle-class” or “poor”.

The “the rich” are usually defined by personal income categorized in percentiles: top 5%, top 1%, and the ultra-rich. To qualify for an entry level position in the top 5%, a person needs to earn an annual income of $150,000. $340,000 is needed for the top 1%. An ultra-rich person in the top 0.1% starts at $1.5 million. An ultra-rich person in the top 0.01% starts at $8 million.

US median household income has fallen substantially this decade—the first such decline since the Great Depression in the 1930s. The Median US Household Income chart, from the 2012 US Census Bureau report[2], shows that median US household income started decreasing prior to the Great Recession. In 2007, the median US household income for all races peaked at $54,489. In 2011, it was $50,054, for a loss of $4,435, or 9%. All races suffered a decline over the same period, but the US Asian community continues to have the highest median household income of $65,129, followed by Whites ($55,412), Hispanics ($38,624) and Blacks ($32,229). Over the decades, income inequality has remained relatively the same between the races, collectively increasing during good times, and collectively decreasing over bad times. During the good times, income inequality was not a politically-charged issue since increasing household income provided a sense of well-being. During the last five years, declining household income has produced anxiety and discord.

The US Federal Reserve reports[3] on income inequality using the Income Gini Ratio (also called the Gini Index or Gini Coefficient) by race. The Gini Ratio is defined as a measurement of income distribution that ranges from 0, representing perfect equality, to 1, representing prefect inequality. As shown, Black Americans suffer the worse inequality within their own race. In other words, the distance between rich and poor within the Black community is greater than the distance in other races. The Hispanic community is the most homogeneous in terms of household income. Whites and Asians are in the middle with the Asian community having volatile swings during the decade.

A number of international organizations, like the World Bank and International Monetary Fund, use the Gini Ratio to define income inequality among nations. The Global Income Inequality chart (above) was created by Jobenomics using US Central Intelligence Agency data listed in their widely-accessed World Factbook’s Distribution of Family Income-Gini Index[4], which was compiled by the CIA using data from various international institutions. As far as global income inequality, the United States ranks slightly above average. The world’s worst income inequality is in emerging and totalitarian countries. Industrial and democratic countries are much more equitable in terms of income inequity. Globalization has narrowed the income inequality between nations but has exacerbated income inequality within nations due to global competition, international supply chains, global capital markets, and new information technology.

The data that gets most political and media attention is from the US Census Bureau’s Income Inequality Historical Tables[5]. The Census Bureau reports historical income inequality data in current dollars (not adjusted for inflation) and inflation adjusted dollars.

The US Historical Income Inequality chart was created by Jobenomics using Census 2011 dollars (adjusted for inflation) over the last 45 years. Over the last 4 ½ decades, the bottom 95% of US households have not made significant income gains. The top 5% average household income increased from $111,866 in 1967 (note: unadjusted 1967 household income for the top 5% was $19,000) to $186,000 in 2011 for a gain of 66%, or 1.5% per year— significant but certainly not great. To get to great numbers, one must use top 1% or top 0.1% data that is addressed below.

Here is the same chart showing current dollars that are not adjusted for inflation. In current dollars the top 5% increased their average household income by 879% ($19,000 in 1967 to $186,000 in 2011) as opposed 66% ($111,866 in 1967 to $186,000 in 2011) using 2011 Dollars that were adjusted for inflation. Jobenomics believes that inflation adjusted dollars give more of an apples-to-apples comparison, than non-adjusted current dollar comparisons.

Jobenomics created the Top 1% chart using the most recent bipartisan US Congressional Budget Office report[6], updated August 2012 (note: the US Census Bureau does not report on the top 1%). The chart shows that the top 1% far exceeds all other taxpayer incomes. In 2009 Dollars, the top 1% earned an average after-tax income of $886,700 down from $1,120,500 a year before the recession. The CBO also reports that there are 1.1 million top 1% households out of a total of 117.6 million US households, and that their share of total after-tax income was 11.5%. In other words, the top 1% represents 1% of all households and earns 11.5% of total US income.

There is no US government data that regularly reports on ultra-rich income. However, much antidotal data is available. The average CEO of the top US companies make $13 million per year, not counting stock options. By some accounts, the top 25 hedge fund managers make as much as all the top S&P 500 CEOs. These managers make billions, not millions, per year. From a global perspective, while Americans consider millionaires and billionaires to be rich, there are many areas of the world where personal wealth is measured in billions and trillions. In oil rich Arab nations, baby-sheikhs (20 year olds) are worth tens of billions of dollars and their fathers are trillionaires.

The 2012 presidential campaign debated the merits of increased taxation on the wealthiest American. Using Congressional Budget Office data[7], if taxes were increased by 5% on the top 1%ers, as requested by President Obama, approximately $60,985 more would be paid by each of the 1.1 million 1%ers. The net result would be approximately $69 billion dollars in new tax revenue, which is a relatively insignificant compared to $1 trillion annual deficit spending. Since $69 billion is only 7% of $1 trillion, the other 93% would have to come from increased taxes on the middle-class or reductions in spending. If taxes were increased all Americas in the top 20%, the net result would be $264 billion, or 25% of our annual spending deficit. It should be noted that the lower end top 20%ers (81^st to 90^th percentile) do not feel that they are wealthy, especially if the average $131,700 household income is a dual income family (e.g., husband and wife) each earning $65,850.

Income Opportunity. Income opportunity involves money that people can earn as opposed to money that they have. The term opportunity implies favorable conditions or prospects in order to attain advancement or success. Today, the American dream of upward mobility, fairness and optimism has been shaken in the wake of a Great Recession, chronically high unemployment and a stagnant economy.

Income opportunity is directly influenced by socio-economic mobility. Socio-economic mobility is the movement of an individual or group from one income level to another. Socio-economic mobility can be upward or downward. In America, with a few exceptions, mass upward socio-economic mobility has been the general trend since the creation of the United States. Most people that enter US workforce from high school or college move from initial lower paying jobs to higher paying careers. Those that dropout of school or society are likely to entrench themselves in the lowest income quintile with much lower mobility. While welfare and unemployment payments provide a safety net for those in the lowest quintile, these payments tend to trap these same individuals in low quintiles by eroding their socio-economic mobility. The longer a person is out of the workforce, the harder it is for that person to get a meaningful job. Socio-economic mobility is also influenced by education and social status. A presentation by Assistant Treasury Secretary Jan Eberly at the 2012 Economic Measurement Seminar produced an insightful graphic on intergenerational socio-economic mobility[8]:

According to Sec. Eberly, higher education is critical for economic mobility. Without a college degree, children born in the bottom income quintile have a 45% chance of remaining there as adults. With a degree, they have a roughly equal chance of attaining each income quintile, which means an 80% chance of being in a higher income quintile than their parents.

While America has always been know as the “land of opportunity”, the Great Recession and chronically high unemployment has eroded socio-economic mobility for those at the base of America’s economic pyramid. A 2012 study[9] by the Economic Mobility Project of the Pew Charitable Trusts states while “Eighty-four percent of Americans have higher family incomes than their parents did….Those born at the top and bottom of the income ladder are likely to stay there as adults. More than 40 percent of Americans raised in the bottom quintile of the family income ladder remain stuck there as adults, and 70 percent remain below the middle”.

Jobenomics believes that high school dropout rates, especially in the inner cities, is symptomatic of a greater problem—the lack of income opportunity. Jobenomics is working with local leaders in Detroit, Harlem, Atlanta, Washington DC and a number of smaller communities, all of whom say that high dropout rates are directly related to the lack of jobs. Why graduate from school when meaningful opportunities are not available? Jobenomics defines meaningful opportunities more in terms of careers as opposed to jobs. To most young people, minimum wage jobs are not meaningful as compared to income opportunities derived from illicit employment or government welfare benefits. Consequently, Jobenomics emphasizes community-based business generators in order to mass produce thousands of micro-businesses in the inner city. Micro-businesses provide meaningful income opportunity.

Many Americans feel that Washington policy-makers can fix our problems. Jobenomics disagrees for a number of reasons. First, a stagnant economy as well as a deeply divided citizenry makes political consensus-building difficult. Second, the biggest challenges for improving income opportunity are beyond Washington’s reach. Thirdly, global competition in the digital age levels the playing field for 6 billion other people around the world who want income opportunity and are often more motivated to strive to get it. While Washington has an important support role, it is up to the private sector to create businesses and jobs.

Since the beginning of this decade, small business has created 66% of all new jobs in America.

A recent McKinsey report[10] entitled Restarting the US Small-Business Growth Engine accurately describes small business as the engine of US economic growth with emphasis on “high growth” small businesses. The McKinsey article states that “a subset of small businesses—high-growth ones—creates the vast majority of new jobs. Seventy-six percent of these high-growth firms are less than five years old. The 1 percent of all firms that are growing most quickly (fewer than 60,000 in all) account for 40 percent of economy-wide net new job creation.” The biggest challenge for the McKinsey model is picking winners. It is hard to identify the next generation serial entrepreneurs, like Bill Gates (Microsoft), Steve Case (AOL), Mark Zuckerberg (Facebook) and Meg Whitman (eBay). Therefore, the McKinsey model focuses on small businesses that already have established themselves with potentially high growth products or services. McKinsey also advocates big business and government assistance to help emerging businesses grow rapidly and mass produce jobs.

Jobenomics focuses on “highly scalable” start-up businesses that are unlikely to receive significant government and big business support. Jobenomics is currently working on the establishment of a dozen community-based business generators that will mass produce small and self-employed businesses that can be replicated easily. Self-employed businesses (both incorporated and unincorporated) are a good example of the type of highly scalable business that can be mass produced in order to create millions of jobs. The Jobenomics model focuses on individuals that have a yearning to start a business. Jobenomics is currently concentrating on four demographics: inner city minority groups (service-providing businesses that focus on journeyman skill sets), women-owned businesses (direct-care, direct-sales and education/training businesses), Generation Y (start-up businesses that focus on monetizing social networks and the internet) and veterans-owned businesses (businesses that specialize in defense industry related occupations). These demographics have the potential for 10s of millions of jobs and millions of new businesses that can be replicated across America.

In conclusion, income distribution is relatively well divided in the US even though a majority of Americans believe otherwise. So why are Americans so upset about income inequality when official government data indicates otherwise? For America to prosper, the answer lies with income opportunity, not income inequality.

Today, too few are paying for too many. Only 32% of our population financially supports the rest of our population. We have a moral obligation to provide a safety net for the 23 million looking for work and the 70 million that cannot work. We also have an economic imperative to grow the private sector work force that currently consists of 102 million people. The Jobenomics goal is 20 million new private sector jobs by year 2020. The Jobenomics national grassroots plan is designed to unite a divided nation through business and job creation with emphasis on small, emerging and self-employed businesses in the middle and bottom of America’s economic pyramid. Providing meaningful income opportunity is essential to sustaining the American dream of mass upward social mobility.

[1] The New York Times, The Opinion Pages, Look How Far We’ve Come Apart, by Jonathan Haidt and Marc J. Hetherington, http://campaignstops.blogs.nytimes.com/2012/09/17/look-how-far-weve-come-apart/, 17 Sep 12

[2] US Census Bureau, Income, Poverty, and Health Insurance Coverage in the United States: 2011, by Carmen DeNavas-Walt, Bernadette D. Proctor and Jessica C. Smith, http://www.census.gov/prod/2012pubs/p60-243.pdf, issued September 2012

[3] US Federal Reserve Bank of St. Louis, http://research.stlouisfed.org/fred2/graph/?id=GINIBAF,GINIWANHF,GINIHARF

[4] CIA World Factbook, Distribution of Family Income-Gini Index, https://www.cia.gov/library/publications/the-world-factbook/fields/2172.html

[5] US Census Bureau, Historical Income Tables: Income Inequality, H-1 All Races, http://www.census.gov/hhes/www/income/data/historical/inequality/

[6] Congressional Budget Office, Distribution of Household Income (Supplemental data spreadsheet), updated 10 August 2012, http://www.cbo.gov/publication/43373

[7] Ibid

[8] US Department of the Treasury, Remarks of Assistant Secretary Jan Eberly before the National Association of Business Economists (NABE), 2012 ECONOMIC MEASUREMENT SEMINAR, 31 July 2012, http://www.treasury.gov/press-center/press-releases/Pages/tg1662.aspx, and http://www.treasury.gov/press-center/press-releases/Documents/View%20the%20charts%20shared%20with%20NABE%20today.pdf, Page 6

[9] Economic Mobility Project of the Pew Charitable Trusts, Pursuing the American Dream: Economic Mobility Across Generations, 9 July 2012, http://www.pewstates.org/research/reports/pursuing-the-american-dream-85899403228

[10] McKinsey & Company, McKinsey Quarterly, “Restarting the US small-business growth engine”, by John Horn and Darren Pleasance (Strategy Practice), November 2012, http://www.mckinseyquarterly.com/Strategy/Growth/Restarting_the_US_small_business_growth_engine_3032

Nation of Shopkeepers

The epithet “Nation of Shopkeepers” was used by Napoleon to infer that a British merchant society was incapable of effectively waging war against the mighty nation of France. Napoleon was wrong. British merchants and industry provided the resources that enabled England, with half the population of France, to win the Napoleonic Wars.

The phrase, “Nation of Shopkeepers”, did not originate with Napoleon. It first appeared in The Wealth of Nations by Adam Smith in 1776. Smith believed that when individuals pursue their self-interest, they indirectly promote the greater good of society. He argued that merchants, seeking their own self-interests, contribute significantly to the commonwealth by producing vital goods, services and tax revenues. Without this “invisible hand”, societies would be incapable of effectively pursuing self-sufficiency, prosperity and wealth creation.

Recent articles in prestigious publications, like USA Today and The Economist, make similar claims that a nation of small businesses cannot compete in the global marketplace because:

Big is better. Big firms employ more, are more productive, can reap economies of scale, can focus resources on innovation, offer higher wages, and pay more taxes.
Smaller means weaker. Small businesses fail at greater rate than big businesses. Small businesses are not particularly adept at creating jobs, at least not the best jobs. Almost all the 6 million companies in the US are small businesses, with fewer than 500 workers. Most small business owners just want to be their own boss and never expect to hire more than a few employees.

Like Napoleon’s premise that a nation of shopkeepers cannot compete, those that believe that a nation of small businesses cannot compete are simply wrong. Small business is America’s economic backbone—producing $6 trillion worth of annual products and services and employing half of the American private sector work force. Moreover, it is small business, not big business, which is the foundation of job creation. Since the beginning of this decade, small business generated 95% of all new American jobs (see: Employment Scoreboard: March 2012). As far as innovation, the Small Business Administration (SBA) reports that small business produce 16.5 times more patents per employee than large firms.

There are not 6 million small businesses in the US. There are 27.3 million small businesses. The latest available Census data show that there were 5.9 million firms with employees and 21.4 million without employees in 2008. These 27 million small businesses pay 43% of total US private payroll and are responsible for 97.5% of all identified exporters with 31% of export value as reported by the SBA Office of Advocacy. Just as important small businesses do not export jobs like big businesses.

The perception that small businesses regularly fail is only partly true. While the failure rate is high, so is their entrance rate. A recent landmark Census Bureau study showed that small establishments are no more inclined to exit business than large businesses. This misperception exists because of the high exit rate of micro-firms (1-4 employees), which averaged 18.4% over the last three decades. While this rate was high, their entry rate was even higher at 21.3%, therefore producing a net gain of 2.9% over the period. The entry/exit rate difference for all firms was only 1.9%. Looking at this data from a different perspective, compared to all businesses, micro-firms were more likely to succeed, which is counter-intuitive to common perception.

More recent data, reported by the ADP National Employment Survey, shows that very small businesses with 1-49 employees grew +7% over the last dozen years, whereas small businesses with 50-499 employees and medium/large businesses with more than 499 employees lost -4% and -16% respectively over the same period of time.

According to a recent Kauffman Foundation Study, job growth in the US is driven entirely by startups. The study reveals that, both on average and for all but seven years between 1977 and 2005, existing firms are net job destroyers, losing one million jobs net combined per year. By contrast, in their first year, new firms add an average of three million jobs. According to the Kauffman Foundation, “Policymakers tend to focus on changes in the national or state unemployment rate, or on layoffs by existing companies. But the data from this report suggest that growth would be best boosted by supporting startup firms.”

From a Jobenomics perspective the government’s primary jobs creation role is to create an environment where small, entrepreneurial businesses can flourish. Unfortunately, government officials are locked in a mindset that a nation of “shopkeepers” cannot compete and the solution to growing the economy is a combination of big business and government. Perhaps the greatest factor contributing to this mindset is the scarcity of business owners working in government. Furthermore, entrepreneurs and serial-entrepreneurs are almost completely absent in government decision-making.

Bureaucrats tend to view risk as a liability, whereas entrepreneurs embrace risk as an opportunity. Serial entrepreneurs embrace multiple ideas, get companies started, and transfer leadership to operational managers so they can move on to new ventures. Steve Jobs is an example of a serial-entrepreneur who created multiple iconic businesses. Our country is blessed with tens of thousands of proven serial entrepreneurs. Unfortunately, few serial-entrepreneurs serve on government economic councils that are replete with politically-correct and process-driven corporate chieftains and economists.

If small business is America’s economic engine, and if entrepreneurs and innovators are essential to business startups, then how does America change the government mindset? The upcoming presidential election debates are a good place to start.

From a Jobenomics point-of-view, neither the President nor the leading Republican candidates have yet articulated a viable jobs creation strategy. Virtually all of the proposed job creation plans are top-down political agendas oriented to ideologically-driven constituencies. Almost every political speech contains references to a reformed regulatory environment, better tax incentives and cuts, debt and deficit reduction, helping the middle-class, importance of small business, revitalized manufacturing, green jobs, environment protection, energy independence, stimulation packages, tort reform, reciprocal trade agreements, and increased exports as ways to increase jobs. While all of these areas are necessary, they are insufficient.

Political focus has to be on business creation, not job creation. In recent years, small, emerging and self-employed businesses have been responsible for virtually all of America’s new jobs. Yes small businesses fail, but enough survive to prosper our society. Seven out of ten startup firms survive at least 2 years, half at least 5 years, a third at least 10 years, and a quarter stay in business 15 years or more. From an entrepreneurial perspective, these are very lucrative statistics that should be the bedrock for a national business initiative to create millions, or tens of millions, of new small and self-employed businesses by year 2020.

A nation of small businesses empowered by 21^st technology can compete globally in ways never before thought possible. It is almost inconceivable that today half of America’s GDP is generated by 27 million small businesses. It is equally inconceivable that 52% of these businesses are home-based. Jobenomics envisions that the American labor force will continue to be transformed by small, largely self-employed, home-based businesses. This transformation will be lead by 70 million members of America’s millennial generation who will monetize the internet and social networks in ways not yet conceived. The country that learns how to monetize social networks, like Facebook with 825 million users, will be transformed almost overnight. Tens of millions of new businesses (mostly small and self-employed) will be created.

American innovation, ingenuity and entrepreneurship are the keys to a prosperous future where everyone who wants to work can find a job. A national small business initiative starts with an achievable vision. President Kennedy focused American science and technology on getting to the moon in a decade. In comparison, the Jobenomics 20 million new private sector jobs by year 2020 (20 by 20) goal should be very achievable. If China can lift 400 million peasants out of poverty in two decades, America can create 20 million new private sector jobs in one decade. Adding millions of new “shopkeepers” to a nation that is already of nation of small businesses could boost our commonwealth to new economic heights.

Jobenomics

A National Grassroots Small Business and Job Creation Movement

Tag: unemployment

Jobenomics U.S. Unemployment Analysis: Q2 2016

Jobenomics Community-Based Business Generators

Jobenomics Baltimore City

2016 State of the U.S. Labor Force

Jobenomics-New York City

Stock Markets and The Fed

Income Inequality versus Opportunity

Nation of Shopkeepers