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Not your father’s US job market – Introducing the Job Quality Index

On the surface, the US job market is having a bumper run, with continuous growth signalling that more and more people are in work. Take a closer look and all is not well: the quality of jobs has worsened and living wages are an issue. We consider the societal implications and the effect on the relationship between low unemployment and (the absence of wage) inflation.

US labour market

  • The good news is that more than 10 years into the economic expansion, US payrolls continue to grow. December’s employment report showed continued solid labour market performance: non-farm payrolls grew and the unemployment rate remained at 3.5% – a 50-year low.
  • The bad news, according to new research, is a structural deterioration in the quality of jobs. A group of researchers has created a US Private Sector Job Quality index (JQI). Its purpose is to assess, each month, the extent to which the number of jobs is weighted towards more desirable higher-wage/higher-hour jobs versus lower-wage/lower-hour jobs. As such, the JQI serves as a proxy for the overall health of the US jobs market and the US economy.
  • Arguably, headline unemployment rates or jobs created no longer suffice in a world – the US job market not being unique among developed economies in this respect – where one of the major trends, in private sector employment, over the last 30 years is the decline in the capacity of many jobs to support households – even those with multiple job holders. Information of the sort provided by the JQI offers a means of tracking the direction and degree of change in job composition.
  • The structural decline in the quality of jobs raises major questions about the consequences for post-modern societies. It also goes some way to explaining one of the features of this US business cycle. Namely, the breakdown in the correlation between low unemployment, and higher wages and inflation.

Introducing the US Private Sector Job Quality index (JQI)

The JQI is the result of research undertaken by the following consortium of institutions:

  • Researchers at a programme on the Law and Regulation of Financial Institutions and Markets of the Jack G. Clarke Institute at Cornell University Law School
  • Coalition for a Prosperous America (CPA)
  • University of Missouri – Kansas City Department of Economics (UMKC)
  • Global Institute for Sustainable Prosperity (GISP).

Launched in November 2019, the JQI is updated and released on the same day each month as the US employment report.

In this article, I give some background information on the index and notions about the US job market. These are covered in greater detail in the white paper published to accompany the launch of the JQI.

The researchers define ‘job quality’ as the weekly US dollar income a job generates for an employee. It would seem difficult to dispute their observation that “payment is the primary reason people work: the income generated by a job being necessary to maintain a standard of living, to provide for the essentials or life and, hopefully, to save for retirement.”

A short history of the US labour market

  • Over the last 25 years, the size and composition of the labour force has changed substantially. The number of positions below the mean level of weekly wages (weekly hours multiplied by hourly wages) increased significantly from the 1990s through the last decade as the service sector expanded and goods production declined. Specifically, the percentage of service sector jobs rose steadily from about 55% after World War II to the end of the Global Financial Crisis in 2009.
  • Since 2009, this percentage has plateaued at around 83%. The researchers behind the JQI reason that 17% may be the level of goods production that the US economy must retain (construction, mining, heavy industrial goods, food, energy, etc.) simply by virtue of geography and physics.
  • Growth in service sector jobs may have peaked, but job quality continues to worsen. The  JQI aims to provide information on the extent and trends in this decline. To put it bluntly, having plateaued, the period of expansion in service sector jobs has been followed by a decline (either in terms of pay or hours available to work) in the quality of these jobs.
  • This first version of the JQI covers US production and non-supervisory (P&NS) workers. These account for around 82.3% of jobs in the US across 180 separate sectors of the economy. A second index, covering all private sector jobs, is due to be launched later in 2020.
  • The JQI divides all categories of jobs into high and low quality by calculating the mean weekly income of all P&NS jobs and then computes the number of P&NS jobs above or below that mean. An index reading of 100 would indicate an even distribution between high and low quality jobs. Readings below 100 indicate a greater concentration in lower quality (those below the mean) positions and readings above 100 a greater concentration in higher quality jobs.
  • The JQI complements other measures of employment. Trends in the JQI may be more predictive than the unemployment rate or hourly wage growth as standalone measures of
  1. near-term labour slack or shortages
  2. wage pressure or its absence
  3. household income, itself a determinant of demand
  4. to an extent, overall economic growth.

What does JQI data show?

Exhibit 1: The Private Sector Job Quality index shows a prolonged decline in the quality of jobs on offer in the US economy

3-month trailing average of monthly base inputs

JQI unemployment wages 1

Source: www.jobqualityindex.com

  • Historically, the concentration of labour in lower quality jobs grew, from a JQI reading of 94.9 in 1990 to 79 as of July 2019.
  • The gap in weekly income between high and low quality P&NS jobs has widened significantly since 2004. A ‘dramatic’ difference in hours worked on high quality versus low quality P&NS jobs explains most of the disparity in weekly income.
  • According to the researchers, the data does not support the argument that a material change in the style of employment (e.g., the development of a ‘gig economy’ characterised by a higher percentage of self-employed workers) has occurred in the US.

Instead, they see the primary problem in the job market as being a decline in the quality of jobs on offer. This in turn has led to a sustained depression of the labour force participation rate or an ‘effective underemployment’.

Understandably, jobs that do not offer pay that maintains the living standards of workers often go unfilled.

The consortium’s researchers use the term ‘reservation wages’ to describe the lowest wage rate at which a worker would be willing to accept a particular type of job.

Currently, the researchers see the reservation wages of the young and, to some extent prime workers, not being met by many of the jobs on offer, while the reservation wages of older workers are relatively low and attracting high participation.

If 55.7% of P&NS jobs offer a collective average of below 30 hours per week (often on uncertain schedules), then there are a lot of workers with excess labour who could be contributing more to the US economy.  

Exhibit 2: The current US economic cycle has seen a breakdown in the correlation between low unemployment and higher wages

With the unemployment rate (in %) at a 50-year low, the latest data for average hourly earnings for P&NS private employees (YoY % change) shows a fall in the year-on-year change from 3.4% from 3%, the smallest gain since July 2018.

JQI unemployment wages 2

Source: Bloomberg, BNPP AM


This article appeared in The Intelligence Report

The Intelligence Report TIR

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