Mass Layoffs: The Continuing Devastation

by Gary North
by Gary North
Recently by Gary North: Bernanke Sidesteps the Three Big Questions, Again

Stock market investors shrug off a disaster in our midst: mass layoffs. Investors act as though it will soon be business as usual. Companies cut costs by firing employees that have been with them for decades. Then the companies can report higher earnings from cost-cutting measures. The media then proclaim an increase in earnings. But how will these increases be sustained? How will an unemployment rate of 11% help get the economy back on its feet?

Companies do have to cut costs. Consumers are telling them this is no uncertain terms. But it is not a time for rejoicing when people are laid off. They trusted senior management. They trusted the economic system. They have never heard of the Federal Reserve System. They know nothing about derivatives. All they know is that the Federal government bailed out the big banks in 2008, while they have lost their jobs. In this report, I will consider the question of mass layoffs. This topic does not get much attention by the financial press. It should.

Instead, we are told about three statistics: the unemployment rate, initial requests for unemployment insurance benefits, and total unemployment.

UNEMPLOYMENT STATISTICS

First, let's consider the unemployment rate. The latest figure is 9.5%. It is widely expected to rise to 10% by the end of the year. No one in a position of authority is predicting a major reduction of this rate by the end of 2010.

The unemployment rate is not well understood. It is not the ratio of people out of work to adults in the economy. It is the ratio of people out of work compared to the total labor force. The Bureau of Labor Statistics explains.

What are the basic concepts of employment and unemployment?

The basic concepts involved in identifying the employed and unemployed are quite simple:

• People with jobs are employed.
• People who are jobless, looking for jobs, and available for work are unemployed.
• People who are neither employed nor unemployed are not in the labor force.

. . . The sum of the employed and the unemployed constitutes the civilian labor force.

Let's follow through on this. Joe gets fired. He is unemployed. He looks for a new job. He is still in the labor force. So, the unemployment rate rises: the ratio between those out of work in comparison with the total labor force.

Joe looks for a job. His unemployment insurance runs out. He stops looking for work. Or he starts looking for jobs that pay in cash. In either case, he is removed from the labor force. He is therefore also removed from the unemployment rolls.

As an unemployed person, he had a greater weight in the numerator (fewer people, total) than he did in the denominator. So, when he gets removed from both, the unemployment rate goes down. Victory for the stimulus! But the victory is purely statistical.

Second, let's consider initial claims for unemployment insurance. The most recent claims have been in the 566,000 per week range (4-week average). It was 616,000 a month ago. It was 623,000 a month before that. So, there has been some slight improvement. People go on the rolls. Then they go off, as they get work or run out of payments.

Total unemployment as of July 23 was 6.2 million.

MASS LAYOFFS

The Bureau of Labor Statistics publishes another statistic: mass layoffs. A mass layoff is defined as one company that fires 50 or more people at one time.

A mass layoff indicates panic in senior management. This means doing without a lot of workers. It is not a normal occurrence. Here is the BLS report for July 23: "Mass Layoffs in June 2009."

Employers took 2,763 mass layoff actions in June that resulted in the separation of 279,231 workers, seasonally adjusted, as measured by new filings for unemployment insurance benefits during the month, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Each action involved at least 50 persons from a single employer. . . .

Over the year, the number of mass layoff events increased by 1,046, and associated initial claims increased by 104,483.

That means that a year ago, the number of mass layoffs was at 1,717. It rose to 2,763.

The report also provided information regarding the extent of these mass layoffs since the official beginning of the recession in December 2007.

During the 19 months from December 2007 through June 2009, the total number of mass layoff events (seasonally adjusted) was 39,822, and the number of initial claims filed (seasonally adjusted) in those events was 4,090,538. (December 2007 was designated as the start of a recession by the National Bureau of Economic Research.)

If we divide the total number of mass layoff events of 39,822 by 19 months, we get an average monthly figure of 2,095. June's was 2,763. The media tend not to report on this figure. It is limited to large firms. Most firms cannot fire 50 people. They do not employ 50 people.

Most new jobs are created by small businesses. Large firms employ lots of people, but these are long-term jobs. So, when people lose their jobs at large, established firms, they are forced to look for work in comparable firms if they want to keep their pay level. The problem is, mass layoffs are hitting in unprecedented numbers. The comparable jobs are not available.

The job-seeker must set his sights lower. He aims lower in terms of pay and seniority, because he will be entering the labor market in the "just getting started" segment. These jobs are not secure. They tend not to pay as well as established jobs in large companies.

Mass layoffs are career-disrupting. People who had hoped to keep a job in an established company that offers health care benefits and a retirement program now find that they have lost their health care insurance, and their pension money is insufficient to offer them any hope for retirement.

NEW COSTS, MORE FIRINGS

The proposed health care plan proposes to force large employers to pay for these programs. The smaller firms will initially be exempted. This will raise costs of operations for those firms that already have health care programs – just not so generous as the new law will mandate.

This will place large firms at a disadvantage. They will be likely to fire marginal workers or else not hire marginal workers. They will be facing new competition from smaller firms that are not under the new law.

The result will be the opposite of what the promoters of the law say they want. They want more workers covered by employer-funded programs. There will be fewer people covered, because fewer will be employed. They want more extensive coverage. Workers will get less.

The mass layoff phenomenon will continue. Additional costs will force businesses to cut costs rapidly. They will face rising costs in a time of recession. Those firms that held out, hoping that the recovery would come, will find that they can hold out no longer.

The fact that the Obama Administration is pressuring Congress to pass this law before there is any sign of economic recovery indicates that the President thinks the bill will not pass if he delays. He wants to use his popularity as a battering ram while it still can batter down resistance.

CAREER CHANGE

A mass layoff is likely to take place in one town. They are not individual layoffs spread across several plants or regions. They are likely to hit one plant. The company shuts down a division. It finds that the entire output of a plant or a division is no longer profitable.

When this happens, the loss of income is concentrated in one geographical area. This hits housing harder than if the layoffs had been spread across several plants located in different towns.

Without warning, every fired person must scramble to get a job. The local market finds it costly to absorb all of them at once. The obvious response of employers is to offer a lower salary without fringe benefits. The job-seekers are not in a position to negotiate. They have bills to pay.

One of these bills is the monthly mortgage. It is a large share of the household budget. The family will resist skipping this payment. But, if they are facing a mortgage that is now larger than the market value of the home, they are tempted to stop paying.

If they knew how expensive it is for a lender to hire a lawyer and pursue the foreclosure in civil court in most states, a lot more families would stop paying. How much does foreclosure cost the lender? On average, $50,000. This includes the loan loss ($40,000 on a $210,000 home), lawyers' fees, and court costs.

The lender does not want to foreclose, because the loss must be recorded. It can be delayed for as long as there is no final transfer of the house to the lender. The lender may like to threaten to foreclose, but if the family abandons the home, it becomes a high-risk asset. No money is coming in. The house is deteriorating. Vandals may hit the house. Squatters may move in.

The family finally has to throw in the towel. It either walks away from the home or is evicted. In either case, the equity is gone. The family now has a large black mark on its credit. It will be hard for the family to get a bank loan in the future. It may have to declare bankruptcy.

The threat posed by mass layoffs is terrible for a family. Yet people don't see these layoffs coming. They stay in a doomed career, hoping that there will be some deliverance. In June, deliverance did not come for 279,231 workers.

Month after month, this process continues relentlessly. Occasionally, a television news show will cover a town that has been hit with a major mass layoff. But there is no realization that these events are taking place, month by month, in thousands of communities.

NO PROBLEM!

The economic recovery is not here yet. The media report as good economic news statistics of less serious decline. The public has become less pessimistic about the economy. What is the basis of this optimism? Media spin. Congressional promises. Bernanke's assurance that he saw some green shoots.

What is needed is evidence of recovering trade. Rising freight shipments would be a welcome indicator. What we see is slightly less decline. Across the board, railway shipping is down, far more than in the recessions of 1991 and 2001.

Rising imports and exports at the nation's largest ports would be another welcome indicator. Again, no compelling evidence.

The slowing of the decline is better than acceleration. But with unemployment continuing upward, how does anyone expect consumers to begin to buy the items that do well in boom times? Why should we not assume that they will buy such things as basic foodstuffs? They will save money. They will deposit money in banks. But the banks are not yet lending. They are putting the money with the Federal Reserve at 0.15% per annum: excess reserves. The bankers remain convinced that the green shoots are worth investing in.

We are regaled with stories of depression-era people withdrawing money and hiding it mattresses, as if those people were fools. They were smart; the banks were unsafe. At least 6,000 banks failed, 1930–33. Anyone who had his money in those banks lost every dime. Besides, the people hiding money in a mattress today are America's bankers. The mattress is called "excess reserves."

Where will the profits come from in the old-line, boom-era businesses? Why will consumers who are facing uncertainty about their jobs be ready to borrow and spend as if it were 2005?

The fund managers are convinced that happy days are here again for stocks, even though most economists predict a slow, weak, extended recovery. The others predict more recession.

CONCLUSION

We are in the midst of a disaster. The economy is still on its back. Economic growth requires capital, but the government is absorbing savings. The banking system is not providing the funds that businesses require.

Unemployment is rising. Foreclosures are continuing. Moody's senior economist testified before the Senate Finance Committee on July 21 that the financial system's $1.2 trillion in losses so far will be followed by $1.4 trillion. He said that almost 1,000 banks are at risk of failing. No one noticed.

There is a discrepancy between investors' assessment of the economy and businessmen's assessment. They continue to have mass layoffs.

Profits come from accurately forecasting future consumer demand. Unemployed consumers are not the source of profits.

July 25, 2009

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2009 Gary North

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