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Quality counts too - not just Quantity

07 July 2014

In explaining one of the major strengths of the Red Army, Joseph Stalin once stated that “Quantity has a Quality all its own”

It’s a quote that came to mind in analysing Wall Streets reaction to the undoubtedly impressive headline result in last weeks Non-Farm Payroll report, which showed that the US added 288,000 jobs in June, smashing market expectations, and causing the US unemployment rate to drop to just 6.1%. On a side note, U-6 barely moved, and is still sitting at 12.4%

This caps an impressive few months of job creation in the USA, with over 200,000 jobs created in each of the past few months, a clear pick up on the past few years, as the chart from Deutsche Bank below (which I saw on Eureka over the weekend) shows.

Average Jobs Gained

Markets, unsurprisingly, reacted with glee, which is unsurprising in light of the fact that for the past few years, generating enough jobs of any kind has been beyond the government, Fed and private sector in the US, with the huge decrease in the unemployment rate heavily influenced by the plunging Labour Force Participation Rate, which is at a 35 year low.

In terms of jobs created though, the US economy has clearly turned some kind of corner, and for now, markets, analysts and investors are focused purely on the quantity factor, highlighting it as evidence that the US economy is approaching ‘escape velocity’ and that the Fed will successfully transition a recovery built on extraordinary and unprecedented monetary stimulus to something built around jobs, wages and genuine economic activity.

We are not so sure, for whilst as a general rule any job is better than no job, quality counts too. On that note, things are still looking pretty alarming in the USA.

Despite the consistent increase in average monthly payrolls since the “depths” of the GFC (I won’t say “end” because I don’t think its over), there’s been no follow through in terms of real wage increases in the land of the free.

The following chart, which the Wall Street produced using BLS figures, shows this clearly, with wage increases essentially halving in the last few years (thanks again to Eureka who produced this chart over the weekend).

Wage Growth

Indeed in the latest employment figures released in the USA, average earnings increased by only 0.2%, and 2% for the year. In real terms, Joe Six Pack (the average American worker) continues to go backwards, one of the major reasons the broader economy is still so soft.

The lack of “quality” jobs has been a factor that some market observers have been paying attention too for some time, and the chart below highlights the problem neatly.

As you can see, in the period between 2008 and 2012, roughly 20% of the jobs lost were those considered ‘higher wage’, bringing in $21.14 an hour or more. Roughly 20% of the jobs created were in this category too.

However, when we look at mid wage and lower wage occupations, we can see a disaster. Fully 60% of the jobs lost were middle wage jobs, yet barely 20% of the jobs gained have fallen into this category, whilst nearly 60% of jobs created were low wage occupations, where employees earn less than $15 an hour.

Job Gains Job Losses

This problem has probably only been exacerbated by the introduction of the Affordable Care Act, with many employers seeking to cut employee hours so they can afford expensive benefits programs the government would force them to offer.

If an individual was previously working 40 hours at one place of employment, but now was 2 jobs with 20 hours work in each one, they’re at best going to be earning the same income (arguably going to be poorer taking into account extra travel etc), yet total jobs will have increased.

Its only full time high paying jobs that lead to family formation, greater aggregate demand and higher levels of growth, not just any job.

As John Mauldin highlighted in his must read weekly missive “Thoughts from the Front Line” when looking at the latest numbers

Employed persons at work part time:

Part time involuntarily +275k

Because hours cut back +72k

Because that’s all they could find 111k

Part time voluntarily +840k

That is seriously pathetic and makes me wonder about the Retail adds +40k and the Leisure & Hospitality adds +39k. Low-paying, less than 40 hour a week jobs? You bet. Ditto Health care and social assistance, which clocked in with a hefty 33.7k.

But it also explains why, with 288k bodies added, the average workweek is not budging. Translation: they are hiring more workers instead of increasing the hours of existing workers. Which suggests that maybe this is more of what we have seen already: the quest to hire part time employees to avoid the benefits baloney.

Use your head. If we really created 288k jobs. And 275k folks were made involuntarily part-time, then this suggests that there are still way more candidates than there are openings.


Whilst its great that the US is more consistently creating greater numbers of jobs, investors would be foolish to focus only on the quantity, and overlook the quality of the jobs being created too. The US is still facing enormous economic headwinds and isn’t even close to ‘escape velocity’ or a sustainable economic recovery. With valuations where they are, prudent and conservative asset allocation makes more sense than ever.


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