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Demos: High Unemployment & Its Surprising New Economic Effect

I am not an economist by any stretch of the imagination.

My area of expertise is white collar productivity and labor/workforce issues at an enterprise, not macro economics.

However, as part of helping enterprises improve the deployment of labor/workforce, we inevitably deal with macro economic shifts such as the unprecedented expansion of the part-time labor force and strategies to meet the needs of the workforce at the both ends of the demographic spectrum – gen x to baby boomers.

For the last few 2 quarters, it has been clear that while job losses have been slowing, unemployment levels are still stubbornly high.

Yet in the last two quarters, we have seen much stronger than expected consumer spending.

Unemployment
CNBC.com
Unemployment

A few data points include the holiday season where consumers spent well beyond the expected norms based on unemployment. And then the February retail sales came out the other and, despite the raging storms on the east coast, retail sales were significantly higher than expected.

The paradoxical situation (high unemployment, better than expected consumer spending) leads one to think there must be some other force or forces at work in this economic cycle than experienced in the past.

Two+ Earner Households

One the factors not often talked about deals with the enormous growth of 2+earner households in the market. Currently 2+ earner households are at an all time economic high. The hypothesis here is that the historic high ratio of 2+ earner households as a percent of employment is creating a household productivity effect (HPE) on consumer spending. It is also quite likely that a high percentage of 2+ earner households could have a dramatic effect on the shape of the labor force emerging from this economic cycle.

What is “household productivity”? Simply put it is the ratio of 2+ earner households compared to the total employed population. The theory marries (no pun intended) common sense and some common statistical data.

As the chart compiled from labor statistics shows the rate of growth of 2+ earner households grew steadily along with the employment rates in the 2001-2006 time frame. Then as employment rates slowed down and in fact went negative, 2+ earner household continued to grow, albeit at a much slower rate.

A the end of 2009, 2+ earner households comprised 35.3% of the total employed, up from 33.4% in 2007 or an increase of 5.7% in just two years!

The Impact on Consumer Spending

If two wage earners live under one roof, and one loses their job, is it possible they may in fact display more purchase power than if two individuals were living separately and one lost their job? Common sense would say so. The disruption of a household's ability to purchase must be better when it goes to half then when it goes to zero.

According to the HPE, we should then also expect to see a “lift” in consumer purchase power when employment is growing. That is, the existence of two wage earners in a household perhaps creates a stronger sense of security than one wage earner would and therefore spending grows at higher rate than would be expected. If this is the case, we could expect accelerated consumer spending than is forecasted as we emerge from this recession. This could in part explain the holiday results as well as recent retail sales.

It also stands to reason, therefore, that a large percentage of two wage earner households could provide a cushion to consumer spending as employment declines. That is, with more single wage earner households on a relative basis, each job loss hits an individual household harder than when there are two wage earners at home and one is still employed.

The Impact on Employment

The potential impact of HPE has big implications on the employment structure as well. At this point in the market, we are seeing the largest growth in the part-time workforce than we seen in the last 30 years. Common wisdom says that when the markets get better, this ratio will go down as people clamor for more fulltime work, especially since much of the growth comes from what is considered “non voluntary” part timers. However, if we continue to see a growth in 2+ wage earner households, then we could see an increased interest in part-time work, as a 2+ wage earner household creates some flexibility. This hypothesis is also supported by recent trends in technology, which enable many jobs, such as contact center agents, to be performed in the home. And the trends in technological capabilities are also supported by trends in management and HR practices which are also becoming more flexible in terms of supporting remote, more flexible schedules for all types of white collar jobs.

If the trends toward more 2+ wage earners continue, we will likely experience better than expected consumer spending at current unemployment levels all across the spectrum. We would also likely see shifts in the behaviors and expectations of the size and needs of a part-time workforce. Organizations will want to consider this effect as they map out workforce and labor strategies into the future.

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Darryl Demos is a Managing Director in the New York office and leads Novantas' partnership with Verint systems.

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