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Every morning I read through the Seeking Alpha headlines and click through to various posts that catch my eye.  Last week, I was browsing and saw “Steady And Disappointing – July Jobs” and decided to give it a read.

As I was reading through the article, I got a sense that people still do fully understand the fact that the job market has fundamentally changed since the last recession.

The Cycle Of The Job Market Pre-2008

I've been in the job market full time for about 18 years.  I've seen a few recessions, and have worked through enough companies that have gone through some sort of cost cutting measures, so that I got a sense of how the job market worked.  It was a pretty standard cycle, and I'll pick things up in what was the best part and go from there:

  • Full Profit and Job Growth – Profits would go up, and companies would expand jobs and wages, as more jobs meant more work which contributed to the bottom line.
  • Declining Profits, Continued Job Growth – The economy would start slowing down,  but there was always a lag, so job growth would continue.  The difference resulted in declining profit margins.
  • Continued Declining Profits, No Growth – Companies would finally start recognizing the slowdown in the macro economy and would cease hiring and likely freeze wages.
  • Job Cuts, Profitability in Free Fall (maybe even losses) – Recognizing that there were too many employees to justify slowing sales, layoffs would commence.  Jobs would be cut and the bleeding on the bottom line would hopefully be stopped.  If companies were lucky, they just had narrow losses, but in some cases, they would be in the red.  This would, of course, factor into how many jobs were lost.
  • Stabilized Profits, No Growth – No more jobs are added here, but the idea is to stop the bleeding, otherwise further cuts are required.  If things are stable and the economy as a whole hits bottom, the recovery can start.
  • Improving Bottom Line, Moderate Growth – Eventually things pick up and growth starts occurring.  Jobs start to get added in key areas.
  • Full Profit and Job Growth – The circle is complete.  If things went well, sales were soaring, profits had recovered, and headcount was back up.

That's the way things were.  But, with the last recession, things changed.

The Post-2008 Job Market

The model I described above worked pretty regularly, but the 2008 recession was so severe, and other factors came into play (which I'll get to in a minute), that the cycle was broken.

Effectively what happened is that companies went through the cycle where they hit rock bottom, but the panic set in when things didn't get better.  The 2008-09 recession was one that broke the cycle and it forced companies to drastically changed.

And they did.

When the cycle didn't get broken, companies fundamentally changed their business models.  They restructured their operations.  They got more efficient.  They restructured or eliminated debt.  They shed business practices that they had previously been able to keep on even though they weren't hugely profitable.

A lot of companies didn't do this or were unable to do this. Most of those companies are gone today.

The ones that made it found that their changing business practices led them back to profitability.

And this time, companies learned that job growth was not key to getting back to profitability.  Yes, jobs were needed, but by becoming more lean, more efficient, more focused, and more driven to innovation, they could get their profitability back without bring back employees en masse, as had been pretty standard practice.

This is going to sound harsh, but the thought pattern emerged was “Why bring employees back if we don't need to?”

As an employee, that's scary.  We all want to see everybody with jobs, with great jobs that we love that give us big raises every  year.  For a good portion of my career to date, that's what I was used to.  My friends and I, we all grew, we all got raises, we all knew that if one door closed, there was another somewhere that was waiting to be opened.

It was secure.  It was comfortable.  It couldn't last.

Not after 2008.

But, I don't think everybody really gets that.  Max Wolff, the author of the article I linked to, writes in one paragraph:

“We are now 4 years into an impressive profit and asset price recovery.  Our leading indexes have recently been setting new highs.  The Q2 earning season…was strong again.”

With that in mind, I was thinking that he ‘got it' and understood that this is the new reality and why it is.  But the cracks appeared when, in the next paragraph he says:

“The economy we have been rebuilding is not generating job opportunities sufficient to steadily increase labor force participation…..This means that many more folks are left behind than are included in the recovery.”

I started shaking my head when I read that.  Here he acknowledges that profits have recovered, that leading indexes are showing strength, and that corporate earnings were strong.  Then, he laments asking why jobs haven't followed suit.

Answer: Because they don't need to.

Question: If companies are hitting all the high notes with the employees that they have, what motivation is there to create more jobs?

Answer to that question: There isn't any.  I'll repeat that, there isn't one reason in the world that companies should hire more if they're hitting all of their goals and objectives, have solid balance sheets, and have debt under control.

Look at most of your strong performing companies, and you'll find that by and large, those things hold true.  They also hold a benefit that I've mentioned before, and will outline again, that being that the profitability and balance sheet standing as things exist today provide a more fundamentally strong economy than existed prior to previous recessions.  This means that while the robustness may not be there that many economists and job seekers are looking for, I also believe that the economy is much more insulated from the potential of future recessions and the impact that they could have.

The Next Driver of Job and Wage Growth

What will drive job growth next is opportunity.  The marketplace will have to create opportunity above and beyond what we have today.  That could be through new technology, new or additional needs in the certain sectors above what we have today, or any number of reasons.

When I read articles like this, I almost get the sense that many out there think that job and wage growth is something that is not only desired, but expected.  Almost like companies owe the marketplace more jobs and higher wages.

Unfortunately, that's not the case.  Companies owe it to themselves and their shareholders to be profitable.  If they can do that with less jobs than they had provided in the past, then that's what they are going to do.  If this means that you think that the economy is broken or hasn't fully recovered, that's fine.

But, until something fundamentally shifts, I don't think this is going to change. There is no magic fairy dust that the marketplace is going to suddenly provide.  Hopefully this gets recognized, and we can stop reading articles about how today's job market equates to a weak or unsteady economy.  The two simply are not correlated as many would suggest.

Readers, what are your thoughts on the job market and the current state of the economy? Do you agree that the old way of equating economic strength with the job market is no longer valid?  Discuss below.