The Single Biggest Problem With America's Labor Force

If you had asked investors in March 2009 what the likelihood was that the Dow Jones Industrial Average (^DJI 0.61%) and S&P 500 (^GSPC 0.08%) would be hitting new all-time just four years and change down the road, you would probably have generated enough laughs to land your own HBO comedy special. Yet, somehow here we are at, or a fraction off of, a new all-time record closing high despite the unemployment rate running higher than the historical average, and GDP growth trekking lower than the historical norm.

Investor optimism has certainly been a big part of this rally, with higher consumer confidence boosting both consumer and enterprise spending. Improving economic fundamentals and historically low lending rates have also played their role in fueling this uptrend.

An underutilized and unmotivated workforce
However, the way I view it is one key part of the equation on the jobs front continues to dampen any major hope of a sustainable growth-based recovery, as opposed to a temporary cost-cutting-induced move upward.

Last month, we examined a study by Gallup on the state of the American worker with regard to workplace engagement. The results of that study showed that only 30% of the American workforce is actively engaged in their job (i.e., they're innovative and willing to work toward bettering the business). The remaining 70% are either not engaged (52%) and are simply going through the motions, or are actively disengaged (18%) and are actually seeking ways to undermine their employer.  

Today, I intend to dig deeper into that study and examine one of the biggest reason why America's labor force is in big trouble: underemployment.

One measure that the Bureau of Labor Statistics employs that might be a better judge of the overall health of the labor force than the unemployment rate is the labor underutilization rate, commonly referred to as U-6. This figure takes into consideration the number of unemployed persons as well as those who are seeking part-time work but have been forced to take on part-time work for economic reasons. As a percentage of the labor force, it's still an extremely high figure:

Source: Bureau of Labor Statistics. 

Full-time jobs are hard to come by
This is a big problem, especially for our country's youth. According to The Federal Reserve Bank of New York which in June, 44% of all recent college graduates were working at a job that didn't require a college degree. Understandably, for some graduates it's a matter of starting somewhere and working their way up. But for many more, it's a sign of a very difficult job market that's becoming impossible to chisel away at.

The impending implementation of the Patient Protection and Affordable Care Act is also having a decipherable impact on U-6, even if a study from the Federal Reserve Bank of Minneapolis demonstrates that few employers are changing their hiring habits. Regal Entertainment (NYSE: RGC), the nation's largest operator of movie theaters, slashed thousands of its workers' hours to get under the 30-hour weekly average in order to avoid being penalized for not providing health care insurance options to its employees. That point is somewhat moot now with the PPACA employer mandate being pushed back another year, but it's nonetheless a reason why full-time work is becoming difficult to come by in certain sectors.

Advancement is driving engagement
What's particularly interesting about Gallup's findings is that job engagement isn't just lower for recent graduates than high-school graduates – it's lower for all college graduates, regardless of whether or not they've recently graduated. Furthermore, being actively engaged in their job was dependent on the occupation they had. Jobs that required higher levels of skill or for graduates to actively use their degree often resulted in higher engagement scores. Jobs that require less education, or surrounded college graduates with lesser educated coworkers, resulted in less enthusiastic college-educated employees.

Here are Gallup's results of college-educated engagement broken down by occupation type:

Source: Gallup. 

We really shouldn't be shocked to see service workers -- think retail or food service -- toward the bottom of this list. Service workers are among the hardest hit by PPACA-related hourly cutbacks, and they often boast some of the lowest pay. Trust me, I've done my penance in the retail world previously and I can vouch for this! What this means is that service-oriented jobs are among the most difficult to keep a workforce engaged, usually resulting in high turnover and little employee cohesiveness.

You may not agree with me on this example, but take McDonald's (MCD 0.89%) for instance. McDonald's is arguably the stepping stone by which competing fast-food restaurants have modeled their brand around. But, according to estimates by Fast Food Nation that McDonald's employs 700,000 people in the U.S., and figures from McDonald's itself that it hires 1 million people annually in the U.S., this means the Golden Arches' turnover rate is around 143% per year! With generally low wages, inconsistent hours, and a staff with high turnover, perhaps investors should stop questioning McDonald's lack of innovation for its recently stagnant same-store sales results and start looking inward toward its employee engagement?

The key to turning America's labor force frown upside-down
The real key to success is in ensuring that college graduates are intrigued with their job, challenged on a daily basis, and are surrounded by coworkers who share those same goals. I would propose that some of the best examples of this are Internet-based companies such as Google, which have latched onto America's college graduates and given them a job filled with innumerable perks.

But, I would also extend this example beyond just offering big perks to grads to keep them happy. Simply removing the barriers of advancement often seen as the status gap between executives and employees can go a long way to encouraging engagement in the workplace. Take Red Hat (RHT +0.00%) CEO Jim Whitehurst, who chooses to work in a cubicle right along his employees, presumably to set an example that anyone within the office setting is reachable -- even the person in charge.

Whole Foods Market co-CEO John Mackey is another shining example, taking home just a $1 annual salary while capping executive pay at 19 times that of the average store employee.

Making employees realize they're important to the team, giving them a path to advancement, and paying them commensurate to the hard work they put into their college education, are all parts of the equation to really turning the American labor force around.