Unemployment rate ignores the millions who have stopped looking

The employment rate is the key measure of Main Street’s economic health and the Labor Department’s April 5 report was weak and discouraging at best. After adding more than 200,000 jobs per month since last November, American employers added only a paltry 88,000 jobs in March, less than one-third the number created during February.

The country needs about 250,000 new jobs each month for five years just to get back to the headline unemployment rate we had in 2007. What’s more, this recent report found stagnant wage growth. We are not exactly witnessing a revival of breadwinners’ jobs.

Job creation was at its slowest pace since last June, totaling less than half the number economists had expected. The headline unemployment rate stands at 7.6 percent, shockingly high for a recovery that is nearly fours years old. This is not even remotely close to the pre-recession 4.7 percent rate in 2007.

Unemployment would be even higher if not for the large numbers of working-age people who have simply dropped out of the job market. Nearly 500,000 people just plain gave up looking for work and are no longer counted in the official employment numbers. Where they have disappeared to is anyone’s guess.

As a result, the labor participation rate fell to 63.3 percent, the lowest since 1979, which was before women entered the labor force in large numbers. If you count this exodus of Americans from the labor force as well as those still counted as unemployed and the involuntary part-timers, the true, actual joblessness rate is closer to 13.8 percent. Our friends in Washington, D.C., are stuck in the tar sands of an old paradigm continuing to focus on the “official” unemployment rate, but this masks the true crisis in the labor market.

Last December 12, Ben Bemanke, the fourteenth chairman of the Board of Governors of the Federal Reserve system, said the Fed would keep running the printing presses and thereby keep interest rates ultra-low for as long as the unemployment rate remained above 6.5 percent as long as its official forecast for inflation does not surpass 2.5 percent.

A jobless rate that low is not valid if it is predicated on a shrinking labor force. By only counting people who actually tried to find work within the previous four weeks, the unemployment rate ignores the millions of Americans who have stopped looking. The result? A falling official unemployment rate is not always a good economic omen.

We want the unemployment rate to go down because more people are getting jobs, not because they are giving up. During an economic recovery, an expanding economy usually brings people back into the labor market. This time, many are staying on the sidelines and more are joining them.

What happens if the real world economy regains its footing and starts to show signs of life? Many of these discouraged workers will probably resume their job searches.

But this will actually increase the size of the active labor force and cause the official unemployment rate to increase as well. This is good news hidden behind seemingly worst statistics. But it is really an admission of how bad things have been all along.

Alternatively, if the  conomy is facing a long twilight of no growth, maybe the Federal Reserve believes these people who have stopped looking for work will never return to the hunt; in this case, the headline unemployment rate will continue to decline as American workers remain on the sidelines.

Of course, this will result in the continuing growth of transfer payments such as unemployment benefits and food stamps, with the average worker leaning on government for relief, and flirting with poverty. They wouldn’t have far to go.

originally posted: April 27, 2013

We can’t solve today’s problems with yesterday’s solutions

The Federal Reserve recently launched open-ended quantitative easing (QE3), injecting large amounts of money into the financial markets for the third time since 2008. “Quantitative easing” is government­ speak for printing money.

The plan is to buy $40 billion in mortgage-backed securities every month, for as long as it takes, until the economic recovery strengthens and the job market is back on its feet. It amounts to another high­ risk, low-reward gamble with our economic future, and transferring wealth from the least privileged to the most.

With a slow jobs recovery and anemic economic growth, perhaps QE3 is evidence that previous efforts have failed.

The Fed also laid out its plan to maintain near-zero interest rates until the middle of2015.

The Fed is supposed to use monetary policy to ensure both maximum employment and price stability. It is currently focusing more on jobs than the inflation critics say quantitative easing will create down the line.

To the Fed’s way of thinking, inflation is under control. The so-called core inflation measures have been within the 2 percent annual rate that the Fed considers acceptable. Of course, that’s because the number excludes volatile energy and food prices.

Federal Reserve Chairman Ben Bernanke calls this “a Main Street policy” that will boost the economy and help the labor market improve significantly. The conceit here is that expanding the money supply will somehow jump-start investment, production and consumption.

It’s hard to see how these policies will protect the average American worker from structural problems such as competition with low-wage countries, technological advances and the relentless corporate drive to cut costs.

What an acceptable unemployment rate is remains an unanswered question in the context of price stability. The headline rate has dropped to 7.8 percent, but that’s because since June, half a million Americans have stopped looking for work. And what happens when the Fed starts to sell all the bonds it has bought when the economy finally recovers and interest rates are rising? Does this abort the recovery by further driving up interest rates?

Monetary policy produces winners and losers. Low interest rates are good for borrowers, like the federal government itself, which has saved trillions of dollars in interest payments in the four years since the Fed started aggressively expanding its balance sheet. But declines in the middle class’ real income have been especially severe during that time.

Printing money floods the market with dollars, which reduces their value and means that commodities such as oil and food end up costing more. These increases are most harmful to those with the lowest incomes. All of this increases income inequality, leading to weak aggregate demand and more unemployment.

Low interest rates are bad for people on fixed incomes who are trying to live off their savings. If you are a saver, you should be unhappy because interest on your savings and pension accounts won’t keep up with inflation, forcing you into high-risk assets such as the stock market to try to keep up.

Driving up stock prices independent of weak corporate earnings would surely put a smile on Bernanke’s face. Jobs are not created out of thin air; corporations need to increase sales to grow their earnings. Sadly demand is not there.

Einstein, who for some strange reason is more widely quoted than read, said, “We can’t solve today’s problems by the same type of thinking we used when we created them.” The Fed told us in 2007 that the sub-prime mortgage debacle posed no danger of an economic crisis; the folks who helped create the economic crisis are not the ones to get us out of it.

originally published: November 13, 2012