The truth behind those unemployment figures

As we all know, the world economy recently endured a precipitous tumble. Even five years after the near-depression ‘s onset, unemployment remains high and economic growth is constipated. The financial crisis opened up a sinkhole in which millions of Americans lost their jobs. No one has been more affected by the debacle than young people.

To the average American, the unemployment rate is the indicator to which they pay the closest attention. As well they might, when you consider that unemployment is the black mark on the American economy .

The August headline unemployment rate dropped from 7.4 to 7.3 percent and 169,000 new jobs were reported, but that was fewer than expected. Unemployment is at its lowest rate since December 2008, but the rate fell for the wrong reason: another 312,000 Americans stopped looking for work and are no longer counted as unemployed.

These people essentially become nonexistent, usually a sign of an ailing economy, not a recovering one. If the economy were growing, the unemployment rate would decline because people found jobs, not because they quit looking.

From a broader perspective, current views of the labor market can roughly be divided into two groups. One argues that the weak labor market is the result of a shortfall in aggregate demand and argues for continuing an aggressive monetary policy known as quantitative easing, whereby the U.S. Treasury buys up billions of dollars of debt.

The other group notes that structural factors such as the rise of technology are the major challenges for the labor force. That means firms have jobs but can’t find qualified workers. For this crowd, greater emphasis must be placed on programs such as job training and mobility assistance.

It is generally believed that 250,000 new jobs are needed every month to keep pace with population growth and people entering the workforce for the first time. In addition to the anemic August jobs report, the federal Bureau of Labor Statistics also revised its June and July figures sharply downward.

It turns out that June’s job growth was not 188,000 as previously reported, but only 172,000. July’s numbers got knocked down all the way from 162,000 to 104,000. Does this suggest a correction next month to the August increase of 169,000jobs?

Labor participation, the percentage of Americans over 16 who have jobs or are looking for them, declined slightly from July to August and is at a 35-year low. BLS reports that 90 million eligible workers are sitting on the sidelines who don’t count as unemployed. The recent decline in the unemployment rate reflects reduced labor force participation, not increased employment.

The labor market is worse than government numbers reflect. Businesses are not hiring because of stagnant demand, and sales are not growing because consumers have less money. Consumers have less money because stagnant demand means businesses are not hiring full-time employees. It’s a classic Catch 22.

Many subgroups, especially the young, less educated and minority groups, are facing unemployment rates well into the double digits. Young workers have been the hardest hit. The recession and weak recovery have sharply reduced opportunities for entry-level workers in virtually every industry. The August unemployment rate for Americans under 25 was 15.6 percent, more than two and halftimes the rate for those 25 and older.

This may explain why young people are so pessimistic about the future; perhaps they fear they will be part of a “lost generation.” Many of these future leaders are sitting on the sidelines, having trouble finding full-time work that will help them develop the skills they need to transition to higher paying employment. They are struggling to pay off massive student loan debts and living with their parents because they can’t make the loan payments while living on their own.

The jobless economic recovery and the absence of bright, young people in the labor market do not portend well for our country. Instead of buying homes and creating new households, more young people are becoming dependent on government benefits, not paying taxes and creating a new underclass that will endanger America’s future.

originally published: September 21, 2013

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