Free Markets, Free People

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The real unemployment rate

Ed Luce, writing in the Financial Times, discovers something our own Dale Franks has been saying for a couple of years.   The real unemployment rate is much higher than the published unemployment rate:

America is employing a decreasing proportion of its people. At the start of the recession, the employment-to-population rate was 62.7 per cent. The rate is now 58.5 per cent. Last month, unemployment fell from 9 per cent to 8.6 per cent. On the surface, this looked like a welcome leap in job creation. In reality, more than half of the fall was accounted for by a decrease in the numbers “actively seeking” work. The 315,000 who dropped out of the labour market far exceeded the 120,000 new jobs.

According to government statistics, if the same number of people were seeking work today as in 2007, the jobless rate would be 11 per cent. Some have moved from claiming unemployment benefits to disability benefits, and have thus permanently dropped out of the labour force.

Etc.  The fact is the government undercounts the unemployed because it bases its count on those drawing unemployment benefits.  However once those benefits end, those who are still unemployed but no longer eligible for benefits become invisible.  They’re no longer included in the count.  Thus you’ll see reports where the number of jobs created is far below even that necessary to maintain the unemployment rate and yet the rate goes down.

We don’t count the unemployment rate accurately at all, and politicians, as you might imagine, are fine with that.

As for the jobs that have been created:

According to a study this year by Michael Spence, a Nobel Prize-winning economist from Stanford University, and Sandile Hlatshwayo, all net job creation since 1990 has been in the “non-tradable sector”. Between 1990 and 2008, the US added 27.3m jobs, of which almost every one was in services. Almost half were in healthcare or the public sector – both areas in which productivity growth is virtually zero. Conversely, manufacturing’s impressive productivity growth has tracked its shrinking headcount.

Its not clear how one can blame this on the “1%” or the “rich” instead of the evolution of our economic state in a myriad of different areas (and for just as many different reasons).  Apparently politicians have to have someone to blame when the public tries to stick them with the responsibility for the downturn, but this is something that has been developing for decades and has gotten a pretty firm final push from the recession.  And politically here’s the ground truth:

“The truth is that we don’t know how to fix the US labour market – we are in uncharted territory,” says Peter Orszag, Mr Obama’s former budget director, now a vice-chairman of Citi. “It would help to spend more on retraining and on infrastructure and to have a more rational immigration system. But these wouldn’t fundamentally transform the situation for the middle class … It is not yet clear what, if anything, could.”

Luce concentrates on fixing the education system which he calls “mediocre”.  And of course, it is a system that while widely panned, demands more and more investment for less and less return.  Naturally, in 1979 we were sold a bill of goods by our politicians that said government had to get much more deeply involved in education in order to save it from the mediocrity from which it obviously continues to suffer.  Thus the Department of Education was born.  The results have been very expensive and less than sterling.

Others will try to blame this all on globalization and the “outsourcing” of America’s manufacturing jobs.  But what they always fail to mention is America had priced itself out of the manufacturing business quite some time ago.  The fact that the jobs went elsewhere was a function of competition which has, in fact, benefited the American consumer.   You can’t have it both ways.  You can’t demand the lowest prices at Wal-Mart and then complain when a business does what it takes to meet that demand.

The bottom line here is we now face a new economic reality that says unless we make fundamental changes high chronic unemployment could become the norm.  Part of making those changes is to first recognize what shape we’re really in and why.  It isn’t because of the “rich” or the “1%”.  The problem is much broader and deeper than that.  Reporting incomplete statistics, such as the number used for unemployment, doesn’t help us understand or appreciate the shape we’re in or what we need to do to remedy that situation.  It simply continues to hide the reality of that situation in favor of making the number more palatable politically.

The number of unemployed is at 11% whether the politicians wish to admit it or not.  That’s a very high proportion of unemployed and as unemployment benefits continue to end for thousands of unemployed with meager job creation, it stands a chance of going higher.   That’s reality. That’s the number we should be dealing with.  Not this incomplete number that tells us a bad situation is better than it is.   That’s simply another means of self-delusion which has, unfortunately, become commonplace in the political world.  Harkening back to Peter Orszag’s words, just listen to the President’s new class warfare theme and you’ll understand that Orszag is exactly right. 

They haven’t a clue.

~McQ

Twitter: @McQandO