8.6% Unemployment Is a Myth

Transcription

1 8.% Unemployment Is a Myth Sondra Albert Chief Economist, AFL-CIO Housing Investment Trust December 13, % unemployment is a myth! And, to the 13.3 million people who are currently counted as unemployed, and the.2 million more who want a job but have given up hope of finding one, the recovery is also a myth. A closer look at the unemployment statistics shows that the official unemployment rate significantly understates the extent of joblessness in this country. In addition, the loss of jobs during the recession and the weak job growth during the recovery will have even wider longterm economic consequences as young people are unable to enter the labor force and older unemployed workers are unable to adequately prepare for retirement. While the national unemployment rate is currently 8.%, unemployment rates are exceptionally elevated for certain subgroups of the population: 13.2% for workers without a high school education; 15.5% among African Americans; 23.7% among all teenagers; and nearly 0% for African American teenagers. Even among college graduates, whose unemployment rate is much lower than that of the population as a whole, the rate has doubled since the start of the Great Recession in late 2007 to.%. 1 The nationwide unemployment rate peaked above 10% in October 2009, followed by a fairly steady decline over the next 12 months. By February of 2011, the jobless rate had dropped below 9%, and renewed optimism about the economic recovery and equity markets was the pervasive sentiment. 2 The unemployment rate then rose again through the second and third quarters of this year, causing optimism about the recovery to fade. Over the last two months the unemployment rate has fallen again, encouraging more optimism. But the lower rate has more to do with discouraged workers exiting the labor force, rather than a surge in hiring. 1 Bureau of Labor Statistics Employment Report, November Ibid. 1

2 12 Unemployment Rate (percent) Nov 8 Nov 51 Nov 5 Nov 57 Nov 0 Nov 3 Nov Nov 9 Nov 72 Nov 75 Nov 78 Nov 81 Nov 8 Nov 87 Nov 90 Nov 93 Nov 9 Nov 99 Nov 02 Nov 05 Nov 08 Nov 11 History of the Unemployment Survey In 1878, Carroll D. Wright, chief of the Massachusetts Bureau of the Statistics of Labor, attempted to count the number of unemployed people in Massachusetts. The 1870s were a time of economic anxiety, with a financial crisis caused by the panic of 1873 that had spread into the broader economy. Wright speculated in 1878 that there were not nearly as many people out of work as commonly believed. 3 He created a survey that asked town assessors to estimate the number of local people out of work. He had the assessors only count adult men who really want employment. By doing this, Wright said he understood that he was excluding a large number of men who would have liked to work if they could have found a job that paid as much as they had been earning before. 5 This was the first attempt to define who was in the labor force. Wright s results showed that only 22,000 people were unemployed in Massachusetts, less than one tenth the number previously estimated by the government. Carroll D. Wright From Massachusetts, Wright went to Washington, where he served as the inaugural director of the federal government s Bureau of Labor Statistics and later as the head of the United States Census. His method for counting and not counting the unemployed became the basis for Census tallies of the jobless and, eventually, for the monthly employment report put out by the Bureau of Labor Statistics. Over the last few decades, there has been an enormous increase in the number of people who are not counted as 3 Unemployment and Skewing the Picture, by David Leonhardt, NY Times (3/5/2008). Ibid. 5 Ibid. Ibid. 2

3 part of the labor force, using the stipulation that a person must be actively looking for a job as first introduced by Carroll Wright 130 years ago. 7 How Unemployment Is Calculated Fast forwarding to the 190s, the Works Progress Administration began publishing statistics on those working (the employed) and those looking for work (the unemployed). In 197, the Bureau of Labor Statistics began publishing data on the dimensions of the so called hidden unemployed people marginally attached to the labor force who currently are neither working nor looking for work but indicate that they want and are available for a job. Discouraged workers, a subset of the marginally attached, have given a job market related reason for not currently looking for work, such as their belief that no jobs are available. 8 These unemployment statistics first published in 197 were revised in 199 (becoming the alternate measures of unemployed recorded in tables titled U 1 to U and ranging from a narrow definition of unemployment to a broader definition), adding the controversial requirement that discouraged workers must have sought work in the prior year for the U measure. This change halved the number of discouraged workers, resulting in a complete break in the time series and hampering comparisons of pre and post 199 counts of the hidden unemployed. 9 According to the old definition there would be around 2 million discouraged workers, rather than the over 1 million recently reported. 10 Today, someone is counted as unemployed if he or she is at least 1 years old, did not work during the unemployment survey week, was available for work, except for temporary illness, and had made specific efforts to find employment sometime since the previous month s survey week. Persons who were waiting to be recalled to a job from which they had been laid off need not have been looking for work to be classified as unemployed. The unemployment rate calculated from this count is often referred to as the headline unemployment rate, or U 3 rate. 11 The Current Unemployment Rates The national headline unemployment rate was 8.% in November. However, by the broader measure of unemployment (referred to as the U rate), which includes marginally attached workers and involuntary part time workers, 12 the unemployment rate was 15.% in November, nearly 7 percentage points higher than at the start of the recession. 13 Included in this broader measure are approximately 8.5 million people who have had to settle for part time work because they are unable to find full time jobs. 1 Even though the 15.% rate takes into account these marginally attached and involuntary parttime workers, it still likely underestimates the true unemployment rate. 7 Ibid the unemployment rate.html. 10 Bureau of Labor Statistics Employment Report, November Bureau of Labor Statistics, October 2011 report. 13 Ibid. 1 Bureau of Labor Statistics Employment Report, November

4 Unemployment Rates Remains Almost Double the Rate Prior to the Recession (percent) Civilian Unemployment Rate (U 3) Unemployed+Marginally Attached+Part Time Econ Reasons (U ) The unemployment rate would be significantly higher if the labor force had not been contracting rapidly since the start of the recession. Discouraged workers have dropped out of the labor force at a record rate since the start of the recession because they do not believe there are jobs available that meet their qualifications. The labor force participation rate is down to.0% of the population 1 years old and above, the lowest level since In addition, long term unemployment is at a record high, of the 13.3 million unemployed workers 3% have been out of work for six or more months. 1 The longer people are unemployed, the more likely they are to become discouraged about their prospect of finding employment, and the higher the likelihood that they will drop out of the labor force. Labor Force Continues to Contract (civilian labor force to population ratio, percent) Nov 83 Nov 85 Nov 87 Nov 89 Nov 91 Nov 93 Nov 95 Nov 97 Nov 99 Nov 01 Nov 03 Nov 05 Nov 07 Nov 09 Nov Ibid. 1 Ibid.

5 The Labor Market Is Worse than the Unemployment Rates Show While the high rate of U unemployment acknowledges the large amount of slack in the labor market, weak wage growth demonstrates the impact of the shaky labor market on workers compensation. This slack in the labor market is keeping wages from growing enough to boost consumer spending and support substantial economic growth. Over the past 12 months, average hourly earnings have risen by just 1.8%, failing to keep up with an inflation rate of around 3.% (as measured by the Consumer Price Index). 17 This has cut into U.S. consumers purchasing power, which is extremely detrimental to the living standards of working families and also to the recovery of our consumer based economy. Wages Not Keeping Up with Inflation (yearly percent change) Aug 07 Nov 07 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09 Feb 10 May 10 Aug 10 Nov 10 Feb 11 May 11 Aug 11 Nov 11 CPI Average Hourly Earnings The Labor Market Is Likely to Remain Weak Even more dispiriting than this snapshot of the employment picture is that there is so little momentum toward improvements in labor market conditions. The level of payroll employment fell by nearly 9 million jobs from February 2008 to February To date, only about one fourth of those lost jobs have been restored. The pace of job growth in recent quarters has been barely enough to absorb new entrants to the labor force and wholly insufficient to produce a meaningful decline in unemployment. The failure to add enough jobs in 2011 to absorb new labor force entrants is coupled with some discouraging long term trends that create a dismal outlook for U.S. employment. Even before the recession, the labor market seemed to be on a slower growth trajectory than in previous decades. From the economic expansion that followed the recession of early 2001 to the onset of the Great Recession in late 2007, the number of payroll jobs rose an average of only about 0.% per year, compared with job 17 Bureau of Labor Statistics Employment Report, November 2011, and CPI October Report. 18 Bureau of Labor Statistics Employment Report, November

6 growth of 1.8% per year in both the 1980s and 1990s. 19 In addition, the labor force participation rate and the percentage of the population employed both peaked around the year 2000 and have been on a downward trajectory since. Some of this decline can be attributed to the aging U.S. population, but most of it is due to weak economic recoveries and the outsourcing of American jobs to lower wage countries. Therefore, many of the jobs lost over the last decade are not coming back, potentially leading to a permanently higher U.S. unemployment rate, unless there are significant changes to the operation of U.S. companies that would support job creation. The expiration of the federally funded extension of unemployment insurance benefits at the end of this year would add to the misery of unemployed Americans. The Congressional Budget Office projects an unemployment rate of 8.5% at the end of 2012, which is still elevated at almost three percentage points higher than the long run average. 20 Extending the expiring unemployment insurance benefit through 2012 would not only provide a lifeline to the families of millions of long term unemployed workers, it would also generate spending that would support well over half a million jobs. 21 The lack of job growth and the high unemployment rate represent a loss of productive capacity by U.S. workers. The situation is a lot worse than the numbers suggest. If the BLS used the unemployment calculation that was in place when President Clinton took office in 1993, the unemployment rate now would stand at around 18% percent. This means that the true unemployment rate is really more than twice the official rate announced each month. The lack of job growth has contributed to rising poverty rates in the U.S., which have long term consequences on the U.S. economy and continue to pressure U.S. social safety nets that have been eroded over the last few decades. This demonstrates how important a program to create U.S. jobs is to the future viability of the U.S. economy. This help must come in the form of something more powerful than low interest rates; rates have been low for three years while economic growth has failed to take off. Congress needs to shift its focus decisively to job creation. These efforts should include investment in critically needed infrastructure such as bridges, schools, and broadband, which are vital to the economic prosperity of every state and the nation as a whole. This document contains forecasts, estimates, opinions, and other information that is subjective. Statements concerning economic, financial or market trends are based on current conditions, which will fluctuate. There is no guarantee that such statements will be applicable under all market conditions, especially during periods of downturn. It should not be considered as investment advice or a recommendation of any kind. All statistics are current as of December 13, 2011, unless otherwise noted. 19 Bureau of Labor Statistics Ibid.