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Tuesday, January 7, 2014

True Unemployment Rate Is 11.9%




The Real Unemployment Rate Is 11.9%,          not 7.0%

(This March 2014 employment report from the Chicago Political Economy Group is the best description I've read, and it matches my own analysis.)
In October 2009, four years ago, the official unemployment rate hit 10.0%, its peak or trough of the Great Recession, and now officially it has cascaded down to 7.0%. Should we be suspicious of this number? I think so. 

The very slow increase in the labor force (LF) is the major factor that has skewed our numbers. The labor force (LF) has not been tracking the increase in the “working age population,” which is normal for the LF. (The “working age population” is called the civilian noninstitutional population (CNP) and is made up of all citizens 16 years old and older, 78% of all U.S. citizens.)  

For instance, over the 20 year period 1988 to 2008 the growth rates of all the major groups increased at the same rate. In these 20 years the CNP increased by 26.6%, the labor force by 26.8%, the employed (E) by 26.4%, the unemployed (U3) by 33.2%, and the “not in labor force” by 26.3%. The driver of all the growth rates is the largest number, the CNP, the “working age population.” When the CNP increases all other rates derive their impetus from this large population numbering 246,567,000. The LF presently numbers 155 million, the total employed (E) 144 million, the unemployed (U3) 10.9 million, and the “not in labor force”  91 million. (See the BLS page where I draw much of this data.) 

The ratios between these groups had a norm or average over the 20 year period. The labor force to population ratio (LF/E) was 66.5%, the employment to population ratio (E/P) was 62.9%. Today’s ratios are very low in comparison, LF/P is 63.0%, and E/P is 58.6%. In fact, in October 2009 when the U3 topped out at 10.0% the E/P was at 58.5% -- there's been no improvement in four years. 

In contrast, during the six year period, 2007 to November 2013, the Bureau of Labor Statistics  reports that the the CNP increased by 6.3%, but the LF grew by only 1.4%. If the LF had grown in tandem with the CNP then most if not all of the added entrants would be unemployed and the unemployment rate (U3) would be 11.9%. The number employed decreased by 1.1%. Under normal circumstances -- read no recession -- the number employed would have grown in tandem with the same rate of growth as the CNP. But the number employed, instead of increasing  by 9.2 million, decreased by 1.7 million. So both LF growth and E growth are down significantly. 

During this period also the the labor force to population ratio (LF/P) decreased from 66.0% to 63.0%, representing a loss of 7.4 million workers. And the employment to population ratio (E/P) dropped by 4.4%, from 63.0 to 58.6%, representing a job loss of 10.8 million paid employees. As a result of the Great Recession fewer workers were entering or staying in the LF. In fact they were dropping out in droves.

This is why the drop from 10.0% to 7.0% is very suspicious. There are 7.3 million workers, using the 2009 to Nov. 2013 period, left out of the count, all of them unemployed. 

Let’s look at a 12 year period, November 2001 to November 2013. CNP increases by 14.1%, LF increases by 7.7%, E grows by 5.1%. and private sector employment, responsible for 77% of all employment, increased by 4.8%, or 5.2 million jobs, 34% of its expected rate. The “job creators”, the nation’s corporations, have been off the job for 12 years. Yet their profit rate is at an all time high. (Here's an essay by Robert Reich underscoring the main ideas of this essay.) 

Professor Andrew Sum, writing in Challenge magazine, Nov.-Dec. 2013, states: 
“First, the number of paid wage and salary jobs in the United States must substantially and continuously increase. From the first quarter of 2001 to the first quarter of 2013 [a 12 year period], U.S. employers, both private and public, created only 2.5 million net new wage and salary jobs versus 23 million between 1992 and 2000 [an 8 year period]. The job creation record in the past decade was the lowest on record since the end of the Great Depression.” (Vol. 56, #6, page 80) In eight years 23 million new jobs, in twelve years 2.5 million new jobs -- this again throws suspicion on the 7.0% unemployment rate. 

There is a normal rate of LF and E growth, it matches CNP growth, and these groups have fixed, normal ratios. During the 20 year period, 1988 to 2008, the average LF/E ratio was 66.5%, meaning for the 20 year period almost two thirds of citizens 16 and older were working or looking for work -- participating or active in the labor force. Today’s LF/E ratio, at 63.0%, is at a  30 year low that was last marked in 1983 when Reagan was president. This means that 3.5% of CNP are not active in the LF, 8.6 million workers. If they entered LF they would all be  unemployed and would swell the large unemployed ranks to total 19.5 million. The LF would also increase, and the new U3 unemployment rate would be 11.9% -- hence the title of this essay. 

The normal rate of E/P, the employment to population ratio, over the 20 year period was 62.9%. The present rate is 58.6%, a low not marked since Jimmy Carter was president in 1978. The difference is 4.3% of CNP or 10.6 million jobs lost from the normal 20 year standard rate. Therefore there are 10.6 million fewer workers employed than normal. To this we add the normal 20 year period unemployment rate (U3) of 5.4%. This represents 8.9 million unemployed. Again the total unemployed is 19.5 million, and the U3 registers 11.9%, not 7.0%. 

If instead of using the 20 year norm ratios we used the ratios during the last four years of the Clinton presidency, when the economy was cooking, then the unemployment rate would stand at 12.7%. Try that on for size. Today, are we in a recession or a depression? 

Today’s economy is managing, sometimes even thriving -- annualized GDP growth for 2013 Q 3 was 4.1% -- with fewer workers relative to our total population. The new norm is a lower ratio of workers to total population. 

No one likes to replace the happy, simple story -- that unemployment has dropped from 10% to 7%  --  with one that is compicated and negative. That’s really bad form. But this story is more accurate, and it should replace the inaccurate story -- 11.9%, virtually 12.0%, unemployment is the reality. And then add to the 11.9% the workers involuntarily employed in part-time work and it rises to 16.6% or one in six workers. 

One in six -- that’s scary. This is definitely a minor depression, even with a growing GDP. All families and workers are affected by this poor performance. 

The Big Picture of the U.S. Economy

Income share shift

(This graph I found here at Too Much, a weekly web newsletter. Or see the graph at it's source, page 7. In this same paper, Striking It Richer, the author, U.C. Berkeley professor Emmanuel Saez,  states, "Hence, the top 1% captured 95% of the income gains in the first three years of the recovery", 2009 to 2012.)

The distribution of national income has crossed a new divide: half of the annual national income goes to the top-earning 10%, the other half to the lower-earning 90%. In 1967 66% of the national income went to the lower-earning 90%. If today we had the same 1967 income distribution each of the 108 million households in the lower 90% would have $15,600 more income each year. That would make a huge increase to at least half of the U.S. population.

And on top of all this bad news, the lower-saving half of the U.S. population own just 1.1% of all savings, so they have very little to fall back on. In the past 5 years, since 2008, total U.S. household private net worth or wealth has grown by $17.6 trillion or by $150,000 per household. (The updated figure is just under $20 trillion. See the Federal Reserve source, page i. In comparison, the entire national debt is $17 trillion, and the public debt $12 trillion. The nation's private wealth has grown from $57 trillion to $77 trillion in five years, more than the total federal government debt which expanded by $6.4 trillion since Obama assumed office. Instead of pushing for cuts to Social Security benefits and raising the retirement age, the country could choose to tax the new wealth creation that surpasses the SS Trust Fund, which is only $2.7 trillion. Read this article.) The mean average household net worth is $616,000 (updated to $642,000) per household. Unfortunately only small minority at the wealthy top realized this wealth increase because it was an increase in the value of financial assets. During the same years the median household’s annual income was reduced from $54,000 to $50,000. 

At this point I should remind that between 1933 and 1937 the unemployment rate dropped from 25% to 9.6% because of a government program of direct job creation. During the period 1940 to 1945 direct government job creation also increased the number of Americans at work by 40% -- which sounds incredible but its true. There are several proposals to directly create jobs -- they are feasible and historically they have functioned well. One can look at the Congressional Progressive Caucus’ budget, A Budget for All, or its explanation at the Economic Policy Institute. It would allocate $700 billion a year for a 3 year duration to knock a big hole in unemployment. It’s been done before. And there are ways to finance it. 

In a democracy it is important to have valid information, so a false impression of economic improvement running contrary to reality is bound to have negative repercussions. This article, complicatetd as it is, teases apart the more accurate numbers in the hope that the official, perhaps false, ones can be seen for what they are. 


1492 words  
Ben Leet, Economics Without Greed, http://benL8.blogspot.com, January 7, 2014  

Chris Sturr, the editor at Dollars and Sense, sent me a note about articles D & S has published on the topic. They are worth reading, here, here, and here. And this is one quote I'll remember from Alejandro Reuss' article, "With economic growth resuming but wages stagnant, corporate profits now account for a near-record percentage of total income. This helps explain why corporations have been content with policies allowing the crisis to drag on through years of lethargic 'recovery.'”

Dean Baker has a short piece explaining the difference between the Reagan 1986 economy and today's. 
"In other words, the most obvious reason these people are unemployed is that the government is running macroeconomic policies that are keeping the economy far below its potential level of output, not some inexorable trend in globalization or technology."

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