The Unemployment Rate is Not the Most Important Thing

How do I say this gently?  The unemployment rate dropped to 8.1% in April, the lowest it has been since December 2008, but, it seems to me, that this is not the most important thing we should be focusing on. 

If we continue to look at the unemployment problem as a cyclical problem we will do the wrong things. 

I know, I know, there is an election coming up this fall.

Yet, this is where the Obama White House and where the apparent Republican presidential candidate are putting all the marbles.  Listen to this: "Much more remains to be done to repair the damage caused by the financial crisis and the deep recession," wrote Alan Krueger, chairman of the White House's Council of Economic Advisers, in a statement. "It is critical that we continue the economic policies that are helping us dig our way out of the deep hole that was caused by the severe recession that began at the end of 2007."

The financial crisis and the deep recession...come on!

Here is the number I think we should be focusing on: the participation rate…the share of the population of working age that are in the labor force…is at 63.6 percent, the lowest it has been since December 1981.  And, this was just when women were really starting to participant in the work force.  Within this figure the percentage of working age men in the workforce fell to 70.0 percent, the lowest it has been since the Labor Department starting collecting data in 1948.

The labor force dropped 342,000 in April.  This is not unemployment…it is something worse!

My calculations indicate that about one in five Americans of working age are under-employed.  This is a structural problem…it is not a cyclical one.

And, how did we get into this situation?  We got into this situation because we treated almost everyone that lost a job a consequence of the business cycle. 

And, the proposed solution to this problem?  Inflate the economy with Government deficits and monetary expansion.

Put everyone that lost a job back into the job he or she lost!

This was the political mantra that inhabited both sides of the political spectrum since the early 1960s. And, although the politicians pursued these policies with the intention of achieving high employment…and getting themselves re-elected…it was probably, over the longer run, the worst thing that these individuals did for the people they were trying to help.

The American…and the European…problem right now is a structural one and not a cyclical one. 

Look at the figures: since the Great Recession began in December 2007 payroll employment in construction is down by almost 26 percent; manufacturing payrolls are down by 13 percent; and retail payrolls are down by over 5 percent.  This is after almost four and one-half years of economic recovery. 

And, we know that jobs losses in the public sector are adding more and more to the overall depressing figures.  Last month, government job losses totaled 15,000 a rate that has been roughly maintained over an extended period of time.

We know that there has been a big push for productivity over the past four years of so.  This was one way to combat the recession and get businesses going again.  And, this worked for a time, although the recent increases in productivity may be coming to an end. (http://professional.wsj.com/article/SB10001424052702304746604577381713675051658.html?mod=ITP_pageone_1&mg=reno64-sec-wsj)

The 1990s into the 2000s saw labor hoarding in many manufacturing and other business jobs as the credit inflation policies of the federal government bought out the business exposure connected with the hoarding of labor. Rising property values meant that state and local governments could build their regional empires with the assurance that they would have a constant increase in revenues to cover their expansions.  Housing programs along with financial innovations like subprime loans, underwrote a massive expansion of the housing industry.  There was substantial over-hiring in so many fields during this time period.  And, this was a time when the Internet boom took off resulting in a huge re-structuring of the way almost everything gets done. 

The point is, the only real solutions to the situation we now find ourselves in are long run solutions.  Short-run stimulus will only delay the efforts to re-structure the workforce and postpone any real efforts to make things better.  And, monetary policy cannot, in the longer run, reduce the unemployment rate.    

Long run programs, like education and re-training, are what are needed. I direct your attention to a recent article that addresses this situation: “Education is the Key to a Healthy Economy” by forms Secretary of State George Shultz and Eric Hanushek. (http://professional.wsj.com/article/SB20001424052702303513404577356422025164482.html)

The problem is that politicians work only within a very short time horizon…the next election.  We can expect little help here!

That is why I say that the unemployment rate is almost irrelevant, except to those that are up for election.  People are leaving the workforce.  Many of the people that have left the workforce cannot be hired back into the labor market in positions similar in effort or pay to the jobs they lost because they don’t have the skills or experience to work in any other area than direct customer service…and this region of the jobs market is already over supplied.

We need to shift our focus to things like labor force participation rates, male labor force participation rates, and under-employment and ask the really hard questions about what is needed to turn these trends around.  Given all the blather connected with the current presidential election, one cannot be too hopeful.