Paul Godek: Jobless Numbers are much worse than we think

Via WSJ:

In terms of employment, how bad is this recession? Last month's unemployment rate was 9.5%, according to the Bureau of Labor Statistics (BLS). But the jobs picture is even worse than that rate suggests.

The BLS defines the jobless rate as the number of unemployed as a fraction of the labor force. If one person in a labor force of 10 people is unemployed, the unemployment rate is 10%.

The problem is how the BLS counts the jobless. It defines the unemployed as those who are "out of work but have been seeking and are available for work." Those out of work but not "seeking work" are not considered to be unemployed—and are thus not counted in the labor force.

As one might imagine, the definition of "seeking work" is less than precise. According to the BLS, you are seeking work if you "have actively looked for work in the prior 4 weeks" (See the BLS Web site for the definition of "actively looking" for work.) Those without jobs and not seeking work—the people not considered to be in the labor force—are often referred to as "discouraged workers."

If people without jobs become discouraged and stop seeking work, the unemployment rate will decline (other things being equal). On the other hand, if people become hopeful about future employment, job seeking will go up—as will the unemployment rate.

This way of measuring job availability is clearly flawed. One simple alternative would be to measure the labor force as the number of people with jobs. Unemployment would be determined based on increases or decreases in the number of people employed relative to historic job growth.

The number of nonfarm private jobs has been growing steadily since the 1950s. That number reached a peak at the end of 2007. Between 1958 and 2007, the number of U.S. jobs grew to 115.4 million from 43.5 million—about 2% per year on average. The steady upward trend reflects the long-run growth of the economy and increased participation in the labor force.

The nearby chart compares employment and that trend. It shows the percentage difference between employment and the trend line generated from monthly employment figures over the past 50 years (July 1960 through June 2010).

What we see is astounding. For almost 25 years—between 1984 and late 2008—the level of employment never fell to more than 3% below the trend line. Over that period, total employment grew by more than 36 million.

Employment fell briefly to about 6% below the trend during two previous recessions: in 1975 and again in 1982-1983. During those periods, the unemployment-rate peaks were 9% (in 1974) and 10.8% (in 1982). The unemployment rate in 2009 peaked at 10.1%.

By 2010, however, employment had fallen to about 10% below the trend, far below any previous level in the last half-century. These figures indicate that as of the first half of 2010, the economy has generated about 12 million fewer jobs than expected. In other words, things are not as bad now as they were in the early 1980s; they are much worse. Recall as well that the unemployment rate of the early 1980s was the result of the ultimately successful battle against inflation.

One message we're hearing often from Washington is that recent increases in government spending have averted another Great Depression. That's nonsense. If such policies had any coherence there would have been no Great Depression (when government spending grew); the U.S. economy would have collapsed following World War II (when government spending plummeted); and the U.S., not to mention Greece, would now be experiencing a boom like no other.

As many observers of the economic scene have noted, private investment and hiring are suppressed by economic and political uncertainty. Such uncertainty is generated by unprecedented government intervention, massive increases in government spending, and anticipated tax increases. This is what the policies undertaken during the 1930s, those that sustained the Great Depression, should have taught us.


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