Facing the Unemployment Dilemma

By Heude B. Malhotra
Heude B. Malhotra
Heude B. Malhotra
January 15, 2013 Updated: January 21, 2013

The U.S. employment situation for December 2012 has not changed since September 2012, hovering around the official rate of 7.8 percent, according to the Jan. 4 Bureau of Labor Statistics (BLS) report.

The 7.8 percent is the official published unemployment rate, while alternative measures of labor underutilization, also published by the BLS, show a more realistic rate of 14.4 percent. The official published number does not include those who have given up looking for employment or for lack of anything else are working part time.

A January article on the Seeking Alpha website analyzed the BLS numbers, taking into account a number of factors that could affect the unemployment rate, and came up with two numbers that differed by 6.2 percent.

“The real unemployment rate could be 11.7% (not 7.8%) if those nearly 7 million Americans [who are no longer employed] have simply fallen off the radar. Likewise, the real underemployment rate could be as high as 17.9% today,” according to the Seeking Alpha article.

The misery index was 9.46 by the end of November 2012, which equals an unemployment rate of 7.7 percent. The misery index was created in the 1960s by Arthur Okun, an economist and adviser to President Lyndon Johnson.

Gallup, a research and analytical firm, suggests a seasonally unadjusted unemployment rate of 7.7 percent for December 2012, not including the underemployed, which when included brings the rate to 17.1 percent. The underemployed includes all unemployed workers who are actively looking for a job, involuntary part-time workers looking for full-time work, and those available for a job, but have given up looking.

In a Jan. 3 release, Gallup states, “The employment situation continues to remain fragile. Employers’ uncertainty about the fiscal cliff and the economy’s future state may have resulted in reluctance to hire additional workers.”

Forecasting 2013 Employment

“It’s unclear how much hiring employers will do this year, with major budget talks ahead in Washington. But with some fiscal drag expected to weigh on the struggling U.S. economy this year, many analysts don’t expect much change in the unhealthy unemployment level—and some even see it rising,” a Jan. 4 article on the Money Morning website suggests.

U.S. corporations have tried to keep productivity high without increasing their workforce significantly or at all. It is predicted that this trend will continue throughout 2013, forecasting a dismal unemployment situation.

The labor participation rate of 63.6 percent is disconcerting, as the labor participation rate of a healthy economy is between 67 percent and 68 percent. The labor participation rate reflects those who are employed or actively seeking jobs divided by the total working-age population.

“Approximately 12 million Americans are among those counted as unemployed. When you add in those who have fallen off the radar, stopped looking for work, and returned to school because they can’t find work, the number swells to some 24 million,” the Money Morning article states.

A Jan. 9 article on the Calculated Risk blog suggests that the labor participation rate could continue with its downward trend, bounce back and forth, or increase in the short term, but ultimately settles on a constant rate.

“My guess is the participation rate will remain around 63.6% in 2013, and with sluggish employment growth, the unemployment rate will be in the mid-to-high 7% range in December 2013 (little changed from the current rate),” according to the article on the Calculated Risk blog.

Of the 12.2 million unemployed Americans, 6.9 million individuals are out of work, but actively looking, according to an Economic Letter released by the Federal Reserve Bank of San Francisco (FRBSF) on Dec. 17, 2012.

“Based on historical averages, about 2.1 million of them could enter the job market. … A big unknown is whether these workers will stay out of the labor force permanently or enter as the economy recovers,” according to the FRBSF Economic Letter.

Interpreting Unemployment Data

“Policymakers seeking a path to economic recovery must first answer one crucial question: Is our persistently high unemployment structural or cyclical?” according to an Oct. 2, 2012, article on the Advisor Perspectives website.

The article suggests that if the U.S. unemployment numbers are cyclical, then the Federal Reserve System (Fed), which is the central banking system of the United States, has to implement monetary policies and the national government fiscal policies that increase consumer spending. Stimulative policies include tax cuts and short-term spending increases, as well as increasing liquidity in the market.

A FRBSF Economic Letter, dated June 11, 2012, discusses a number of research presentations, suggesting that any cyclical problem affecting the economy is generally more short-lived than a structural problem, that is, a few years versus a long-drawn-out time period.

“Disentangling secular and cyclical fluctuations in labor force participation is never simple, but has been especially difficult lately. … The extent and timing of the recent drop in participation have been difficult to interpret conclusively,” the Dec. 17, 2012, FRBSF Economic Letter states.

Discussions among economists and analysts suggest that part of what has been happening is a cyclical phenomenon, but there is no agreement as to whether the increase in unemployment numbers was an outcome of the recession and recovery process.

The FRBSF Economic Letter states, “The BLS implicitly sided with the camp that emphasizes secular factors when it released its regular medium-term labor force outlook in January.”

Cyclical Factors

“The analysis in this paper and in others that we review do not provide any compelling evidence that there have been changes in the structure of the labor market that are capable of explaining the pattern of persistently high unemployment rates. The evidence points to primarily cyclic factors,” according to a working paper published in July 2012 by the National Bureau of Economic Research (NBER).

The paper suggests that the authors couldn’t find any structural adjustments that would defend the unemployment rate changes since 2008. There didn’t appear to be a mismatch in job skills or relocation of industries.

The patterns of the recent unemployment situation appear to be more cyclical in nature than can be discerned from any prior recessionary period.

Industries that experienced the highest number of laid off workers are the retail, manufacturing, and construction industries. “Those industries that contributed much to the increase in unemployment between 2007 and 2009 were the same that accounted for decreases in unemployment since 2009,” the NBER paper concludes.

The main reason for unemployment, which undoubtedly is cyclical, is the ongoing damage to America’s global competitiveness, according to an article published in the September–October 2012 Harvard Magazine, discussing America’s competitiveness.

“Yet the real problem, obscured by this acute, cyclical downturn, may be a long-term erosion of competitiveness in a more challenging global economic era,” the Harvard Magazine article states.

A July 2012 article on the Macro and Other Market Musings website suggests that the latest U.S. unemployment situation is partially based on structural and partially on cyclical phenomena.

A response to the Macro and Other Market Musings article brings another theory into the equation, stating that the present unemployment situation “is not just about a ‘skill mismatch.’ It is ultimately going to be about a total lack of demand for skills (and workers). … It is caused by advancing technology. … Technology is moving faster and faster.”

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