Friday, June 5, 2009

The Real Unemployment Rate-And What It Means

Regular readers of this blog know the drill. Another month, another unemployment stat when the BEA puts out its report for May 2009, which it usually does the first Friday of the month.

According to the release, May saw the official ("U-3") unemployment rate rise from 8.9 to 9.4 percent-a full half percent increase, for the second month in a row.

The "U-6 measure," the fullest calculation of "labor underutilization" regularly reported in the BEA stats (counting not just "total unemployed" but also marginally attached workers, discouraged workers and involuntary part-timers) went up from 15.8 percent of the work force in April to 16.4 percent in May.

Once again, this bad news is being packaged as a "good news, bad news" deal.

The good news is that the job loss rate is slowing. What this means when you look at the actual numbers is that 345,000 jobs were lost in May-a lousy number, but still less than the half million-plus seen in recent months.

Yet, the overall 9.4 percent number that resulted from this slower pace of loss is worse than what was expected (apparently, a 9.2 percent unemployment rate).

This implies a contradiction which has not been commented on (how can fewer job losses than expected track with more unemployment than expected?), and so one has to look below the surface of that number.

As it happens, the category that saw the main increase is people coping with long-term (15 weeks+) unemployment, which went up from 4 to 4.5 percent of the work force, this happening without depleting the other categories covered, there being "more where they came from."

One explanation for this is that more people are participating in the labor force. There is a tendency to think of this as an unusual, temporary aberration, but it may plausibly be taken to mean that the hard times have driven a certain percentage of people who earlier didn't feel that they had to work to look for employment (retirees who have watched their investments vanish; members of households coping with the loss of income, etc.)-skewing the figures perhaps, but in a way that reflects the current difficulties.

Additionally, it is worth noting that the "official" (9.4 percent) figure does not include those working on an involuntary part-time basis, a category which did see a slight increase during May, and may also be reflected in the cutbacks in hours worked. The work week is down to 33.1 hours, the shortest it's been "since recordkeeping began in 1964." As Liz Wolgemuth of U.S. News & World Report notes,
cost-cutting employers may have slowed their job shedding but continued to slash their employees' hours. Indeed, more than half of employers surveyed last month by outplacement firm Challenger, Gray & Christmas reported using cost-containment strategies such as cutting salaries and wages, while a smaller percentage were cutting staff.
This must be recognized as a different strategy, distributing the economic pain differently, rather than clear-cut proof things are getting better.

While not related to the problem at hand, it is also worth noting that the steepest losses were in the sectors concerned with actually making things (particularly manufacturing, where 156,000 places were lost), whereas the sectors adding jobs were in services (health and government, particularly-with in the latter cases, federal employment seeing job losses, while education systems have done some hiring). Of course, this would seem to be a commonplace, manufacturing being more susceptible to such shocks, and quicker to let workers go, but given the long-term trend of U.S. deindustrialization this would seem to support Richard Moody's claim that the recession is creating a great deal of structural, rather than cyclical, unemployment.

Not inconsistent with such an outlook, James Galbraith recently predicted that not only will the official figure hit 10 percent, but that it will stay there for "a long time"-perhaps years (an assessment that brings to my mind the bleak picture projected for Ireland in the report by Ernst & Young I discussed last month).

Even the comparative optimists banking on a recovery in the third quarter of the year (July-September) expect the employment picture not to recover this year, improvements in the employment generally lagging recoveries (perhaps by up to a year in this case, according to one prediction).

My guess-looking at the collapse of business investment reported in last month's GDP data, and the data from earlier this week testifying to the weakness of consumption, is that while we may see some ups as well as downs in the months to come, the foundations of a really solid recovery have yet to be laid-and things could yet get worse than even Galbraith has speculated.

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