Monday, March 12, 2012

What A Real Job Recovery Looks Like

Much has been made recently of the jobs gains that are "proof" of a jobs recovery. As I've mentioned before, the current unemployment rate does not necessarily reflect reality given that many people have been unemployed so long that they are no longer counted in government figures. This skews the unemployment rate downwards as the number of people "seeking employment" are less than the number who desperately would like to work but are no longer looking or have dropped off unemployment due to exhaustion of benefits. The media refers to them as the 99ers, those who have used up the extended 99 weeks of benefits but have not found employment.

One measure that adds context to the current unemployment rate is the labor participation rate. This number shows how many people are counted in the current labor force. When times are good, people will see that jobs are available and people will seek work. Those that deferred entering the labor force or had given up finding a job will then come back into the labor force.

Below I present two graphs. One is from the 1980's when we clearly had strong GDP and job growth. The other is our current environment. Keep in mind that we currently have a declining unemployment rate. The question is what does it mean in light of the labor participation rate.

As you can see, during the 1980's people entered the labor force as jobs became widely available.

In this recent graph we can see that even as unemployment has declined, so too has the labor participation rate.

So what does it mean? If the economy is truly getting better we should surprisingly expect the unemployment rate to increase. Why? Because it will mean that many who have given up looking for work will re-enter the work force with the hope that they may successfully resume their job search. If, however, the labor participation rate continues to decline it will merely mean that more Americans have given up and are dropping out.

Graham Summers is not optimistic. In Five Charts That Prove We’re in a Depression he uses data from the St Louis Federal Reserve that paint a stark contrast to the "good news" you may be hearing on the nightly news. Keep in mind this data comes from the same government that report the unemployment data. The Fed is, of course, aware of all the data and make policy based on reality even if they are selective in what they promote. Why? Because in our modern consumer economy confidence is the single most important factor in influencing the economy. A rising stock market (even if the gains are nominal and not real given the inflation rate) is the single most important factor consumers use to gauge their personal situation. What's the next? The price of gas. For this reason, I'm not particularly positive on the economy at the moment.

Let's hope I, and Graham Summers are wrong.

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