Unemployment, Employment

Employment growth and the real rate of unemployment are not only key economic indicators. They are the measure of the economy. All the other numbers, including GDP growth and the other indices, are secondary. Labor is the primary capacity that must be used to its maximum. A full employment economy is the only healthy economy.

Earned incomes, the basis of healthy demand, deteriorate in periods of high unemployment.  It is not simply that the number of idle workers enables employers to demand lower wages, it is the fact that high unemployment can exist only in conjunction with low rates of investment.  Investment goods production typically pays more than consumer goods production, and investment produces -- or can produce, if targeted coherently -- the value that grows the economy and incomes.

Idleness is bad.  It is bad for the skills and well-being of the idle person, and idle capacity means unmade goods and services, an absence of products we could use to build on.  On the other side, the incomes that come with jobs are the demand that is the primary driver of market capitalism.  The stagnation in the employment numbers is further exposed as a disease by the fact of these falling real incomes for most workers.  People who lose jobs and find another typically lose up to one-third of their take-home in the exchange.  This is a recipe for further decline.

Any one of a number of measures shows that the labor economy has been deteriorating for decades. A major impetus for consumer debt was to make up for this deterioration. This debt bubble, the financialization of the economy, and the inevitable crash are the proximate reasons for the current long-term stagnation, but they are also symptomatic of the longer term trend.  The fundamental point remains that a full employment economy is the only healthy economy.  Fore forecast purposes, this means that gauging the strength and direction of employment will go a long way to predicting outcomes, and policies that address employment will be the only effective policies to recovery.

There are a lot of problems.

The problem in theory and in policy is the conventional wisdom that unemployment, underemployment and mal-employment are necessary or natural conditions, that the economy can be healthy when its workforce is sick.  [There are, in fact, major tools of policy-makers whose presumption is exactly this.  NAIRU, for example, the "non-accelerating inflation rate of unemployment," or as it is sometimes called, the "natural rate," assumes a trade-off of employment and inflation. Likewise the Phillips Curve, treats output and unemployment as balancing.  Both view inflation as a volatile and dangerous thing, a plague unto itself, rather than as a temperature reading that could as easily mean health as disease.]

A second problem is finding a metric that correctly indicates the health of the labor market.  The headline unemployment rate, for example, measures the number of unemployed, as limited by several characteristics, divided by the number of available workers, as limited by several characteristics.  The limitations have been added over the years, always tending to reduce the headline number, so that it now bears little resemblance to the number of fifty years ago.

The reduction of the rate from its peak in 2009 is largely a function not of the increase in employment, the numerator (of unemployed/workforce), but of the denominator. The workforce has been deteriorating under the economic pressures. Job growth rarely peeks above 200,000 in a month, and we need 600,000 to get to recovery, but the unemployment rate goes down because fewer people are actively seeking employment.  Thus the slow drop in the unemployment rate is not a sign of health, but  a symptom of stagnation, a function of the decline in job-seekers.  The employment-to-population rate ought to be around 63%.  It is stuck below 59% and is not moving.

Click on chart for larger image

And the third problem for our forecast is, of course, we need to be comparable to other forecasts so as not to be accused of fixing the game. So what we need is a metric that defines idle and under-used labor that can be translated to the headline unemployment rate that others focus on while still telling the tale of the true condition of the workforce.

We've chosen the U6 "All-In" rate published by the Bureau of Labor Statistics as Table A-15. To translate to the headline rate, we are going to use the statistical relationship from the past, which is relatively stable but drifting higher (now at 1.85).  The chart at the top displays the historic rate and our projection for the next two and a half years, for both U6 and the headline rate of unemployment. 

Our chart has some colors in it to display the relationship of unemployment to the economy at large.  A number above 10 is in the red zone.  Incomes, demand, budget deficits, a whole range of socioeconomic indicators is deteriorating.  These effects are not short-term, and damage both the condition and trajectory of the economy.  In the 8-10 range, things are stabilizing.  Below 8, things are constructive, as indicated by the green bands.

It is important to remember, again, that any step downward in these rates is likely due to the weakness in the available workforce, as people become discouraged or move to second-best options. When we show a flat line, it is actually a worsening condition in absolute terms.  It is also important to remember that the longer the number is in the red, the more suffering in the immediate term, but also the more long-term irremediable damage.

We do not expect to do dramatically better than others in this metric. The forecast is easier for everybody in stagnation, particularly those whose primary technique is to extend the trend line. 

Forecast:

Stagnation continues.

There is no reason for anything to change fundamentally.  Further federal austerity will cause unemployment to drift higher.

The direct employment programs, construction of infrastructure, or federal support to states and localities which are the only too obvious beginnings of a labor market recovery are not in the political pipeline.  The agenda has been captured by austerity advocates.  Cutting back in a period of stagnation is a course certain to replicate the experience of the 1930s.  The difference between the 1930s and today is that we have the New Deal programs of Social Security and unemployment insurance, and we have other social safety net programs that provide a floor of demand higher than that of that era.


What it means

Literacy, mobility, public order, rescue of the environment, protection of the young, old and infirm -- these are essential features of a civilized society, and there is no gizmo, no technology, no carbon technology, that can provide these things. These are labor intensive. Look at the complexity and interdependence we experience in any single day. And consider this: Everything in the world is composed of energy and labor. If we need to use less energy, we will need more labor, particularly in Agriculture.  Is that the direction we are headed?

The sad part for us is that we need these people.  We cannot afford to be idle.  Climate change is on the march, an army on our borders, and our defenses have not yet begun to be built. Every person on this planet needs to be in this struggle, but because the generals of the assault on the environment have co-opted the political leadership, we are locked out of the armories that contain our weapons: infrastructure spending, pricing energy at rational rates, full-scale research and development, immediate conversion and retrofitting. The workforce needs to be trained, employed, housed, educated, fed, and so on.  When it is returned to health, the economy will return to health.