Monday, October 5, 2009

Runaway Unemployment?

The September jobs report from the Bureau of Labor Statistics rattled markets on Friday, and aged poorly over the weekend in light of more detailed review and analysis. First, the loss of 263,000 jobs exceeded the most pessimistic estimates. Second, the government acknowledges that it overestimated the number of jobs in the past by 824,000. Third, the number of long term unemployed reached alarming levels implying the permanent erosion in workforce skills. Fourth even those employed are working a record low number of hours. Given the levels of debt in our economy, we must be concerned that continued deterioration in labor income will trigger a second wave of defaults leading to huge financial losses with cascading job losses and plunging GDP. In other words, these levels of unemployment could trigger another vicious downward cycle, perhaps more serious than what we have seen so far.

The chart above shows the civilian employment ratio. It is simply the number of employed individuals divided by the nation’s population. It spotlights a fundamental element of our ability to service debt over time. Employed people can pay their debts and unemployed people cannot. The employment ratio is at a multi-decade low with little prospect of improvement. Wage growth could offset job losses but, for years, wages stagnated. Our elected leaders must address the crisis in our labor market or the entire financial system risks massive defaults brought on by runaway unemployment.

We need a jobs program targeted at the most hardcore unemployed. We also need a jobs training and higher education program to mitigate unemployment and to enhance the nation’s human infrastructure. So far the government response to the crisis neglects these realities. In the past, programs like the Civilian Conservation Corps and the GI Bill succeeded in building human capital and strengthening the economy over the long term, while ultimately costing the government little or nothing, and in the case of the GI Bill generating tax revenues that exceeded expenditures.

The irony is that the government laid out trillions to bailout financial elites (much of which sits idle at the Fed) when investing in the economy would have helped everyone (including financial elites) the most. Hopefully, it is not too late for a more balanced government response.





  1. Professor Ramirez,

    Thank you for your post. This is sobbering material. What impact or role does our shift from a manufacturing based economy to a service based economy play in this discussion? In light of this shift, how do we craft jobs training and educational programs to respond to the need for service workers? Again, thank you for an illuminating and insightful post.

  2. My sense is that our standard of living requires a post-industrial economy. Unskilled manufacturing jobs are not likely to be an engine of prosperity in the US, because of the vast pools of unskilled labor worldwide. The only option is to have the most innovative and dynamic workforce in the world which in turn suggests a focus on higher education and unleashing diversity.

  3. So why are we still admitting 1.5 to 2 million immigrants per year (legal plus illegal), given that many also have low levels of human capital in terms of skills and education? Why grant 1.5 million work visas per year given such high levels of unemployment?

  4. By "unleashing diversity" I assume you mean racial preferences in university admissions and public/private section employment? How does such discrimination against white and Asian males with high skill and education levels increase our human capital?

  5. A post-industrial economy? It seems that anyone looking carefully at history would have to agree. Unfortunately, our greatest young minds aren't being trained to understand what this means. Meanwhile, as Anon notes, our highly skilled worker needs are filled by foreign nationals - that's the case everywhere I've worked the past 10 years.

    Too bad our academic institutions looked at history and decided it was time to follow Billy Ayers and turn out social activists rather than a creative, skilled workforce. Focusing on higher education is not enough and, with respect, "unleashing diversity" is an inherently meaningless phrase. Obsessive emphasis on "diversity" for its own sake is part of the problem, in point of fact.

    What's needed is to get our schools to unleash imagination, creativity, productivity, fulfillment and individual accomplishment - these are the things that pushed the U.S.A. to the pinnacle of civilization. None of these are supported by the constructivist educational model in place today. And none of them are supported by the intolerant atmosphere in most colleges and universities, which celebrates collectivism, conformity and adolescent morality, and which stifles any and all study of classical history and classical economic theory. Together, those would demonstrate that a free market enforced by small government is the most efficient socio-economic structure. Instead, what we have today is socially-engineered cultural suicide.

    Until we get that message across to academia, this country will continue on its path toward totalitarianism: everything politicized, everything within the State, nothing outside the State, nothing against the State.

  6. A friend of mine has been on the engineering faculty at MIT for over 20 years. He told me the incoming students they accept, while bright, aren't prepared for rigorous academics (say, applied math), they only want to talk. Higher education will not work without correcting K-12. That means a major overhaul of the educational institutions at the local level. Start by bouncing the unions and their petty work rules.

  7. As a white male, everytime somebody says "diversity" I know it's a code word for talking about everyone except me.

  8. Nice piece, however... Given the decline in birth rate, increase in college attendence and the aging boomers, this graph is almost certain to have a strong downward trend. Limiting the denominator to, say, population aged 22-64 might abstract usefully from this trend.

  9. If the published unemployment rate, either U-3 or U-6 is plotted from the right side of this graph, we should see an exact inverse of this curve. To the extent we do not, we see the effect of cooking the books to produce better statistics.

  10. pat, since the nation's employed individuals are the ones shouldering the largest portion of the financial burden imposed by the maintenance of society (i.e., through funding government), the ratio depicted in the graph is already quite useful, IMHO.

    An even more useful graph might be one that tracks the ratio of those who actually pay income tax vs. the total population (including illegals).

  11. Post-industrial economy my RIA. I refuse to be led down the path to serfdom by leftist academics and their ilk. We're only pointed in the direction of post-industrial society because we've regulated ourselves out of certain industries. Tort reform is needed desperately, as is the introduction of cost justification for environmental laws, as well as the repeal of many other government regulations which limit our ability to grow, mine and manufacture what we consume here in the US. Yes US workers get high wages - they are also highly productive. Get the unions out of politics and maybe we'll figure out that labor and management need each other to survive. This is not that hard to figure out.

  12. Very interesting, BTW, to map this graph onto this one (which is discussed here).

  13. The best jobs program is private industry employing the people it needs to make a profit or increase its profits. When the government gets in the way and crowds out the private sector, we get the results we are looking at today.

  14. Really? A CCC is going to help this?

    I suspect a CCC costs more per job than it produces.

  15. Let's see: We still have the "War on Poverty" programs. We have job programs for people with disabilities, we have an entire "Employment and Training Administration" within the Department of Labor and they have programs for specific industries and programs for specific geographical areas. We have a National Apprenticeship program and the Workforce Investment Act and the Dislocated Worker and Youth Activities Act...and on and on AND YOU WANT MORE Federal programs!? Good grief. Open your eyes. These federal programs are ponderous and largely ineffective. The profit motive is the great motivator and Capitalism is our salvation, not our enemy.

  16. Federal programs didn't solve unemployment in any recession we've had in the past. Job training programs are certainly not the answer, either, since the problem isn't lack of skill; it's lack of capital. There's no capital because everyone's in debt up to their eyeballs. Government jobs programs don't attract capital, ergo, they cannot solve the unemployment problem.

    It would go a long way toward helping if we repealed the minimum wage. Biting the bullet and allowing Americans to work the low-paying jobs that we currently export to the rest of the world doesn't provide fun jobs, but it provides jobs. Ending the capital gains tax and the corporate tax (which can be paid for by making the bottom 45% of wage earners pay taxes) would make the USA a magnet for foreign capital, creating jobs.

  17. I did something similar after the Sept employment/unemployment report, but added a wrinkle you may wish to explore---take private sector employment (the workers who actually pay the bills) and multiply by avg hours worked, then divide by US population, carrying it all back about 10 years.

    the result is that for every person in the US, hours worked has declined from about 58 hrs/month (remember this is spread across the whole population, not just workers or labor force) in 1999, to 50 hrs, most recently, and still plunging. That's a 15% decline in wealth-producing activity per person.

    Since no one believes employment will soar (and there are demographic reasons why we won't see that 58 hrs any time soon) and all the movement in Washington is in the direction of discouraging investment to improve productivity (as opposed to feel-good stuff like economically wasteful "green jobs" even as the tax code acts to prevent real investment), the long-term prospects for the big entitlements like Medicare, Medicais and Social SEcurity, not to mention a new health care entitlement, are beyond grim.

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