The Unemployment Charade Or, Ignore The Headlines

While employment rose by 160,000 jobs in July, the overall unemployment rate remained at 8.3%.1 “Hurrah” is not the correct response to these data. (“Hurrah” is the response seen the most in the MSM.) First, the trends:

The payrolls chart (right) reveals a largely flat trend for the past year, which says that job formation is weak and has not been able to offset job losses. The overall unemployment rate (left) actually increased to 8.3% in July (from 8.2%) as if to underscore the weak employment situation.

Here is where the job gains were:

  • Manufacturing (Durable Goods) +24,000
  • Retail Food & Beverages +6,200
  • Retail health care +6,400
  • Transit, Ground transportation  + 6,500
  • Professional and technical service + 17,900
  • Computer systems design +7,000
  • Administrative and waste services + 27,000
  • Employment services +  21,800 (Temp is 14,100 of that)
  • Education + 18,200
  • Health care + 12,000
  • Social services + 7,100
  • Food services and drinking places + 29,400

At least we are dining out and drinking. Sarcasm aside, while the healthiest numbers to take away from this report is that manufacturing job growth was relatively strong (especially auto and fabricated metals) but … that sector is getting soft and, as we know, auto sales fell off last month. With the economy is stall mode, we should expect manufacturing employment to shrink along with it. Generally these numbers reflect a stagnating economy.

Unless you have an economy where all wants and needs of the lotus eaters are satisfied without effort, ultimately things need to be manufactured and food needs to be grown in order to support the service economy. Of course with growing international specialization of labor and free trade, things can be purchased abroad, as long as foreign exporters bring back the dollars here to buy something. Which is one of the reasons we can support a huge and growing services industry (lawyers, architects, engineers, software designers, finance). Foreigners are large consumers of American services. So we need not panic about the relative decline of manufacturing in the U.S.

What one can worry about is the ability of our workers to adapt to a changing work environment. And that is a problem as our labor force is shrinking relative to our population. The “civilian labor force participation rate” is now at 63.7% of the total workforce. The total employment to population rate is 58.4%. This puts these rates back to about 1982 (see where blue and red lines intersect the black line):

There are several reasons for this trend, including aging demographics (Boomer retirement), a poor educational system that fails to match skills to employment needs, the inability of workers to retrain for new careers, union quasi-wage controls that deter employment and send companies to source products from abroad, an outdated immigration system that restricts the entry of highly skilled workers (engineers, doctors, software designers, etc.), and last but not least, government regulations that deter employment such as minimum wage rules, high employment taxes (FICA, SSN), the burden of health care plans, and the highest corporate tax rate among OECD nations (39.2%). 

Of course the primary reason for current high unemployment is our never-ending recession. The last two boom and bust cycles have devastated our economy. The employment ratios decline (above chart) didn’t start in 2008 but with the crash of the Dotcom economy in 2000. There is no conspiracy here: these cycles originate with the Fed’s attempt to revive the last boom by pumping new money into the system. Two successive rounds of boom-bust have resulted in massive malinvestment of capital into companies that made no economic sense (Dotcom) and into real estate and consumption that fed the biggest splurge in our history. 

The conflation of money and wealth has caused the destruction of trillions of dollars of real savings and not-so-real savings (boom related swag, if you will) and the economy is having a difficult time recovering from this crash because of attempts by the Fed to reflate the economy with more of the same things that caused the crash, plus policies of the Administration(s) that have thwarted liquidation of malinvested assets and related debt, thus tying up capital in wasteful projects.

Until the monetary madness stops, the economy will remain stalled, stagnating in the Japanese fashion until either interest rates are raised, QE is nailed in a coffin, and rules hampering new business formation and growth are eliminated; or (more likely) more rounds of QE and bank lending inflate us into another bubble.

These observations will come as no help to the unemployed. While the government professes to help the jobless, until workers adapt to a changing market, they will remain a permanent underclass. And that is not good for America.

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1. The actual unemployment rate is always a subject of controversy. Many claim that the actual rate is much higher because of various seasonal adjustments, and the birth-death model of business formation, and the like. For those that wish to follow this line of thinking, please visit Mish who does an excellent job with this. My position is that the actual rate is less important than the trend. We can never know what the “real” data are, but the important thing is whether or not jobs are increasing or decreasing and the approximate rate of such.

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13 comments to The Unemployment Charade Or, Ignore The Headlines

  • D

    Bravo! Great post!

  • David Pristash

    Jeff you do great work and in principle I can’t argue with your logic but the principles of a free market and capitalism have been perverted by many politicians from both the left and right for their own personal gain. My undergrad is economics ( I was very good at this) and although I moved into different areas after school I still kept up with the subject. Now that I am retired I research study and write a lot on this subject.

    I have an analysis of our current situation (jobs) that I did last year that explains how, what is going on is destroying this country and why there are,and can not be,any real job growth from now on unless drastic changes are made and made soon. Its to long to post here but if you want I’ll send you a copy to read if you give me a place to send it.

  • mak

    A service job is not a real job unless there is a underlying support of manufacturing jobs.

  • Anonymous

    mak: A person who works as a crossing guard to see that schoolchildren cross a street safely after school is supporting no mfg job but is performing a service. A physician who responds to a telephone call with a diagnosis is not necessarily going to involve a manufactured good (such as a drug) in the advice. Similarly for much legal advice, etc.

    Your overall point is sensible, though. In fact, the differentiation between “manufacturing” and “services” is often less clear than one might expect.

  • mak

    Anonymous….We sort of agree…but, money is created not out of the service jobs, be they doctor, lawyer or indian chief. Jobs are created by manufacturing something useful…unlike a lawyer. If there were no “real” money making jobs then the government would have to print money to stimulate the economy….oops…

  • David Pristash

    BLS Household data table A and A-1 both show: 195,000 “fewer” people were employed in July verse June; 45,000 “more” people were unemployment; and 348,000 people “left” the work force. BLS Household data table A-1 not seasonably adjusted shows: 76,000 “fewer” people were working; 216,000 “more” people were unemployed; and that 58,000 people “left” the work force. All three indicators were in the same direction which shows a contraction is underway.

    The table in the BLS report that shows an increase in jobs by 163,000 in July is not supported by the BLS facts as shown in their tables. In fact it is a statistical aberration based on their methodology with no basis in reality. The GDP is going down because a smaller and smaller percentage of the people are working and those that are, are making less and less money in 2005 dollars.

    The National debt will go above $16.0 trillion within a few weeks; The rate of GDP growth is barely above the rate of inflation; and tax receipts per worker are down. The market is being driven up by fiat money(this term is being used here as a compost of all the way the FED has created money)and QE3 or more operation twist or whatever Benny and Timmy concoct will not solve the core issues which are that the federal government by its laws and regulations are making this country a place you would not want to do business in. We need to vote all non conservatives out of office in November no matter what party they are in.

    If what I am saying is not true then why are GE and GM (to name only two) expanding operations in China while at the same time closing operations in the US?

    • Karl

      Yes, the Household survey, which is used for the unemployment rate also calculates a jobs added number. This number differs from the official jobs number each month, often substantially. However, over longer periods of time, the two surveys give similar results. For instance, the Household survey also shows over 4 million jobs added since December 2009. The Household survey showed much more positive results in May and June, with 550,000 jobs added in these two months. I note you forgot to mention those numbers.

      You are incorrect that “the GDP is going down…” GDP has been growing since the 3rd quarter of 2009. Real GDP exceeds pre-recession levels.

      • David Pristash

        Karl, I didn’t say the GDP was going down I said the rate of growth was barely above the inflation rate nominally both are around 1.5%. But the rate of growth has gone down by half since around 2nd Qtr 2010. That is not a good trend.

        As to the jobs — I find Table A-1 to be more accurate with other data as in looking at Treasury tax receipts. I will concede that they tend to even out over time but I’m more interested in current data rather then long range trends.

  • mak

    David…As a service oriented country that everyday grows weaker, we will, I’m sure be able to change the oil in those cars made in china so the lawyers and crossing guards can get to thier work places…

  • slotowner

    “ultimately things need to be manufactured and food needs to be grown in order to support the service economy”
    Is this the 1920′s? The job numbers are mediocre but don’t massage the info to support your argument by saying that service jobs are not really producing anything and don’t really count. We are using virtual things all the time & they have as much value as the food we consume or the clothes we wear. Software, logistics, data storage, media, personal grooming & health, travel, & accounting are as real as a fishing rod, Pokemon, or set of dishes. A shortage these virtual goods will have as much impact as running out of soap or TP.

  • Karl

    “The payrolls chart (right) reveals a largely flat trend for the past year, which says that job formation is weak and has not been able to offset job losses.”

    No, what it shows is that job formation has EXCEEDED job losses for two years, 29 months if you don’t count temporary census jobs.

    Regarding the labor force participation rate, the overall rate has been declining since 2000. However, the long term driving force is our aging population. Since the rate counts everyone over age 16, our increased life expectancy and years in retirement will cause this rate to decrease for the foreseeable future.

    This can be seen by separating the rate by sex. The rate for men has been declining from 87% to 70% since they started keeping the statistic in 1948. This is disguised in the overall rate by fluctuations in women’s participation. After the Civil Rights Act of 1964 prohibited discrimination against women, their rate increased through 2000 from 38.5% to 60%. The rate for women has declined over the last decade to 57.6%. Working women are retiring in larger numbers as well.

  • mak

    Slotowner…Don’t get the wrong impression when I say that virtual items/jobs are useless…but who are making those items…the USA or some little kid in the far east? When the money runs out because of our lack of of a reasonable industrial base we’re screwed. We can pretty much live without most of the things you named, they are nothing more than improvments on items we already had…maybe not as fast but still there. we, meaning the feds have been pumping money into the system (as much of europe has)just to keep people thinking all is ok…it’s not. But Mak, eventually all that money will stimulate the economy and we’ll catch up….No we won’t. We are a debtor nation until we start making real things…..