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Jul
2013
29

The Emperor’s Old Clothes: False Recovery Being Masked by Everyone Looking at Wrong Numbers

employment_population_ratio

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On the Washington Post wonkblog, Dylan Matthews recently took a dive into depressing new Century Foundation research that suggests when the number of people retiring or dropping out of the workforce is considered, unemployment remains exactly where it was at the height of the recession.  In the Daniel Alpert study in question, low-wage jobs are shown to be the only real source of “new” employment. A pair of graphs tell the tale of this false recovery.

Regarding the graph at top:

The dotted red line is the U-3 unemployment rate, or the number you see everywhere. It can go down for one of two reasons: either more people are working, or fewer people are in the labor force.

So which is it?

You see that solid blue line? That’s the employment/population ratio, or the number of employed people divided by the civilian noninstitutional population (aka everyone over 16 who’s not in prison, a mental institution, the military, or a nursing home). It’s barely changed since the nadir of the recession. The share of adults who are working isn’t going up; it’s stagnating. More people aren’t working.

Now, look at the blue dotted line. That’s the labor force participation rate. See how it nearly perfectly tracks the movements of the unemployment rate? That’s a pretty good sign that people leaving the labor force, rather than getting jobs, is what’s driving the latter down.

A second graph predicts what the unemployment rate would be minus those who left the work force.  As you can see, the real unemployment rate is pretty much exactly what it was at the height of the depression.  

u3_if_lfp_unchanged

Alpert argues that this is because we are looking at the wrong numbers.  He supplies a set of headlines to answer Ben Bernanke, who recently stated that he was puzzled by the lack of growth in an economy that was adding 200,000 jobs a month.  

Here, then, is a different set of “headlines” for you (and the chairman) to mull over:

• Over 69 percent of the jobs created in Q2 2013 and over 57 percent of all the jobs created in the first half of 2013 were created in the three lowest wage sub-sectors of the economy, Retail Trade, Administrative and Waste Services, and Leisure and Hospitality, that otherwise account for an aggregate of only 33 percent of all private sector jobs. These jobs, in the aggregate, pay an average of only $15.80 per hour, compared with the other two-thirds of private sector jobs, which pay $27.16 per hour. Relative to unemployment benefits and other assistance, jobs at $15.80 per hour put less than $3.00/hour more in the pockets of a newly working consumer.

• About half of the jobs created during H1 2013, and a large majority of the jobs created in Q2 2013, appear to have been part-time jobs that offer employees as little as one hour of work per week, and up to 35 hours of work. Moreover, after falling from a recession high of 9.2 million to a post-recession low of 7.6 million at the end of Q1 2013, the number of people saying they are working part time because they can’t find full time work (part time for economic reasons) crept back up to 8.2 million, double pre-recession levels.

• The U-6 underemployment rate, incorporating those working part time for economic reasons, plus another 6.6 million folks who the Bureau of Labor Statistics does not count as part of the labor force, but who nevertheless say they want a job, as well as others, rose during Q2 2013 to 14.3 percent from the 13.8 percent it registered at the end of Q1. The U-6 rate topped out at 17.1 percent during the Great Recession, and has only declined by 16.4 percent from its peak, while the official U-3 unemployment rate has declined by 24 percent.

• Unsurprisingly, therefore, since the recession it turns out that the decline in the U-3 unemployment rate has been principally due to a reduction in the labor forces itself, which stood at 65.09 percent when unemployment hit its 10 percent peak (down already from the pre-recession high of 66.11 percent) to 63.46 at the end of Q2 2013. If the unemployment rate were calculated at the 65.09 percent labor force participation level, U-3 would stand at 9.77 percent today.

• Real wages, calculated after giving effect to inflation, have been falling for nearly fifteen years. But with inflation at or near all-time lows, U.S. families are beginning, on average, to scratch their way back—albeit slowly. But decidedly not so in the sectors in which most of the jobs are being created. On the whole—with hyper-low inflation (which is likely to continue)—U.S. wages are roughly keeping pace across the board (real wages are up 0.07 percent—tiny, but considering that they have been falling for so long, not so bad). But in the three low-wage sectors responsible for the creation of over 69 percent of jobs in Q2 2013, wages have fallen after inflation by -0.7 percent (seven tenths of 1 percent) year over year. In contrast, wages in the high-wages sectors which have generated less than a third of newly created jobs, have risen 0.44 percent after inflation.

The uptick in low-wage jobs can conceivably be perceived as a slight positive for the economy, however these jobs are being filled by unemployed workers who formerly worked in other sectors and are accepting new positions because their benefits have run out. This paints an entirely different picture.  Alpert is correct in saying that he believes the U.S. economy is sick, though there doesn’t seem to be a convenient remedy at the President’s disposal.

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