July 02, 2003

Yet More Bad Labor Market News

Every once in a while I stop, take a look at the labor market, and scratch my head. First, I'm impressed at how low the unemployment rate is given how bad most of the other labor market indicators are. Second, I'm impressed at how bad most of the labor market indicators are.

Little relief in unemployment expected soon - Jul. 2, 2003: NEW YORK (CNN/Money) - Two years ago, the U.S. economy was just entering its third -- and probably last -- quarter of recession, and the unemployment rate was just beginning to climb.

Two years later, the jobless rate is still climbing, and is likely to rise further Thursday when the Labor Department is scheduled to report on unemployment and payrolls for June.

According to a recent Reuters poll, economists, on average, think unemployment will rise to 6.2 percent from 6.1 percent in May, and they think payrolls outside the farm sector will be unchanged after losing 17,000 jobs in May.

Usually, by this point in the recession-recovery cycle, the jobless rate should be on its way back down.... Today's economy... seems to be climbing out of its own slump -- but it probably won't be enough to create many new jobs any time soon.

"We're looking for increases in employment, but because the labor force is growing 1 percent a year, we need 125,000 new jobs per month to stabilize the unemployment rate," said Mickey Levy, chief economist at Bank of America and one of the best economic forecasters of the past 17 years, according to a recent Federal Reserve study. "We see the unemployment rate drifting slightly higher and lingering higher for the next year."

Even if the Labor Department says the unemployment rate didn't rise in June, there's little hope that payrolls grew very much, if any. Payrolls have fallen year-over-year for 23 straight months, according to Labor Department data, and could very well add another month in June, extending the worst stretch for the labor market since World War II.

And the unemployment rate, though relatively low by historical standards, may actually understate the labor market's woes.

For one thing, many unemployed people have simply quit looking for work, meaning they are not counted as part of the "labor force" and thus are not counted in the Labor Department's calculation of the unemployment rate. If the economy improves, many of these "discouraged" workers -- 482,000, by the department's last count -- will likely start looking for work again, and the unemployment rate will rise.

Meanwhile, 1.9 million people have been unemployed 27 weeks or more, meaning many of them have exhausted their unemployment benefits. According to research by Anthony Chan, chief economist at Banc One Investment Advisors, 43.2 percent of all unemployed workers have exhausted their benefits -- the highest rate in more than three decades.

"Despite the fact that the unemployment rate remains low relative to prior economic downturns, the burden on the unemployed population has been the most severe, by one measure, since at least 1972," Chan said.

Furthermore, many of the people who do have jobs are working only part-time. According to the Labor Department, if you add all the workers "marginally attached" to the labor force -- out of work and not looking for work -- to all those working part-time and those unemployed and looking for work, the unemployment rate rises to 9.7 percent...

But... [if] employers have finally stopped cutting jobs. They've yet to show any inclination to hire more workers. The Manpower Inc. survey of the third-quarter hiring plans of 16,000 U.S. employers showed only 20 percent planned to add workers -- a lower percentage than the second quarter, and lower than the third quarter of 2002...

Posted by DeLong at July 2, 2003 10:32 AM | TrackBack

Comments

I'm not even remotely informed on economics, so I was wondering if anybody knows how similar the calculation of the unemployment rate is in the EU versus USA and Canada. I was wondering if that may explain some of the difference between jobless rates there versus here. Another possibility is that perhaps some unemployed people have been "defined away" recently? I recall something like that happening under Bush The Elder.

Posted by: Ken Overton on July 2, 2003 10:50 AM

Isn't the large shadow work force of illegal and legal immigrants the secret both of full employment without inflation and of low unemployment during a downturn? It's like there is a category of players which are counted in some of the statistics but not all of them, according to convenience. This might also help account for the stagnation of the income of the bottom 20%, since immigrants are fed into the system as needed if wages start to climb. So immigrants aren't "taking American jobs", they're just scavenging what the can get and keeping wages low. There's nothing like an illegal if you want labor flexibility.

Posted by: zizka on July 2, 2003 10:52 AM

Dear Brad DeLong

I think the 125,000 jobs needed to keep up with labor force growth is accurate. Why did you suggest the figure was 85,000? The difference is substantial. I keep hearing happily employed sorts say that employment is a lagging indicator, but this lag is different - far longer and far more ominous.

Posted by: anne on July 2, 2003 11:03 AM

Answer - More tax cuts.

Posted by: lise on July 2, 2003 11:36 AM

Actually, the events described in the article won't qualify as bad news unless they come to pass, starting with a rise in the jobless rate to 6.2% (or higher) tomorrow. For now, its all forecasts and speculation, not news. And, should the jobless rate rise, it won't qualify as a surprise, since just about every economist who makes such predictions has predicted that the jobless rate will rise above the 6.1% posted in the May report. First comes trend growth, then comes a steadying in the jobless rate. We can't reasonably expect more than that.

Posted by: K Harris on July 2, 2003 11:37 AM

We are still running above 400,000 added jobless claims each week. I find no reason to believe we are soon going to have enough job creation to keep up with labor force growth, even if 85,000 jobs created are needed.

Demand would have to gain from an already high level to cause employers to add workers. No. employment will continue to be a problem for months and that means we will grow haltingly for several more quarters.

Posted by: jd on July 2, 2003 12:10 PM

"First comes trend growth, then comes a steadying in the jobless rate. We can't reasonably expect more than that."

Yes, first coms trend growth, but how fast does growth have to be to begin significant job creation? Say %4 on a sustained basis, because productivity growth is continuing appace. Can we do 4% this year?

Posted by: anne on July 2, 2003 01:01 PM


A question for all of you out there:

Is it just me, or is there a surge of hostility toward the FED building among 'conservative' commentators? I read a screed by Alan Reynolds in the Washington Times complaining that the FED doesn't know what its doing and really should just keep inflation at a steady level. The article itself is full with mischaracterizations and out-of-context quotes from the FED.

I bring this up because there seems to be a lot of grumbling among Republicans about the FED. Why are they hostile to it?

Posted by: SZ on July 2, 2003 02:44 PM

SZ

It is not you. The 'conservatives' you refer to are really the free lunch supply side crowd who want to pretend that tax cuts can spur long term growth even if they are not matched by spending cuts. Now there just might be a Keynesian opportunity for this in the short-run but not over the long-term if the law of scarcity applies. But this thread goes back at least 20 years to when the Reagan tax cut stimulus was offset by tight money. The free lunchers hated see the crowding-out predictions of true conservatives (aka real economists) vindicated. And certainly when real economists (lberal or conservative) try to suggest the Bush tax cuts will crowd-out investment, they cry "oh no, deficits don't raise interest rates". So the pressure will be on Greenspan not to do the right thing when (and if) we get back to full employment.

Posted by: Hal McClure on July 2, 2003 04:02 PM

In support of your point regarding more-than-six-month-unemployed workers who have given up searching for work, it's increasingly apparent that the economy of rural central and southwestern Virginia is in an absolutely frightening state of free fall. The stated unemployment rates -- up to 10-12% in some areas -- do not describe what is happening.

But there's a hell of a good place to find out where the real story is: tax receipts. As thousands of sole proprietors fold up shop and companies stop making periodic withholding payments, the receipts go down, down, down, down, down...

There is a horrifying catastrophe brewing. The states -- many of them -- are headed for outright bankruptcy. There just isn't enough money coming in, even after all the cuts.

Posted by: Bryan Pfaffenberger on July 2, 2003 05:31 PM

SZ - Regarding conservative flack on the Fed.

I think the conservative press is gearing up to cover Bush's ass for 2004. It seems pretty clear that the unemployment rate will be high going into the 04 campaign. So whatch ya gonna do ?
BLAME THE FED. BLAME THE FED. BLAME THE FED.

They didn't cut fast enough ...
They didn't say the right things to convince the bond market ...
blah blah blah

With ongoing deficits tight money will occur but the economy has to recover a bit first. That won't be the case in 04. All the stimulus has gone to the wrong places. It's so peverse.

Posted by: Scott McArthur on July 3, 2003 07:19 PM
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