- The Washington Times - Tuesday, September 9, 2008




The spike in the unemployment rate from 5.7 percent in July to a five-year high of 6.1 percent in August left forecasters with egg on their faces. No change or a slight uptick had been expected.

Even with the 84,000 August drop in nonfarm payroll jobs, the eighth monthly job decline in a row, last month’s jump in unemployment was out of proportion to the weakness in employment. There are lags and catch-ups in economic data, so one month doesn’t tell the story. A closer look shows the employment-unemployment relationship has been out of historical whack all year. Insofar as economic forecasters are empiricists who rely on past behavior for guidance, recent underestimates of joblessness are understandable.

Since the beginning of the year, employer-reported payroll jobs have dropped by more than a half million while unemployment has risen by a surprising 1.8 million. Total employment, as measured by household survey, is down by 771,000.

In the past, when the job market has deteriorated, labor force participation has also declined. Some people who lost their jobs saw no point continuing a futile search and some who would have liked to enter the work force postponed doing so until prospects improved. Since government statistics count as unemployed only jobless people looking for work, the decline in labor force participation dampened the rise in the unemployment rate.

What’s unusual about this downturn is the larger number of people who are either starting or persisting in a job search despite the dimmer prospects of finding work. They have pushed up the unemployment rate to above “normal” levels relative to total job losses.

Given the drop this year in the percentage of the working-age population employed, the labor force participation rate (the proportion of the population in the work force) would have been expected to decline from 66.1 percent in January to 65.8 percent in August, based on previous experience. But the participation rate hasn’t declined - it was 66.1 percent last month. That means 800,000 more people are in the labor force and unemployed than past relationships in the data would have predicted.

The unemployment rate under more normal circumstances would have been 5.6 percent last month instead of 6.1 percent as reported - a big difference with political implications. The estimated gap between rates was smaller in July, 0.3, as previously reported on this page. If rising unemployment gets further out of synch with employment, it could raise new questions about the meaning of the unemployment data.

We can only surmise why more people persist in job search in the face of declining employment than was the case in past downturns.

Some commentators have said the sharp rise in the August unemployment rate may have been partly due to the recent extension of unemployment benefits, though my analysis suggests the effect was not very large.

For the year to date, there are more likely explanations. Inflation has been relatively high, outrunning wage gains. Personal savings are low, debt is high, and home and other equity values have eroded. Economic insecurity is widespread, and the unemployed are less assured than in past periods of weakness that they will get their jobs back. With higher unemployment, more workers worry about paying their mortgages on time and fear losing their homes. When you’re being pinched and have less of a cushion, you don’t give up looking for work.

There are whispers that the Federal Reserve should come to the rescue. But, as hints from Fed policymakers indicate, it’s unlikely they will, at least in the near term. In any event, it’s questionable that a drop in the federal funds interest rate would be of much help right now.

Furthermore, the Fed may be a Catch-22 situation. Insofar as inflation may be adding to unemployment - by inducing more people to look for work in a weak job market - if the Fed were to lower the federal funds rate in an effort to help the economy and the job market, it would be risking more inflation and further additions to unemployment. If inflation abates on its own, reflecting the recent drop in crude oil prices, that should ease the upward pressure on the jobless rate.

There are also calls for another tax rebate to stimulate the economy, though the last one appears not to have been very successful. As before, a good chunk of another rebate would likely be used to pay down debt or be put into savings rather than be spent.

It would certainly help if more illegal immigrant workers were nabbed and deported, creating more job opportunities for legal jobseekers.

The recent jump in unemployment is a blow to Republicans and, as a talking point, a boon to Democrats. In the days ahead, we can expect to hear some fast talking.

But is either the Republican or Democratic presidential candidate brave enough to say there’s not much more that can be done to help the economy in the near term, and that we’ll just have to grit our teeth and suffer it out for a spell? Don’t bet on it.

Alfred Tella is former Georgetown University research professor of economics.



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