- The Washington Times - Sunday, August 10, 2008



Economists are split on whether the economy is in a recession, but the labor market almost certainly is. Payroll jobs are down 463,000 from their peak last December, hours of work and real wages have fallen, and unemployment has risen sharply. At 5.7 percent in July, the jobless rate was 0.7 percent above year-end and a full percentage point above a year ago.

If the job market is signaling recession, at least in one respect its behavior is atypical.

Oddly, at first blush at least, one key statistic - the labor force participation rate (the percent of the population age 16 and over in the work force) - has held up despite the weakening job market. The participation rate is pro-cyclical and would ordinarily decline as workers leave or do not enter the labor force because of declining job opportunities. Even though the fall-off in jobs this year has been less steep than in the comparable stage of past downturns, at least some weakness in labor force attachment would have been expected.

In July the labor force participation rate was 66.1 percent, slightly more than the 66.0 percent rate of last December and a year ago. With the recent decline in jobs and a 0.3 point drop in the employment-population ratio since year end, the participation rate would have been expected to decline by at least 0.1 rather than rise. Given the size of the population, even a 0.2 point difference in the participation rate translates into almost a half-million difference in the size of the labor force.

This means that, with employment weakening, the greater than expected labor force growth added nearly a half-million more people to unemployment than normally would have occurred. Based on the historical cyclical relationship between labor force attachment and employment opportunities, the unemployment rate last month would have been 5.4 percent rather than 5.7 percent.

The interesting question is what’s holding up labor force participation and giving an extra upward push to unemployment.

In the last recession in 2001, jobs declined more than now. But consumer inflation then was modest and relatively stable, whereas this year prices have been going up faster. The consumer price index (CPI) for urban consumers rose by less than 3 percent in 2001. In the past 12 months (the latest data are for June) it has risen by 5 percent, spurred by food and energy, up from a 2.7 percent rate a year earlier.

When inflation enters into the labor supply equation, the picture becomes clearer. It would not be surprising if the need to keep food on the table and to fuel vehicles were forcing hard-pressed jobseekers to remain in the labor market despite its weakness. It’s doubtful that the temporary boost in income from the recent tax rebate was sufficient to offset the effects of rising inflation on the jobseeking decision.

Consumers are hard pressed in other ways. Savings are low, debt is high, equity and home values have declined, and people are pulling money out of their retirement accounts and cashing in insurance policies to make ends meet. The state of the economy is the No. 1 issue among consumers - and voters - today.

Nearly 40 years ago Arthur Okun, chairman of the Council of Economic Advisers under President Lyndon Johnson, devised a “misery” index by adding together the unemployment rate and the consumer inflation rate. Since 1950, the monthly index has varied between 3 in mid-1953 and 22 in mid-1980 when unemployment was 7.6 percent and inflation was at an annual rate of 14.4 percent. Recall that 1980 was a stagflation year.

More recently, the misery index has been on a rising trend for the last two years. In June of this year (the latest rate), it broke into double-digit territory for the first time since mid-1993, hitting 10.5 - yet another albatross around the Republican neck.

By comparison, in the recession of 2001, the misery index did not approach that level. In May of that year it hit a peak of 7.9, with the jobless rate slightly higher than the inflation rate. In the 1990-91 recession the misery rate was higher, peaking at 12.5 in November 1990, with the unemployment and inflation contributions about equal.

The current outlook is for higher unemployment in the months ahead. Of late, fuel prices have fallen some, and if that continues the inflation rate could moderate enough to offset the effect of worsening unemployment and keep the misery rate in check. But that’s a fingers-crossed scenario.

Alfred Tella is former Georgetown University research professor of economics.

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