- The Washington Times - Tuesday, November 11, 2008



The roller-coaster drop in jobs in recent months has been worse than forecasters expected. Even more of a surprise has been the rapid rise in unemployment.

Nonfarm payroll employment fell by 240,000 last month (preliminary), with the job count for the previous two months revised downward by 179,000. October was the 10th consecutive month of decline, which is longer than the recession of 2001. Since January, jobs have fallen by 1.1 million, with more than half the decline occurring in the last three months.

The unemployment rate started the year at 4.9 percent, jumped to 5.5 percent in May-June, then pushed up to 6.5 percent last month - the highest rate since early 1994.

The depth and breadth of job losses taken together with other key economic indicators are spelling recession with a capital “R.” There can be little doubt now that we’re well into a recession, and it looks to be nasty, deep, and long, even with more government stimulus.

It’s a good bet that the fractional decline in economic growth initially reported for the third quarter of this year will subsequently be revised downward into deeper negative territory and be followed by a sharp decline in real output in the current quarter. Although two consecutive quarterly declines in gross output don’t formerly define a recession, it won’t be long before the National Bureau of Economic Research committee of official deciders, after sifting through the relevant indicators (e.g., real income, jobs, GDP, industrial production, retail sales, etc.), will make the call.

In one important respect, the current recession has been different from its predecessors in the postwar period. Typically, the percentage of the working-age population in the labor force rises and falls along with changes in the availability of jobs: labor force participation rises as employment expands and drops when job opportunities decline.

But in the current downturn, despite the marked drop in the demand for workers, the participation rate has stubbornly refused to decline. This has pushed up unemployment to a level well above what past behavior would have led us to expect.

In the 2001 recession, for example, the labor force participation rate declined from 67.2 percent in March to 66.7 percent at year end. This year, the participation rate started out at 66.1 percent, and it’s still 66.1 percent. By not declining as it has in past recessions, the participation rate has given an unanticipated boost to the labor force. With not enough jobs to absorb the additional jobseekers, the unemployment rate was lifted to an above-normal level relative to the amount of job loss. It’s not that the unemployment rate wouldn’t have risen if the participation rate had declined - it would have - but not by as much as it did.

Taking into account the drop in employment this year and additions to the labor force from population growth, if the labor force participation rate had declined as expected based on past behavior, the current unemployment rate would be 6 percent rather than 6.5 percent as officially reported. The half point difference between these rates is equal to an additional 900,000 people counted as unemployed. In other words, historical relationships would have predicted an unemployment level in October of 9.2 million rather than 10.1 million as reported.

For July of this year, as previously reported on this page, the gap between the official unemployment rate and the lower model-based estimate based on past experience was 0.3 percentage point. The discrepancy between the officially reported and the expected unemployment rate has been growing.

But that’s not to say the unexplained additional unemployment should not be taken seriously. We don’t know why labor force participants have changed their behavior. It could be financial desperation among job-seekers faced with declining asset values and heavier debt burdens, or uncertainty and plain economic fear. In many respects, this is a recession like no other in the last 60 years. The higher unemployment could also be the result of biased responses or measurement errors that have crept into the monthly labor force survey.

Whatever the reason for the unusual behavior of the unemployment rate this year, it’s something that needs to be investigated, sooner rather than later. The jobless rate is an important target variable for economic policy, and policymakers need to know what so vital a statistic currently means before they aim and fire. Meanwhile, it seems to make sense to put more weight on the job numbers than on the unemployment rate.

Predictions that the unemployment rate in coming quarters will rise to 8 percent are becoming more prevalent. If the statistical uncoupling between employment and unemployment continues, an 8 percent jobless rate could become 9 percent or more.

Alfred Tella is former Georgetown University research professor of economics.

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