- The Washington Times - Thursday, October 15, 2009

ANALYSIS/OPINION:

The inching up of the unemployment rate from 9.7 percent in August to 9.8 percent in September doesn’t begin to convey the disastrous deterioration of the labor market.

Total civilian employment last month plunged by 785,000 (a change that more than meets the criterion of statistical significance in the government’s monthly household survey). Employer-reported non-farm payroll jobs fell less but still by 263,000, more than the August decline in jobs. When civilian employment is adjusted to be consistent with the definition of payroll jobs, the September decline was still a huge 662,000.

The reason the unemployment rate didn’t rise more last month is in part traceable to the behavior of labor supply as reflected in the labor-force participation rate - the percent of the working-age population in the labor force. The participation rate dropped from 65.5 percent in July and August to 65.2 percent in September, which lopped off about 700,000 from the official unemployment count.

Had labor-force participation continued at its July-August rate, the unemployment rate in September would have jumped to 10.2 percent, a half point above August.

The year-over-year contraction in the September participation rate was even more dramatic. The decline from September 2008 amounted to 0.8 percentage point, the largest drop in nearly a half century - a fact not mentioned in the Labor Department’s press release or in mass-media reports.

Why has labor-force participation fallen off so dramatically? For one thing, job searching is not costless, and the unemployed understand that jobs have all but dried up and hunting is all but useless, at least for the present. Also, unemployment benefits have run out for many of the unemployed, so they may feel less compelled to continue looking for work besides being less able to afford it. A further extension of benefits is likely to resuscitate job searches and bump up the unemployment rate somewhat.

If the participation rate reflects supply behavior, the employment-population rate (percent of the working-age population who are employed) is more a measure of worker demand. The monthly employment rate has worsened over the course of the current recession, and year-over-year, it has worsened progressively. The annual decline in September was 3.1 percentage points, a record drop in the postwar era - another fact not mentioned in the government’s press release or in the mass media.

Making the labor market picture even bleaker, the Labor Department dropped a bombshell in its latest employment release when it announced the preliminary annual estimate of the benchmark revision to payroll jobs. (The monthly payroll numbers are based on a sample of employers, while the benchmark revision takes advantage of universe job counts obtained from unemployment insurance tax records.)

The results showed that the March 2009 sample-based payroll count will be revised downward by about 824,000 - a colossal adjustment far exceeding the average revision in previous years. According to an Oct. 2 statement by the commissioner of labor statistics before the Joint Economic Committee of Congress, “Most of the additional job loss occurred in the first quarter of 2009 when payroll employment was declining most steeply, and appears to be due in part to an increase in the number of business closings.” The final benchmark revision will be reported on Feb. 5, 2010.

Considering the further deterioration in the economy since the first quarter of this year, it’s likely that business closings have continued, which means another downward annual revision in payroll employment may be in the cards.

If productivity remains healthy, even with 2 percent or slightly better economic growth in the next two years, there won’t be enough job creation to make much of a dent in the unemployment rate. If productivity growth slows and the economy expands moderately, unemployment will decline by more - but full employment, by any reasonable definition, is likely to remain out of sight for years. To the extent that new legislation and government regulation result in higher labor costs, reducing unemployment will become all the harder.

Before taking on new hires, employers will increase the reduced hours of their existing workers. Currently, 1 in 3 unemployed has been jobless for more than a half year, a postwar high (another record not mentioned in the government’s news release). The longer the spell of unemployment, the less employable the jobless become because of skill erosion and changing technology. For many, education or retraining is essential, and its subsidization is a productive use of taxpayers’ money.

But if the job market has a weak recovery or stagnates and labor-force participation continues to decline, consumer spending will be constrained and unemployment will be trimmed artificially as more of the jobless give up the search out of discouragement and frustration. In that case, unemployment will go underground and not be counted in the official unemployment data. What used to be visible cyclical unemployment will become longer-term structural hidden unemployment, which is far worse. We can’t afford to have a growing segment of Americans permanently frozen out of the job market.

Alfred Tella is former Georgetown University research professor of economics.

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