Wednesday, May 22, 2013

Measuring the More Meaningful Thing ... The Employment-to Population Ratio

The "official" unemployment rate as narrowly defined is 7.5%. The more broadly defined U-6 rate stands at 13.9%.

Yes, unemployment remains a big problem in America today and perhaps more troubling, the U.S. employment situation will continue to be below normal for a long time to come. But broken down into parts, the employment condition among working age Americans is at historic lows.

The sad fact is that we have far fewer Americans employed today as a percentage of the total population than we did at the turn of the century.

So let's look closer at the employment-to-population ratio, which is more informative than the unemployment number and measures the percentage of working age people employed in relation to the total.

Put simply, our nation's output is largely determined by the number of people actively engaged in the work force, combined with how productive that work force is. {NOTE: We'll skip the productivity component of the nation's work force herein, although it's also a most important part of the total equation.}

The biggest factor by far which contributes to the nation's economic growth is how many people are actually working, so let's concentrate on that one for now.

From 64% in 2000, the employment-to-population ratio in the U.S. today stands at only 58%. This six percentage point drop in the percentage of people employed from 2000 to today amounts to more than ten million fewer people working now than "normal." It also means that our economy is not producing anywhere close to its capability.

Among other things, that reduction in people working is a confidence killer. In turn, that results in lower confidence in government officials (as if it's not already at rock bottom levels), less consumer spending, a smaller economy, higher debt levels and many other negatives that contribute to a confused and concerned citizenry. And we definitely are that.

To repeat, the number of people working as a percentage of the working age population today is at a 30 year low. What it means is that getting back to what we used to call normal employment will take another decade or longer at the current rate of jobs being created each month on average. Stated another way, what it also means is that we need 300,000 monthly jobs created in order to get back to the "good old days."

It's neither a healthy situation nor does the low employment situation serve as a positive backdrop for our economy's future growth. But facts are facts, so let's look closer.

Look at the doughnut, not at the hole is subtitled 'Looking behind the unemployment headlines:'

"The health of the labor market is best measured by employment, not by unemployment....

Employers have more job openings than at any time in the past five years, yet they are in no hurry to fill them.

On the other hand, those who do have jobs are unlikely to lose them. First-time claims for jobless benefits last week were the lowest in more than five years. As a result, the jobless rate last month stood at its lowest level since 2009.

Does this mean that the labor market has finally returned to a pink-cheeked state of health? I don’t think so.

The drop in the unemployment rate from over 10% just after the recession ended to 7.5% today is more a reflection of people dropping out of the labor force than of people finding jobs.

At one point, the percentage of the labor force that had been out of work longer than 15 weeks was at a postwar high of nearly 6% of the labor force (it was 1.5% before the recession began). It is down to about 4% today, mainly because lots of people have simply given up, and are no longer looking for work. And if one does not seek a job, one is not considered as part of the unemployment statistics.

We can deduce this from another key figure, the share of Americans holding a job. Known as the employment/population ratio, this share today is just over 58%.

To put this ratio in perspective, it has not changed since the end of the recession, is well below the 64% reached in 2000 — and is the lowest in 30 years. And rather than rising after a recession ends, the way it did in the past, the employment/population ratio has remained flat.

To make matters worse, most of the jobs that are being created these days tend to be low paid and without such benefits as health care and sick pay. . . .

As a consequence, earnings actually fell last month, gains in jobs notwithstanding.

Not surprisingly, stagnant incomes are cutting into consumer spending.

What is more, when people do spend, they tend to buy less, and only those items that are on sale. This is why there is little or no inflation, even though money growth is rapid and interest rates are at record lows."

Summing Up

We need to be doing everything possible to create private sector jobs, and that can only result from private sector investment. Not government knows best spending.

After several years of trying the government knows best formula, we currently have the lowest employment to population ratio in 30 years.

It will be at least another decade before it returns to what we used to call normal. Put another way, we need another ten to fifteen million jobs, and a fair share of those jobs need to be "good paying" jobs. That can only happen with the private sector leading the way.

America has energy, America has food, America has a competitive economy, America has a stable currency and a strong system ruled by law.

What America doesn't have right now is a functional government that understands the gravity of the situation and the importance of encouraging entrepreneurial investment and private sector led innovation.

That's my take.

Thanks. Bob.

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