But regardless of what's reported, what's the real unemployment rate? Is it 5%, 7.8%, 9.3%, 11% or something like 15%. The correct answer is that it all depends on how the rate is calculated, of course. But whatever the "official" number is reported as being Friday morning, one thing is absolutely certain. The unemployment rate, whatever number is reported, is nowhere close to 5% and won't be for a very long time to come.
So however it's reported, it's going to be much too high for anything approaching what would be necessary for a growing and healthy economy.
And besides that, the "official" unemployment rate, however it's calculated and counted, while AN important piece of the equation, is not the MOST IMPORTANT piece of the puzzle. The more important number is the labor force participation rate. In that regard, we don't have nearly enough people participating in the work force today.
The fewer the number of people who work, the less we'll have in output, aka GDP, as a nation. Less GDP means less MOM to spend and less OPM to redistribute in the private and public sectors, respectively.
In short, it's total output that matters most to a nation's overall economic well being, even though as individuals our well being is based on whether we're gainfully employed or otherwise receiving money from our fellow citizens (generally through the legalized fiction of government) to furnish our financial needs.
So let's take another look at unemployment and what it means to our efforts to increase economic output and grow the overall economy. Accounting for Dropouts in Unemployment Rate says this about the importance of focusing on labor force participation:
"9.3%: The unemployment rate in September 2012, if the labor force were following historical patterns.
The unexpected drop in the official unemployment rate to 7.8% in September has given rise to conspiracy theories about politically motivated data-doctoring. Most economists find the notion laughable. . . .
Those who pay close attention to economic issues know that the Labor Department uses a relatively narrow definition of “unemployment,” counting only those who are actively looking for work. As a result, economists often look at another measure, the labor force participation rate, which is the share of the population that’s either working (employed) or looking for work (unemployed).
During the recession, the unemployment rate shot up and the participation rate plunged, as people dropped out of the labor force. More recently, the unemployment rate has been getting better, but the participation rate has continued to trend down.
Some people — notably Republican presidential candidate Mitt Romney — have argued that to get the “real” unemployment rate, we should add back all the people who have left the labor force and consider them unemployed. Doing that gives an unemployment rate of around 11%, depending on what month you choose for a baseline.
But adding back everyone who’s left the labor force makes little sense. Long before the recession, the participation rate was declining due to factors unrelated to the business cycle. People are entering the labor force later as more people go to college. The Baby Boom generation is starting to retire. And the flood of women into the workforce, which drove a long rise in labor force participation in the second half of the 20th century, has slowed. Any serious effort to assess the job market has to take such trends into account.
Still, it’s clear that millions of people dropped out of the labor force because they couldn’t find jobs. Shouldn’t those people count as unemployed?
The trouble with that logic is that people have always left the labor force during tough times. If the “real” unemployment rate is higher than the official rate now, it was also higher in past recessions. The big advantage of the unemployment rate, whatever its shortcomings, is that it’s used a consistent definition for decades. 7.8% might not be the “right” rate now, any more than 10.8% was the “right” rate in 1982. But as long as the definitions don’t change, the two should be comparable.
That comparability is based on a critical assumption, however: that workforce patterns have remained largely consistent over time. For most of the past 40 years or so, that assumption appears relatively well-founded. The participation rate’s overall path has been determined by demographic and other long-term factors, but it also has a clear cyclical element, showing slower growth (or a faster decline) during recessions, then returning to its prior path when the economy recovers.
It’s possible to quantify this pattern using a simple model that
takes into account both the long-term direction of workforce participation and
the historical impact of the business cycle. . . .
The model suggests that the big drop in the participation rate during the most recent recession, dramatic though it was, wasn’t out of step with historical patterns. The recessions of the early 1980s had a similarly dramatic impact on the participation rate, although because the labor force was growing due to demographic factors, the result was a much slower rate of growth, rather than an outright decline. That means the unemployment rate from the current recession should be comparable to the rate in the 1980s.
But starting in mid-2010, the model and the real world began to diverge. As employment begins picking up, the model, based on historical patterns, expects the participation rate to start stabilizing. Instead, workforce participation has continued to drop, hitting a three-decade low in August.
That suggests the historical pattern has broken down, and that in order to make today’s unemployment rate comparable to the past, at least some of the people leaving the labor force should more properly be considered unemployed. Using the model’s participation rate forecast, it’s possible to estimate what the unemployment rate would be if historical patterns had held. Based on the model, the labor force is about 2.5-million people smaller than it “should” be. If we add those people back the labor force as unemployed workers, the unemployment rate today would be 9.3%, well above the official rate of 7.8%, but also below Mr. Romney’s 11%. . . .
It also assumes that the trend leading up to recessions was the “true” long-term path of the participation rate. If, as some economists have argued, the housing boom artificially inflated the participation rate in the years leading up to the recession, the model would predict an unrealistically strong rebound during the recovery. In fact, if the pre-boom trend in participation had held — that is, if you ignore the 2005-2007 boom years entirely and assume the participation rate had continued to fall at its 2002-2004 pace — the predicted participation rate in Sept. 2012 would exactly match the actual rate.
But of course, the early 2000s were terrible years for the job market. No one wants that to be the long-term path for American workers."
Summing Up
We should all be very concerned about the lack of good jobs in America, but we should be even more concerned about the general lack of jobs.
Unless people work, we will have no production. And if we have no production, we will have no income. And if we have no income, we will have no MOM to spend, and government will collect no taxes. And if we have no MOM and collect no taxes, we will have no government revenues to redistribute.
We can't spend or redistribute what we don't have to spend or redistribute.
Specifically, if we aren't able to compete successfully in the world economy, our days as the most prosperous and secure nation on earth are numbered.
We need to get everybody working to grow our nation's economy and output. Energy, for example.
So until we are below 6% in unemployment and headed toward that elusive 5% rate down the road, we should take no pleasure in a 7.8% or even considerably lower unemployment rate.
Any number over 6% is too high. Way too high, in fact.
Nevertheless, we very well may have several years of "way too high" unemployment rates and "way too low" labor force participation rates ahead of us.
And economically, those two together will make for a terrible situation all the way around.
So my advice is not to get too excited about the unemployment number tomorrow. It's going to be way too high, whatever it is.
And do get concerned about our near term actual domestic energy output. It's going to be way too low due to government policies which thwart economic growth.
Politics sucks.
Thanks. Bob.
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