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Number of Discouraged American Workers Hit Record High

January 09, 2011
EconMatters

EconMatters

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The latest U.S. Labor Department data indicated that non-farm payroll added 103,000 jobs in December, which is far short of expectation, but the unemployment rate somehow managed to fall sharply to 9.4% (from 9.8% in November) far exceeding expectation.

103k Jobs Not Enough To Drop Unemployment Rate

The current consensus is that the U.S. economy would need to create 150,000 to 175,000 new jobs each month in the next 5 years or so, at minimum, just to restore the 8+ million jobs wiped out by the Great Recession.

Since the nation added only 1.1 million jobs in total last year, or averaging 94,000 jobs a month, the 103,000 new jobs added, coupled with a 0.4% drop in unemployment rate in December, simply does not make much sense.

Totally Discouraged

Nevertheless, a closer look at data the Bureau of Labor Statistics (BLS) tells that the drop in unemployment had very little to do with newly created jobs. Instead, it was primarily due to 260,000 workers dropping out of the labor force. As a result, the labor force has shrunk by 246,000 from the pre-crisis 2007 level (The U.S. labor force average growth rate is supposed to be around 0.8% per year from 2000 to 2050, according to Joel Kotkin, a scholar on urban development.)

Furthermore, not only the number of discouraged workers over job prospects hit a record high (since 1994, the earliest year the data is available) of just over 1.3 million (Fig. 1)--more than the number of jobs added in 2010--but the labor participation rate also plunged to a 25-year low of 64.3% ....post-recession! (Fig. 2).

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Most Disturbing – Long Term Unemployed

Most disturbingly, the average number of weeks people remain unemployed also has risen to 34.2 weeks in December vs. 33.9 weeks in November, with 6.4 million jobless people classified as long-term unemployed, i.e. without a job for 27+ weeks.

The All Inclusive Jobless Rate Could Be 11%+

All these suggest there is a large number of frustrated workers who left the labor pool but unaccounted for in the unemployment rate calculation. That means the all inclusive jobless rate could easily be 11% or more, instead of the 9.4% flashing in headlines today.

Needed - 300k Jobs Per Month

Overall, the latest employment report seems to reflect a painfully slow-recovering, but still confused labor market. Large corporations are hoarding cash reluctant to hire or invest fearing uncertainties ahead, while small business still strapped for cash and credit can’t afford to hire since business is still slow.

Most economists estimate that that in order to make a meaningful dent in the jobless situation while keeping up with the labor force growth rate, new job creation needs to be at around 300,000 a month going forward, which is a long way from where the economy is right now (Fig. 3).

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Worse Before Better

Furthermore, since the long-term unemployment benefits have been renewed, they could bring more people back into the labor force leading to a rise in the unemployment rate. So, things may get worse before they get better, and that Federal Reserve Chairman Bernanke is probably right when he said it could take “four to five years” before the unemployment rate is back to a more normal 5% or 6%.

Housing & Auto - Key To Jobs

On the other hand, the economy could get there a lot faster beating Bernanke's estimate if both housing and auto sectors could really fire on all cylinders, and if the Administration would really start pushing for more jobs-friendly policies and measures, as the presidential re-election is due in 2012.

QE3 - A Matter of When

Moreover, I think with this latest employment report, it looks like QE3 could be just a question of when, and there’s no way Fed would cut QE2 early as some speculated.

That, of course, will evolve into a total beast by itself later on. But we could always remain hopeful that the U.S. labor market and economy would be strong enough to tackle that equally, if not more, daunting challenge.

About the author:

EconMatters
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Comments

paulwitt
Paulwitt - 3 years ago
My new years resolution is that I won't talk about politics.....and I'm keeping to it.....so far!


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