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Unemployment vs Underemployment

Posted By Barry Ritholtz On July 12, 2004 @ 9:52 pm In Finance | Comments Disabled

At the beginning of this year, we mentioned the Augmented Unemployment Rate [1] as a way of drilling beneath the unemployment rate headline data, as a way to get to the true employment situation.

Then, in May [2], we noted (with a bit of a snicker) that the WSJ [2] was surprised — while we were not — by the lack of broad public satisfaction with the apparently improving economy:

“Despite months of strong growth and recent good news on payroll jobs, six in 10 American voters say the economy is heading for trouble rather than prosperity, according to a new Wall Street Journal/NBC News poll. Moreover, the proportion of Americans who say the economy has improved in the past year has declined significantly since January, as has the proportion who believe it will improve in the next year.”

We see yet another conformation of the tepid jobs improvement in this chart below, courtesy of Job Watch [3]. It further confirms both Fed Chair Greenspan’s Augmented Unemployment Rate [1] data, as well as the WSJ poll [4]:

Underemployment higher than at recovery’s start
20040702_underemploytrends650
Source: EPI/Jobwatch [3]

The significance of these dates: March 2001 was the official start of the recession, November is its official end. Last months employment data, June 2004, is a full 31 months after the recession ended: Underemployment is actually higher.

This continued Job weakness is very consistent with our September 12, 2003 discussion of the President’s tax package. We observed how the White House was seemingly over-emphasizing the stock market, to the detriment of a more broadly based macro-economic stimulation. At the time, we wrote: “I simply cannot recall any previous time where the focus was on stimulating the Markets, rather than stimulating the economy.”

More specifically, in “Stock Market vs the Economy [5],” I detailed exactly how this was occurring:

“The President’s tax package was very much focused on the Stock Market. It replaced an odd accounting permutation – the preference for debt over equity by public companies (via double taxation of dividends) – by creating a new odd permutation, a new “dividend class” taxpayer bracket; For some reason, we also lowered the capital gains tax – on the heels of the biggest investment bubble in history.

It’s hard to imagine that capital investment really required additional stimulation.

The bulk of the tax cuts were for the investor class (ie, the top 10%); As you can see, it had the expected response – it stimulated investment in the market. To stimulate the economy, you cut taxes for the spending classes – the middle class. They typically spend most of their discretionary income. That in turn stimulates manufactured goods and service consumption, which should lead to additional hiring. The trade off is less of a fund flow driven rally, and more of a better set of employment numbers.

All told, I don’t believe that’s the most effective way to spend a trillion dollars. As the President often says, “if you want more of something, tax it less.” So, on top of middle class tax cuts, if you want to increase hiring, give companies a tax credit for new hires or health care costs or just cut the payroll tax. It’s really not that complicated – when you increase your domestic headcount over a previous percentage – i.e., 2001′s high number, the firm gets a tax credit. Note that overseas outsourcing or reducing US headcount will not qualify you for the cuts.”

Lets hope June employment data was an aberration, and not the reversal of the recently improved jobs numbers of March, April and May.

This is one instance where I really wouldn’t mind being wrong . . .


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2004/07/unemployment-vs-underemployment/

URLs in this post:

[1] Augmented Unemployment Rate: http://bigpicture.typepad.com/comments/2004/01/augmented_unemp.html

[2] May: http://bigpicture.typepad.com/comments/2004/05/wsj_its_the_eco.html

[3] Job Watch: http://jobwatch.org/index.html

[4] WSJ poll: http://online.wsj.com/article/0,,SB108380597660303603,00.html

[5] Stock Market vs the Economy: http://bigpicture.typepad.com/comments/2003/09/stock_market_vs.html

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