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Employment Situation: Much worse than it looks . . .

Posted By Barry Ritholtz On October 9, 2004 @ 10:26 am In Finance | Comments Disabled


After the September Jobs numbers came out, we mentioned [1] that drilling beneath the headline numbers may reveal structural problems in the labor market which might be overlooked.

This is no big surprise — we have continually commented that in a post-bubble environment, Economists err when they apply the usual presumptions about typical recession/recovery cycles. This environment is the exception to the usual rules . . . That is my best guess as to why the dismal scientists have been so wrong by so much for so long.

As we have noted several times [2] over the course of the past year [3], the Augmented Unemployment Rate [4] is a good adjunct to the the rosy view of the Jobs situation as painted by the employment rate.

Now, we see several reports suggesting exactly why the labor situation is even worse than it looks in the Augmented Unemployment Rate:

“Tom Gallagher, head of policy research at ISI Group, points out that part of the decline in the unemployment rate has come from people dropping out of the work force. The so-called labor participation rate has fallen to 66% from a high of 67.3%, meaning a smaller share of the civilian, working-age population is looking for work. It’s hovering near 15-year lows.

Mr. Gallagher offers that if the participation rate were at the older, higher level, then the unemployment rate would be around 7.2%. Even using a 10-year average participation rate yields a 6.4% unemployment rate.”

That’s only ‘modestly’ bad news — consider what happens if we add in the “so-called marginally attached workers and part-timers who really want to be working full time. Barron’s Alan Abelson [5] notes the Liscio report’s conclusion that under those circumstances, the unemployment rate would actually be a “formidable 9.4%.”

Ableson excerpt:

“There’s little cheer in the employment picture. That was evident on Friday when the Bureau of Labor Statistics released its September employment report, and it was just plain ugly. But, please, don’t blame those meteorological serial nasties, the hurricanes. There was kind of a wash, if you’ll pardon the expression, between the number of folks who couldn’t get to work and those who, in the wake of the big winds, hired on to clean up the mess and rebuild.

Actually, as Philippa Dunne and Doug Henwood point out in their excellent review of the data in the Liscio Report, the overall tally doesn’t by any means tell the story of just how skimpy job creation in the private sector was last month — all told, it accounted for only 59,000 of the total. The rest — more than one-third — came by grace of the federal and state governments.

Using history as a guide, Philippa and Doug reckon that “we’re now 9.3 million jobs below where we’d be in a ‘normal’ recovery.” Adding in the benchmark revisions still leaves the count nine million below the aggregate payroll addition we should have seen.

They also offer some pertinent observations on the incredibly shrinking labor force, a phenomenon that’s largely responsible for the deceptively modest unemployment rate. The labor market seems to be suffering, in their parlance, “serious withdrawal symptoms.” In September, even though the population grew by 264,000, the labor force shrank by 221,000. Over the past year, it has expanded less than half as rapidly as has the population and a mere one-third of the rate it enjoyed from 1980 to 2000.

Thanks solely to what they term “the massive withdrawal” from the labor market, the unemployment rate has held steady. Suppose, instead of contracting, the labor force had grown over the past two months at the same pace as it did in the previous two. Further suppose the dropouts had been counted in the ranks of the unemployed. The result would be a jobless rate of 6.2%, not the relatively benign 5.4% that was reported. And, we might add, if one includes the so-called marginally attached workers and part-timers who really want to be working full time, the unemployment rate weighs in at a formidable 9.4%.

The future job picture doesn’t shape up as exactly rosy, either. The placement firm Challenger, Gray & Christmas tallies some 107,000 planned lay-offs announced in September. That was up 45% from August and 41% from September 2003. What’s more, the dirgeful bell continues to toll: Last week Bank of America targeted 4,500 jobs for jettisoning and AT&T, 7,400.

Pretty grim stuff.”

Where Federal Reserve Chairman Alan Greenspan and CEA Chief Greg Mankiw seem to be wide of the mark is in there expectations that the so-called soft patch is but temporary and non-structural. As these two graphics illustrate, that is likely not the case:

Clearly, this cycle is different than the prior recession/recovery cycles:

Click for larger graphic
Post_recession_job_gains [6]
Graphic courtesy Cleveland Federal Reserve [7]
(Yes, I know I’ve shown this chart ad infinitum — get used to it)

This recession recovery cycle is more than atypical. It represents an ongoing structural change in the labor market and the broader economy that has been a long time coming:

Click for larger graphic
20041008changeintotalemp650 [8]
Graphic courtesy EPI [9]

The above graphic suggests that these changes cannot be blamed — at least, not totally — on President Bush. These are the cards he was dealt. You can, however, hold him responsible for how he played these cards.

Let’s look at the even bigger picture: Consider the employment-to-population ratio. The Cleveland Federal Reserve Board observes that this decline in the employment-to-population ratio is a useful indicator of the growth of “labor market slack.” In September 2004, it was 62.3% thats a drop from the 2001 (pre-recession) level of 64.3%. That 2% fall represents an even bigger drop than the labor participation rate slide of 1.3%.

You may be wondering: What is the significance of the employment-to-population ratio? Consider this: As the Boomers retire, and start collecting Social Security, that ratio — along with the percentage of 70 year old plus population — is going to determmine how solvent the system is.

Pretty grim stuff, indeed.

Alan Abelson
Barron’s, MONDAY, OCTOBER 11, 2004


Growth Is There, So Why Isn’t Bush Doing Better in the Polls? [10]
Wall Street Journal, October8,2004


Employment Surveys Are Telling the Same (Sad) Story [11]
Mark Schweitzer and Guhan Venkatu
Cleveland Federal Reserve, May 15 2004


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

URL to article: http://www.ritholtz.com/blog/2004/10/employment-situation-much-worse-than-it-looks/

URLs in this post:

[1] we mentioned: http://bigpicture.typepad.com/comments/2004/10/weak_jobs_numbe.html

[2] several times: http://bigpicture.typepad.com/comments/2004/01/chart_of_the_we_2.html

[3] past year: http://bigpicture.typepad.com/comments/2004/03/augmented_unemp.html

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

[5] Barron’s Alan Abelson: http://online.barrons.com/article/SB109727927789840886.html

[6] Image: http://bigpicture.typepad.com/photos/uncategorized/post_recession_job_gains.jpg

[7] Cleveland Federal Reserve: http://www.clevelandfed.org/Research/Com2004/05-15.pdf

[8] Image: http://bigpicture.typepad.com/photos/uncategorized/20041008changeintotalemp650.gif

[9] EPI: http://www.jobwatch.org/

[10] Growth Is There, So Why Isn’t Bush Doing Better in the Polls?: http://online.wsj.com/article/1,,SB109718246032139609,00.html

[11] Employment Surveys Are Telling the Same (Sad) Story: http://www.clevelandfed.org/Research/Com2004/05-15.pdf

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