First-time readers, the dialogue in this blog is set in the future (sometime after the year 2020). Each entry assumes there has been a 5th revolution in the US — the Revenge Revolution. More about Revenge Revolution and author, Entry #1. List and general description of entries to date. Annual assessment if Revolution plausible.
Note: most characters appear in a number of entries, with many entries building on previous conversations. Profile of characters. You’ll catch on quickly. Thanks for your time and interest…and comments.
Scene: Gelly, Jordan’s assistant, has been editing and updating a primer Jordan wrote about 2011. Section starts Entry #235. (Primer will be available as PDF in more traditional format after the first few entries. The download will be updated regularly.)
Jordan: “Good. Which one?”
Gelly: “Unemployment rate. Several things I didn’t know.”
Jordan: “Such as…?”
Gelly: “The unemployment rate lags behind economic growth. Until I read your example, I never thought about why changes in the unemployment rate follow other activity. I also didn’t realize how the rate was calculated. The idea that the rate can go up as the economy is improving just didn’t seem right at first.”
Gelly: “I think so. Here’s the write-up. I need to make one chart a little more clear. We should also update some of the information for the Trump Administration. But everyone should get the idea for now.”
Jordan: “OK, Gelly. Thanks.”
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When Obama was president, most Republican politicians and conservative talking heads continually criticized the Administration for not creating more jobs. During president Obama’s first term, a typical comment from the right would be, “There has been no sharp decrease in the unemployment rate. Therefore the stimulus package and deficit spending has not worked.”
On the surface, the comment seems fair. But what is the unemployment rate and how should we interpret changes in the rate?
How Would You Behave? Situation: You own a business. Sales and profits are down. Lately there has been some uptick in sales but you’re not sure if it will last. Question: Would you start hiring people the minute sales started to pick up or would you wait to be certain sales were going to continue at a higher level? Answer: Most all business owners wait…and the behavior is logical.
With this behavior in mind, let’s think about the unemployment rate. If businesses wait to hire more people until they are certain the economy is getting stronger, how should the unemployment rate be characterized – as a “leading” economic indicator or a “lagging” economic indicator?
The unemployment rate is a “lagging” economic indicator – the unemployment rate does not decline until the economy is already weaker and the unemployment rate does not fall until the economy is already improving. Thus, gains in employment will come after the economy has started to improve.
The chart depicts monthly changes in employment. The data points above the “zero” line indicate increases in employment compared to the previous month. Data points below the “zero” line indicate losses. As you review the chart, keep in mind that employment is a “lagging” economic indicator so changes in overall economic activity occur before the changes in employment.
The economic decline that turned into the “Great Recession” started during Bush43’s second term and the decline accelerated sharply as Obama was taking office. Early in the Obama Administration, Congress passed an economic stimulus package. These type packages, whether implemented by Republican or Democratic administrations, take time to have an effect on the economy and an even longer time to have an effect on employment.
Note that beginning October 2008, about 7-8 months after the stimulus package was passed, monthly job losses stabilized and the monthly losses decreased until the beginning of 2010. Because the unemployment rate is a “lagging” economic indicator, the economy was actually starting to improve even though people were continuing to lose jobs and the unemployment rate continued to increase.
While it makes for great political theater, those claiming that the economic recovery program implemented by the Obama Administration was a failure, conveniently failed to provide an accurate representation. The recession of 2007-2008 was labeled the Great Recession because the economy almost sank into a depression.
Just how bad were job loss been compared to previous recessions? Much worse. The job losses were much sharper and more severe than in any other post-WWII recession. The area within the ellipse reflects the losses in 2007-2008. Notice how much steeper and deeper the losses are compared to other recessions. (I’m working on a chart that is easier to read.)
So, if the job losses were significantly worse than previous recessions, wouldn’t you think any economic recovery should take longer? Not if you’re a politician of the opposing party. For all those criticized the Obama Administration for not creating more jobs, the critics should remember who was president when the recession started – and why the recession started.
Explaining the Unemployment Rate
Enough politics. Just what is the unemployment rate? The unemployment rate is total number of people looking for work but unable to find work divided by the total work force. The result is “unemployment rate” or percent of the workforce considered unemployed.
Part of the confusion lies in the definition of the “total work force.” Total work force is the sum of people looking for work and people currently employed. If people are unemployed and have given up looking for work, they are not considered part of the workforce. Huh? Really? Yes, really. Here’s an example.
Situation A. 100 people are available to work – 90 are employed and 10 are unemployed and all 10 are actively looking for work. Thus, the workforce is 90+10, or 100. The unemployment rate is 10.0% (1-90/100).
Situation B. Same 100 people as Situation A. However, after several months, 5 out of the 10 people unemployed cannot find work, become frustrated and quit looking for a job. What happens to the unemployment rate? It goes down. Yes, down, even though the total number of people stays the same.
The unemployment rate decreases from 10.0% (10 unemployed out of 100 in the workforce) to 5.3% (5 unemployed out of 95 in the workforce.) The unemployment rate decreases even though the number of people without work stays the same.
Even more confusing is when the economy improves, those who previously quit looking begin looking for jobs. What happens to the unemployment rate? The rate may actually increase even though the economy is improving.
Situation C. Start with Situation B where 10 people were unemployed but 5 of the 10 quit looking for work. Now the economy starts to improve and the five people who quit looking start looking again. Only 2 of the 5 who quit previously find jobs right away but everyone who was not employed is again looking for work.
Situation C now has 92 employed, 8 unemployed. What happens to the unemployment rate? The rate jumps from 5.3% in Situation B to 8.0% in Situation C, even though the total number of people employed increased from 90 to 92. Why? Because the total workforce – the number of people employed and number looking for work increased from 95 to 100. (Unemployment rate calculation, (1-92/100=8.0%)
Another problem interpreting the data is the unemployment rate includes workers who have jobs but are working less than full-time. These people are counted as “employed.” Using the same 100 people, if 15 are working say 30 hours per week instead of 40 hours per week, the 15 would be counted as “fully employed,” even if weekly income has been reduced.
While these calculations are not hard to understand, the method used to calculate the unemployment rate is not often explained, especially the effect of “under-employed” or “quit looking for work.” Understanding the methodology will help you explain to others why results of programs to reduce unemployment always lag economic growth.
(Reference material: Bureau of Labor Statistics website has vast array of information about employment, unemployment and how to interpret. http://www.bls.gov)