December 2, 2011

Right Now, Higher Unemployment Might Be Better

This morning I was listening to P.O.T.U.S. on XM satellite radio and a guest, economist Mark Lieberman from Economics Analytics Research, put succinctly and in easy to understand terms what the lower unemployment rate of 8.6% announced today, is actually not good right now.  

It has nothing to do with what might benefit the GOP in 2012, and everything to do with the unemployment trending.

He is of course talking about the difference between U6 and U3 as measures of unemployment as provided by the Bureau of Labor Statistics.  While the president and his team are going to be all over the recovery winter message associated with a 0.4% drop in unemployment, they really should not be crowing about it.

The reason, according to Lieberman, is that discouraged workers, and those who have left the labor search altogether are not included in the drop because they are not included in the calculation of those out of work, employable and looking for work.  U6 unemployment adds in discouraged workers who have stopped looking for work.

Labor force measures are based on the civilian noninstitutional population 16 years old and over. Excluded are persons under 16 years of age, all persons confined to institutions such as nursing homes and prisons, and persons on active duty in the Armed Forces. The labor force is made up of the employed and the unemployed. The remainder—those who have no job and are not looking for one—are counted as "not in the labor force." Many who are not in the labor force are going to school or are retired. Family responsibilities keep others out of the labor force.
As Lieberman puts it, those who are actively looking for work should increase as signs of a recovery take hold.  Therefore, people who were previously discouraged workers not looking for work (part of the U6 measure) would start looking for work, thus increasing the number of unemployed as per the U3 (common) definition of unemployment.  But the U6 rate is going down too, and in a rapid burst at that.

However, if you look at U6, that rate went down as well, so maybe Lieberman's theory is not correct.  There is evidence that supports his position. The record number of people on food stamps, and the number of people on welfare still up 8.3 million from 2007, and the aging of the duration of unemployment as per the two graphs below, indicate that clearly all is not well. 
% of Unemployed, out of work  less than 5 weeks.

% of Unemployed out of work more than 27 weeks.

Something is still not well in America.  People coming back into the job seeker category and increasing the unemployment rate is counter-intuitive to a recovery, but workers got unemployed longer and then got discouraged, those people should be coming back if things are going well.  They don't seem to be coming back yet.  Look again at those graphs, the aging of the unemployment duration has not fundamentally changed.  An 8.6% rate would be better if those aging graphs started reversing their curves as well.

There is always the consideration that two weeks from now those numbers will be adjusted to show a more accurate and less rosy picture too.

In summary, the decrease of unemployment rate, while seasonally adjusted still is not the good news it will be portrayed as.  Not yet.  In the words of Shania Twain, "that don't impress me much."
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