Archive for unemployment

Reality Check on Employment Numbers

On Friday, the big news was that the unemployment rate had fallen below 6 percent for the first time in six years. That’s swell news, but the headline unemployment rate tells us virtually nothing at all about the real employment situation. Since the unemployment rate is a function of both the labor force size and the total number of people who self-report as employed, we need to get a sense of both labor force dynamics and total employment. Below, I’m going to use the government’s own numbers, so keep in mind this data is the rosiest picture that BLS could credibly paint. I will not be using the so-called “seasonally adjusted” (SA) numbers, because they’re more heavily manipulated than the not-seasonally adjusted (NSA) numbers. Also, seasonal adjustment is simply unnecessary and adds  totally unnecessary complexity to the data. Everything I look at below is not adjusted, and is from the BLS.

Here’s the unemployment rate graph:

emp5

The unemployment rate bottomed out near 4 percent during the last expansion (2002-2008), and it then shot up to over 10 percent. Ever since then, it’s been heading down steadily. The headline SA number for September 2014 was 5.9 percent, and in this case the NSA number was even lower, at 5.7 percent for September. That’s down from a year earlier, when the rate was 7.0 percent.

How great! What a big drop. We’re finally back to what was ten years ago considered a mediocre unemployment rate. But it’s better than ten percent, right?

Sure, it’s better, but what really matters, in terms of the unemployment-stats game is how much actual employment opportunity there is. The fact of the matter is, the total number of employed persons in the US has gone basically nowhere since 2007.  We see this if we look at the components of the unemployment rate, which are the labor force size and the total number of employment persons. This is the Household Survey, which means that the data is based on surveys of actual persons who are asked if they want to be employed, and if they have actually managed to find employment. People who have given up looking for work, or gone back to school, or just accepted a lower standard of living because they’re premature retirees who’ve given up permanently, are all excluded from the labor force. So, looking at the components of the unemployment rate, we see:

emp3

When the gap between the two lines is big, the unemployment rate is high. And when the gap is small, the unemployment rate is smaller. It’s perfectly possible to get a decline in the unemployment rate without adding any new jobs at all. All you need to have is a decline in the size of the labor force. We saw this at work back in 2010 and 2011, when the unemployment rate was dropping, but employment growth was near-stagnant. This was because the labor force size fell slightly, in spite of the fact that 3.3 million people continued to graduate from high school each year. Did 100% of them go to college full time? And what happened to all the people who graduated from college in those years? Well, they apparently didn’t enter the labor force. Labor force growth continues to be anemic, and it’s certainly not just because baby boomers are retiring. Many people are simply electing to leave the work force for a variety of reasons, including declines in opportunities for work. Many critics of the administration have correctly pointed to the fact that labor force participation is at very low levels.

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A Lesson in Economic Analysis from the Minimum Wage Debate

Magician holding a magic wandMises Daily Tuesday by Ken Zahringer:

Supporters of government interventions like minimum wages often pretend the economy is far less complex than it really is, and then conjure up a statistic as evidence of success. Careful analysis reveals another story, however.

Measuring Unemployment

1024px-Unemployed_men_queued_outside_a_depression_soup_kitchen_opened_in_Chicago_by_Al_Capone,_02-1931_-_NARA_-_541927Over at Mises Canada, my Saturday article worked through the finer points of a better way to discuss unemployment. One problem with current measures is that the actual unemployment rate has little bearing on how difficult it is to get a job. There are periods with high numbers of unemployed masses but with many people finding a job, and stagnant periods where not many people lack work, but not many unemployed people are able to find work either.

I previously discussed some of the other problems with the common measures of unemployment here.

Even though the unemployment rate was still north of 8% in early 2012, the average number of unemployed finding work was a healthy 2%. Today the unemployment rate is lower, but there is also a lower percentage of unemployed people finding work. In short, even though the total employment situation might be better today than it was two years ago, the average unemployed worker is going to have a more difficult time finding a job.

In fact, the average unemployed worker today has about as good a chance of becoming

Read more here.

Even the Feds Admit Minimum Wages Cause Unemployment

6782Mises Daily Tuesday by Nicholas Freiling:

There is a little-known loophole in federal law that allows for people with disabilities to be employed at wage rates below the minimum wage. Why the exemption? It’s an effort to lessen unemployment among the disabled, and a tacit admission in federal law that minimum wages cause unemployment.

Measuring Unemployment

The employment picture in America today is as bleak as it was  at the worst of the dot-com recession. In my recent Mises Canada daily I explain why the common unemployment measures that are paraded around give a false depiction of the true employment picture. I also argue that using the steady-state unemployment rate (SSUR) more ably deals with the tricky issues of part-time workers and discouraged job seekers:

Today the SSUR is hovering around 8%. It’s not such as a rosy picture as the U3 paints, but it’s quite a bit better than the U6. Notably this SSUR is the worst that America has faced in the past 14 years. The dot-com bust that led to a recession in 2001 found its bottom with an unemployment rate a hair over 8%, just like today. There has been a slow economic recovery, but the average Joe or Jill still has only as great a chance at getting a job than at the bottom of the second-worst recession of the past 30 years.

Read more here.

Unemployment and A Tale of Two Financial Crises

6776Mises Daily Tuesday by D.W. MacKenzie:

Politicians have blamed the current lackluster economy on everything from the weather to the severity of the last recession. They won’t admit that quantitative easing and fiscal stimulus are failed policies and that these policies have unquestionably failed to produce a rapid recovery over the past five years.

Ben Wiegold Talks Minimum Wage

Interviewed by Paul Molloy of Freedom Works radio, Mises Daily author Ben Wiegold discusses his article and the effects of the minimum wage.

Mises Daily: There is No Tradeoff Between Inflation and Unemployment

6771There is No Tradeoff Between Inflation and Unemployment by Chris Casey

Even mainstream empirical data shows that the Phillips Curve is wrong and that inflation does not cure unemployment. More importantly, Austrian economics has long shown that, regardless of how you slice and dice the historical data, inflation causes malinvestment, booms, and busts, thus increasing unemployment.

The High Cost of Minimum Wages

6765Ben Wiegold writes in today’s Mises Daily:

In this vein, it is prudent to think of minimum wage statutes in the same manner that one thinks of price controls generally: if a given price is forced below the market rate, shortages will occur; if a price is forced above the market rate, unsold surpluses will accumulate. The nuisance of unemployment, then, is to be simply explained as a surplus of labor services, the natural result of minimum wage laws which force wage rates above the market price.

Insofar as concern is expressed for low-income workers — the ones whom minimum wage laws are intended to benefit — it seems rather arbitrary and unwarranted to not be concerned also about those that will lose their jobs.

Video: Mark Thornton Discusses the Unemployment Rate

Mark Thornton explains why the government’s latest unemployment numbers are a sham, and the labor market is nowhere near recovered.

For More Jobs and Stability, Set the Economy Free

6718John Cochran writes in today’s Mises Daily:

Unfortunately Yellen’s strong compassion for the plight of the unemployed comes tied to a faulty understanding of the cause of unemployment. With Yellen’s ascendency to the Chair of the Fed, the Wall Street Journal notes the “Tobin Keynesians are back in charge at the Federal Reserve.” The last time this group’s Phillips Curve-based ideas dominated Fed policy, the Fed engineered the stagflation of the 1970s. Exhibiting a lack of historical understanding, sympathetic cheerleaders such as Justin Wolfers see Yellen’s commitment to the dual mandate as a plus.

Yellen’s appointment should be viewed as an investment in the Fed’s dual mandate, which emphasizes the central bank’s role in taming both unemployment and inflation. The unemployed should rejoice that they have a powerful advocate willing to battle the hard-money types willing to consign them to the economic scrap heap.

How Minimum Wage Laws Increase Poverty

6714George Reisman writes in today’s Mises Daily:

Furthermore, the higher the minimum wage is raised, the worse are the effects on poor people. This is because, on the one hand, the resulting overall unemployment is greater, while, on the other hand, the protection a lower wage provides against competition from higher-paid workers is more and more eroded. At today’s minimum wage of $7.25 per hour, workers earning that wage are secure against the competition of workers able to earn $8, $9, or $10 per hour. If the minimum wage is increased, as you and the President wish, to $10.10 per hour, and the jobs that presently pay $7.25 had to pay $10.10, then workers who previously would not have considered those jobs because of their ability to earn $8, $9, or $10 per hour will now consider them; many of them will have to consider them, because they will be unemployed. The effect is to expose the workers whose skills do not exceed a level corresponding to $7.25 per hour to the competition of better educated, more-skilled workers presently able to earn wage rates ranging from just above $7.25 to just below $10.10 per hour. The further effect could be that there will simply no longer be room in the economic system for the employment of minimally educated, low-skilled people.

Of course, the minimum-wage has been increased repeatedly over the years since it was first introduced, and there has continued to be at least some significant room for the employment of such workers. What has made this possible is the long periods in which the minimum wage was notincreased. Continuous inflation of the money supply and the rise in the volume of spending and thus in wage rates and prices throughout the economic system progressively reduce the extent to which the minimum wage exceeds the wage that would prevail in its absence. The minimum wages of the 1930s and 1940s — 25¢ an hour and 75¢ an hour — long ago became nullities. To reduce and ultimately eliminate the harm done by today’s minimum wage, it needs to be left unchanged.

Obamacare Delay: Good Politics, Bad Economics

Ace of heartsD.W. MacKenzie writes in today’s Mises Daily:

The Obama administration has in the same week admitted that the burdens that the ACA places on small businesses are onerous. The costs of the ACA will therefore cause smaller employers to demand fewer workers.

Economically speaking, there is not a real difference between workers supplying fewer hours of labor and employers demanding fewer hours of labor. In terms of the production of real wealth fewer hours of labor used in industry translates into reduced overall production. Politically, however, there is a very real difference between workers wishing to supply more hours, and employers demanding more hours.

How Special-Interest Groups Benefit from Minimum Wage Laws

Greedy Business PartnersGary Galles writes in today’s Mises Daily:

Consider an analogy. If the price of ice cream was pushed up, earnings of ice cream producers might go up or down, depending on how much less was bought as a result. But producers of frozen yogurt, a substitute for ice cream, will definitely benefit, because a higher price of ice cream will increase demand for frozen yogurt, clearly benefiting its producers.

Similarly, increasing the minimum wage will raise the cost of hiring low-wage workers. And while it might actually hurt low-wage workers, it will help each substitute for low-wage labor by increasing its demand. Thus, the narrow self-interest of those offering substitutes for low-skill labor, rather than compassion for the working poor, may best explain support for higher minimum wages.

Unions top that list. A higher minimum wage increases the demand for union workers by reducing competition from lower-skilled workers. For instance, if the minimum wage was $8 and the union wage was $40, employers give up 5 hours of low-skilled work for every union worker-hour utilized. But increasing the minimum to $10 means employers give up 4 hours of low-skilled work for every union worker hour.

Higgs: Looking Beyond the Unemployment Numbers

Robert Higgs, in spite of his reservations about writing op-eds, has written a great one for the McClatchy-Tribune wire:

One of the main reasons for containing our joy is that the rate fell from 7 percent in November despite the addition of just 74,000 net new jobs, a weak performance by any measure – and far below the 2013 monthly average of 182,000 new jobs. Another reason for caution is that the standard unemployment measure (U-3) provides a distorted picture of what’s taking place in the job market.

A better measure of the health of the job market is total employment: how many people have jobs. After all, it is employment that contributes to our well-being. Jobs, not unemployment, produce the goods, services and earnings that our families rely on. And on this front the picture is grim by historical standards, with 2 million fewer civilians working at the end of 2013 than at the end of 2007, when the economy began to tank.

But even this doesn’t tell the full story, because while the economy and job market have been struggling, the population has been growing. This means that a smaller percentage of the job-eligible civilian population – that is, non-institutionalized individuals age 16 and older – has jobs.

 

The Mises View: The Latest Employment Numbers

Mark Thornton explains what the latest government employment report really tells us.

The Minimum Wage: Are Economic Laws Valid in Australia?

 Guest Post: The Minimum Wage and Unemployment in Australia

 by Ben O’Neill

Are things really topsy-turvy down-under?  Since people in Australia are already walking upside down on the bottom of the Earth, do the laws of economics operate upside-down also?  Does the minimum wage in Australia lead to more employment, instead of less?

In light of recent debate over minimum wages, referring to the situation in Australia, one might be tempted to believe that the answer is yes.  Some commentators have argued, contrary to prevailing economic theory, that the minimum wage can actually increase employment, owing to additional “money in the pockets” of workers flowing on to greater spending in the economy, which in turn causes greater demand for goods and services, and more employment for workers.[1]  Some have attempted to bolster this argument by pointing to the high minimum wage and low unemployment rate in Australia as evidence that the policy either does not cause unemployment, or possibly even increases employment.[2]  If only other countries could be more like Australia, where the beer is cold, the women run around in bikinis, and the minimum wage and employment levels are both high!

Australia and the USA: a simple comparison

A simple comparison of the reported minimum wage rates and unemployment rates in Australia and the USA show that, prima facie, Australia has a higher minimum wage and lower unemployment.[3]  Even after conversion of the minimum wage into equivalent currencies, or equivalent purchasing power, the higher minimum wage in Australia still holds.[4]  This simple comparison tells the story of an Australian economy with greater employment and higher minimum wages than in the US.

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However, as with many superficial comparisons of this kind, there is a lot more to the story that must be understood.  First of all, the rosy picture of employment in Australia ignores a great many statistical issues which take certain kinds of unemployment and underemployment out of the official figure.  Second, the minimum wage in Australia is exaggerated somewhat by the above figure, since its application to low-skilled groups is tempered substantially, using a sliding scale of rates that reduces the hallmark figure for the main groups affected by the policy.  Finally, there is the simple fact that basic comparisons of this kind do not get to the root of the causal effects of a policy like minimum wages — economic comparisons must occur ceteris paribus, not cum hoc ergo propter hoc.  When one takes account of these various issues, the reality of economic law is brought back into focus, and the situation in Australia is neither unusual nor inspirational.

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