What Might Happen with America's Unemployment Rate

Noam Scheiber continues the discussion on what might happen with the American unemployment rate, and he disagrees with Nate Silver; unemployment will probably increase to 10% or higher, he says.

Mr Silver's analysis is off in several ways, according to Mr Scheiber. First, it anticipates something like a typical postwar recovery, when America has not had a typical postwar recession. Second, Mr Scheiber references the work on financial crisis driven recessions by Kenneth Rogoff and Carmen Reinhart, which suggests that something like a 7% increase in unemployment from the previous low is in order. This would send the unemployment rate over 11%, if correct.

Mr Scheiber says that this is a little implausible given what we currently know; there simply doesn't seem to be a mechanism for generating that large an increase. Still, it's a point in favour of a higher than expected peak in unemployment.

Finally, he points out that recent recessions have entailed a very long lag between the end of contraction and the end of rising unemployment. During the previous downturn, the economy bottomed out in November of 2001, but the unemployment rate continued to rise until June of 2003. Were unemployment to rise for an additional 19 months after output growth resumed this time around, it seems absolutely certain that the 10% threshold would be crossed.

But is it reasonable to think that this recession will closely mirror the previous one? In some ways, yes. Both occured in the wake of popped bubbles, both have taken place in an environment of very low interest rates, and so on.

On the other hand, the 2001 recession was barely a recession at all. Output only shrank for two, non-consecutive quarters, and in each the rate of contraction was barely over 1%. The unemployment rate never got above 5.9% during the recession, and it subsequently peaked at 6.3%. Relative to the late 1990s, that seemed like a very high unemployment rate. Relative to the 25 years before the late 1990s, that looked like full employment, or close to it.

In other words, the unemployment rate's stubborn refusal to fall during the last recession may be attributable to a rise in structural unemployment during the period, such that there simply wasn't much room for additional growth in employment at the time. The Federal Reserve's attempt to get the unemployment rate back below 5% may then have been foolhardy, contributing to bubble-friendly conditions, rising commodity prices, and so on.

This time around, of course, job cuts have been far deeper, and there is no question that much of the level of unemployment at present is due to cyclical factors. It stands to reason that with a bottom and recovery for output, hiring sufficient to cut unemployment will take place. After all, we've seen that firms have been very aggressive about trimming their staffs and inventories; an uptick in demand will translate into an uptick in production and employment. This doesn't mean that the recovery won't in some sense be jobless—there may indeed be a higher than normal structural rate of unemployment lurking beneath the cyclical change. It does suggest that unemployment may easily avoid the 10% level, only to remain stuck well above historical lows for a prolonged period of time.

Another way of looking at this is to note that job cuts in this recession have been quite deep relative to changes in output. What will happen next where the unemployment rate is concerned depends upon how you interpret that factoid. Does it suggest that output changes will eventually catch up with employment, leading to a renewed and deeper contraction? Or does it suggest that firms are running with skeleton crews and employment will quickly rebound as demand growth resumes?

This article originally appeared on The Economist.com

Comments

[markfl:]

I'm sorry that this article asks more rhetorical questions than it does answer real ones. 10%? 12%? It's a question of the labor force participation rate as well as job creation. Perhaps you worked full time for 20 years from 1988-2008. You lost a job in 2008, your benefits expired in October, and in November you ceased looking. You're not in the labor force, not on the claims report, and not unemployed (you are not on the headline u3 jobs report).

In January 2010, you started looking for work. You weren't successful and when surveyed in Feb. you are counted as unemployed because the economy has not created a job for you to fill. How many people will re-enter the workforce? How many jobs will be created? In the scenario above, you were a u5, or marginally attached, and became a u3. The difference between the two stats is now 9.4 vs. 10.7. A year ago, u5 was only 7.0.

Key also here is that to claim benefits you must seek work. Its hard to say how many workers will stop claiming/exhaust benefits and how many will continue looking. Nobody knows. Nobody knows if federal benefits will be re-extended, when this might happen, or for what duration they might be extended.

Aug 12 03:08 AM

[Moon Kil Woong:]

Structurally the US is in a bind. It has educated millions for the financial sector or as well heeled executives for decades when the real need is for more scientists, and engineers, and entrepeneurial businessmen. That means we will have millions entering the workforce with masive student debt and no jobs for their skill sets for years. Compounded by increased productivity and a shrinking middle class I don't see any rapid improvement in real unemployment. There is always a chance for government accounting for unemployment to drop if they can get enough people to say that gave up trying to get a job.

Well, at least the US got it right in that there will still be work for lawyers which can be another article all together on why America is becoming less and less competitive.

Aug 12 03:59 AM

[John Bowman:]

It's not just careers in the financial field that colleges are spewing out, it's non-technical types that the future job market will never need. Liberal arts degrees will be for the well-heeled in the future as it was decades ago.

I have also read that the latest U6 unemployment figures are hovering around 16.3%

Aug 12 04:49 AM

[Steven Hansen:]

"Another way of looking at this is to note that job cuts in this recession have been quite deep relative to changes in output."

this statement needs to be defended as there seems to be confusion between manufacturing (which is less than 10% of GDP) and private non-farm employment. imo job cuts are commensurate with output changes in services and goods production.

"But is it reasonable to think that this recession will closely mirror the previous one? In some ways, yes. Both occured in the wake of popped bubbles, both have taken place in an environment of very low interest rates, and so on."

bubbles are the biggest cause of our recent recessions because we have structural underlying issues which we have not addressed - such as the ones Moon above points out.

i wish the statements in this article were hyperlinked to the facts supporting these statements, as a few run contrary to what i believe is true. SA is an information exchange, and much of this article is unsupported.

Aug 12 04:56 AM

[perceptions...:]

The actual Unemployment rate, is likely much higher than suggested by official figures.

In addition, the Employment (participation) rate, is likely to continue to fall.

That said, a lower "participation rate" could result in a "effectively lower Unemployment Rate" than may otherwise be the case, as the jobs vacated by the retiring Boomers are Lost to the economy, but not added to the "unemployment rate".

Aug 12 06:19 AM

[conceptwizard:]

Was it June’s horrid numbers, in which 467,000 people lost their jobs compared to 345,000 in May, a one-time fluke? Or does it mean that all those Wall Street economists who believe the economic recovery is starting are dead wrong?

Not to scare you, but the situation is actually worse than it seems. Over the years, the government has changed the way it counts the unemployed. An example of this is the criticized Birth-Death Model which was added in 2000. The model is designed to account for the birth and death of businesses and the resultant lag in survey data. Unfortunately, the model doesn’t work that well during economic contractions (like we have now) and consistently overstates the number of jobs being created each month.

John Williams of Shadow Government Statistics specializes in removing these questionable tweaks to the government’s statistical data to better align current numbers with the methodology used to gather historical data. After reviewing the data, Williams believes that “the June jobs loss likely exceeded 700,000.” David Rosenberg of Gluskin Sheff notes that the fall in the number of hours worked in June (to a record low of 33 per week) is equivalent to a loss of more than 800,000 jobs.

There are similar issues with the way the unemployment rate is measured. The headline rate only jumped from 9.4% to 9.5% because of a drop in the number of people in the workforce. The more inclusive “U-6″ measure of unemployment, which includes discouraged workers, jumped from 16.4% to 16.5%. But even this doesn’t adequately capture the situation on the ground: Back in the Clinton Administration, the definition of discouraged worker was changed to only include those that had given up looking for work because there were no jobs to be had within the last year.

By adding these folks back in, William’s SGS-Alternate Unemployment Measure rose to a jaw-dropping 20.6%. Separately, the Center for Labor Market Studies in Boston puts U.S. unemployment at 18.2%. Any way you cut the numbers, the situation is very bad. According to David Rosenberg, one-in-three among the unemployed have been looking for a job for more than six months and still can’t find one.

Aug 12 08:03 AM

[John Galt:]

During the previous downturn, the economy bottomed out in November of 2001, but the unemployment rate continued to rise until June of 2003. Were unemployment to rise for an additional 19 months after output growth resumed this time around, it seems absolutely certain that the 10% threshold would be crossed.

But is it reasonable to think that this recession will closely mirror the previous one? In some ways, yes. Both occured in the wake of popped bubbles...


I wrote about this exact thing but pushed further. There is a HUGE difference between your economy having an Internet tech Stock bubble and having a Housing/Credit bubble which infect your entire economy.

Last time we had a 9 month recession followed by 18 months of job contraction. Right now we have an 18 month recession... do the math!

Aug 12 08:51 AM

[Pat C:]

We simply must have Americans making "stuff" again. I believe it was Mark Thoma on SA who provided a graph of non-durable production employment for the last decade(s) and the decline was extraordinary. The much hyped "service economy" and highend employment is just not getting it done. We have to look at this reality and stop putting our heads in the sand. This highend employment (smiley face) theory is a bunch of baloney. If you outsource the production, other than some marketing, the rest of employment goes with it (not to mention real competitive advantage - you think China and others are not taking notes!?), get real. I don't want to sound like Lou Dobbs here - but we have to look this straight in the face and deal with it.

Aug 12 10:33 AM

[sutski:]

www.shadowstats.com

Nudging 20% unemployment in reality...If the real figures were out there instead of pure Govt. lies, I think a lot more people would shut up about the goddamn green shoots and the frikkin tentatively out of the woods garbage...

" There is a HUGE difference between your economy having an Internet tech Stock bubble and having a Housing/Credit bubble which infect your entire economy."

Correct.

Aug 12 10:44 AM

[WhoisJohnGalt:]

Pat C,

I would love to agree with you regarding America's return to its core strength of industrialism, but that might not be in the cards. Economies also run on a life cycle and the shift from hard to soft goods (i.e. services) is inevitable. We export the labor and supply costs elsewhere, but in the process of achieving greater margins, money leaks away from domestic to foreign shores.

A financial firm requires less people (unless you're GS, dilute that ridiculous bonus) relative to a factory, so perhaps an uptick in the natural rate of unemployment is expected. Everyone is blame for overextending themselves: banks on questionable loans and securities, consumers on credit, and perhaps businesses on expansion. Corporate vision of limitless growth induced firms to open up stores too soon and hire too many. This makes sense in context of the recent news that productivity has improved due to cost and labor cuts.

And the damage may not be done/reported. Average working hour declines and an increasing proportion of full-time workers shifting to part-time will all come into the big picture in a quarter or two. And since these expectations are certainly not incorporated into market prices just yet, the day of correction could be a nasty one.

Aug 12 10:58 AM

[Socialism c...:]

Unemployment WILL go double-digit AND remain there for an extended period. We continue to bleed jobs to overseas sources. This week's productivity report has shown cause for employers to hold off on hiring -- just squeeze those who remain for more output. And lastly, the neo-Marxist policies of the current administration do not foster growth, but stagnation -- this is not my opinion, but the historical truth that has been repeated time and again: socialist economics leads to higher unemployment and slower growth...precisely because government are not producers, but redistributors...which means that those who do the producing are continually hit with ever-higher costs and therefore, shrinking margins. That doesn't foster hiring. We all know this...but Congress refuses to acquiesce!!!

Aug 12 11:14 AM

[hksche2000:]

As John McLaughlin would say:

The unemployment rate WILL be >11% , the real unemployment rate is already >20%! and will go higher.

Sorry to say!

West and East Germany have had these UER for decades! despite much better exports and trade balances than ours.

We rely on the US consumer (>70% GDP) who, together with the Gov't, is tapped out for years to come; the lack of jobs just adds to the vicious cycle.

Highly restrictive bank lending to (especially the job generating) SMALL businesses will con't because of banks' trillions of toxic assets will haunt them/us for yrs/?decades to come.

Not to mention US asset deflation >$15T in the last 2yrs (how many of us are still feeling rich?) and huge unfunded boomer legacy costs looming.

We'll have to bring out the best in us and we will. And I'm sure about that!

Aug 12 01:33 PM

[Pat C:]

WhisJohnGalt and others, thanks for the comments. Its driving me crazy, I'm not an economist but it seems like we have to look at this game differently now. It seems to me that economic history is good but has to be put in the context of real life events and sooner or later you have to look at the real economy. Monetary policy actions are helpful but merely bandaids. Assuming we move labor to where it is the most cost effective; what is it that we create here that adds value for the US society? (I think it is safe to say that consumption has permanently fallen) Afterall, we are still a nation state even though much of commerce has become internationalized. US Government transfer payments, financial add on's and many services at best, just move things around and at worse are wealth destroying.
We need to change the game. Clean energy and the corresponding infrastructure improvements along with ancilary innovation sounds great. But is it big enough in terms of social structure change and are we still relying on outdated economic theory to fix a unique national challenge.
As you can see, more questions than answers, thanks for the opportunity to reflect my frustration.

Aug 12 02:49 PM

[NotChicken:]

"an uptick in demand will translate into an uptick in production and employment."

Who can make a blanket statement like this with any economic background? If the U.S. economy experiences an uptick in demand in the next few years, the slack will be met mostly with current workers and increased hours.

Aug 12 10:38 PM

[Russ M:]

Many of the engineers I went to school with never went to work in engineering and many who did no longer practice. Anecdotal evidence to be sure, but I've read articles to indicate that there may be an actual trend.

Lots of management saw 'the light' in the late 90's and early 21st century with the development of the internet and began the commoditization of many engineering disciplines. Engineering as a career in the US is going bye-bye in search of cheaper labor rates in less expensive countries like India & China. It's not happening quickly, but it is happening.


On Aug 12 03:59 AM Moon Kil Woong wrote:

> Structurally the US is in a bind. It has educated millions for the
> financial sector or as well heeled executives for decades when the
> real need is for more scientists, and engineers, and entrepeneurial
> businessmen. That means we will have millions entering the workforce
> with masive student debt and no jobs for their skill sets for years.
> Compounded by increased productivity and a shrinking middle class
> I don't see any rapid improvement in real unemployment. There is
> always a chance for government accounting for unemployment to drop
> if they can get enough people to say that gave up trying to get a
> job.
>
> Well, at least the US got it right in that there will still be work
> for lawyers which can be another article all together on why America
> is becoming less and less competitive.

Aug 13 09:23 AM

[Owen:]

Aren't you tired of always being right?

Last October you told us here on SA how the bailout will never work and how the taxpayer will never see a penny of it back. Now we know the bailout saved the economy, and not only much of it has already been repaid, the taxpayer made a cool 15% profit on the funds.

So now what? Of course, predictions of doom about employment.

At least have the decency to admit that you don't have the ability to forecast economic conditions any more than a pair of dice. In fact, you'd probably be right more often if you used a pair of dice to make your predictions.


On Aug 12 11:14 AM Socialism cannot compete! wrote:

> Unemployment WILL go double-digit AND remain there for an extended
> period. We continue to bleed jobs to overseas sources. This week's
> productivity report has shown cause for employers to hold off on
> hiring -- just squeeze those who remain for more output. And lastly,
> the neo-Marxist policies of the current administration do not foster
> growth, but stagnation -- this is not my opinion, but the historical
> truth that has been repeated time and again: socialist economics
> leads to higher unemployment and slower growth...precisely because
> government are not producers, but redistributors...which means that
> those who do the producing are continually hit with ever-higher costs
> and therefore, shrinking margins. That doesn't foster hiring. We
> all know this...but Congress refuses to acquiesce!!!

Aug 31 04:34 PM