The Curious Case of US Unemployment

In my first article as a writer for ESSA, I wrote about how the unemployment rate was going to have a significant impact on President Obama’s re-election chances.

In the 2 months since that article was written there have been some significant developments in the US economy and in the political sphere as we approach the Presidential Election.

Firstly, President Obama now has a presumptive opponent in Mitt Romney, who has pivoted from the bitterness of the Republican Primary to relentlessly attacking the President on his management of the economy, the sclerotic nature of job creation, and bloated government spending which adds to the mounting national debt.

Additionally, there has been some movement in the US economy, but certainly not at the rate that materially improves the President’s re-election chances. GDP only grew at an annualised rate of 2.2% in the first quarter of 2012 whilst unemployment has trended downwards towards 8.1% as of this April. However, when we delve a bit deeper into the dynamics affecting these changes in the unemployment rate, we can see that most of the movement is out of the labour force, with job creation only averaging 117,000 in the last two months. These numbers are well below what they were earlier in the year when the economy added 243,000 jobs in January alone.

Exiting the Labour Force, Long-Term Unemployment, Underemployment

Let’s focus a bit more on this dynamic of workers leaving the labour force. As is to be expected (and as macroeconomic theory informs us), when one is out of work for a long time, there is an increasing likelihood that they will become disheartened about their prospects at future employment. Consequently, after a period of time, some will completely give up and stop looking for work, formally classifying them as no longer in the labour force. As such, they are no longer counted when the Bureau of Labour Statistics measures unemployment in America, thus masking the real severity of the jobs crisis.

One important factor to note is that if the economy were to pick up and these discouraged workers re-entered the labour force looking for work, the unemployment rate would likely rise. So despite a potentially improving economy, the snapshot figures can suggest otherwise.

When we look at the U-6 rate, classified as those unemployed plus those working part-time because of economic conditions and those who’ve stopped looking for work, it currently sits at 14.5%, up form 11.1% at the onset of the GFC in September 2008. This is a figure that Mitt Romney likes to regularly cite to emphasise the President’s failure to create jobs during his term; depending on the attentiveness of the American voter.

Government Employment

One final factor that we ought to consider as we look at unemployment in America is the impact of changes in government employment. To provide some context, government spending (when you combine the state and federal levels) constitutes over a quarter of US GDP.

A recent Wall Street Journal article highlighted that since December 2008, government jobs have contracted by 586,000 as budget deficits in numerous states necessitate layoffs of government employees (such as teachers, first responders and bureaucrats); many state constitutions mandate a balanced budget year-on-year.

If we were to plot the trendline in US unemployment without these lost government jobs, unemployment would today be at 7.1%, as seen below. However, like we mentioned previously, this rosier economic context would likely increase the size of the labour force and those looking for work, thus placing upward pressure on unemployment again.

So as we head into the general election and a continued debate on the state of the American economy and the job market, it’s important to place these dynamics in context.

Too often we look at the snapshot figures and make simple judgements based upon them. Unemployment in America is a curious beast, and one that will continue to fluctuate due to numerous factors between now and Election Day.

You can follow me on Twitter at @CRJWeinberg.