Unemployment and the Bureau of Labor Statistics Flawed Accounting

In the early part of the Great Depression, Richard Jensen in his paper The Causes and Cures of Unemployment in the Great Depression, argues that initially the mode of unemployment was that of cyclical unemployment, a deficiency of demand for labor and goods,  was of primary importance from 193I through 1934 (p. 566). Based on his initial findings, one can argue that during a recession that discouraged workers tend to represent the cyclical type of unemployment. When there are fewer demands for consumer goods and services during a recession, firms have an increase in their available inventory which causes them within a year to cut back on their production, thereby, directly resulting in a decrease in demand for labor.

What’s most interesting about Jensen’s arguments are that when the depression continued past 1934 that there was a shift from the cyclical form of unemployment to a structural form of unemployment (Ibid p. 566). Jensen writes that,” in the Great Depression, prolonged cyclical unemployment turned into irreversible structural unemployment for 1O percent of the labor force. Five million previously “normal” workers suddenly and utterly unexpectedly fell into the hard core trap and could not escape” (Ibid p. 556 ). The root causes of these challenges revolved around a change from the demands of unskilled labor force to a greater demand of higher skilled labor force. A clear classical example of structural unemployment where you have a mismatch of labor who lacks the skills to work in new, emerging and changing job markets.

Whereas, displaced workers during short-term economic recessions like the early part of the Great Depression suffered from a cyclical type of unemployment, one can argue that during economic expansion, discouraged workers suffer more from the challenges of structural unemployment. Reasoning for this centers around how the Bureau of Labor Statistics defines discouraged workers:  “as those not currently looking for work specifically because they believe no jobs are available for them or there are none for which they would qualify” (Bureau of Labor Statistics http://www.bls.gov/cps/lfcharacteristics.htm#discouraged ) Obviously, a mismatch of job skills with job openings.

Although on the surface this is a superficial argument,, it is not without its merits.  David Colander in Macroeconomics notes that initially the government regarded 2 percent unemployment as condition of full employment, allowing the 2 percent of the workforce to consist of frictional unemployment (p. 138).  However, he observes that the government has shifted the name to target rate of unemployment which is a rate that is attainable given existing demographics and the economy’s institutional structure; and that number today sits around 5 percent. (Ibid p. 138). If you accept the Bureau of Labor Statistics definition of full employment under its official U-3 calculations table then December 2014 was a banner month under the Obama administration. The US Bureau of Labor Statistics reported for December, 2014, that “total employment of nonfarm payroll rose by 252,000 in December 2014, causing the official unemployment rate to decline 5.6 percent making us officially only .6 percent away from reaching the status of what the US government considers the equivalent of full employment.    (http://www.bls.gov/news.release/pdf/empsit.pdf). If you go back to the original definition of a discouraged worker as someone who believes that there are no jobs available for them or that there are none for which they would qualify—the United States Bureau of Labor Statistics alternative measures of labor underutilization paints a less rosy picture  (http://www.bls.gov/news.release/empsit.t15.htm  ). If you use the U-4 chart calculations for unemployment which include discouraged workers the unemployment rate for December 2014 rises to 6.0 percent, U-5 which includes all marginally discouraged workers the unemployment rate jumps to 6.8 percent and U-6 we are all the way back up to 11.2 percent.

The Economist reported in a July 2005 article of the findings by Katherine Bradbury’s paper which argues that the unemployment rate may be a poor measure of slack in labor market (Economist p. 376) . Bradbury calculated that if the real unemployment rate  included discouraged workers it  would be 8 percent not 5 percent or 12.6 m not 7. 5 million unemployed for that year respectively (Ibid 376). Even less rosy would be including discouraged workers in the official job unemployment rate as it would increase both the federal deficit and the national debt. Beyond loss of income for the unemployed, there is a loss of income from the government from a decrease in tax revenue from income taxes on goods and services. Likewise, there is also the need for the government to spend more money on unemployment benefits and job retraining for the economically displaced—as well as a clear connection between economic downturn and increases in enrollment for  Social Security Disability Insurance (SSDI) program

Since 2007, the number of people receiving benefits from the program has increased by 23%, to 11 million. While this is a large increase, it is really just an extension of a trend that has been going on for decades. According to a recent Congressional Budget Office report, disability rolls increased six times between 1970 and 2011, far outstripping population growth during the same period. What’s notable, however, is that the percentage of the population receiving benefits tends to rise during recessions — suggesting that the program, which was created to help Americans who are unable to work under any economic condition, is being used by many Americans to help them get through periods of temporary unemployment (http://business.time.com/2012/10/16/the-unemployment-report-wasnt-rigged-but-its-not-accurate-either/)

Fewer people working and earning higher wages, means not only an increase in government spending but also a decline in disposable income with fewer people spending money which means less money in circulation to fuel our economy, as well less demands for products and services.  The United States Gross Domestic Product would also logically suffer because it will be operating at lower levels of output and income.

 

Sources:

Bureau of Labor Statistics. (date). Labor Force Characteristics [Web page]. Retrieved from http://www.bls.gov/cps/lfcharacteristics.htm#discouraged

Bureau of Labor Statistics. Unemployment Rate December 2014. Retrieved from http://www.bls.gov/news.release/pdf/empsit.pdf

Colander,David C. Marcoeconomics, 7th Edition, McGraw-Hill, 2008

Finance and economics: It’s the taking part that counts; economics focus. (2005, Jul 30). The  Economist 376, 74.

Jensen, Richard J, The Causes and Cures of Unemployment in the Great Depression

Journal of Interdisciplinary History, Vol. 19, No. 4, (Spring, 1989), pp. 553-583: The MIT Press.

 

The Unemployment Report was not rigged but it is not accurate either. Time Magazine, (October 10, 2016) Retrieved from http://business.time.com/2012/10/16/the-unemployment-report-wasnt-rigged-but-its-not-accurate-either/

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