Why are people complaining about unemployment? Everyone seems to be worried about jobs, especially now that the political campaign season has begun. Alan Greenspan has assured us that he can see new jobs right around the corner. The White House has proclaimed that 2.5 million jobs will soon be created. Is there reason to be so concerned about unemployment?
Unemployment is certainly a serious issue, but most complainers completely miss the mark in terms of the causes and cures of unemployment. For example, should Americans be worried that telephone-answering jobs are being shipped overseas? No. Those telephone-answering jobs (think 1-800-technical assistance) are not great jobs to begin with and they are going to be increasingly phased out via automation. The President’s chief economist, Greg Mankiw is correct — outsourcing is good for the American economy.
Should we worry that the number of manufacturing jobs is plummeting? Three million manufacturing jobs have been lost in the last four years and the level of manufacturing employment is at its lowest level in over 50 years. The rapid loss of manufacturing jobs has many causes (its not free trade), but we must also remember that most Americans no longer aspire to get a manufacturing job. Furthermore, these jobs will continue to lose out to automation and foreign competition.
Yet, every night Lou Dobbs drones on CNN about "broken borders" and the outsourcing of American jobs to help drive up his show’s ratings enough to save his own job. The Democratic presidential candidate complains about the lack of good-paying jobs for Americans while the Republican candidate takes credit for new job creation and hopes that more will be created. Neither knows anything about finding work or creating jobs. Protectionism, fair trade, government education and retraining, and tax breaks will only make the job market conditions worse.
Complaining about jobs is an old tactic of the socialists and unions. What is making this old rhetoric ring so resonantly in 2004? After all, the official unemployment rate is now below the "natural rate." We have been officially out of the recession for quite some time. Why all the complaints?
To understand the complaints, first take a look at the unemployment rate. The graph below depicts the government’s best guess of what the unemployment rate has been over the last half century. A rate of 5.6% doesn’t seem that bad.
Civilian Unemployment Rate
Five to Six percent is considered the "natural rate" of unemployment. Anything over 6% is a sign of recession or depression. Anytime it hits 4% or below it is usually a bad sign of economic boom or war. The current rate of 5.6% is in the sweet spot of the business cycle.
However, if we look at the number of people who are officially unemployed we find a couple of million people who since 2001 are not too happy. People are very fearful of unemployment compared to problems like inflation and government deficits. In fact, Presidential elections are often decided by the unemployment rate. If conditions in the labor market worsen, Bush could end up like his father — a failed one-term president.
Unemployed: 16 Years & Over
The data shows that the number of unemployed fell from 7.5 million to 5.5 million during the Clinton/Greenspan boom and then increased by 4.5 million to more than 9 million in 2003 and it remains well about the 8 million mark.
On the positive side, the contraction-recession should be over with by now according to historical averages, the number of unemployed is decreasing and the number of people unemployed less than five weeks is falling back to its normal level of about 2.5 million.
Civilians Unemployed — Less Than 5 Weeks
On the negative side, the only reason we are statistically out of the recession is government spending and consumer borrowing, neither of which are a sound foundation for economic recovery. Also, the number of people who have been unemployed for 15 weeks or more has risen dramatically as shown in the graph below.
Civilians Unemployed — 15 Weeks & Over
The drop of 500,000 in short-term unemployment is encouraging, but is overshadowed by the increase in longer-term unemployment of nearly 2,000,000. As the length of unemployment increases people often become "discouraged workers." These are people who would and could work if jobs were available, but who are no longer actively looking for work and therefore are no longer counted in the government’s statistics. The average duration of unemployment has increased significantly during the Bush recession (more than two weeks longer than average) and it continues to increase.
Median Duration of Unemployment
As the duration of unemployment lengthens, more people become "discouraged" and drop out of the official labor force. The drop in labor participation rate from 67% to 66% over the last three years does not seem to be a big deal, but that translates to more than 2 million people.
Civilian Participation Rate
There are many reasons why people drop out of the labor force, many of which are good reasons like early retirement or raising a family. However, the graph below suggests that lack of jobs probably dominates in this case. The Help Wanted Index, which is a good indication of the availability of jobs, is at its lowest level since the early 1960s.
Index of Help Wanted Advertising in Newspapers
If we put those 2 million people back into the labor force numbers as unemployed, the unemployment rate increases from 5.6% to 7%. The rate of 7% has only occurred six times since WWII and all six were recessions. Of course the number of "discouraged" workers has accumulated over time and is actually much larger than the 2 million figure used here.
It seems that Lou Dobbs does have something to crow about. Too bad he has no idea what is causing the problem or how to cure it. The cause of "unemployment" is government — inflation, debt, taxation, regulation, spending, the uncertainty and liability it engenders, and war. The cure for unemployment is less government, not more.
Disclaimer: I am not a labor economist and employment statistics are not a precise or even reliable indicator of employment markets. Also, I really love my job, but I’ve always had a secret desire to be "bought out" or "forced into early retirement."
All data is available from FRED.
Mark Thornton [send him mail] is an economist who lives in Auburn, Alabama. He is author of The Economics of Prohibition, is a senior fellow with the Ludwig von Mises Institute, and is the Book Review Editor for the Quarterly Journal of Austrian Economics. He is co-author of Tariffs, Blockades, and Inflation: The Economics of the Civil War.