Behind the February 2011 Employment Numbers
Once again, the latest U.S. employment numbers for January 2011 gave mixed signals. Employment rose by a mere 36,000 yet the unemployment rate fell to 9.0% from December's 9.4% rate. How can that be? Moreover, how should we make sense of these numbers?
On average, the U.S. economy needs to generate 120,000 new jobs each month to absorb all the new entrants. Since the latest recession began, the number of people without jobs grew to more than 8 million with another 8 plus million either giving up or working part time. If the economy generated 320,000 jobs per month, it would take more than 6 years to get back to a "full employment" level. This is why so many people believe the economy will struggle for years to come.
Yet if we look deeper into the jobs picture, the problem is both alarming and a sign that things are improving. While a deeper employment problem will be with us for years to come, the economy is generating more jobs than the 36,000 number implies.
Lack of Jobs Here to Stay for Some
For some people the lack of jobs will be with us for years. Not surprisingly, unemployment hits those with less education and fewer skills the most. The chart below from Chart of the Day illustrates the unemployment situation by education level. Those with more education experience better job prospects and make more money.
Those with at least a bachelor's degree are experiencing a 4.2% unemployment rate, whereas people without a high school diploma see poor job prospects with their unemployment rate at 14.2%. If you have a high school diploma, your unemployment rate for January 2011 was 9.4%.
These numbers are for those that the government considers unemployed. You must be actively looking for work over the last four weeks to be in this category.
Add to this number the number of people who have given up or are working part time while looking for full time work and the number is over 16%. While the Bureau of Labor Statistics does not report this number by education level, I bet it is much higher for those without a high school education. This is a serious problem that will be with us for years.
Clearly, the recession hit those without a high school education the worst. To succeed in the global economy high cost economies like the United States and Europe need workers to perform more complex and skilled tasks. Jobs that expect you to have more than a high school education. If you do not have the necessary education, it is difficult for you to get a minimum wage job as you might be competing with someone with more education. For example, some graduates from prestigious law schools have been unable to find a job as a lawyer. Instead, they are working as court reporters or law clerks in a municipal court, jobs normally held by trained and college educated people. This pushes these people to find work wherever they can such as minimum wage jobs. What chance does someone without a high school education have?
According to a report by the Center for Labor Market Studies at Northeastern University in Boston, Massachusetts, and the Alternative Schools Network in Chicago, Illinois, in 2007 before the recession more than 16 percent of the total population between 16 and 23 do not have a high school education or its equivalent. If such a large part of our society does not possess minimal skills, how do they expect to be contributing members of society? Many face a life of menial jobs at best, part time work if they can find it, and living off of government support, as long as it is available. They face a dim future.
In addition, they will be unable to participate in a growing economy. Rather, their dependence on government assistance acts as a drag on overall economic growth. The U.S. unemployment rate will remain high for many years, until we solve the education problem.
Statistics Strike Again
If you closely follow the Bureau of Labor Statistics (BLS), you have heard of the birth-death model. The BLS uses this model to estimate the number of new companies formed (birth) and the number of existing companies that no longer are in business (death). In addition to their surveys, the BLS uses this birth-death model to estimate the number of jobs gained and lost by sector. The problem is the model tends to lag the actual numbers.
When the economy is topping out, the birth-death model remains on the rising trajectory even as the economy is turning down and companies are laying off workers. Eventually it catches up.
When an economy is turning up, recovering from a recession, the birth-death model tends to under estimate the number of new jobs being created. We face this situation today. Despite attempts to improve the model, history tells us the birth-death model is under estimating the number of new jobs the economy is generating.
Since the recovery is still in its early stages, I believe the 36,000 new jobs for January is lower than what is really taking place. New companies are forming, small businesses are hiring more workers (skilled) and there are better job prospects for those with the right education and training.
The problem is we do not know how many new jobs there really are, other than the BLS is underestimating the number. On the other hand, I do not believe the number of new jobs is anywhere near the number necessary to reduce real unemployment and absorb the new entrants to the work force. Most likely the United States is generated somewhere in the range of 100,000 to 200,000 jobs per month. More than in the past, but not enough jobs to address the chronic unemployment problem. Moreover, each month new entrants join the work force.
Speaking of the unemployment number, the headline tells us unemployment fell to 9.0%. What we are not told is the number of people in the work force fell causing the drop in the unemployment number. Fewer people in the work force is not a positive sign for the economy.
For January 2011, the total civilian labor force was 153,186,000 down from 153,690,000 in December 2010. Essentially, 504,000 people either retired or quit the work force. In November 2010, the total civilian labor force was 153,950,000. The drop in the unemployment rate for the last two months is due primarily to the drop in the number of people counted as in the labor force. Removing more than 500,000 people from the work force allows the number of unemployed to fall as well. For January, the number of unemployed fell by 622,000. Take away the 504,000 from that number and the number of unemployed drops by only 118,000.
Had the number of people in the work force remained at the December 2010 level, the unemployment rate for January would remain at 9.4%. Once again, the details in the statistics tell a different story than the headlines.
The Bottom Line
The strength of the economic recovery is an important determinant of the growth potential for most companies. As we move forward, U.S. companies will grow and expand despite a long-term high unemployment level. The labor situation will place downward pressure on wages as people with the necessary skills and training move from part time work to the higher paying full time jobs. This will benefit most companies, as their labor costs will remain constrained. Labor inflation will not be a problem. However, some companies may find it difficult to find skilled workers.
From a human perspective, those without the necessary education face a difficult life. Since the government cannot afford to provide their support, the country faces a difficult dilemma. Education and skills and the key to a better life. Companies, communities and individuals will need to step in to create ways for these people to change their lives. If we do not, the economy will suffer as will the country. While I do not expect a revolt, the high unemployment situation in many countries fostered major changes in the government. It can happen in the western world as well.
About Hans Wagner
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