Unemployment Report (Newspaper Version)

The unemployment rate in November fell .2 percent. Finally, some good news about employment! Still, a 10 percent unemployment rate is too high. There were 15.3 million unemployed last month.

Worse, unemployment isn’t uniform. The unemployment rate for college graduates was 4.9 percent. Those never completing high school had 15 percent unemployment. For white men over 45, it was 7.5 percent. For white women over 45, it was 5.7 percent. For black men between 16 and 19, the unemployment rate was 57 percent!

Duration of unemployment is also important. While approximately 2.8 million have been unemployed for 5 weeks or less, there are 5.8 million who have been looking for more than six months. The median duration of unemployment is now 20 weeks, so about half have been seeking work for less than 5 months and half for more than 5 months.

The unemployment rate is the percent of the labor force that is unemployed--not working, but actively looking for work. The labor force of nearly 153.8 million is made up the unemployed and the nearly 138.5 million employed. When the recession began in December 2007, there were 146.3 million employed, and so, employment has fallen by nearly 8 million workers.

The official unemployment rate may understate the problem. While “actively” looking for work only requires glancing at the want ads during the past month, there are 5.6 million who say they want a job but are not counted as unemployed. Of those, 2.8 million looked sometime in the last year. Why didn’t they look during the last month? There were 863,000 “discouraged workers,” who said they didn’t think they could find a job. But there were others who had family responsibilities or were ill. Finally, there are nearly 2.1 million people working part time because they cannot find full time work. Combining all of those workers with the officially unemployed, the total was 17.2 percent. Beyond the officially unemployed, there are 7.7 million more workers who would be willing to help produce additional goods and services.

When the Great Recession began, the unemployment rate was 4.9 percent. There were 7.5 million unemployed. The more inclusive measure was 8.7 percent, adding another 5.9 million for a total of 16.2 million workers. Why are so many people not working even though the economy is growing ?

In 2007, the last year of expansion, 22.6 million workers were discharged—fired or laid off-- approximately 15 percent of those employed. Total quits in 2007 were 35 million, 24 percent of those employed. With 39 percent of workers leaving their job one way or another, why didn’t the economy suffer mass unemployment? Firms hired 63 million workers during the year. Total employment expanded by about 300,000 workers, from 146 million to 146.3 million. While many of the quits involved leaving one job for another without any period of unemployment, the turnover in the labor force, leaves many workers unemployed and needing time to find a new job. There were 4.5 million unfilled openings in the typical month, equal to 3 percent of those employed and 65 percent of the unemployed.

What happened during the recession? In 2008, 24.4 million workers were discharged and another 23.4 million during the first 10 months of 2009. That was about 17 percent of those employed. During the dark days of the fourth quarter of 2008 and the first quarter of 2009, when production was falling at a 5 percent annual rate, there was a spike in discharges, going from 2 million a month in October 2008 to 2.5 million a month in January 2009, and remaining at that elevated level through March. That adds up to nearly 2 million “excess” discharges last spring.

Surprisingly, the increase in discharges has been more than offset by a reduction in quits. While there have been 49 million quits during the 22 months of recession (through October 2009,) the rate during the recession fell from 3 million a month in 2007 to 2.2 million a month. That people are less likely to quit their jobs during a recession should be no surprise. During 2009, the quit rate has fallen to 1.8 million per month. Remarkably, total separations, including both discharges and quits is down. The 4.7 million per month rate is substantially less than the 5.2 million per month before the recession.

The real problem with employment has not been the separations, but rather the number of hires. There have been many people hired since the beginning of the recession, 97.8 million, but the rate of hires has been 4.4 million per month since the beginning of the recession and 4.1 million per month this year. That is much lower than the 5.3 million hires per month in 2007. Even though separations have fallen, new hires have fallen even more, leading to the decrease in total employment.

It is the gap between separation and hires that creates falling employment. The biggest was the 637,000 gap in November of 2008 and the 613,000 gap in March 2009 was nearly as large. Only in June did the rapid deterioration end, though separations remained 237,000 greater than hires in October of 2009. Openings are lower as well, averaging 3.2 million during the recession and closer to 2.5 million in recent months. This is much lower than the 4.5 million average in 2007.

Reviewing the facts and figures about unemployment is a good start. But what should be done? The Federal Reserve needs to commit to returning total spending to an adjusted growth path—$16.1 trillion for fourth quarter 2010, and then 3 percent growth in the future. A stable macroeconomic environment is important. However, the best role for the government is to stay out of the way, and let the free enterprise system expand the level of openings and the number of new hires. Only a persistent period with new hires greater than separations—a positive gap-- will increase total employment enough to return the unemployment rate to a more reasonable level.