We, as average citizens, are able to determine our own answer through various economic and financial measures. Many of us are familiar with the concept that a healthy stock market is a reflection of a healthy economy or at least a recovering one. Similarly, the monthly jobs number released by the Bureau of Labor Statistics reflects the health of the labor market and by proxy the broader economy.
This report is released the first Friday of each month and it discusses the job creation of the prior month. Whereas the jobs report is a bottom up approach, the unemployment rate is a top down statistical measure, which tells the same story—the health of the United States economy.
The Jobs Report
As expected this report does not include all the jobs in the United States. It is called the Monthly Non-Farm Payroll report. Non-farm payroll jobs refer to all jobs associated with goods production, construction and manufacturing companies in the United States which contribute approximately 80% of the US GDP. It does not include farm jobs, non-profit positions, or private household jobs (i.e. nannies). Job report numbers generally range between 10-250K new jobs per month with a healthy economy averaging 225K+ jobs.
March 2009 is generally accepted as the bottom of the credit crisis of 2007. From December 2007 to February 2010, the economy lost jobs every month. Only in January 2013, did the economy start consistently adding a healthy amount of jobs, which is when economists accepted that we were on the path to recovery.
Unemployment—A Deeper Issue
If jobs are the catalyst for economic growth then the unemployment rate is its barometer. In a healthy economy, economists agree that the ideal unemployment rate is 4.5-5.5%. It cannot be 0% unemployment due to imperfections in the market. In the aforementioned period of December 2007 to February 2010, the unemployment rate went from 5% to 9%. At first glance, 9% does not seem so bad but it exposes a major flaw in how the unemployment rate is measured.
The unemployment rate is the ratio of the number of unemployed to the total labor force.
Unemployment measures the percentage employable individuals in a country’s workforce over the age of 16, who have lost their jobs and are actively seeking new work. The unemployment rate does not account for those who have completely given up on finding new work or the underemployed such as part time workers.
Studies show that if the unemployment rate reflected this part of the population in its measure it would be around 16% unemployment—a more severe number.
The Economics to Government Policy Disconnect
Jobs growth and the unemployment rate are established principles in economics. However once economics is examined in the context of politics, it becomes much more controversial.
Before we delve into this, let’s examine the issue of the deficit, which an economist or financier can solve in one sentence—raise taxes on everyone. Although the solution is an oversimplification, a politician would be committing political suicide if this were suggested as a solution. President George Bush Sr. raised taxes in his first term, and as a result his popularity suffered greatly. In the 1993 presidential elections, Bill Clinton defeated the incumbent Bush by promising to reduce taxes. Once voted into office, President Clinton didn’t deliver his tax promise (and luckily didn’t receive backlash).
Along with a 7 year economic boom cycle and increased taxes during his two terms, the United States enjoyed its biggest budget surplus in 30 years. A very powerful example which illustrates this disconnect between good politics and good economics.
Returning to present day—President Obama has proposed increasing the minimum wage as a sort of appeasement policy to those making minimum wage, but still in poverty.
Anyone who has studied even a bit of macroeconomics knows that raising the minimum wage will have an adverse effect on the minimum wage earners.
If suddenly the minimum wage is raised from its current $7.25 to the proposed $10.10 per hour, there will be increased competition at the new price level in the form of employees switching industries or coming out of retirement. All things equal for a given wage level, the most qualified candidate will get each job opening. President Obama with his supportive economic policy has possibly and inadvertently created more unemployment with the biggest losers being the original $7.25 earners.
Looking Into the Future
Job creation is an important reflection of a growing or healthy economy. Although the usefulness of analyzing job creation trends hasn’t diminished, the credit crisis has exposed the unemployment rate to be flawed.
The Federal Reserve Chair Janet Yellen stated “[there’s] a lot of “hidden unemployment” that makes the official unemployment rate just an interesting footnote, not an important milestone for policy.”
Going into the future, the Federal Reserve said it will evaluate the health of the economy through multiple measures and not depend on the performance of any particular one. The good news is that the United States is averaging 213K new jobs per month for 2014—while the nation isn’t recovering at the speed everyone expected, at least we’re moving in the right direction.
This article is the opinion of the author and is not shared by India Currents or any of its staff. All investors should conduct their independent analysis before taking any actions and should not make any decisions on the information provided in this article alone.
Rahul Varshneya graduated from the Leavey School of Business at Santa Clara University with a degree in finance and is working in the technology industry as a financial analyst.