Economy adds 228,000 jobs in November, unemployment holds at 17-year-low rate of 4.1%, but wages are stagnant. Why?

December 9, 2017

Yesterday morning the Labor Department announced that the economy added another 228,000 jobs in November and the unemployment rate held steady at 4.1% – the lowest rate in 17 years.  Yet, wages remain stagnant.  Everyone – economists, the Federal Reserve, business analysts – everyone, seems totally baffled by this phenomenon.  Why isn’t this supposedly strong demand for labor beginning to drive up wages as employers compete for workers?

The answer is that the unemployment rate isn’t really 4.1%.  It’s 7.1%.  The Labor Department would like you to forget that the rapid drop in unemployment following the “Great Recession” in 2008 was fueled in large part by its “mysteriously vanishing labor force” trick, claiming that vast swaths of workers were simply dropping out of the labor force, so they were no longer included in the unemployment calculation.  Take a look at the following chart.  It’s a little confusing, so I’ll explain.

Labor Backlog

Look first at the blue and orange lines.  The blue line tracks the actual growth in the labor force due to growth in the overall population.  The orange line tracks the labor force growth as reported by the Labor Department.  Note that in all but three of the past ten years did the Labor Department’s reported growth in the labor force exceed the actual growth.  It usually significantly under-reports that growth.  The result is a growing “backlog” of unreported workers, represented by the yellow line on the chart.  That backlog peaked at 6.4 million workers in 2014 and fell to 5.1 million in 2016 but, so far this year, has actually begun to rise again, hitting 5.2 million workers in November.

Now, look at the green line, which is the growth in the employment level.  If that growth matches the growth in the labor force, then unemployment will hold steady.  If it exceeds that growth, then unemployment will fall.  Compared to the blue line – the real growth in the labor force – it has consistently exceeded that blue line by a small amount each year, beginning in 2011 – the start of the recovery from the “Great Recession.”  But if you compare the green line to the orange line – the fake growth in the labor force reported by the Labor Department – it has beaten that growth by a significant amount every year beginning in 2010.  The result of that growth in the employment level relative to the fake growth in the labor force is the Labor Department’s reported unemployment rate, represented by the purple line.  Note that it has fallen precipitously to its current bogus level of 4.1%.

That’s why wages are stagnant, because there is a huge, unreported backlog of labor force which eagerly snatches up any extra jobs that are created each month.  The labor force is still pretty grossly out of balance with the demand for labor.  Until that backlog of workers is employed, wages will remain stagnant.

Just to drive home the point about how phony the official unemployment rate is, take a look at these next two charts:

Per Capita Employment

Unemployed Americans

The first chart tracks the employment level relative to the total population.  It’s analogous to what the Labor Department reports as the “participation rate.”  As yo can see, it’s been very slowly recovering from the 2008 recession, but still hasn’t gotten back to its pre-recession level in 2007.  (You can see that, even then, it was already plummeting.  I can’t tell you what it was before that since I didn’t begin tracking it until then.)  In November of 2007, per capita employment was at 48.4% and the unemployment rate was 4.7%.  Last month, per capita employment was at 47.2%, but the unemployment rate was 4.1%.  How in the world could unemployment have fallen at the same time that per capita employment fell?  Sounds pretty bogus, doesn’t it?

The second chart above shows a similar phenomenon.  It tracks the number of unemployed, assuming that the labor force grew along with the population.  In November of 2007 there were 7.2 million unemployed workers.  Last month there were 11.8 million.  And yet the unemployment rate fell?  Baloney.

While some see nothing but good news in yesterday’s employment report, I see some warning signs.

  • The employment level grew by only 57,000, far less than the reported growth of 228,ooo jobs.
  • Per capita employment fell slightly for the 2nd month in a row.
  • An honest accounting of unemployment (one that’s honest about growth in the labor force) finds that unemployment rose for the 2nd month in a row to almost 7.2% after reaching a low of 6.8% in September.  That’s a notable jump.

So now you know why wages are stagnant.  The demand for labor hasn’t caught up to the backlog of unreported growth in the labor market.

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The Beginning of “The Great Regression?”

February 8, 2011

http://www.reuters.com/article/2011/02/07/us-eurozone-regression-idUSTRE71611B20110207

I found the above-linked opinion piece that appeared on Reuters this morning interesting in that it forecasts a “great regression” to follow what’s been dubbed the “great recession.”  (It’s also interesting how quickly it was pushed off the front page of Reuters.)  I found it interesting because it’s forecasting the very phenomenum (albeit for more superficial reasons) that I forecast in Five Short Blasts – that rising unemployment and poverty and a decline in living standards would be the inescapable consequences of allowing population growth to drift ever higher while ignoring the relationship between population density and per capita consumption.

The author of this piece, a Europe-based Reuters associate editor, sees the dramatic cuts in government spending in European countries leading inevitably to declining living standards there.

Wages, pensions, unemployment insurance, welfare benefits and collective bargaining are under attack in many areas as governments struggle to reduce debts swollen partly by the cost of rescuing banks during the global financial crisis.

The European Union, which long trumpeted a European social model with a generous welfare state, social partnership between unions and employers and a work-life balance featuring limited working hours and long paid holidays, has lost its swagger.

At first, you may think to yourself, “Good!”  “It’s about time that those Europeans had to experience some of the same things that Americans have been going through for decades.”  But not so fast.  In spite of the fact that American workers have always been far more productive than their European counterparts with their 35-hour work weeks and weeks-long vacations, the U.S. has a big trade deficit in manufactured goods with Europe.  Do we really want them to get more competitive?

The problem is that it’s inevitable there, just as it’s inevitable here.  For quite some time, government spending (which includes “spending” in the form of tax cuts) has been used to mask falling wages and cuts in benefits by the private sector.  In spite of all the talk of the need to cut taxes, the truth is that taxation in the U.S. is at historically low levels, having been used time and again to breathe life into a flagging economy.  There was a time when private sector wage increases outpaced inflation, while tax rates were simply shrugged off as a fact of life.  But no more.  And there was a time when every company provided generous health insurance and pension plans because the demand for labor was so great that if you didn’t, your competitor would end up with all the talent.  But no more.

Why pay high wages or provide such benefits now?  Good workers are a dime a dozen.  Announce a job opening and you’ll get a hundred or more applications.  Corporate America eventually figured out that annual merit increases and generous benefit packages were a waste of money when labor was so plentiful.  The only way to prevent declines in take-home pay that would surely result in a recession or worse was to cut tax rates and bolster social safety net programs.

But the government spending can’t be sustained.  The debt crisis may appear to be the problem on the surface, but dig deeper and you’ll find that the problem is really rooted in an ever-worsening imbalance between the supply of and demand for labor.

Greek Prime Minister George Papandreou, one of Europe’s few remaining socialist government chiefs, lamented in Davos that the global crisis had speeded a race to the bottom in labor standards and social protection in the developed world.

Emerging countries such as China and India had achieved competitiveness through low wages, no collective bargaining, little or no healthcare and social insurance and disregard for the environment in exploiting resources and production.

These factors are not what makes a nation competitive.  These factors are the result of a gross over-supply of labor.  It’s the over-abundance of labor that makes them competitive.  And if these factors cited above are the consequences of such badly bloated labor forces, then it begs the question:  why should we want to emulate them?  Why should we “compete” with them at all?  What do we gain?  Wouldn’t we be far better off if we stopped sharing access to each other’s markets?  Of course we would.

But back to the great regression.  With the “great recession” put to bed by the explosion in government spending, now we can tackle the deficit issue, or so the thinking goes.  That is, until someone figures out that cutting wages, pensions, social programs and government spending in general is a recipe for economic disaster, just as the spending itself is a recipe for the same thing.  Such “regression” will manifest itself in the macro-economy in a familiar way – as a recession, or worse.  What will be the approach for dealing with a double-dip recession?  More spending and tax cuts.  Bank on it.

Without addressing the conditions that are driving the ever-worsening imbalance in the supply of labor relative to demand, there is no escape from this conundrum.  “Creating jobs” may sound appealing, but jobs cannot be created from thin air.  Every job depends upon consumption of some product or service.  Per capita consumption in the developed world is in decline as over-crowding there worsens, and manufacturing for export to even more badly overpopulated, already-export-dependent, low per capita consumption nations of the developing world is a logic-defying pipe dream.