Jobs and the participation rate

Last Friday's jobs report for the month of November was massively disappointing, with an uptick in the unemployment rate showing that we have much work left to do before we can declare this recession "over" (oh, I forgot, we already did... whoops).

Of course, this report was used by politicians as an excuse to push more stimulus, which was effectively done last night with the "temporary" extension of all Bush-era tax cuts combined with a further extension of unemployment benefits. Nobody seems to wonder or care how we will pay for the additional $700-$900 billion in deficits (depending on the estimate) that these policies promise to create over the next two years, but that's a topic for a different post.

The focus of today's post is to discuss the severe structural problem in our labor market, and why our effective unemployment rate is in fact much higher than even the latest 9.8% figure suggests. I've mentioned before, if briefly, that the effective unemployment rate has edged as high as 17%--a staggering figure by any definition. What accounts for the difference? This:

As our friends over at the Calculated Risk blog show us, the labor force participation rate has plummeted to an all-time low for the Male 25-54 demographic, a key group because it represents such a large portion of the overall labor force.

What does this mean? It means that for various reasons, discouragement or otherwise, a significant portion of our usually productive workers have been classified as "not looking for work", and therefore are not counted in our core unemployment rate--if you're not looking for a job, you're not officially unemployed. As a result, overall labor force participation has dropped from 66.2% in May 2008 to 64.5% now, the lowest rate since 1984.

There are two ways this can go from here, and neither is particularly good for the economy. Either these men stay unemployed forever, meaning that there will be fewer productive workers in our economy--and therefore fewer bodies feeding more mouths (think Social Security is insolvent now? Just wait)--or else they start looking for work at some point in the future, meaning that our unemployment rate (as reported by the government) will remain stubbornly high for some time.

In other words, the more jobs we create, the more jobs we will need to create in order to keep our unemployment rate constant, as more Americans "rejoin" the labor force. It's a simple but disturbing math problem, with a couple of moving variables. We certainly shouldn't wish for the labor participation rate to stay low (it's a baaaad sign for the economy if it does), but it's the only possible way to keep our reported unemployment rate low. We need to wise up and realize that the real unemployment rate is indeed much closer to the 17% number than the 9.8% number, and ask ourselves whether our ongoing "stimulus" is doing any stimulating at all. Because according to these charts, we've got a long and ugly road ahead of us.

That second chart, courtesy of Zero Hedge, projects that on our current stimulus-aided path, we won't recover our pre-recession unemployment levels for another 5 years. What's even worse is that this line assumes zero growth in the aforementioned labor force participation rate. A return to a more "normal" participation rate would extend the pain for another 50-60 months, meaning that pre-recession employment levels would not be met until some time in 2019. A lost decade, indeed.

I don't honestly know what the best way out of this mess is, but I am confident that continuing to play "extend and pretend" with unemployment benefits--while making Devil's bargains like last night's bipartisan "compromise"--will only prolong the inevitable. We need to revamp our education system and do whatever we can to encourage entrepreneurship and small business growth (no, not through tax incentives, we need to be much more creative and transformative than that), whether by citizens or by immigrants (yes, immigration policy is a part of this too, and no, not in the ways that the rhetoric would make you think).

We need to admit that we have a problem, and that blind government spending will not solve it, at least not quickly (see you in 2020) or without creating a host of other debt-related problems. We need to step up and create jobs for ourselves, which means taking a hard look at how we actually provide value for each other in our communities. Either that, or we can just all become farmers again, feeding ourselves with the fruits of our own labor. Whatever works.

[Calculated Risk]
[Calculated Risk]
[Zero Hedge]