Some Quick Thoughts on Unemployment

Posted by Jeff Carter
on October 6th, 2012

No, I don’t think the number was manipulated. Was it correct? I doubt it. When are government statistics correct the first time they are released? Crop reports are never right, and private estimates of crop size are generally closer.

The rate went down from 8.1% to 7.8%. That’s a big jump using our mental statistics when we have been used to single or double digit moves. Plus, with the right wing’s suspicion of how Obama uses the government, it plays into conspiracy theorists hands. I do recall hearing murmurs of the same thing back in 1996.

I always discount the headline number anyway. U-6 didn’t budge. The headline number probably can be explained by technicalities over counting part time workers. But what worries me is the macro situation we have. 114K of non-farm jobs is pitiful. America needs to create over 300k jobs per month to really dent our employment problems. Additionally, GDP is more pitiful than the employment statistics. America needs 3-3.5% growth to keep moving ahead, creating wealth and more importantly, being ahead of inflation. At lower than 2% growth we are gradually becoming a nation of paupers.

Additionally, there are a lot of headwinds to growing employment. First is the fiscal cliff and the economic damage changes in the tax code will do. Expectations will have to be reset under the new reality if something isn’t done. The outcome of the November election will spur a big market reaction. Europe is in recession. That hurts our growth. China is slowing. That hurts our growth. Durable goods and purchasing manager surveys provide evidence of that.

If you remember your Macroeconomics 101 class, you will recall that frictional unemployment is 5%. No matter what, we generally have around 5% of the workforce unemployed for some reason. Left wingers pounded Bush when unemployment was 5.4%. Then became apologetic when unemployment was stubbornly above 8% saying we had a new paradigm in employment stats. I am sticking with the 5% number. Our current situation stinks and it doesn’t look like it will get better.

When candidates spurt numbers rapid fire out of their mouth, you have to know where they logic is behind those numbers. Most of the time they use accounting to get those numbers. Accounting logic only looks backwards. Economic logic projects forward. Using accounting logic allows a candidate to say, if you lower taxes by x%, revenue will drop.”. It’s a stupid statement economically because it doesn’t account for a change in incentives.

The only way to change future numbers is through economic growth. Only way to change that is through a change in incentives to grow. Repealing bad regulation, and adjusting tax codes lower, with less loopholes, would provide a change in expectations so that businesses would hire.

This isn’t rocket science.

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Tip of the hat to Glenn Reynolds at Instapundit.

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