U.S. has fewer jobs, so how can jobless rate be falling?

October 09, 2002|By Jay Hancock

WHAT'S WRONG with this picture? The September unemployment rate was only 5.6 percent, but the country had fewer jobs than it did in February 2000.

A jobless rate of 5.6 percent is below the level economists once thought was sustainable. Unemployment of 5.6 percent is only slightly higher than the best results from the 1980s.

In the developed world, only Japan, Britain and some smaller European nations post better unemployment scores.

And yet, the payrolls of U.S. companies show that they employ 1.6 million fewer people than they did early last year.

The 1.6 million isn't just the layoffs you keep reading about; those add up to much more. Rather, the economy as a whole has 1.6 million fewer jobs, which means employees who have been hired haven't come close to making up for those who have been fired.

Employment shrinkage is not normal. Usually, the United States adds jobs to keep up with its growing population. But this retrenchment is especially prolonged and weird, summoning memories of the "jobless recovery" in the early 1990s and prompting many to disbelieve the encouraging unemployment numbers.

How can the unemployment results be so good - down from 6 percent in April - when the job-creation figures are so dismal?

Last week's jobs report underscored the paradox, disclosing that 43,000 jobs disappeared from the payrolls in September while the percentage of people reporting they were unemployed fell by a tenth of a percentage point.

One conclusion from the mixed bag is that "this particular downturn could be lighter than the last one," a decade ago, says Howard Hayghe, an economist who helps compile the figures for Bureau of Labor Statistics. However, he adds, "I'm really at a point where I can't explain it."

Some analysts explain it by simply dismissing the unemployment rate as a reliable indicator, arguing that the economy is doing much worse than is suggested by the sunny joblessness and gross domestic product results.

The hiring situation is so dismal, these analysts contend, that many who want work have stopped looking for jobs, which removes them from the statistical labor force and the ranks of the unemployed. That makes the official unemployment rate lower than it ought to be, they say.

This is probably true, to a certain extent, but it doesn't fully explain the low level of reported joblessness.

In early 1992, for example, the economy was in roughly the same spot as now: a year into renewed GDP growth after a recession but still 1.7 million jobs below its previous employment peak.

The pressures to abandon job searches and leave the labor force should have been similar to what they are now, yet the official unemployment rate was 7.4 percent - far higher than today's and much more in the range that we associate with distressed economies.

Nor could I find anything in the government's files to suggest that today's level of labor force dropouts is unusually high or that we should take the people who tell government surveyors, "Yes, I have a job," at less than their word.

It's true that the number of "marginally attached" workers - those who want a job but haven't looked in the previous month and aren't counted as unemployed - has gone up. But even if we add the marginally attached to the technically unemployed, we come up with a jobless rate of only 6.4 percent, less than what the same calculation would have yielded in 1995 or 1996, when the economy was healthy.

Likewise, there doesn't seem to have been any unusual increase in the number of part-time workers. If there had been, the ranks of the employed and the unemployment rate could look deceptively healthy.

Of course, part of the answer has to do with this slump's starting point. Unemployment got so low - down to 3.9 percent in April 2000 - that even the serious economic damage of the last year hasn't been enough to push the rate to levels associated with previous recessions.

At the same time, the tightness of the 1990s labor market acted in another way to hold down joblessness today.

"Employers had so much trouble recruiting and retaining these workers ... I think they are a little reluctant to cut deeper until they see which way the economy is going," says Peter Cappelli, a labor economist at the Wharton School of Business who has helped design employment studies for Washington. "And they are also reluctant to hire."

In other words, the economy is in a freeze frame, suspended between progress and regress and awaiting a cue that restores the action. The recently begun fourth quarter, known historically for lavish holiday spending but also for year-end layoffs, should make the story line clearer.

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