Challenge to the Heritage Foundation; Preposterous Unemployment Estimate Revisited

In No Path to Prosperity: Ryan's Incredulous Budget-Balancing Proposal, Preposterous Unemployment Estimate I blasted the Heritage Foundation's estimate of 4% unemployment rate by 2015.

In the above referenced article, I did unemployment math two different ways to show just how silly a 4% unemployment projection is.

In an effort to be as fair to the Heritage Foundation as possible, I will do the math a third time factoring in a few more variables.

Before doing so, please note that Bernanke estimates it takes 125,000 jobs a month to hold the unemployment rate steady. Thus, in a Bernanke scenario we would need 1.5 million workers a year to break even. I find that number reasonable. It is one of the few things I agree with Bernanke about.

Participation Rate Analysis

While pondering Bernanke's estimates, it occurred to me that the demographic projection of 2.5 million working age (16 years old and up) citizens a year from now until 2020 that I used in my previous calculations failed to factor in the participation rate.

The participation rate is a measure of how many of those aged 16 and older are working vs. the entire pool of those 16 and older. In other words we need to account for working-age citizens who are not in the labor force, for example, students and retirees.

Once again, let's start with a look at the April Employment Report (March Data). The unemployment rate is calculated from the Household Survey.

Household Data From Latest BLS Job Report



The current participation rate is 64.2%. It has been 64.2% for three months in a row although it had previously been dropping at an unprecedented rate. This is why the unemployment rate dropped, even though few jobs were added in the last year.

Looking ahead, if we assume 64.2% of those 2.5 million go into the labor pool, then the labor pool would rise by 1.6 million per year, not the 2.5 million I used previously.

Note that 1.6 million workers is very close to Bernanke's 1.5 million estimate.

Additional Forces in Play

1. Boomer demographics suggests the participation rate will decline as will the number of jobs needed to hold the unemployment rate steady
   
2. In a recovery, the participation rate would normally tend to rise
3. In the last three years, 6.383 million people dropped out of the labor force. That is an unprecedented rate. Many of those workers will start seeking employment if jobs are available.
4. Part-time employment. There are currently 8.265 million non-agricultural persons working part-time that want a full-time job. Before employers add employees, expect to see that number drop. Alternatively, expect to see much of the job creation to be low-paying part-time jobs.
5. People working multiple jobs. Some of those who find jobs will be those who already have them. They were employed before and will remain employed so the additional jobs will will not subtract from the unemployment rate. However, some of those working two part-time jobs may get full-time employment possibly giving up one of the part-time jobs. This would open up jobs for others.
   

Points 1 suggests fewer workers will be needed to hold the unemployment rate steady in the years to come. Points 2 and 3 suggest more workers will be needed to hold the unemployment rate steady in the years to come.

Point 4 suggests employers will be cautious about adding new employees and will instead bump up the hours of existing part-time employees.

In regards to point number 5, I suspect those seeking multiple jobs would add to the difficulty in lowering the unemployment rate. Either way, the effect is probably, but not necessarily small. The safest thing to do is ignore the effect. I mention it for completeness.

Factoring in Point 1 - Demographics

Let's assume Bernanke's estimate that it takes 125,000 jobs a month to hold the unemployment rate steady for the next two years. Then because of demographics, let's assume we only need 100,000 jobs a month to hold the unemployment rate steady.

This is a generous assumption to hand to the Heritage Foundation.

In that scenario, to hold the unemployment rate steady, we would need 1.5 million jobs for two years and 1.2 million jobs for an additional two years.

Factoring in Points 2 and 3 - Recovery Math



The above table shows there are 6.25 million people who want a job. Of them 2.434 million are not counted in the labor force simply because they have not looked for work in the past 4 weeks.

Note that those not in the labor force rose by 2.478 million in the last year, in an alleged recovery. Also remember in the last three years, 6.383 million people dropped out of the labor force. Some of them "retired" but it was forced retirement.

Many of them would gladly look for work if jobs were available.

All things considered, I will stick with my prior estimate that sometime over the next 4 years
an additional 2.330 million workers will come back into the labor force, looking for jobs.

Should there be a strong recovery as the Heritage Foundation suggests, that number is possibly very low (thus generous) to the foundation.

Revised Unemployment Math

Factoring in the above, the labor pool would rise by 5.4 million plus 2.33 million or 6.73 million total.

We can now crank the math one more time.

1. The existing labor pool is 153.406 million.
2. Four years from now the labor pool will be larger by 6.73 million.
3. Adding the numbers together, the labor pool in March 2015 would be 160.136 million.
4. Assuming the Heritage Foundation figure of 4% unemployment, there would be 6.405 million unemployed.
5. Subtracting the number of unemployed from the labor pools gives us the number of jobs the economy will need. 160.136 million - 6.405 million = 153.731 million jobs.
6. There are currently 139.864 million employed.
7. Subtracting the last two numbers, the economy would need to add 13.867 million jobs.
8. 13.867 million jobs is 3.467 million jobs a year for 4 years straight.
9. 13.867 million jobs is 289,000 jobs a month for 48 consecutive months.

289,000 jobs a month is certainly easier to achieve than my prior estimate of 401,000 jobs.

However, that number still does not factor in part-time employment.

Table A-8 Part Time Status



There are currently 8.265 million non-agricultural persons working part-time who want a full-time job.

Before employers add employees, the employers would likely increase the number of hours of existing part-time workers. If so, the unemployment rate will be more stubborn than expected.

On that score we are in uncharted territory and the starting point is not pretty. For the sake of argument, however, and again giving the benefit of the doubt to the Heritage Foundation, let's ignore any effect from part-time workers.

Now let's revisit a chart from my prior post.

Monthly Job Growth 1999-2009



The above table shows monthly job growth from 1999 through 2009. I put that table together in November of 2009.

Notice that in the height of the housing boom in 2005-2006, the highest average monthly job total was 212,000 jobs a month. At the height of the internet boom in 1999 with Greenspan stepping on the gas over absurd Y2K fears, the economy added 264,000 jobs a month.

At the peak of the commercial real estate boom in 2006-2007, the economy added somewhere between 96,000 jobs a month and 178,000 jobs a month.

Let's be realistic. The housing boom is not going to come roaring back. Nor is the commercial real estate boom, nor is another internet boom.

Recap and Conclusion

The numbers I originally posted were on the high side. I redid the numbers and lowered the assumptions on how many jobs it would take to hold the unemployment rate steady.

289,000 jobs a month for 48 consecutive months is simply not going to happen.

Thus, the revised number is still preposterous even though I tilted several factors to the Heritage Foundation to get that lower number.

Challenge to the Heritage Foundation

I challenge the Heritage Foundation wants to show their numbers as to how they arrive at 4% unemployment by 2015. I say it cannot be done.

While I am a big fan of cutting expenses to balance the budget, I want to see realistic estimates from the Heritage Foundation, from Republicans, and from the CBO as to what Ryan's plan will really do.

I do not accept it on faith that giving Medicare credits instead of Medicare will substantially reduce unemployment by 2015. Nor do I believe equalizing corporate income taxes at 25% will do so either.

I would actually prefer to see lower corporate taxes in the US than abroad, say 10% in the US and 20% abroad. That would provide real incentive to bring jobs and capital back to the US.

The citizens of the United States deserve the truth about the economy, not a bunch of cream-puff economic projections that cannot possibly happen.

Alternative Mish Proposal

I am all in favor of reducing the deficit. Indeed Ryan's plan falls way short of what is needed. However, if the goal is to create jobs, the way to do that is fix structural problems. Rand Paul has the right idea with right-to-work laws. We also need to scrap Davis-Bacon and all prevailing wage laws.

Those proposals would allow cash-strapped cities and states to rebuild infrastructure at less cost or (and this is key), hire more workers for the same cost and get more work done.

My four proposals for creating jobs are

• National right-to-work laws
• Scrap Davis Bacon and all prevailing wage laws
• Set corporate tax rates substantially lower in the US than overseas
• Eliminate entire bureaucracies such as the department of education and the department of energy

My proposal is far better than Ryan's proposal in terms of creating incentives for bringing jobs back to the US and for helping cash-strapped states rebuild infrastructure.

However, there is no chance what I suggest would come close to lowering the unemployment rate to 4% in 4 years either.

Let's see what if anything the Heritage Foundation has to say about those ideas.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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