Fundamental and Mathematical Case for Structurally High Unemployment for a Decade; Shrinking Job Opportunities and the Jobs Gap; The Real Employment Situation

Since 2008 I have been stating the US would have "Structurally High Unemployment for a Decade".

Indeed, based on historical trends in labor force growth, the expected unemployment rate for the number of jobs created during the recovery would be well north of 11%. Yet, the unemployment rate is currently an artificially "low" 8.5% (not that 8.5% is anything to brag about).

To show how difficult it will be to bring that rate down, let's take a look at job growth (or losses), for the last three decades (numbers in thousands).

1970's Job Growth

Year	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec	Avg
1970	-64	126	151	-105	-226	-94	27	-123	17	-430	-110	381	-38
1971	76	-61	54	178	210	6	63	52	252	22	202	264	110
1972	337	207	293	218	304	293	-51	428	131	404	293	305	264
1973	350	397	269	170	190	240	25	255	115	324	304	126	230
1974	69	149	42	89	163	55	32	-15	-5	13	-368	-602	-32
1975	-360	-378	-270	-186	160	-104	249	386	78	303	144	338	30
1976	489	311	232	244	18	65	170	158	188	13	332	211	203
1977	244	295	404	339	359	399	348	238	458	262	379	235	330
1978	187	353	513	702	346	442	254	276	137	336	437	283	356
1979	137	243	426	-62	372	318	106	82	27	157	94	95	166
Decade Annual Avg													162

1980's Job Growth

Year	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec	Avg
1980	131	79	112	-145	-431	-320	-263	260	113	280	256	195	22
1981	95	67	104	74	10	196	112	-36	-87	-100	-209	-278	-4
1982	-327	-6	-129	-281	-45	-243	-343	-158	-181	-277	-124	-14	-177
1983	225	-78	173	276	277	378	418	-308	1114	271	352	356	288
1984	447	479	275	363	308	379	312	241	311	286	349	127	323
1985	266	124	346	195	274	145	189	193	204	187	209	168	208
1986	123	107	93	188	125	-93	318	113	346	187	186	204	158
1987	171	232	249	338	227	171	346	170	229	492	231	294	263
1988	94	452	276	245	227	363	223	121	340	268	339	289	270
1989	262	258	192	173	118	117	39	47	249	111	277	95	162
Decade Annual Average													151

1990's Job Growth

Year	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec	Avg
1990	342	245	215	40	149	17	-42	-208	-82	-161	-144	-60	26
1991	-119	-306	-160	-211	-128	87	-47	15	35	12	-58	23	-71
1992	49	-66	50	158	126	60	71	141	35	177	140	211	96
1993	310	242	-51	309	265	173	295	161	241	277	261	308	233
1994	268	201	462	353	331	315	363	300	354	207	423	274	321
1995	321	209	222	162	-16	231	79	271	245	147	148	131	179
1996	-19	434	263	161	323	278	232	196	220	243	296	167	233
1997	230	301	312	291	256	253	283	-18	508	339	303	299	280
1998	270	189	144	277	401	212	119	352	218	193	284	342	250
1999	121	410	106	376	213	266	291	192	202	408	294	294	264
Decade Annual Avg													180

2000's Job Losses!

Year	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec	Avg
2000	249	121	472	286	225	-46	163	3	122	-11	231	138	163
2001	-16	61	-30	-281	-44	-128	-125	-160	-244	-325	-292	-178	-147
2002	-132	-147	-24	-85	-7	45	-97	-16	-55	126	8	-156	-45
2003	83	-158	-212	-49	-6	-2	25	-42	103	203	18	124	7
2004	150	43	338	250	310	81	47	121	160	351	64	132	171
2005	136	240	142	360	169	246	369	195	63	84	334	158	208
2006	281	317	287	182	11	80	202	185	156	-8	205	180	173
2007	203	88	218	79	141	67	-49	-26	69	91	127	84	91
2008	13	-83	-72	-185	-233	-178	-231	-267	-434	-509	-802	-619	-300
2009	-820	-726	-796	-660	-386	-502	-300	-231	-236	-221	-55	-130	-422
Decade Annual Avg													-10

2010's Job Growth

Year	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec	Avg
2010	-39	-35	192	277	458	-192	-49	-59	-29	171	93	152	78
2011	68	235	194	217	53	20	127	104	210	112	100*	200*	136
* : preliminary													108

Bear in mind those tables are from the BLS establishment survey data while the unemployment rate is based off a phone survey. Nonetheless, with sufficient time (and BLS revisions), the results merge.

According to Fed chairman Ben Bernanke (and I believe he is correct on this point) it currently takes about 125,000 jobs a month to hold the unemployment rate steady, down from about 150,000 in 2000. I expect that number to drop for a few more years due to boomer demographics, but the key point is the number is positive not negative.

The only reason unemployment rate has dropped recently is because BLS surveys say the number is negative (a shrinking labor force).

Based on historical data and Bernanke's estimates, one would have expected the unemployment rate to have risen during 2010 and peaked mid-2011. Instead, the unemployment rate fell from 10 to 8.5.


The Real Employment Situation

With that backdrop on historical job trends, please consider an excellent article by Lance Roberts of Streettalk Live: The Real Employment Situation Report For December 2011

If you take a look at the actual number of those "counted" as employed, that number has risen from the recessionary trough. However, in reality, employment is still far below the long term historical trend. Currently, the deviation from the long term trend is the widest on record and has made very little improvement.



In order for the country to return to the long-term trend of employment by 2020, we will need to be creating nearly 250,000 jobs each month. This, of course, is a far cry from 200,000 that we saw this month. With the employment-to-population ratio remaining at levels not seen since 1984, the real pressure on the economy remains focused on the consumer.

There are two very negative ramifications of this large and "available" labor pool. The first is that the longer an individual remains unemployed, the more the degradation in job skills weighs on future employment potential and income. The second, and most importantly, is that, with a high level of competition for existing jobs, wages remain under significant downward pressure.

Business owners are highly aware of the employment and business climate, and regardless of the ranting and raving about the "cash on the sidelines", businesses are not operated as charities. Business owners are milking the current employment climate for all it is worth in order to maintain profitability. With high competition levels for existing jobs, and the impeding threat of job loss for those working, employers can work employees longer hours at less pay. This is great for profit margins, and workers won't complain because there are plenty of individuals that will be happy to take their job and do it for less pay.



This impact on wages, as other inflationary pressures rise, hits the consumer where it hurts the most. We have discussed the fact that recent declines in wages and salaries combined with the rising costs of food and energy are consuming more of the household income. This bleed on incomes has led to significant slides in the personal savings rate and the ability for the consumer to continue to spend outside of the main necessities to meet their basic standard of living. This pattern is unsustainable, and sharp decreases in personal savings rates have historically been precursors to the onset of recessions.

Employment Trends Since 1955

In Employment Trends Since 1955 I posted a chart from reader Tim Wallace that conveys the same idea in a different way.

Employment Trends

click on chart for sharper image

Wallace writes ....

Hello Mish

On today's labor report: Note how the labor force has flat lined for four years even though population growth has averaged 1.5 million for the past 55 years. From 1993 to 2007 population growth was 1.7 million per year!

Thus, the labor force should not suddenly turn flat since retirements do not even come close to explaining the chart. Yet, suddenly the work force has just been frozen in time although the population continues on the same upward trend.

The work force is literally one million smaller than during Bush's last year in office. This is statistically impossible, at least judging from historic trends.

We also are still 5.6 million people below the employment number of the peak year in 2007. So, practically speaking we have approximately 11.6 million more people unemployed than in 2007.

If we add the additional 6 million that should be counted as available for the labor force, the unemployment number at the U-3 level surges past 11% as you have said numerous times.

Tim

Shrinking Job Opportunities and the Jobs Gap

Let's look at the same data still one more way.

Please consider Shrinking Job Opportunities: The Challenge of Putting Americans Back to Work

The December Jobs Gap

As of December, our nation continues to face a “jobs gap” of 12.1 million jobs, down by 67,000 jobs from November.

The chart below shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close under different assumptions for job growth. The solid line shows the net number of jobs lost since the Great Recession began. The broken lines track how long it will take to close the jobs gap under alternative assumptions about the rate of job creation going forward.



If the economy adds about 208,000 jobs per month, which was the average monthly rate for the best year of job creation in the 2000s, then it will take until March 2024—over 12 years—to close the jobs gap. Given a more optimistic rate of 321,000 jobs per month, which was the average monthly rate for the best year of job creation in the 1990s, the economy will reach pre-recession employment levels by February 2017—not for another five years.

Statistically Impossible IFs.

Based on the data tables from the BLS that I posted at the top of this article, each of those dashed line in the above chart represents a statistically impossible IF.

The economy is certainly not going to average 472,000 jobs per month for two years. Nor will it add 321,000 jobs a month for six straight years. Finally, the economy is not going to add 208,000 jobs a month, every month, for the next 12 years.

Indeed, one cannot find any 10-year period in which the economy added that number of jobs. The best 10-year period I can find is 195,000 jobs per month from 1991-2000, overlapping decades by 1 year (during the internet boom with hugely falling interest rates and Greenspan's foot on the gas pedal nearly every step of the way).

Fundamental Case for Structurally High Unemployment

• At the height of the internet bubble with a nonsensical Y2K scare on top of that, the economy managed to gain 264,000 jobs a month.
• At the height of the housing bubble in 2005, the economy added 208,000 jobs a month.
• At the height of the commercial real estate bubble with massive store expansion, the economy added somewhere between 91,000 and 173,000 jobs per month depending on where you mark the peak.

Neither the housing boom, nor the commercial real estate boom is coming back. Nor is there going to be another internet revolution.

Moreover, debt levels are high and millions are trapped in their homes, unable to move. Boomers in retirement or headed for retirement have insufficient savings so one cannot expect a spending boom of any kind. Instead, one can expect boomers to draw down on their savings (assuming that have any savings).

In conclusion, the only way the unemployment rate can substantially decline from here is if millions more drop out of the labor force, thereby creating an even bigger "gap" between reality and the BLS's alleged unemployment rate.

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