US unemployment figures could be misleading us all

Unemployment in the US has fallen to a six-year low, with a growing number of jobs added to the payroll each month – but are the figures misleading?

 
Applicants wait to enter a job fair in New York City. Some analysts question whether statistics used by the White House overestimate falls in unemployment
Applicants wait to enter a job fair in New York City. Some analysts question whether statistics used by the White House overestimate falls in unemployment 
Author: Elizabeth Matsangou
May 1, 2015

In February, the Bureau of Labour Statistics (BLS) revealed that the unemployment rate in the US had fallen to 5.5 percent, its lowest level since 2008 (see Fig. 1). This is the latest figure in a promising pattern that has been welcomed by the current administration, following seven years of economic slowdown. Although fiscal growth is still sluggish elsewhere around the globe, there has been an upward shift in the US, with positive indications for the coming year.

As noteworthy as this decline in the unemployment rate is, it is hardly telling of the whole story; there are still nine million Americans out of work and the number of discouraged workers is on the rise. Of men aged between 25 and 64, one sixth are currently unemployed, with youth employment a particular problem for the world’s biggest economy. Overall, the labour participation rate remains low, making the improved unemployment figures somewhat misleading.

As is expected, profits are the focus of business – but in a period of slow growth that philosophy comes at the cost of losing talented workers, which in turns leads to greater frictional and long-term unemployment, while also harming the wider economy.

Job creation
With an average of 222,000 jobs added to the payroll each month, 2014 was the best year for job creation in the US since 1999. This year was also off to a good start with 257,000 jobs added in January, rising to 295,000 in February, despite the period typically being the worst for the labour market. One of the main reasons behind the recent easing in the unemployment rate is the retirement of the ‘baby boomers’, which has created a large opening of job vacancies. “There’s a huge generation that delayed their retirements, some of them as a result of the financial crisis, but in the last three years they have been retiring in great numbers”, says Gad Levanon, Managing Director of Economic Outlook and Labour Markets at The Conference Board.

59.3%

US employment population ratio

222,000

US jobs created each month on average in 2014

Yet not all the reasons behind greater job creation are positive; a notable example is labour productivity, which remains unusually slow. According to the BLS, from around two to three percent a decade ago, it is now growing by less than one percent. As the US’ GDP has begun to grow at an accelerated pace, employers are hiring more staff in order to increase production and meet rising demand. “The low-hanging fruit of replacing workers with technology and equipment already took place 10, 15 years ago, and now moving forward, it’s harder to do more of that very fast”, says Levanon. This is further reinforced by less dynamism in the US economy, illustrated by the fall in the number of start-up companies; together with a disappointing level of investment in technology and equipment, innovation and productivity have suffered as a result.

Moreover, the majority of the newly created posts are for low paying roles in the services industries, particularly in restaurants and drinking establishments, as well as retail. Therefore, the large majority rely on tips, along with a meagre pay of $2.13 per hour – hardly a fitting wage for workers in the world’s largest economy. On a social level, low paying wages seldom provide sufficient means for individuals to cover their basic living costs. Part-time employment also contributes to the rate of employment, but again, these hours are inadequate to support everyday expenses. “Not all jobs are created equal. Not all of them are full time. Not all of them are well paid. There is likely a lot of underemployment in our labour market that these numbers do not reflect”, says Veronique de Rugy, Senior Research Fellow at George Mason University. It is also worth noting that the BLS is less reliable than the payroll, with a purported error margin of 100,000.

Ignoring the figures that count
Discouraged workers are also excluded from the new and improved unemployment rate; this figure is approximately 770,000 and is on the rise. It is commonly known that the longer individuals are out of work, the more difficult it is to find employment. This is due to the job search naturally being less fervent as time goes on and the increased likelihood that employed candidates will be selected ahead of the unemployed. It’s a vicious cycle, and one that has encouraged those stuck in this loop to exit the workforce altogether. When taking these statistics into consideration, the U6 unemployment figure, which remains at an elevated level of 11.5 percent, gives a more holistic view of the labour market, but is rarely used for obvious reasons.

Unemployment in the US

Another figure that has barely moved is the long-term unemployment rate, (referring to those without work for periods of 27 weeks or more), which remained at around 2.7 million in February (see Fig. 2). This figure is often overlooked, yet accounts for almost a third of the total number of unemployed people in the US. Paying undue attention to this section of the population is dangerous in terms of its potential for further lowering the labour participation rate, because the longer individuals stay in this pool, the more likely it becomes that they will leave the labour market.

According to the Federal Reserve, the underutilisation of labour resources is gradually abating, having declined by 1.1 million. But the labour participation rate is still a disappointing 62.8 percent (see Fig. 3). The employment-population ratio was unchanged at 59.3 percent in February, but is up by 0.5 percent over the year. “Under-employment is one challenge. The other one is the decline in the labour force participation. It wouldn’t be a problem if the reason it was declining is that people are retiring or going to college. However, there is a sense that this decline is due to incentives to stop working to collect benefits such as disability insurance”, says de Rugy. Many economists expected those who had left the labour force to return, but this has not yet been the case. It would seem that there is still a need to encourage people not to leave the workforce in the first place, namely by reducing long-term unemployment.

Then there is frictional unemployment, which has become more complex in recent years and now leads to longer periods of unemployment for individuals in between jobs. Jobs are becoming increasingly niche and competition grows fiercer by the year, thereby making it more difficult for employers and prospective employees to find the right fit. Development in human resources has led to a far more rigorous process for hiring; once again intense competition comes into play. Subsequently, higher paid workers, who are the first to go when a company seeks to boost its profits, face the looming threat of this trap, marking another instance in which viewing figures and not people, continues to exacerbate the issue.

Sluggish wages
Job creation is only one side of the coin; wage growth is also a necessity, yet the former seems to overshadow the latter. Raising the minimum age and encouraging unionisation are mechanisms that can be used to increase wages, yet they are rarely employed. Implementing fairer wage distribution within an organisation is another taboo area, as Aaran Fronda explains in his article Income inequality is a moral, not economic, conundrum.

An unemployed man holds up a sign seeking a job on a street in Washington
An unemployed man holds up a sign seeking a job on a street in Washington

In a bid to raise wages in the US, President Obama recently announced a strategy to boost training and employment in high technology, as IT roles pay approximately 50 percent higher than other jobs in the private sector. A statement released by the White House revealed over 500,000 available vacancies and that local governments will be given assistance to train high technology workers in industries such as software development and cyber-security. “Helping more Americans train and connect to these jobs is a key element of the president’s middle-class economics agenda”, White House Deputy Press Secretary, Jennifer Friedman, told Associated Press. Obama’s policy to increase training and hiring for well-paid, high technology jobs is certainly good for the sector, yet this is a very niche market requiring educated employees, and so by no means is it an inclusive field.

If greater support were shown also for low and medium technology industries, such newly created jobs could reach more levels of society. Additionally, more individuals in high-technology roles could result in greater frictional unemployment. Yet the holistic approach does exist and should be employed to a greater degree, such as Obama urging businesses to sell more goods and services to the rest of the world, as exporters tend to pay their workers higher wages. Despite its slow pace, Levanon believes that the labour market is beginning to tighten, “If you look by ages, one of the reasons why wages were held back is because you had this very large pool of young workers who had very high unemployment rates and were willing to work for very low salaries – but we are seeing a recovery.”

Long-term US unemployment

In a significant move by the world’s largest retailer and the US’ biggest employer, Walmart announced that it would raise its minimum wage in 2016 to at least $9 per hour, which is around $1.75 above the federal minimum wage. This is a huge step for the organisation in terms of raising the living conditions of its mammoth labour force. This seems to be part of a wider trend by several state governments and private enterprises, such as Gap, Starbucks and TJX. As Matt Timms discusses on page 120, this decision should not have been left to the employer or local authorities to make; the move could have been legislated by the federal government years ago. Yet, again, the sanctity of a business’ profits comes before the good of its greatest asset – despite the economic benefits.

Profits over talent
Even with the decline in the unemployment rate, ruthless job cuts continue. “I suspect the economy is still not very strong while the uncertainty due to the large regulations which are in the works [Obamacare and Dodd Frank, among others] give an incentive to firms to prepare for rougher days ahead”, says de Rugy. In January, American Express announced 4,000 job cuts from its labour force, eBay revealed plans to reduce its workforce by seven percent, equating to 2,400 roles, and Dreamworks will also axe 15 percent of its personnel – to name just a few. These cuts can be attributed to revenue not climbing fast enough for shareholders, despite all three firms experiencing rising profits in Q4 2014. Skilled workers have become a commodity, a go-to means of cutting costs and boosting profit margins, and while this focus on profits instead of people may appease shareholders, it is damaging for the labour market and the wider economy. Highly experienced and skilled workers have to resort either to unemployment or badly paid jobs, which in turn reduces the pace of the nation’s technological advancement.

Furthermore, drastic job losses are expected within the oil sector as a result of the downward trend in oil prices. Until the price drop, the sector was experiencing significant job growth; according to the BLS, the oil and gas industry accounted for 201,000 new jobs in November 2014, a 21.9 percent increase from 156,900 in the same month five years prior. The cuts have already begun in great numbers; Harburton axed 6,500 jobs, Schlumberger announced plans to let go of 9,000 staff members and Baker Hughes has cut 7,000 jobs from its payroll. BHP Billiton will be reducing its domestic rig operations by about 40 percent this year, while Shell also plans to sever its planned capital investment over the next three years by $15bn; giving more reason for insecurity within the industry.

Resumes placed in a basket at a ‘Job Hunter’s Boot Camp’ in California
Resumes placed in a basket at a ‘Job Hunter’s Boot Camp’ in California

According to a report carried out by Challenger, Gray & Christmas, 103,620 job cuts were announced within the energy sector through January and February – an increase of 19 percent from the same period last year. “Oil exploration and extraction companies, as well as the companies that supply them, are definitely feeling the impact of the lowest oil prices since 2009. These companies, while reluctant to completely shutter operations, are being forced to trim payrolls to contain costs”, CEO John Challenger said in the report.

Again, this highlights a tendency to prioritise profits over retaining talent. When the shale boom first started, there was a demand for skilled personnel, scientists, engineers, analysts and so on. But they were the first to go when profits began to dip, to the possible detriment of future growth within the sector. Of course, oil companies can just hire more staff, but there could be a scenario one day in which the brimming pool of skilled workers may no longer exist – either because such individuals have left the labour force or newcomers have decided not to choose such a precarious field to work in.

Real growth
Job growth has largely been driven by SMEs, therefore government-backed initiatives for supporting such businesses are vital for promoting sustainable growth in the labour market. Large corporations, on the other hand, will always have to answer to the beck and call of shareholders, and, in this respect, are handicapped by the profit margin demon. A company’s talent is the core of its business in any sector, but when this is sacrificed for short term gains, the long-term effects on the industry, and the economy as a whole, are immeasurable.

Labour participation in the US

Far more focus is required by the current administration to reduce the levels of youth unemployment. To neglect the chances for future generations to earn a decent wage, or even one at all, is to neglect the future of the economy. Young entrepreneurs in the US are responsible for some of the largest organisations and most innovative breakthroughs in recent years, which illustrates just how much can be achieved by a young person with a good education. Take Mark Zuckerberg, founder of Facebook, Evan Spiegel, founder of Snapchat, and Drew Houston, founder of Dropbox; all attended Ivy League schools.

There needs to be a revolution in what truly drives the labour participation rate up and the unemployment figures down – not just improving the figures that look good on paper, but the whole scenario. If this were to happen, although it may be costly to businesses in the short term, it will bring other economic drivers such as productivity and innovation, which can promote growth in the long term – to an unprecedented degree. Obama’s middle income economy strategy can be achieved, but it asks that the whole population participate. Looking at all the figures would be an excellent place to start – when this is the case, the focus can fall on the problem areas and not only on improving figures that are misleading in the first place.