[OPE] The unemployment implications of the current recession in the US: pondering the numbers

From: Jurriaan Bendien (adsl675281@tiscali.nl)
Date: Sat Apr 19 2008 - 15:23:24 EDT

Pew research comments:

At a time when the American economy is trending down and the unemployment rate is ticking up, one out of every seven U.S. workers fear they will be laid off in the next 12 months, according to a recent Pew Social and Demographic Trends survey. (...) Those least able to afford losing a paycheck are the most likely to be concerned that they'll lose their job. (...) Current job concerns are most frequent among those who have already undergone recent economic problems. http://pewresearch.org/pubs/802/youre-laid-off

Assume that workers' worst fears come true, so that one in 7 is laid off. That would be 22 million workers laid off in one year. If no new jobs were created, then the US employed labour force would drop from 145 million to 123 million. 

Since US official unemployment is already at 8 million, and the total US jobless is now at 12.5 million (including those not in the labour force wanting a job), then if no new jobs were created, the ratio of unemployed to employed would be 24% and the ratio of jobless to employed would be 34%+. 

That would be a Marxist-type depression, leading to a deep political crisis. But those percentages are of course a wild exaggeration, because new jobs are also created; the net increase of the US employed labour force has been about 1.4% per year, or about 2 million jobs or so. For example, in the June 2007 quarter, the gross job gains in the US private sector were about 7.6 million and the gross job losses were about 7.4 million, resulting in the net addition of 241,000 jobs. http://www.bls.gov/news.release/pdf/cewbd.pdf

The fears of workers might be rational, insofar as they might indeed lose their jobs due to reorganisations, but the great majority of US workers (more than 80% of them) in recent times do find another job in the same year, as can be verified from the unemployment duration data. 

>From the US BLS Job Openings and Labour Turnover Survey (JOLTS), we can learn that in January 2008, 4.6 million workers were hired and 4.5 million workers left or lost their job, implying an increase of 162,000 jobs. In February 2008, 4.6 million workers were hired, and 4.4 million workers left or lost their job, implying an increase of 153,000 jobs. http://www.bls.gov/news.release/jolts.nr0.htm In fact, official unemployment actually dropped by 79,000 in January and by 195,000 in February this year. However, in March, net official unemployment rose by 434,000 while net payroll employment was down absolutely by 80,000.  http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_numbers&series_id=LNS13000000&output_view=net_1mth
The NYT comments:

"The biggest problem with the job market isn't the jobs that are being eliminated, shipped overseas or filled by temporary workers. The biggest problem is on the other end of the equation. There are far fewer jobs being created by new or expanding companies than there were throughout the 1990s. (...) This pattern has gone overlooked because of the way that the government tabulates its closely followed monthly jobs report. It includes only the net change in employment: jobs created minus jobs eliminated." http://www.nytimes.com/2007/11/28/business/28leonhardt.html?ex=1353906000&en=ce06487a37d75c43&ei=5088&partner=rssnyt&emc=rss
Yeah. Suppose that net unemployment continued to rise by the same amount as in March, for the rest of 2008. That would imply an extra 4.3 million unemployed (roughly 50% more unemployed people in total), raising the total unemployed to about 12 million and the total jobless to about 17 million. Then, if the total employed remains exactly the same (i.e. no 2 million jobs extra created in 2008), the ratio of unemployed to employed would be 8.4% and the ratio of jobless to employed would be 11.5% (about 7.6% of the total labour force would be unemployed, and 10.8% of the labour force would be jobless). In that scenario, then basically something like one in US ten workers would be unemployed at the end of 2008 (I haven't considered fluctuations in the labour participation rate in the calculation i.e. demographic change). That alone would knock off close to $1 trillion from annual GDP (the Keynesian "multiplier effect").

If that trend continued linearly in 2009 (an unusually severe and lengthy recession), the ratio of unemployed to employed would rise to over 11% and the ratio of jobless to employed would rise over 14%. In that case, workers's worst fears would be realised at the end of 2009, because then the ratio of unemployed to employed workers would be about one to nine workers, and the ratio of jobless to employed would be about one to seven. Around 10% of the labour force would be unemployed then.

For the historical perspective, the most severe recessions in the post-war USA in terms of duration were in 1969/70 (11 months), 1973-75 (16 months) and 1981-82 (16 months), the average of ten post-war recessions being about 10 months. Then we could extrapolate, using the law of averages, that the US recession would last maximally until mid-2009 - unless it was even more severe than all other post-war recessions. But there is no good evidence for that hypothesis with regard to the US economy itself, which is still brimming with surplus capital funds, and is in a strong exporting position. Hence Mr Bush's remakrs on the subject. Most probably, the fears of US workers, although rational, are slightly exaggerated. So really the only thing that could then make the recession unusually severe, is an "external shock"...

- a strong price increase in strategic imports (oil, raw materials), 

- a sharp drop in the inflow of foreign capital,

- a dramatic event of geopolitical significance which would strongly exascerbate market uncertainty (in turn, that will depend a lot on the foreign policy pursued by the federal government - if it aggravates the world situation more, the likelihood of an external shock increases). 

- a strong deterioration in the economies of the biggest US trading partners (Canada, Mexico, Europe, Japan)

... Or, an "internal shock" such as:

-  a strike wave by US workers aggrieved by pay and/or conditions who are not prepared to take it anymore (possibly a wildcat strike wave) 

- the assassination of important US political leaders

- the discovery of gigantic accounting and auditing errors, or massive fraud

-  a major outbreak of crime & violence

- a very big disagreement in the US polity, precipitating a serious political crisis

- Louis Proyect writes more posts about Henryk Grossman's astounding prophecies from 1929

The probability of an external shock is greater than that of an internal shock, I would say. The worst that could happen in the next two years, is probably that about one in ten American workers would be unemployed. That is capitalism, and if you don't like it, you are going to have to think differently about what's really important in life. Should speculators in Wall Street be able to determine how your life will go, yes or no? If you say no, then the US Senate has to prohibit certain capital transactions. If you say yes, you can share in the further adventures of Wall Street. Enjoy the ride!



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