Sunday, December 4, 2011

The unemployment rate is 11%, not 8.6%

A quick note on a good write-up by Mike Shedlock who points out the "magic" of 8.6% unemployment rate. We all know that as people drop out of the workforce and no longer qualify for benefits, they are no longer counted as unemployed. Mike quantified the imact of those "not counted" for us:
Town Hall: In November, those "Not in Labor Force" rose by a whopping 487,000. If you are not in the labor force, you are not counted as unemployed. Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%. 
He also does a nice job in describing how we got here.  In particular his chart on monthly job numbers is quite telling:

 Source:  Mike Shedlock,
Massive job losses in 08-09 are followed by a quick burst of job gains from census hiring, losses from census firing, and a slow grind in job creation from that point on.

According to the Heritage Foundation, the prospects of getting to what they call "natural employment" (basically pre-recession levels) any time soon at current rate do not look that great:

Source: The Heritage Foundation

This is not a new concept, as each of the recent recessions had taken incrementally longer to get to full employment.  Understanding this, the Fed recently announced that the "natural employment" number should be closer to 6-7% unemployment rate rather than 5%, thus lowering the bar to begin raising rates.   It will take a while to get to even these higher levels from 8.6%. The problem is that the "backlog" of those who dropped out of the labor force will continue to put upward pressure on the true unemployment rate for years to come.  Because the starting point is closer to 11%.
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