Wednesday, April 2, 2008

The Underemployment Rate is Rising

I like this term I found in this article - "Underemployment"; I've been struggling to think of a term for all these people who are struggling with part time work, working 2 jobs, or in contractor jobs where they get hired/fired on a daily whim ( I call them "nomad workers"). Before we get into that, as we preview this Friday's job report I want to point out 2 things in the interest of education - which most financial news media gloss over. Let me preface this by saying almost any large scale "survey" has major statistical bias, and the government reports are among the worst....

First, it is critical to understand the effect of the birth/death model [Jan 27: Monthly Jobs Report & Birth/Death Model]. Worth reading the article I linked to, but in summary the government estimates how many jobs have been created by "new" or "too small" companies to be included in the survey. Many of the "jobs created" are now coming from this "guesswork". Not real surveys of job creation by larger companies. So flaw #1. There is a handy chart in the link above that shows you how dominant the birth/death model is "job creation"

Second, the unemployment rate. Keep in mind it went DOWN last month. Why? If people give up looking for work they drop out of the labor force and by the machinations of this report unemployment rate goes down. Like magic. Because less people are looking for work. So just imagine if a few million more people give up in disgust. By our government calculation unemployment would plummet... heck we could be at 3% unemployment rate and our President can keep telling us how great the economy is! Booming! Flaw #2.

As a corollary to the "true unemployment" rate point above, I'd like to show you what the true unemployment rate would be if we had kept our measuring standards consistent from how they used to be measured in the early 90s and before. Instead of sub 5% we'd be north of 12%. Just like our inflation measures, the government has been adjusting these figures over time, hand picking what should stay in and what goes out so the numbers look better. This is unfortunately what the sheep are told, and the sheep are too busy watching Britney Spears exploits to notice. But after 10-15-20 years of this, eventually it will reach the breaking point - i.e. when the majority of people can't afford a middle class lifestyle. Give it another decade and that's when social acrimony should reach a boiling point as my "World of Shortages" (global competition for resources) really crests. At some point the masses will revolt... (I know that sounds over the top, but just as people in 3rd world countries now riot over food shortages, outrage leads to serious consequences - it is not at a critical mass but if groceries continue up 10-20% a year, and fuel/heating 10-20%, along with healthcare, along with tuition, along with insurances at what point do the majority break when they are told inflation is 3%? "just trust us")

(click to enlarge)

Third, is simply the underemployment this article from CNNMoney points out. This is a systematic and secular situation - nothing to do with 1 month's report or another. It is part and parcel with the erosion of living standards - and why so many in the middle and lower economic strata turn to home equity, credit cards, etc to just get by.

So whatever the number, Wall Street in its ivory tower will cheer or boo. And the real economy will continue along, eroding the living standards of the "great middle" year by year as more and more wealth is concentrated in the top 1%. [Dec 8: Do the Bottom 80% of Americans Stand a Chance?] But don't be fooled by any good cheer. We have long term erosion happening - a "shadow" system in labor just as we've had a "shadow" system in banking. A "service" economy is by nature, simply the transfer of the same paper money (in increasing amounts as the Federal Reserve increases money supply) trying to make everyone feel rich. Yes you get more money but inflation eats away at all those gains so you make no "real" gains. But speculative bubbles in assets (i.e. tech stocks, i.e. homes) make us forget the issue for a few years at a time. That's the bottom line of a "service" economy where in most sectors nothing is "created". It's been catching up to us the last 5 years+; again - hidden by the home asset inflation boom.

Last point, we have 2 huge beaurocracies - federal government and healthcare. To keep the government from going even more insolvent we should in theory be cutting jobs from these 2 white elephants. Healthcare costs spiral out of control and we hire more people - I believe healthcare is now 16% of GDP. But how do you cut costs without cutting jobs? Thats the other dark secret - most of our recent gains in jobs are either government or healthcare related. So how do you fix the long term problems in either? Chicken or egg? They are sapping our national wealth away by their huge excesses/costs BUT they also provide the main job growth as well. As with everything my expectation is the "kick the can down the road" theory will continue - keep growing these massive beaurocracies (create more jobs and costs now) and let another generation pay for it.
  • An unemployment rate at 5% used to be called full employment. Today it's considered the sign of a recession. When the Labor Department gives its March employment report this Friday, it's important to keep in mind that the relatively low unemployment rate isn't telling the whole story about the weakness of the U.S. labor market.
  • Economists surveyed by are forecasting a loss of 50,000 jobs from the nation's payrolls in the month. That would mark the third straight month of job declines. The unemployment rate is expected to jump to 5.0% from 4.8% in February.
  • But some economists point to other readings, which show that the market is much weaker than the unemployment rate would suggest.
  • For one, there has been an increasing number of people who want to work full time who are only able to find part-time jobs.
  • There is also a rise in the number of those who have stopped looking for jobs because they've become discouraged by the weak market.
  • Finally, there has been a decline in the number of employees working as independent contractors.
  • According to the February jobs report, there were 565,000 more part-time workers who wanted full-time jobs than a year ago. That's a 21.1% jump in the number of those who are under-employed.
  • In addition, a rapidly increasing number of people are being forced to take more than one job. There were 161,000 more workers in February who held more than one part-time job than there were in January. One economist said this is a further indication of how bad the market is. (thats almost 2 million more people a year, at this rate)
  • Wyss said another sign of the weakened market is the steady decrease in the past year in the number of temporary employees in the business and professional services sectors. There has been a loss of more than 100,000 jobs in this category in the past 12 months. "This is a leading indicator, since these are very often the first employees cut," said Wyss.
  • That's because the unemployment rate calculates only the percentage of workers who describe themselves as unemployed, divided by the number of those potential workers counted in the labor force. So under-employed people don't show up as unemployed.
  • And if you look at the number of people out of work in addition to part-time workers who want full-time jobs as well as people not searching for a job at the moment, a far more alarming picture emerges. Keith Hall, the commissioner of the Bureau of Labor Statistics, which prepares the monthly jobs reports, said in Congressional testimony last month that this broader measure stood at 8.9% in February, up from 8.1% a year ago.
But don't worry - the malls will be full with people waving their $600 rebate checks by this summer.

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