The Truth Behind Rising Unemployment

The official unemployment rate failed to reflect the eroding labor market situation earlier this summer, primarily due to volatility in the household survey and the imperfect seasonal factors that are applied to smooth out the volatility. Other data have been less ambiguous.

While initial claims seem to have come down a bit since June, the relentless high volume of continuing claims tells the true story. Laid-off workers are having increasingly more difficulty being reabsorbed into the labor force. Both the volume of help-wanted advertising and hiring plans as surveyed by Manpower Inc. are at recessionary levels. Moreover, the sum of continuing and initial claims is as high as it was during the second half of 1990 when the economy was in a recession.

While the official unemployment rate understated worsening labor market conditions earlier in the summer, the August rate likely overestimated the severity of the deterioration. The August surge can be explained in large measure by the later than usual survey week (the household survey is conducted during the week that includes the 12th of the month).

Many young workers had finished their seasonal work by the time of the survey and were counted as unemployed. Indeed, workers between 16 and 24 years of age accounted for one-half of the increase in unemployed workers. Normally, the increase in unemployment would have been registered in September, and seasonal factors are in place to deal with this. However, since it occurred in August, the seasonal factors amplified the number of unemployed. On a not seasonally adjusted basis, the number of unemployed increased by 159,000. On a seasonally adjusted basis, the number of unemployed increased by 562,000. The Bureau of Labor Statistics warns that too much stock should not be placed in a one-month movement.

The rise in joblessness among 16 to 24 year olds is only half the story, however. Most of the remaining increase in unemployment is accounted for by prime-aged workers ages 25 to 34. In addition, for the first time in this slowdown, the increase in joblessness was distributed across all occupational groups, from professional workers to laborers.

The significance of the rising unemployment is reduced somewhat due to the makeup of job losses. Most of the job losses are still concentrated in manufacturing and temporary help workers (many of whom are employed in manufacturing), while the remainder of the economy continues to expand, albeit at a decelerating pace. In August alone, manufacturers shed 141,000 jobs, while the remaining economy eked out a gain of 28,000. During the past 12 months, manufacturing and temporary help employment has declined by 1.3 million, while the remainder of the economy has added 1.8 million jobs. The broadening of the job losses to other industries poses a tangible risk.

While the rising unemployment rate is certainly a cause for concern, it needs to be placed in historical context. Bear in mind that the unemployment rate is still near a post-WWII peacetime low. During the expansion of the 1980s, for example, the jobless rate never fell as low as it is now. What this means is that 95 percent of the labor force is still employed, a crucial factor in maintaining consumer spending.

As the daily litany of layoff announcements continues, joblessness is expected to rise further, however. Even though there is some evidence that manufacturing conditions could be firming up, that does not mean that labor market conditions will improve soon. Companies will be wary for a while before they begin to staff up again, even after the economy reaccelerates. Moreover, many of the cuts that have occurred are permanent, as the manufacturing sector streamlines and improves efficiencies.

Notably, the unemployment rate continued to rise for more than a year after aggregate output began to increase following the recession of the early 1990s. It is likely that this pattern will repeat this time around. Economy.com expects the unemployment rate to reach 5.3 percent in the middle of next year before it starts to retreat. That translates into the addition of 700,000 more unemployed workers.