Sunday, January 18, 2009

The unemployment rate and job loss number is only part of the story

News stories reporting on unemployment focus on the numbers without putting the data into perspective, leaving people with insufficient information with which to evaluate what those numbers really mean.

These stories tell us that 524,000 jobs were lost in December, that the rate is 7.2 percent and that it hasn’t been that high since 1993. This information is presented in a manner that signifies a serious unemployment situation, and while the unemployment rate is inching up, it isn't all that high in historical terms. At the end of 1982 the rate was almost 11 percent, and as high as 7.8% in 1992. For 34 consecutive months, from August of 1981 until May of 1984, unemployment was higher than it is today, and for 10 consecutive months it was above 10 percent.

The unemployment rate is about proportion, comparing the number of people out of work with those who have a job. Even with the rate at 7.2 percent, 92.8 percent of those in the job market have a job. In school, 92.8 percent is a very respectable B+.

Some reporters make things seem more important than they really are. For example,, the Web site of American City Business Journals, Inc., reported on the unemployment rate moving up a mere four-tenths of a percentage point from 6.8 to 7.2 by trumpeting "December’s layoffs shot the rate" up. Think about that: If you make $10 an hour and your boss gives you a raise of four-tenths of a percent to $10.04 an hour, will you believe that he or she “shot” your hourly wage up?

An increase of four-tenths of one percent in the unemployment rate is not a crisis and neither is an unemployment level of 7.2 percent. Relevant? Yes. A crisis? No.

Some additional information would provide perspective and help people understand what the numbers mean. New jobs are constantly being created as entrepreneurs start new companies and existing firms hire new workers, and jobs are being created even in the worst economic periods. Conversely, even in the best economic times businesses contract and shut down, costing people their jobs. For proper context, all of this should be explained.

The monthly unemployment number that everyone focuses on is not the number of people who have lost their jobs; it is the difference between the number of jobs lost and the number of jobs created. That’s just common sense to some people, but many others don’t know that. The rate goes down if more jobs are created than are lost, and it goes up if there more jobs are lost than are created. But news reports rarely address this relevant aspect of unemployment data.

James Sherk, Bradley Fellow in Labor Policy in the Center for Data Analysis at The Heritage Foundation, being privy to information that average Americans are deprived of, has a different view of what unemployment numbers mean and how the country ought to react to them. He explains that the primary reason unemployment is rising is because employers are creating fewer new jobs, not because the number of layoffs, or job separations is rising.

We might expect that job separations would have increased sharply in 2008, but he provides data showing that from January of 2007 through October of 2008 the job separation rate actually dropped. But so did the new hires rate, and new hires fell more than job separations, raising unemployment. We cannot know this by merely digesting media reports of unemployment figures.

Mr. Sherk suggests that “to reduce unemployment Congress needs to encourage firms to innovate, invest, and take risks and remove policies that discourage them from doing so.”

President-elect Obama has proposed eliminating the capital gains tax on start-up companies, and that would certainly help by encouraging venture capital investment in new businesses. But Mr. Sherk further recommends that Congress turn thumbs down on the misnamed Employee Free Choice Act (EFCA), which would remove secret ballot protection on votes by employees on whether or not to approve union representation.

“Allowing unions to pressure millions of Americans into joining would further reduce job creation — the driving force behind unemployment,” he said. “Academic research shows that employment growth slows dramatically once unions organize a company.”

“Passing EFCA would increase unemployment,” Mr. Sherk concludes, and we must hope the Congress pays attention.

Click Here to Comment

Cross Posted at Faultline USA

Technorati Tags: , ,

No comments: