Friday, February 17, 2012

Jobless Claims Decline But 5.4 Million Discourage Workers Remain

Regarding recent jobless claim declines in the US economy, and this as an indicator by some of an improvement of the aggregate economy…..what about the 5.4 million total discouraged workers (short-term discouraged and long-term discouraged = total discouraged)?

U6 unemployment measurement includes the short-term discouraged worker as well as other categories of workers and currently stands at 15%. Lets dust off the SGS alternate unemployment rate and bring it off the shelf (reflecting total discouraged) and one notes that it stands at 22.5%. (1)

Focusing on jobless claims and considering a three year trend regarding a declining-to-stagnant economy, jobless claims trended up, peaked, then trended down as firms removed marginal workers at the margin, then marginal workers more toward the core, ending with a firm made up of core workers. Hence with the firm running on core workers and the firm producing few new jobs:

(1) the now “core employment” doesn’t shrink,

(2) few new jobs created means fewer new jobs to be possibly eliminated,

(3) hence fewer jobless claims.

Keep this in mind for a moment.


During the same phenomena described directly above, the discouraged worker pool increased at an increasing rate. That is, some sub-set of jobless, having been a prior jobless claim statistic in month MM in year YY becomes long-term unemployed and eventually falls into the discourage worker pool.

We end with a core firm economy, and the core firm within this economy finds it can do more with less. The core firm economy, and its core firm employed, match the demand gap and hence a dynamic equilibrium. The end result is that at this point on the trend line the firm hires few and fires few.

One must consider that the  5.4 million discouraged are attracted back to the labor pool (become active job seekers) once the economy shows signs of improvement (flooding the denominator of the unemployment formula hence sending unemployment upward in a improving economy). Moreover, these 5.4 million can not make a jobless claim, all they can do is show up in the denominator. However, the denominator keeps suffering from statistical revisions [guesses/political guesses?] e.g. 1.2 million statistically eliminated January 2012.

The next observation is: are we at the core or are we at a false core? If government is still spending more than the revenue taken in, is the core false? For example, if government moved toward a balanced budget, government would need to shed workers. If government moved toward a balanced budget, some expenditures would end associated with the private sector, meaning the core economy to some degree shrinks in the short-run.

One must also consider there has to be a cost associated with the 5.4 million discouraged workers. Welfare, food stamps, Medicaid, state level social welfare programs, etc. certainly are costs associated with maintaining the standing army of 5.4 million discouraged. However, considering 5.4 million discouraged workers, where are the soup lines, where are the tent cities, where are the masses sleeping in the street? That means the costs enumerated above must come with some addition cost. That is, since we see no soup line/tent cities there must be some expenditure/cost by some exogenous provider that creates a buffer between what one sees and what one would expect to see with an army of 5.4 million discouraged workers.

One might conjecture that these costs come in the form of items such as living in mom’s basement; the return to the extended family; income diverted from the core employed to the discourage relative; grandparents liquidating wealth and giving the funds to the discourage extended family member, etc.. Consider this, how long or at what rate can this exogenous cost continue? The cost can not be absorbed infinitely. Does the ability to absorb the cost deteriorate and deteriorate at an increasing rate suddenly exposing soup lines/tent cities?

Hence is the media, talking heads and pundits overrating jobless claim declines as a positive indicator?









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