Does Unemployment Matter?

Let’s get something very obvious out of the way right from the start: the official federal unemployment rate does not measure the total number of people who are out of work. Yet a lot of us are freaking out over it.

As many of us like to point out on the message boards, the US unemployment rate is a misleading number at best. It is NOT the number of jobless people divided by the total labor force; it’s the people who are actively looking for work divided by those same people looking plus the people who already have jobs.

So if people have lost hope and given up the search, they aren’t counted, which is bogus. When a recovery is young and people get excited about looking again, this rate is actually going to (counterintuitively) go up for a while.

On top of that, lots of us are convinced that the recession can’t end until unemployment (official or not) starts to fall appreciably. What a lot of us don’t realize is that unemployment is a lagging indicator (against the stock market) for a number of reasons.

Put yourself in the executive hiring manager’s chair for a minute. When do you hire?

So the recession has hit, and you’ve had to let some people go. You “get lean” and make your remaining staff make do with less. Suppose that works, and the productivity gains head to your bottom line. Do you hire now?

Nope—we’re in a recession!

Fast forward. Recovery starts; you start to see a slight bump in sales. Do you hire now?

Nope—can’t afford it yet!

Fast forward. Recovery starts to get a little stronger, and because your staff has gotten more productive, they’re able to handle it. Do you hire now?

Nope—the recovery could stall, or we could slide back into recession! Besides, we can make do with contract or part-time/temporary workers, which is also good for you because you most likely don’t have to pay them benefits.

Fast forward one more time. You’ve had a few quarters of increasing sales now; your people are looking more exhausted and overworked than usual, and your sales managers are telling you that it’s gotten to the point where you’re leaving money on the table by not bringing more people on board.

Do you hire now?

Yes, you can start…and recruiting, interviewing and hiring takes months.

See what I’m getting at? Firms only start hiring appreciably until a while after a recession “officially” ends. And historically, if you plot the unemployment rate against S&P500 returns, an ideal time to go long is a few months before unemployment peaks. A glance at that same graph (presented in Ken Fisher’s book, “Debunkery,” which I’ve done a review of) shows you that stocks take off long before unemployment starts to fall. They do not move in lockstep.

Does this make you feel any better about broader employment prospects for the economy? Your own personal search? Or are we going to trot out the “it’s different this time” approach? If yes, how?

 
Best Response

I agree with you that the media over-hypes the unemployment number, especially following it so closely month to month as a barometer of the aggregate economy. That being said, there is significant evidence that the past three times (early 1990's, early 2000's, and the Great Recession) have been different.

While unemployment always lags, it historically began recovering within 4-6 months after the output recovery and completely recovered within two years. That has not been the case recently. In fact, unemployment never fully "recovered" from the early 2000's recession.

There are myriad possible explanations for this phenomenon. I tend to think that it is related to technological innovation and substituting capital for labor - many of the former hallmark "middle-class" jobs are fairly routine and capable of being at least partially replaced by computer technology. This structural change leaves more people unemployed and results in a sharply polarized economic landscape with widespread wealth inequality.

Now, inequality is not inherently bad, and those of us merely worried about mid-term stock market gains and capital appreciation stop listening now. But in a representative democracy broad changes in economic equality can have unsavory political consequences that stunt economic growth. So, while many may be focusing on unemployment for the wrong reason, I do think we should be focusing on unemployment from a long-run perspective and look at how to fix it (education, skilled immigration policies, etc.).

But, as far as people's opinions of their own personal search, the WSO community is a fairly self-selected group that should find themselves consistently a part of the 90+% of the statistical labor force that find themselves employed.

 

A theory has been developed as to why many people can remain unemployed despite a large number of job vacancies, and it's called ‘search friction.’ This keeps people from finding a job because they are unaware of the position even if they are qualified.

Is this why Obama would rather keep people's unemployment benefits at a steady flow? It would defer people from looking for jobs, thus decreasing the unemployment rate.

Of course liberals would never admit to that, because they "care" about poor people, but I don't think very many people realize this.

 
BTbanker:
Is this why Obama would rather keep people's unemployment benefits at a steady flow? It would defer people from looking for jobs, thus decreasing the unemployment rate.

Absolutely. You know, the other day Obama came into my house and force-fed me unemployment benefits. He came in through the bathroom window, with an elvish grin and protected by a silver spoon. I told him I didn't want them, but he didn't listen! I was kicking, and screaming, and crying, my face was turning strawberry red, but he didn't listen, just kept shoving unemployment benefits into my mouth with his bare hands.

 
Going Concern:
BTbanker:
Is this why Obama would rather keep people's unemployment benefits at a steady flow? It would defer people from looking for jobs, thus decreasing the unemployment rate.

Absolutely. You know, the other day Obama came into my house and force-fed me unemployment benefits. He came in through the bathroom window, with an elvish grin and protected by a silver spoon. I told him I didn't want them, but he didn't listen! I was kicking, and screaming, and crying, my face was turning strawberry red, but he didn't listen, just kept shoving unemployment benefits into my mouth with his bare hands.

So basically you've never met anyone in the lower 10%. Or didn't notice one of the major parties does have a vested interest in keeping a certain part of the population dependent on government. I know you're being facetious, but come on.

 
Going Concern:
BTbanker:
Is this why Obama would rather keep people's unemployment benefits at a steady flow? It would defer people from looking for jobs, thus decreasing the unemployment rate.

Absolutely. You know, the other day Obama came into my house and force-fed me unemployment benefits. He came in through the bathroom window, with an elvish grin and protected by a silver spoon. I told him I didn't want them, but he didn't listen! I was kicking, and screaming, and crying, my face was turning strawberry red, but he didn't listen, just kept shoving unemployment benefits into my mouth with his bare hands.

Sorry to hear you are out of work. I'll pay you to wax my Audi.
 
In The Flesh:
What a lot of us don’t realize is that unemployment is a lagging indicator (against the stock market)

To be fair, initial claims for unemployment insurance is a leading indicator, and nonfarm payrolls is a coincident indicator overall. And while the stock market is indeed a leading indicator, better leading indicators include the hemline index (close cousin to the high heel index), the buttered popcorn index, the baby diaper rash indicator, and of course the latvian hooker index.

 

A lot of firms/groups are holding off on hiring until after the election. Until then, it's an issue of staying sane and getting ready for the thaw. I percieve the larger structural patterns somewhat differently, but for our purposes, things start to get better a lot faster than the general system, so keep a stiff upper lip (and then go home and scream at the lawn, or go to the gym, whatever you do to blow off steam).

This is a super shitty time to try to change jobs or get one. Confidence takes a severe beating, it sucks. Thing is, there are job openings, but just not people's first choice...

As for resume for those who have been laid off: find a friend with a startup...any startup...and become an 'advisor', work for free if you have to. If you show some sign of having kept active it really will set you apart from the crowd. Or start one of your own, even if it only exists on paper it gives the image that you're proactive and not just sitting around collecting an unemployment check.

Get busy living
 
UFOinsider:
As for resume for those who have been laid off: find a friend with a startup...any startup...and become an 'advisor', work for free if you have to. If you show some sign of having kept active it really will set you apart from the crowd. Or start one of your own, even if it only exists on paper it gives the image that you're proactive and not just sitting around collecting an unemployment check.

Great point. I have hundreds of paper startups. My latest one is a kind of SeamlessWeb for food carts.

 

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