Unemployment Doesn’t Just Hurt the Unemployed

October 15th, 2012 at 10:00 pm

Every once and a while I hear someone say, “wait a sec, if the unemployment rate is 7.8% then 92.2% of labor force is working…that doesn’t sound so bad at all.”

That’s wrong simply in the sense that 7.8% is still an elevated unemployment rate (suppose the rate were 15%–would you feel better if someone pointed out the 85% are still at work? 100%-unemp is just not an elucidating metric).

But it’s more wrong in the sense that high unemployment has negative spillovers for most of those still at work.  In a labor market like ours, with low unionization rates, bargaining clout for many in the workforce is very much a function of the unemployment rate.  Excess labor supply over labor demand typically puts downward pressure on both nominal and real wages.

The figure below plots real hourly wages for non-supervisory workers—blue collar workers in manufacturing and non-managers in services (about 80% of the workforce).  It also plots yearly nominal growth rates of that same hourly wage (before accounting for inflation).

As you can see, the latter series just keeps trending down, and that’s what I mean by a weak labor market hurting workers and their paychecks.  Factoring in inflation shows some interesting nuances—even as nominal wages were slowing back in late 2008, declining price levels boosted the buying power of the hourly wage.   But more recently, the combination of price growth and high-unemployment-induced slower nominal wage growth is lowering hourly pay.

Silly season caveat: I can easily see the RNC citing this trend of evidence of the President’s failure, yada-yada…but that’s malarkey, as the VP would put it.  The American Jobs Act, proposed by the President in Sept 2011 and completely ignored by Congressional conservatives, would be chipping away at the high jobless rate as we speak.

The Romney/Ryan rap on this makes no sense.  Their side erects road blocks to prevent the fire trucks from getting to the fire and then complains about the heat.

And before you want to get all “stimulus doesn’t work” on me, check out the excellent box 1.1 on page 41 from the IMF World Report.  A bit wonky, but they’re basically finding that austerity isn’t just counterproductive re growth and jobs.  It’s a lot more so than they thought.

This is just a particularly lousy time to unlearn the fact that spraying water on burning buildings really does quell the flames.


Source: BLS

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4 comments in reply to "Unemployment Doesn’t Just Hurt the Unemployed"

  1. Rima Regas says:

    I’d love to see pieces on the effects of long-term unemployment and unemployment among African Americans. What are the long-term prospects? What do you think should be proposed in a new Congress to help these two populations? Many are starting to lose their benefits. What will they do? What can government do, assuming Dems regain the lower House.


    • Noni Mausa says:

      In addition to the depressing effect on the labour market, higher unemployment means that the support for those unemployed people falls on the shoulders of the employed, whether directly (adult children, spouses or friends supported by people who care) or indirectly through taxes paid for social services, medicare, and prisons.

      So not only do the surviving workers still have to work to support themselves and create value for the business owners, but their depressed wages are further stretched to cover others. The still-employed people are less able to build equity, save for the future or cover current costs — unless they jettison their friends and relatives, and that doesn’t effect the social and taxation burden. Every person unemployed reduces the effective income of the employed, so 100 lost jobs can equal 200 or more hits to collective prosperity.

  2. Mahmoud El-Darwish says:

    Unemployment Doesn’t Just Hurt the Unemployed
    —Jared Bernstein’s

    In truth, an unemployment rate of around 20% is about right for an industrialized 21st Century nation. There is no such thing as a ‘High’ or ‘Low’ unemployment rate.Technology and disinter-mediation will actually lead to a demand adjusted employment rate of around 75% by 2020.
    Indeed, as the author pointed out, the downwards bearing market pressure on wages is a reflection of a paradigm shift in the value of human workers in a New Millennium.This is a reality that the US, for example, fails to confront.
    The solution is serious population reduction. This ugly reality eludes all industrialized nations except for China and Japan perhaps.
    The Western nations such as the UK, USA and Western Europe only have population as a tool to keep unemployment manageable, since manufacturing is all but irretrievable, farming has been outsourced, and the US’s ‘human capital’ advantage in technology and education has slipped away.

  3. Jerome Barry says:

    Hello Dr. Bernstein.

    Oh, dear. Once more the academic goes into the breach to provide cover for the further Keynsian priming of the pump.

    That won’t work. The baby boom started retiring. Already and for the next 20 years the most productive members of the workforce will attrit from making positive GDP effort to being dependent. The 47% will grow to 75%.

    Whether I endorse or oppose deficit spending doesn’t matter to me or you. What matters is that the population bulge of the baby boom is irreversibly moving productivity to dependency.

    True “change” won’t happen until the taxpayers resent and outnumber and outvote the dependents.