09 March 2015

C. K. Michaelson: The American Economy - A Minority Report

Some Assembly Required
A Minority Report
by C. K. Michaelson

The jobs report is all about inflation and interest rates and only incidentally about workers and jobs. Economists claim, with little evidence, that mother nature or the universe or Keynes' ghost has an immutable law decreeing that a certain level of unemployment triggers a certain amount of inflation. Right now they pretend that 5.5% unemployment is the tipping point for this see-saw. If unemployment edges lower than that, inflation will pick up. In fact, hyperinflation may well appear, magically, overnight. It's called NAIRU – the Non-Accelerating Inflation Rate of Unemployment. The idea was first introduced as NIRU (non-inflationary rate of unemployment) in 1975. which was supposedly an improvement over the "natural rate" of unemployment made up Milton Friedman in 1968.

The idea is that as employers create more jobs, they have to compete for workers by offering higher wages, workers can demand higher wages for making the same number of widgets or threaten to go down the street and make widgets for the next guy. And to pay the higher wages, companies have to raise the price of widgets. The customers – who are the workers when they are not at work – will spend the extra wage income on the higher priced widgets and pretty soon they'll want more money for their labor. Round and round it goes and the first thing you know we're the Wiemar Republic.

Many things wrong with this idea, the biggest being the rather quaint pretense that today's American worker any clout when it comes to wages. First there's the huge number of workers who are AWOL from the labor pooI right now. And if the workers unite (ha)! to demand more wages, the companies will just move the jobs to Bangladesh or some other right-to-work place. Oh, wait, they already did, except for baristas, burger flippers and bedpan bangers.

If there is such a thing as NAIRU, it obviously isn't 5.5%, for wages went up a whopping 0.1% with the latest 0.2% fall in unemployment.

And then there's the definitional problem: What is unemployment? How big is the work force and who are all those guys sitting on the bench waiting to get into the game?

For that matter, what is employment? Is working 17 hours a week at Wally World or 22 hours a week at Macky D's 'employment'?

What would full employment look like, the kind that might, just might, lead to wage inflation? Would all workers who wanted a job have a job and would that job be commensurate with their skill and experience? Would that job provide the hours and wages they need to provide a decent life for themselves and their families – or would their kids still qualify for free breakfast and lunch at school and go to the emergency room for their healthcare?

Some data: There are 92,898,000 Americans currently not working. We have a 62.8% labor force participation rate, a 37 year low. Just last month another 390,000 Americans became invisible to the BLS. Officially, there are 8.7 million people who were actively searching for work last month, plus another 6.5 million people who didn’t look last month but who say they want a job. Plus another 6.6 million who want to work full-time but can only get a part-time job. That’s nearly 22 million people who are unemployed or underemployed.

The unemployment rate for blacks is nearly twice the national average.

American added 58,700 waiters and bartenders – pretty much earning minimum wage or less - as part of those 300,000 new jobs.

The unemployment rate would have been unchanged at 5.7% - safely out of the inflationary swamp – if the labor force participation rate had stayed steady. The big improvement didn't come from jobs, it came from despair of ever finding a job.

We're still about 1 million full-time jobs short of where we were pre-recession, and that's not even adjusting for population growth. All told, we're still about 4 million jobs away from the economy being okay;. At this rate we'll break even in September 2016.

Go Recovery!