Unemployment Rate = (Unemployed Workers / Total Labor Force) * 100
The "Total Labor Force" is defined as people of working age and under retirement age who are actively participating in the workforce or actively looking for work. If you look at the equation you can quickly understand that two factors can cause the unemployment rate to fluctuate.
1. The economy adds jobs, therefore resulting in fewer unemployed workers. See below:
a. Let's say the unemployment rate is 10%. The equation goes as follows:
10% = 10 unemployed workers / 100 people in labor force * 100
b. Now let's say that the economy adds two jobs, resulting in two people getting a job and the unemployment rate drops to 8%.
8% = 8 unemployed workers / 100 people in labor force * 100
2. People who are unemployed stop looking for work, therefore resulting in a smaller labor force. Yes, the unemployment rate drops, but not because people have found jobs. Again, see below:
a. Again, start with a 10% unemployment rate.
10% = 10 unemployed workers / 100 people in labor force * 100
b. Now let's say two of those people just gave up looking for work, causing a drop in the unemployment rate.
8.2% = 8 unemployed workers / 98 people in labor force * 100
Now you can see why the drop in the unemployment rate is so incredibly misleading. It is not an indication that the economy is recovering. It is an indication that people are simply giving up on the job search, because they aren't finding jobs! That's not exactly the change in unemployment that we're looking for. The bottom line is that there is so much political uncertainty these days that employers are afraid to hire. And by "employers" I'm really talking about small businesses. They are the economic engine that truly drives the economy, and they create most of the jobs in this country. When a business owner wants to hire someone he or she sits down and calculates how much it will cost to employ that person (salary, benefits, payroll taxes etc.). Business owners cannot make that calculation right now, because they don't know what to calculate. Are they going to have to pay a healthcare payroll tax? Are they going to have to pay a higher income tax? They don't know, and until they can predict their costs with a reasonable amount of certainty they are not going to hire anyone.
Our president and Congress need to understand this. They need to begin to understand that government spending does not create jobs, because government does not and cannot create wealth. In order for the government to create a job it must first take a dollar (through taxes) from someone and then give it to someone else. Zero value is added to either party. On the other hand, when money exchanges hands in private business value is added, and both parties gain something from the exchange. That is how our economy will grow. That is how our economy will add jobs, and that is how the unemployment rate will drop in a positive way. Until then, the drops we will see will be those of despair, people throwing up their hands saying "I give up."
I'm with you baby
ReplyDeleteHey Patrick, thanks for the post. How do they determine who is actively looking for work and who has given up? It seems subjective and arbitrary.
ReplyDeleteActually, the same logic accounts for why the rate has not dropped further as more jobs ARE being created in March. As the economy recovers people who stopped looking start looking again and instead of going down, the rate stays the same or goes up. It works both ways folks.
ReplyDeleteIt's a pity to see the government cheating people like this. Optimism is a nice thing, of course, but if it is introduced as a lie, there's definitely nothing positive about it.
ReplyDelete