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The November Unemployment Figures and the Fiscal Cliff

by Robert Pollin

The U.S. Bureau of Labor Statistics (BLS) reported yesterday that the unemployment rate fell in November to 7.7 percent, relative to the October rate of 7.9 percent. The urge is to treat this as at least mildly good news. But even that reaction may be overly favorable, given what lies behind the headline unemployment rate number. That is, according to the BLS’s survey of U.S. households, the number of people who were employed in November actually fell—not rose, but again, fell—relative to October. Specifically, according to the BLS, 143,262,000 people were employed in November. That figure is 122,000 lower than the October employment figure of 143,384,000 people with jobs.

How does the unemployment rate get to fall while the number of people with jobs has also fallen? The answer is that the unemployment rate measures the number of people with jobs relative to the number of people who are counted as “participating” in the labor force. You can participate in the labor force either by having a job, or by being unemployed but trying to get a job. And here’s the catch: if you have been discouraged by not being able to find a job, and have therefore stopped looking over the past month, you are then considered a non-participant in the labor force. Naturally, when labor market conditions are bad, more people get discouraged and stop trying to look for work.

So here is what happened this past November relative to the previous month. The number of working-age people who left the labor force in November was 350,000. This translated into a decline in the “labor force participation rate” from 63.8 to 63.6 percent of the working age population. Let’s ask this question: If those 350,000 people who dropped out of the labor force had rather stayed in, and were counted as unemployed what would the official unemployment rate be today? The answer is, we would still be at a 7.9 percent unemployment rate, the same as October—that is, no improvement at all.

True, one can look at all the figures from other angles, and see some minor improvements. For example, while according to the survey of U.S. households, the number of people with jobs went down by 122,000 in November relative to October, when government surveyors asked employers how many people they have on the payroll, the number went up by 145,000 relative to October—an improvement, albeit a very modest one when we are looking at a labor force of 155.3 million people.

I won’t try to reconcile here this mixed evidence on job creation from the two separate government surveys—from households and establishments. Suffice it to say that underlying point is, if there are some signs of improving employment conditions, they are small, and fragile. There is certainly no evidence that a robust recovery has taken hold, capable of moving the economy toward 4 percent, or even 5 percent unemployment within the next one, two or even three years.

Thus, the need for the federal government to take strong measures to promote healthy job creation is as urgent as ever. Which brings us back to the fiscal cliff debate now consuming economic policymaking circles. As I have noted before, in a previous blog and in the book Back to Full Employment, the claim that the U.S. is facing a short-term fiscal crisis has no foundation in evidence. In particular, the federal government is currently paying 7.7 percent of its total outlays in interest payments. This is roughly half of what we were paying in the mid-1980s, when Ronald Reagan was President. It is also well below the average 10 percent figure that the U.S. has paid over the past 50 years in interest as a share of the total federal budget.

Yes, the fiscal deficit remains historically large, but the government is also paying less than one percent interest rates on its long-term Treasury bonds. Specifically, as of last Thursday, a 5-Year U.S. Treasury bond was paying 0.6 percent interest. As such, now is the best possible time for the government to borrow to stimulate job creation, rather than sharply cut back on social spending and raise taxes on middle income people, both of which will happen by the beginning of next year if there is no agreement on avoiding the fiscal cliff.

Cuts in social spending and increased taxes on the middle class will hurt job creation, thus weakening whatever movement towards a job recovery we may be seeing now. This is because these cuts will entail job losses for the middle class, and less money in their pockets to spend.

The equivalent is not true when we raise taxes on the wealthy or cut the military budget relative to its current gargantuan $700 billion level. For example, according to the Congressional Budget Office, for every dollar in tax cuts provided for higher-income people through the 2009 Obama stimulus program, the economy experienced an increase in overall activity of only between 20 and 60 cents. That is, it took $1 dollar in tax breaks for the wealthy to raise total economy activity by only 20 to 60 cents. With respect to the military, as I discussed in last week’s blog posting here, spending $1 million on the military will create approximate 11 jobs while, by contrast, spending that same $1 million on the green economy or education generates about 17 or 27 jobs respectively.

If we are really serious about generating job opportunities in the face of the ongoing sluggish—if barely noticeable—recovery, these are the facts that need to frame the debate. The federal deficit at present is a second-order concern that we can best fix by getting people back into jobs. Once millions more people have jobs, they will then pay more income taxes and sales taxes—generating more government revenue and thus contracting the deficit—precisely because they will have more income and more money to spend.

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