The initial employment numbers from December were quite favorable: roughly 200,000 new jobs were added, almost all in the private sector (government employment shrank a small amount), and the unemployment rate ticked down to 8.5%.  These are numbers worth watching, as a recovery may be in progress, despite President Obama’s economic policies.  But  these numbers don’t tell the whole story.

First, Seeking Alpha describes some of “the rest of the story.”  When the current malaise, loss of our edge, and descent into laziness began in December 2007, the civilian non-institutional population* of the United States was 190 million, and the labor force was a tad over 125 million.  As of December 2011, the Bureau of Labor Statistics says that the “civilian non-institutional population” had increased to roughly 194 million, or 3.7 million higher (the difference includes rounding error from my own rounding) than it was those four years ago, and the labor force was 124 million.  BLS also says  that the employment population ratio was 58.5% as of last month.   Multiplying the increase in the U.S. population over the four years by the employment population ratio, says Seeking Alpha, implies that our labor force should have increased by 2 million to more than 127 million, not decreased to the 124 million actually reported: more than three million people are missing in the BLS figures.  (Note that, given the way the unemployment rate is calculated, a smaller labor force produces a better (headline) unemployment rate: dividing the number of employed in December 2011 by the size of the labor force that should exist based on the BLS’ population numbers gives us an unemployment rate of 9.6%, not 8.5%.)

What about those 3 million people, then?  The BLS says these folks left the labor force and that this justifies purging them from the statistics.  It’s certainly true that if 3 million Americans left the labor force—gave up and stopped looking for work—it’s valid for them to be scrubbed from the employment numbers.  (As an aside, note that this departure from the labor pool is a continuing trend: 2011’s labor pool is smaller than 2010’s, despite an increasing total national population.) Thus, it’s not inaccurate—as far as it goes—to say that of the population looking for work, their unemployment rate is the reported 8.6%.  But now think about what it means for 3 million folks to have just given up on finding jobs.  It’s clear that the current recession is continuing (yes, yes, I’m aware that by the consecutive quarters official measure, this recession ended ‘way back in 2009—see how your unemployed neighbor, or your spouse, or yourself feels about that), and no economic recovery has taken place or is in progress.

The Wall Street Journal describes another aspect of the story concerning long-term problems that exist and that will persist as a result of this prolonged recession.

Long-term unemployment remains above 15%, down only trivially from 15.3% to 15.2% last month.  Additionally, our labor market has, over the last 20 years, lost much of the edge it enjoyed over other developed countries.  Some of this is due to the deterioration of our education system, so that our relative gains from the last century due to our education are disappearing.  There are demographic causes, too: we relocate less frequently and change jobs less often, which makes the job market less flexible, as employers are less able to find the workers they want.  If the desired worker isn’t local, the employer has to do without, pay more for more training, or pay more for relocation costs.  And as seen above, a smaller share of us are working.

Additionally, there are 5.6 million Americans that have been unemployed for more than 6 months, and of these, 3.9 million have gone unemployed for a year or more.  Indeed, these 5.6 million out of work for half a year or more represent fully 42.5% of our unemployed.  This, of course, is in addition to those millions that have given up on finding a job.  This long-term unemployment rate forms a vicious circle, also.  The longer people go unemployed, the less (re)hirable they become.  Reasons for this vary, but they include deterioration of skills and the stigma of having already been long-term unemployed.  This can lead, domestically, to the same situation that has occurred in Europe: an underclass of semi-permanently unemployed labor develops, with all of the negative implications for any hope of overall productivity, and regardless of what we might think of social welfare programs, for those programs as well.

There’s another dimension to this negative feedback loop: a National Bureau of Economic Research Working Paper, “Recessions and the Cost of Job Loss,” by Steven Davis and Till von Wachter found that workers who lose their job when unemployment is low—below 6%—lose on average 1.4 years’ worth of earnings.  This is bad enough, but it turns out that those who lose their jobs when unemployment is above 8%—the current jobless population—lose 2.8 years’ worth of their pre-job-loss wages, or twice as much.  Von Wachter, et al., also found that unemployed workers’ earnings fall 1% for each additional month they’re out of work (recall the long-term unemployed numbers above), and that those losses can last for years even after they find another job.  There’s further fallout from this: those lower earnings result in less revenue for government regardless of tax rates and regardless of what we might think of how much money government actually needs.

The longer the government stays in the way of the economy and our recovery, the worse our economy will be and the more difficult and slow any recovery will be because the more entrenched these feedback loops will get.

*BLS-speak for “persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities and homes for the aged) and who are not on active duty in the Armed Forces.”

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