02 October 2009

Employment Situation Worsens In September

The most politically important economic indicators are those related to employment. Those got worse in September.

The employment-population level was at the lowest level since the early '80s. The Labor Force Participation Rate . . . (the percentage of the working age population in the labor force) . . . is also the lowest since the mid-80s.

Nonfarm payrolls decreased by 263,000 in September. The economy has lost almost 5.8 million jobs over the last year, and 7.2 million jobs during the 21 consecutive months of job losses.

The only post-WWII to have a longer period of sustained job losses was the 2001 Tech Bust which was much, much milder. It bottomed out after 25 months and didn't start to recover for 30 months. In that bust, job losses amounted to 2% of peak employment at the bottom, compared to about 5.2% of peak employment so far in the current recession and the job losses were more gradual.

"The number of workers only able to find part time jobs (or have had their hours cut for economic reasons) is at a record 9.179 million." (The record adjusted for population was set in the early 1980s at a level equivalent to about 9.3 million today.)

The current unemployment rate is 9.83%, "This is the highest unemployment rate in 26 years. . . the current recession is now the worst recession since WWII in percentage terms, and 2nd worst in terms of the unemployment rate (only early '80s recession was worse)." In the early 1980s, unemployment reached a peak of just under 11%.

Long term employment is at post-WWII highs:

According to the BLS, there are a record 5.4 million workers who have been unemployed for more than 26 weeks (and still want a job). This is a record 3.5% of the civilian workforce. (note: records started in 1948)

Admittedly, inflation is under control, panic level interest rates have vanished, and gross national product appears to be flat or growing (leading some policy makers to declare that we are probably technically out of a recession), and we know that historically, employment is a "lagging indicator" in most recessions. But, knowing that there is light at the end of the tunnel doesn't make job losses, which may get worse before they get better, any less painful.

The Gap In The Safety Net

There are lots of disasters that the middle class can buffer itself against. If you are a victim of a natural disaster or property crime, deposit money in failed bank, face medical bills from serious illnesses, crash your car, are held liable for negligence, or experience the unexpected death or disability of a breadwinner, insurance policies can mute the harm you experience. Home ownership can insulate you from rising housing costs. Good business planning can limit your exposure to business related liability. Diversified portfolios with suitable mixes of income oriented investments can reduce downside risk when financial markets crash.

Sustained unemployment and similar employment related issues like a reduction from full-time to part-time status, unpaid furlough days, and pay cuts can wreck havoc on family budgets which often include inflexible long term obligations incurred on the assumption of a certain amount of regular income.

Often, in insufficient access to cash forces families to forfeit equity in property that secures loan or give up opportunities that provide large long term benefits like early preventative medical care and college educations for their children, or their personal possessions are ruined when they are evicted. But, few members of the middle class have emergency funds and sufficient access to affordable credit to allow them to meet their bills for more than three to six months, even if they are eligible for unemployment insurance, which is miserly.

Unemployment benefits are often not available if an employer can classify an employment termination as a firing for cause or resignation, are subject to income taxes, are a modest percentage of pre-unemployment income, require a considerable investment in dead weight loss bureaucratic work, are subject to forfeiture if beneficiaries refuse to take jobs that aren't in their long term economic interests as job hunting is micromanaged, and are subject to maximums that mean that only members of the working class and lower middle class get income replacement at anywhere close to the maximum percentage of pre-unemployment income. Disputes over unemployment benefits require considerable resources relative to the amounts of money that are at stake. And, of course, self-employed people who are rendered de facto unemployed as a result of economic hard times aren't eligible for unemployment benefits.

Worker's compensation benefits for injured and disabled workers, and workers with occupational illnesses suffer similar flaws. These systems are unreasonably concerned with showing that injuries are truly work related and truly injuries, and put undue pressure on employees to return to work after an injury, despite the fact that the amounts of money at stake are far lower than in the tort system in most cases.

Our welfare benefits for the poor generally have been unemployment benefits by another name every since the Aid to Families With Dependent Children (AFDC) program was converted into a welfare to work program during the Clinton Administration. The concern about welfare dependency that motivated the change was legitimate, but the cure has had its own negative consequences by weakening our social safety net.

Bankruptcy Reform in 2005 likewise put barriers in the way of a fresh start for debtors who are over their head and need to deleverage themselves so that they have the right kind of economic incentives going forward, while reducing incentives for creditors to be careful in their underwriting of debt obligations.


There are two basic policy approaches to preventing the kind of economic hardship we are seeing now in this country.

One is to make the economy more robust, both at the business and household levels. Businesses with lower debt loads that own rather than lease larger shares of what they need are less likely to default on contractual obligations and are more able to keep its work force employed in bad times. This applies even to employee compensation. In U.S. businesses, payroll obligations are very inflexible, with the lion's share of payroll due in identical amounts every pay period just like a promissory note. In contrast, in Japanese businesses and a few select industries in the United States (e.g. commission sales and finance), base salary payroll obligations are a much smaller part of total compensation, while bonuses and commissions that can shrink when revenues are lower without costing people their jobs, are a much larger share of the total.

At the household level, a more robust economy is one with low levels of debt, high levels of savings, and flexible payment terms on the debt people carry (e.g. student loans routinely allow payments to be reduced or stopped during periods of economic hardship). Households can also be more robust economically when they can easily exit from long term obligations like a mortgage. For example, declining income and a high mortgage payment is a much bigger problem when your house has negative equity and houses are selling slowly, and car loans with large payments are much more problematic when they can't easily be refinanced over a longer term with smaller payments if necessary.

Good economic policy encourages economic choices that make our economy more robust at both the firm and the household level. One can good to far in encouraging this approach, which can keep people engaged in economically marginal activity too long, rather than shifting resources to more productive economic pursuits that meet needs that the economy has determined are more pressing. But, the current financial crisis shows every sign that this is not our economy's current problem. A large swath of our economy as taken too many risks and leveraged itself too much, leaving it ill equipped to weather hard times.

A second basis approach is to find a better way to provide an income buffer for those who are unemployed when their financial house is not in order, so that the nasty, serious and long term harms that can come from even modest periods of unemployment can be averted without creating undue incentives to remain voluntarily unemployed.

One approach would be to simplify unemployment programs and make them more generous. Disentangle the premiums that particular businesses pay from their particular claims histories, so there is not an economic incentive for businesses to contest claims. Cover all unemployed workers, rather than merely "voluntarily unemployed" workers, with possible narrow exceptions for employees dismissed for egregious cause. Eliminate any link between programs to help people find jobs and unemployment benefits. Increase the dollar cap on benefits and the maximum number of weeks that one is eligible for benefits. Allow people to get their first pay check at a new job before terminating unemployment benefits. Allow people to receive their initial unemployment benefit as a lump sum, like a severance benefit, without regard to whether they find new employment before the weeks it is intended to cover run out, even if it is paid out over a period of time. The low percentage of pre-employment pay that unemployment benefits provide give employees ample incentives to seek work without administratively expensive measures to micromanage them, and an ability to get work without immediately sacrificing unemployment benefits makes the incentive to find work even stronger.

Indeed, "housing first" programs for the homeless have shown that providing people with basic necessities without worrying about whether a long list of pre-conditions have been met turns out to be cheaper from the government's perspective because it averts more expensive problems that our society is not morally willing to ignore.

Alternatives like Milton Friedman's proposed "negative income tax" (reflected partially in tax laws like the earned income tax credit), and Alaska's per capita dividend from the permanent fund, approach this kind of ideal. The heresy that it may be cheaper and more effective to simply give large classes of people modest sums of money with no string attached (the opposite of the unemployment system) flows mostly from the dramatic success of the social security system which provides some benefits to almost every retiree at a level based upon past income, rather than using a current means test or requiring ongoing action from the employee.

One of Milton Friedman's more perceptive observation about social welfare programs was that while some people who benefit from them have deeper problems, in a large share of cases, a beneficiary's primary problem is not a lack of housing, of a lack of heat, or a lack of food, or a personal fault. Instead, most beneficiaries are simply suffering from a short term lack of money. For example, while there are chronically homeless vagrants out there, the vast majority of homeless people are families who have lost some or all or their incomes, or seen their rent or mortgage payments go up more than they can afford. Mild, anxiety driven procrastination, a lack of aptitude for paperwork, and an unusual interruption in earning capacity are far more common causes of homelessness than the deep seated mental illness, substance abuse problems and generally dysfunctional lives of a large share of chronically homeless have (sometimes because of the stresses of their situation).

Providing people with more security when they hit hard times, often, as is the case now, due to massive economic trends they have no influence upon, makes it easier for people to get back on their feet with minimal governmental intervention at a paternalistic level.

Many countries have mandatory severance benefits that serve the function of U.S. style unemployment benefits. In these systems, terminated employees are entitled to a certain number of months pay due per year of employment with a particular employee, that are payable in a lump sum, and are available in most cases where employees are not fired for cause, in a manner relatively narrowly defined. Some U.S. states allow companies to pay all or most of the amount that would have been due from a prolonged period of unemployment up front in a lump sum severance benefit, in lieu of unemployment benefits.

Yet another alternative, used in India and to a lesser extent in the Great Depression, which involves less bureaucracy and more public benefit than more traditional welfare systems, and also preserves the dignity and work ethic of those who participate, is a right to a job. The government could simply hire on a day labor basis any and all people who show up at its door at a rate low enough to make private sector employment more attractive if it is available. A government manager would put these workers to work doing whatever needed to be done that those workers were capable of doing.

This might very well mean that the government gets more unskilled work done than it would choose to purchase, if the job creation part of the concept weren't involved. One suspects that this is what is going on in Tokoyo's ridiculously overstaffed park maintenance departments that clear litter and fallen leaves in minutes. The work might be work that wouldn't be profitable if a private enterprise tried to do it, in other words, an indeterminate share of the money spent might be welfare rather than market rate compensation. But, if the private sector hasn't identified enough economically sensible work for people to do that can be done with the skills of the people who are available (which is pretty much the definition of unemployment), at the macro-level putting people to work seeking jobs is fundamentally a waste of time for a large share of people doing it anyway.

If society must choose between having people waste time looking for jobs that don't yet exist, and having people waste time by doing something that benefits the public to some extent, isn't society better off having people engaged in some productive activity that furthers the public good?

Also, a "right to work" program has the benefit of being self-enforcing. No enforcement agency has to seek out people who are violating some law. If you show up and work, you get paid. If you don't show up, you don't get paid. It works just like any other employment situation. This provide an honest, if small income to people who need it, and in practice, these kinds of programs have also been shown to be more effective than enforcement models at getting employers to meet minimum wage and labor condition standards. Employers who don't offer terms as good as a "must hire" government day labor program have trouble attracting workers.


Kevin Dickson said...

So, when do you run for a political office?

Andrew Oh-Willeke said...

When I learn remember names and faces, develop an ability to raise funds, and become fit enough to spend months walking blocks.