Why 3.8 Percent Unemployment Rate Could Be Bad?

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Lauren Weber of the Wall Street Journal cites a research paper showing that the unemployment rate will soon get down to 3.8% within the next fifteen years, which sounds good. Given that the unemployment rate is However, this is deceptive because they’re saying that will be due to labor shortages.  I address this concept in a previous blog entitled “Why A Lower Unemployment Rate Is Not Always Good”.

The main problem is that we will be having a large segment of our workforce retiring, but there will be challenges in replacing this skilled workforce.  By retiring, they will leave the labor force and that will lower the unemployment rate.  In addition, you have younger workers, who have been slow to adapt to a changing labor force.  While they are attaining college degrees at a faster rate, it is not necessarily in disciplines in high demand, such as STEM (science, technology, engineering, and mathematics).  If they become discouraged and drop out of the labor force in large numbers, then that could lead to a misleading drop in the unemployment rate.

Therefore, a declining unemployment rate does not necessarily mean a healthier labor market.


Do Jobless Benefits Hurt Or Help?

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This is a key debate that is covered in my Principles of Macroeconomics course.  Ben Leubsdorf of Wall Street Journal’s Real Time Economics cites two separate studies that suggest that extending unemployment insurance beyond twenty-six weeks caused the unemployment rate to rise up to 1.2 percent more.  They also qualify their findings by referring that this effect is stronger among higher educated workers.

Critics of extending jobless benefits will embrace these two studies and call for Congress to end extending unemployment insurance beyond 26 weeks because:

  • It causes people to slack on their job search because they have a safety net to delay reentering the labor force.
  • This effect was even present among higher educated workers, who conceivably would have an easier time finding a job than those with limited skills.

Supporters of extending jobless benefits will dismiss both studies and urge Congress to continue extending unemployment insurance beyond 26 weeks because:

  • Ignores the catastrophic effects of a financial crisis where firms were fighting for survival and not capable of taking on more payroll.
  • Neither study considered whether reentering the labor force quickly would result in underemployment where they find a job that is beneath their qualifications and skills.

If you believe that being out of work for an extended period of time will compromise the long-term job marketability of workers, then refusing to extend jobless benefits is the right course of action.  However, if you feel that the extended time is needed to find a job that matches their skills, then an extension remains necessary.

Why Are Gas Prices Rising?


You might have noticed a spike in gas prices over the last couple of weeks.  Neil Shah of Wall Street Journal’s Real Time Economics reports that crude oil prices are at a 52-week high.  Specifically, crude oil prices have risen to $108.05 a barrel.  When looking at the market for gasoline, the price of gas is affected by the market forces of supply and demand.

Neil Shah mentions two factors:  a rise in crude oil prices and an improving economy.  Crude oil prices affects supply, while a stronger economy boosts demand.

There are four factors that affect supply.

  1. Change in input prices (any process or resource that goes into making a good)
  2. Change in technology
  3. Change in the number of sellers
  4. Change in the expectations of sellers

In this case, we want to focus on input prices.  Regarding inputs to providing gasoline, think about labor, land, and capital.  In this case, crude oil is considered land, which refers to any natural resource.  Without crude oil, it is impossible to produce retail gasoline.  Crude oil is accessed by refineries, who are then able to convert it into retail gasoline used by cars.

There are five factors that impact demand.

  1. Change in taste (activity is more or less attractive)
  2. Change in income 
  3. Change in the price of related goods
  4. Change in number of buyers
  5. Change in the expectations of buyers

When Shah stated that greater economic optimism is causing prices to rise, this relates to the first and second factors of demand.  When an economy is improving, that means incomes are rising and consumers are more likely to drive and travel because they have more money to spend on shopping.  Even though the unemployment rate remain elevated, consumer spending has been trending up.

It was a little confusing when Shah referred to a boom in American oil production.  That typically results in an increase in supply and drives prices down.  However, that would explain previous dips in prices.  What is happening now is that the utilization of refineries are near full capacity at 90.7% as of the week ending on June 28.  In fact, U.S. refineries are operating at the highest level since 2007.  That indicates that driving activity is on the rise and that would place upward movement on prices due to the first factor of demand again.  If the utilization of refineries start to fall due to refineries expanding capacity through improved technology, then that would be an example of an increase in supply that would drive prices down due to the second factor.

Speculation also plays a role in gas prices and we can look to uncertainty with Egypt.  Even though Egypt is not a major source of our gasoline supply, political turmoil there could impact global supply.  This scenario would be consistent with the first factor dealing with supply.  In this case, prices are driven up not by current market forces of demand and supply, but potential future disruptions in oil supply if the Middle East experiences more political instability.  If disruptions are severe enough, then that would drive the price of crude oil up, which is an example of an input price.

When wondering why gas prices change, one can often look to the market forces of supply and demand.  However, we must also realize the role of market speculation in influencing gas price movements.

Are They Calling Off Euro Zone Crisis Too Soon?

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During a speaking engagement with Japanese leaders, French President Francois Hollande is confident that Europe has averted the crisis.  While it’s true that efforts from the European Central Bank and International Monetary Fund have been instrumental in keeping southern Europe solvent, there are still real concerns.

Unemployment and economic growth figures are disappointing.  The unemployment rate within the euro-zone reached a record high during April at 12.2 percent.  Even with the very high unemployment rate, there were wide disparities among countries.  While Germany had a very low unemployment rate of 5.4 percent, Greece and Spain approached 25 percent.  Their economy is not much better with it shrinking by 0.2 percent, which was the sixth consecutive month of contraction.   Even, one of Europe’s strongest countries, Germany, expects little growth in the first quarter of 2013.  Both are strong signals of a steep recession.

In comparison, the U.S. has fared much better.  The U.S. economy grew at a rate of 2.4 percent during the first quarter of 2013 and its unemployment rate is much lower at 7.6 percent as of May 2013.

Even though the U.S. economic prospects are not that bright, Europe’s performance pales in comparison.

In order to keep abreast of economic news, please consider subscribing to my free online newspaper at econprofaj.

New Jobs Lack Quality

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If you do not subscribe to econprofaj, then you might miss out on this nugget from the Wall Street Journal’s Real Time Economics.  When Federal Reserve Governor Sarah Bloom Raskin bemoaned, “I didn’t think life guard was a job that required an advanced degree.”, she is speaking to a level of frustration that describes many throughout the U.S.  It also highlights the disconnect between education and the skills required by employers.  Even if this does not surprise many, especially those unsuccessfully seeking work, this phenomenon carries significant implications for the future.

While we should be encouraged about the gradual decline in the unemployment rate, we must also be aware of the hidden cost of long-term unemployment.  Individuals that remain jobless for a long period of time will find it difficult to ever become marketable.  That is because firms are reluctant to hire workers with gaps in their resume and the idleness from work negatively affects their skills.

If you are out of work, it is imperative that you find ways to update your skills.  That might involve going back to school; getting additional certifications in a needed area; or volunteering at a non-profit organization.

Immigration Enhances Local Economies

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Immigration is a divisive topic.  Whenever a new segment of workers enter the market, it causes apprehension and distrust.  In the early 20th century, it was African American laborers, who were despised as they were willing to do jobs at wages that whites were not willing to take.  In the late 20th century and 21st century, it is foreign workers, who come from countries that pay much lower wages.  Even when it comes to highly skilled jobs, they are willing to work at a fraction of what Americans are accustomed to.   Both caused dissension and angst with many Americans not fully grasping the role that both workers played in our country’s prosperity.

While Arizona, Georgia, and Alabama are passing laws to restrict immigration, St. Louis is openly courting immigrants in order to stem a steady loss of population.  Loss of industry and perceived unfriendliness to minorities are key factors for the steady decline in population since 1950.  In order to counter this negative trend, city leaders have been openly courting immigrants to reverse it.

Even though many are aware of the negatives of immigration, Jack Strauss, Director of Simon Center for Economic Forecasting at St. Louis University, paints a different picture.  He mentioned that many of the foreign-born immigrants are highly skilled and offer needed skills to the area.    Finding ways to increase their presence would improve the vacancies that are a large burden to the area, along with boosting home prices.  Even when considering low-skilled immigrants, their impact is not as bad as the public would believe.  That is because they are less likely to use food stamps and receive less financial assistance than other low-income groups.

In Strauss’ estimation, St. Louis has not been able to maximize their economic potential.  This includes missing out between 4-7% of income growth for the city and 7-11% for the overall region.  They could have reversed poor job growth inflicting the region where they could have experienced 4-5% more job growth.  Lastly, the unemployment rate for both whites and blacks would have dropped by approximately 2%.

The rate of entrepreneurialism among immigrants is much higher than native-born Americans, so they are job creators rather than job takers.  Strauss’ study showed that immigrants are 60% more likely to be entrepreneurs.  In particular, Bosnians have been very successful in revitalizing parts of South St. Louis by moving into older neighborhoods and starting businesses in diverse sectors such as bakeries, butcher shops, coffee shops, construction, heating and cooling, and even a truck-driving institute.

Despite the efforts by some St. Louis area officials, they have been hamstrung by a Missouri state legislature bent on restricting the flow of immigration.  Even though many of the measures led by Republicans have not been successful, it might create a climate of unfriendliness that turns off immigrants to St. Louis.  In comparison to other top metro areas, their proportion of immigrants within the St. Louis region is low at 4.5%.  The low number of immigrants is one reason cited for their poor economic growth and stagnant income growth.

Despite public support from St. Louis Mayor Francis Slay and St. Louis County Executive Charlie Dooley toward immigrants, Strauss suggests further strategies are necessary to attract foreign-born talent.  He cites efforts in other metropolitan areas where they are openly courting a more diverse workforce.  This includes connecting them with key resources from governmental and nongovernmental agencies, assistance with various social services, and offering career and leadership opportunities.

Of course, it would be ideal if job creation could occur from domestic citizens.  Most income earned from domestic residents will circulate within the same communities.  On the other hand, immigrants, who have left family back in their home country, are likely to give money back there.  That will offset the gains that their presence brings to the U.S.  However, occupying one vacant home, creating one job from a small business, and paying sales taxes from income earned on a job is better than experiencing neighborhood blight, rising unemployment, and declining services from lack of tax revenue.

It is time that we open our blinders and embrace immigration.  They enhance, rather than hurt communities.

Why A Lower Unemployment Rate Is Not Always Good

When one says that a falling unemployment rate is actually not good, the natural inclination is to say “huh”.  Should we not look at a declining unemployment rate as a good sign, especially when most experts did not expect such a drop?  Actually, that is not the case here and that’s due to a misunderstanding of what the unemployment rate measures.  Even though the August job report shows that the unemployment rate dropped from 8.3% to 8.1%, there were only 96,000 jobs added, which was less than expected and not enough to cover normal population growth.

A look at the employment data shows that the unemployment rate declined due to diminished prospects at gainful employment.  While there were slight declines over a number of age and gender demographics, young males aged 16-19 stood out.  They left the labor force at a rate  of 7.2% over the last month, which was much steeper than women of the same age group, which fell  by 1.6%.

While one could argue that this could be a good sign because that means that they are more likely to attend school, not participating in the labor force at an early age hampers their future earnings potential due to lower productivity rates by not being able to enhance their labor market skills.  Unfortunately, this pattern has been occurring over the last decade and is evidence that this generation will likely experience less prosperity than their parents.

It is instructive to note how the Bureau of Labor Statistics collect and analyze employment data.  They actually compile a whole series of statistics relating to the labor market, but most people concentrate on the unemployment rate.  The unemployment rate is a measure of only the labor force and it does not always accurately reflect joblessness.

The key unemployment rates are seasonally adjusted, so fluctuations that occur due to irregular weather patterns are minimized.  When calculating unemployment, they only include active participants that are 16 years or older.  Active participants are individuals working part-time or full-time and those actively seeking employment, but are not currently working.  Since they do not include individuals that desire a job, but have stopped looking due to limited opportunities.   They are called discouraged workers and result in unemployment being understated.

When looking at solutions to this troubling pattern, we must find ways to enhance our youth’s critical thinking skills  and better utilize technology.  Our economy is shifting from industrial to information, so more value is placed on individuals that possess strong critical thinking skills.  With so much information available, firms value prospective employees that are able to access, synthesize, and communicate valuable information that can be used to improve profitability and increase market share.

If employers are not hiring, then our youth must create their own opportunities through cultivating an entrepreneurial mindset and leveraging technology.   Our younger generation are highly skilled in using social media and various forms of technology.  They just need to learn how to transform this knowledge into profitable enterprises.   Unlike any other time in history, the cost and barriers of starting a business have never been lower.

However, we must first learn discipline over financial matters; possess a strong work ethic; and appropriately use our creative energies to exploit opportunities in the highly competitive global economy.  Distinguish needs from wants when buying consumer goods, so that you can build up your savings.  Realize that you may have to downsize your expectations of income in finding a more stable job that will complement your own business on the side.  It might mean not striking it out on your own and delaying decisions on starting a family.

Through vision, perseverance, and following through your plan, one can excel in any economy.