Unemployment Numbers Warn of Growing Entitlement Burden

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The U.S. economy this spring finally reached an employment number equal to the pre-recession peak. The time to recover the employment lost in a recession was a record and long-term unemployment is still at unprecedented levels. Yet the official unemployment rate is at a fairly low level of 6.1 percent. Anomalies in the numbers, such as that in June employment grew by 288,000 while unemployment fell by 325,000, continue to confuse people and make them wonder what is really going on in the labor market. Here is the best picture I can piece together from the regularly released data.

For the purposes of this column, I looked at changes since June 2008, six years ago and very close to the start of the recession, especially for labor market changes. The numbers all come from the Bureau of Labor Statistics Employment Situation Reports and I used statistics from the household survey (meaning people were asked as opposed to employers). Over these six years, the population of people 16 years old and older has risen by 14.3 million. That 14.3 million people is the potential pool of newly employed, unemployed, disabled, not in the labor force, or retired people. All 14.3 million should end up in one of those buckets.

Increased employment accounts for 900,000 and increased unemployment adds an additional 700,000. In other words, out of 14.3 million more people in the working-age population less than one million have been added to the workforce and nearly as many have been added to the unemployment rolls. (Obviously over the six years, employment first fell significantly and then rose to slightly above its previous level while the number of unemployed did the reverse.)

Those labor force changes mean we still need to find another 12.7 million people. Studying the numbers for people aged 16-64 shows an additional 8.4 million people not in the labor force. Of those, about 1.2 million claim to be disabled and 7.2 say they are not disabled. The 7.2 million are the interesting ones: they either could be unemployed but so discouraged they have stopped looking for work, or they could be retired at an early age (either voluntarily or because they gave up hope of finding another job). The data cannot answer this question, but 8.4 million more people of working-age not working is a big number.

Because the government statistics track all people over 16, the elderly never age out of the employment statistics. Looking at the 65 or older category finds another 5.3 million people not in the labor force. These people are much more likely to be retired than to be discouraged wannabe workers; however, the labor force participation rate has actually been rising for those over 65 so we cannot be completely certain.

Now we find a very interesting number: the 8.4 million people under 65 and the 5.3 million over 65 no longer in the labor force adds up to 13.7 million people. That means instead of finding the remaining 12.7 million people, we found one million extra. While the working age population measured by the BLS grew by 14.3 million people, the categories we just examined grew by 15.3 million. The logical explanation for the extra million is that those are illegal immigrants who are working. Thus, they are getting captured in employment numbers but not in the population numbers which they are more likely to have worked to avoid.

What these numbers show is that any determination of the health of the labor market is crucially dependent on establishing the true disposition of the millions of people who are not in the labor force. These people are not working and are not actively looking for work. If they are retired and never plan to work again, then the unemployment rate looks pretty good. If they are simply discouraged people who want to work but have given up looking, then a truer unemployment rate is much higher.

BLS numbers report 2.7 million people as being in this discouraged category of being willing to work but not actively looking for a job. Including them in the unemployment rate would raise it from 6.1 percent to 7.8 percent. This is significantly higher, but not anywhere near the recent peak above 11 percent for this broader unemployment statistic. It also implies there are 11 million more people with little to no interest in ever working again than we had six years ago.

These numbers can be interpreted many different ways and policy makers are fiercely debating what they mean for the direction monetary and fiscal policy should take. To me, the numbers suggest a reasonable situation in the labor market with unemployment back to levels where workers have some power in obtaining pay increases.

More importantly for the financial viability of the country, particularly government entitlement programs that depend on taxpayers to fund them, those numbers say that only 11 percent of the 14.3 million new working-age people are even participating in the labor force (either working or trying to find work). And since those who are unemployed are not earning anything, these numbers mean that 13.4 million more people need someone else to support them compared to just six years ago.

The data suggest a permanent rise in the number of Americans who expect to be supported by either family members or the government. Policy makers probably should put more effort into determining how the nation can afford all these millions of new non-workers. Entitlement reform and personal financial responsibility appear to be high priorities if our future is to be secured.

If you want a simple, clear explanation of why so many people seem to be struggling financially even if they have jobs, these numbers provide a pretty good answer. Each worker has to support more people than they used to: through taxes to fund welfare and entitlement programs or in their families where perhaps only one spouse is working, unemployed grown children have returned home, or elderly parents need financial support. The problem is not how much workers are getting paid, but how many people have to survive on each paycheck.

Jeffrey Dorfman is a professor of economics at the University of Georgia, and the author of the e-book, Ending the Era of the Free Lunch

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