Analyzing Unemployment. One Ingredient at a Time.

“Fewer Americans are working today than in 2000, despite the fact that our labor force has grown by 11.4 million”, says the Wall Street Journal’s Mortimer Zuckerman.  Zuckerman believes that the presidential candidates’ economic stance will dictate the presidential election this year.  Solutions to key issues, such as taxes, jobs, and the U.S. deficit, are what Americans really want, and how they will decide their vote.

The Bureau of Labor Statistics (BLS) earlier this month announced that the unemployment rate had dropped to 7.8%. This is the lowest the unemployment rate has been since January of 2009, when President Obama took office.  But what does this truly mean about jobs? Are there actually more people working?

Although, the unemployment rate is dropping there is still a cause for concern.  There are a few factors, such as biased results, discouraged workers, and underemployment, which may not portray an accurate view of unemployment.

Jack Welch, of the Wall Street Journal, claims that the BLS may have received biased results, as the unemployment calculations can be very subjective.

The subjectivity of the unemployment calculation is noticed in the BLS process for gathering data.  The BLS randomly samples 60,000 households every month.  This is equal to about 110,000 individuals, a relatively large public sample.  The potential bias comes in the questions asked by the BLS; some questions, can potentially lead to ambiguous answers.  For example, one question the BLS asks is if they are employed part-time.  To be considered a part-time worker one could work anywhere from one hour to 34 hours per week.

Therefore, there are many individuals who are underemployed but don’t factor into the unemployment rate.  For example, if you are a teacher who lost your job, and now tutor your neighbor’s son a couple of hours a week, you would still be considered employed, but in no way, shape, or form, would that salary be sufficient enough to live.  Folks like this are considered underemployed, and this variable skews the unemployment rate.  Currently it is estimated that 8.5 million Americans remain underemployed.  If this were true, the real unemployment rate (including those underemployed) would be around 9.8%.

Another party affecting the unemployment rate are discouraged workers.  Discouraged workers are those who have lost their job, and have lost all interest in finding a new job.  They are no longer looking for jobs and are out of the labor force.  They don’t count as unemployed, so they make the unemployment rate seem less than it is in actuality.  Although, The Washington Post’s Ezra Klein argues that the unemployment rate did not fall because of a massive increase in discouraged workers, but because the labor force was reduced by many who retired, went back to school, started a family, and others who are simply not looking for work currently.

Discouraged workers, and underemployment, can fall into one of three categories of unemployment: structural, frictional, and cyclical unemployment.  Structural unemployment is a result of a mismatch between jobs and workers caused by a lack of skills; not much can be done to fix structural unemployment.  Frictional unemployment is caused by temporary transitions of workers.  It is because of structural and frictional unemployment, as well as a lack of capital, that the unemployment rate will never be 0%.  The last type of unemployment, cyclical unemployment, is unemployment caused by the “contraction of the economy”.   These three categories are combined to give us the unemployment percentage.

Governor Romney claims that after his first term the unemployment rate will drop to 6% or lower, by expanding in the private sector.  President Obama has similar goals, and wants to expand federal government jobs as an immediate solution to the economic crisis.

The two presidential candidates have made bold statements about their economic plans, but are what they claiming really true?

Governor Romney wants to take a conservative view on the issue and “pursue free market policies”, which he claims is the best way to elevate job growth.  He also wants “economic prosperity for all” by balancing the budget, and reducing the national debt.  He wants to accomplish this goal while reducing everyone’s taxes by 20%.  Many wonder how Governor Romney plans on reducing the national debt while reducing everyone’s taxes.  In fact President Obama asked the Governor this same question in the second presidential debate.  Governor Romney, when asked about this, refers to “five different studies” done to support this idea.  But, when we look closer at the five different studies, it turns out that the studies were all biased.  According to Lori Robertson, of Factcheck.org, of the five studies, only three could be considered studies, two of which were written by his partisan campaign advisors, and an economic advisor of President Bush wrote the other.

President Obama takes a liberal stance, as he wishes to add new federal government jobs quickly.  In September 2011, he urged congress to pass the American jobs act.  He claimed that this would add 2 million jobs to the workforce, but when this was studied by a group of 34 independent economists, it showed that this plan would only create, or save, 288,000 jobs over two years.  This act passed with an overwhelming majority, in both the house and senate.  We’ve been seeing its few benefits as the unemployment rate has been steadily dropping over the past couple of months.  Currently, the president sticks by this plan with hopes to expand it.  He’s happy with the way it’s running, and wants to use a similar model to add more government jobs.  On top of that, Obama would like to let the Bush tax cuts expire, which would then implement a Clinton like tax, which he hopes would aid in the decline of the national debt.

Both, candidates have their ideas on how to fix unemployment. Romney wants to expand the private sector, whereas Obama wants to add new government jobs.  Both are great solutions that will work with a few minor tweaks.   The only better option would be for them to collaborate and make a plan that wasn’t as conservative or as liberal, something in the middle.  President Obama’s plan works great to grant immediate jobs, but won’t last in the long run if the country’s debt rises.  And Governor Romney’s plan will be sustainable in the future free market, because it supports a laissez-faire economy, but will require a lot of time to take effect.  If both candidates were able to agree on allowing the President’s current plan to continue until the Governor’s plan would be able to be fully implemented, then it would be better for the entire country.

Which Economic Plan Is Better?

Governor Romney and President Obama both have separate ideas of fixing this economy.  Governor Romney’s taking a businessman point of view and is trying to expand the private sector, whereas President Obama wants to add as many jobs as possible, in the shortest time possible.  So, which plan is better?

I don’t know if we can say one plan is better than the other at this point, but it might help if we tried to consolidate, and compare both Governor Romney’s, and President Obama’s economic plans.

Let’s look at the Governor’s plan first.  In a nutshell Governor Romney’s plan wants to cut down the economy’s dependence on government.  He want’s to set up a system where the economy runs on private businesses with very minimal government intervention.  That’s why he wants to cut government jobs, with hopes that the private sectors will expand.  He doesn’t want the economy to be reliant on the government as much as it is now. When these private sectors expand, they are going to need to hire well-qualified workers, which is why he wants to also make improvements in higher education, and make training for these positions more accessible

President Obama’s plan on the other hand, wants to expand government interaction with the economy.  Creating more government jobs now, is a quick and easy solution to dropping the unemployment rate, but it’s not very helpful for the future.  Recently we saw the unemployment rate drop, as government has been expanding, and that is very good for our current economy, but if the economy is to reliant on the government, then in the future, when the country faces more national debt, many more people may lose their jobs, causing yet another recession.

Governor Romney’s plan is great for the long run, but will take a lot of time to implicate.  Whereas President Obama’s plan is stimulating job growth now, it isn’t preventing future disaster.

Therefore, the “best” option, in my opinion, is probably somewhere in the middle.  In my opinion the ideal plan would be to let the current Obama plan keep running (since the unemployment rate has been dropping for the last couple months) until Romney’s plan is able to be implemented fully.

 

*UPDATE:  My description of President Obama’s plan was a bit misleading.  It turns out that under his presidency government jobs have decreased by over half a million, and at the same time the president has claimed to add 4.3 million jobs to the private sector, and therefore believes the private sector is doing fine.  He believes the countries real weakness lies in government jobs at the state and local level, and wants improvements in these areas.  However, as the budgets get tighter, state and local governments are forced to layoff workers.