Unemployment - Why It Matters
August 31, 2012
July saw a slight uptick in unemployment to 8.25%. Unemployment has stayed stubbornly high since the great recession. It surprises me, however, that many investors don’t understand the importance of unemployment and its ties to government debt, economic growth, and market conditions. I consider it to be the “Keystone” of our markets future.
While the unemployment rate has come down from the highs in 2010 (unemployment was almost 10%), we still face a significant headwind to get back to our historic norm of 5.8%. From 1948 to present, our highest unemployment was in 1982 at 10.8%. Our lowest unemployment was 2.5% in 1953. As important as the U3 unemployment rate is our long-term unemployment rate. 40.7% of those currently unemployed have been so for longer than 27 weeks. To put things into perspective, in 1982 the long-term unemployment never got above 28%.
The way our government publishes the United States’ unemployment rate is a bit deceptive too. U6 unemployment, which looks at the unemployed, the under employed, and discouraged job seekers is at 15%.
Why unemployment happens:
At its most basic, when the economy slows or contracts employers cut works hours or they are forced to lay off workers. But unemployment and lowering it isn’t always as easy as saying create more jobs.
Not enough jobs:
Right now there are 3.4 people unemployed for every job opening. This is down from the 6.6 highs found in 2009. In early 2007, this statistic was down to almost 1.6 unemployed workers per job opening.
Not enough hours:
The number of non-agricultural part-time workers has almost doubled from 2006 lows to present. Those that are working in production and nonsupervisory positions are only working 33.7 hours per week. This is almost number of hours as it was before the recession, but significantly lower than the 80’s and 90’s. Companies are also looking to fill needs using temporary workers, up 10.6% from this time last year.
A mismatch of jobs and the unemployed skill set:
Unemployment rates are significantly higher for those who are not highly educated. As this country has moved from producing goods to providing services, education is more important than ever.
Educational Level Unemployment Rate
College Graduates 4.1%
Less than Bachelor’s Degree 7.1%
High School, No College 8.7%
No High School Diploma 12.7%
A mismatch of where the jobs are, and where the unemployed are:
Right now there is a huge disparity between the high unemployment states, and the low unemployment states. It has become difficult for some companies to keep up with the demand of their product because they don’t have enough qualified employees to hire.
Highest State Unemployment Rate
Rhode Island 10.8%
Lowest State Unemployment Rate
South Dakota 4.4%
North Dakota 3.0%
Why this all Matters:
If you are not working, you’re not paying taxes:
Those that are on unemployment are not paying federal or local taxes. There are 12.8 million unemployed Americans today. It would take putting 4 million of them back to work full time to get unemployment rates down to the 5.8% historical norms. The average household in the United States made $50,000, putting them in the 25% tax bracket. Getting these people back to work would raise almost $50 billion in revenue for the government. In 2011, unemployment benefits cost the federal government over $120 billion in 2011. You could knock off at least $40 billion in unemployment benefits. That’s almost a $100 billion saving to our government.
If you are not working, you’re discretionary spending goes down:
If you are not working or working fewer hours, your ability to spend money on discretionary items goes down. If the average worker is spending more money on the basics (food, mortgage, utilities, etc.) and less on discretionary items, they will not be spending money in their local community. Sales taxes suffer, affecting local governments. If you are spending less, corporate earnings can suffer. If companies are not making enough money, they will not look to hire new employees.
If you are not working, you can’t afford to pay your mortgage:
Right now, 3.5% of all of Fannie Mae mortgages have not been paid in over 90 days. This is almost 7 times greater than where things were in 2007. Foreclosures rip communities apart. Families are displaced. Home values go down because there are a higher number of homes on the market. Local governments suffer because their property tax base goes down, thus affording fewer fire fighters and police officers (just ask Vallejo) to support their community’s needs. People are unable to spend as much money at local stores, causing many to close. Financial secure residence move from the area to find better towns for their family.
What are the Solutions?
This is a great long-term solution but one that will not solve our immediate issues. The concept is that the more educated your population, the more they fill higher paying jobs. The more educated the population is more efficient and produces higher quality goods. Higher incomes translate into more taxes. Higher productivity translates into higher profit margins. Both are good, unfortunately both are long-term solutions for a short-term problem.
Adjusting Tax Rates
This is a highly debated topic. There are those who believe that if you lower taxes for individuals and corporations that they will spend more. Individuals will have more disposable income, thus they will spend it on discretionary items. This will increase income for local governments through sales tax. Companies will make more money, and hire more employees as the need for their products and services increase. Cutting corporate taxes will mean that more revenue can be spent on employees. With more people working, the federal government’s tax basis would actually increase even though tax rates have gone down.
The debate against cutting taxes is there is no guarantee that people will spend more just because they’ve made more. They may put more into savings, thus no additional economic growth. And companies making more money don’t have to hire more employees in the United States. They may invest this newly found profit abroad to diversify their businesses.
No one I’ve met wants to pay more in taxes. There are those out there that will debate that an increase in taxes can improve the economy. An increase in taxes could improve the government’s balance sheet, thus allowing it to spend money on special projects. More special projects, more jobs.
The obvious argument against this thought is removing money from discretionary spending could lower spending and thus economic activity.
This is a very controversial potential solution. The concept is that by the government spending money it creates jobs. The “New Deal” during the great depression is a great example of job creation. Just look to the Golden Gate Bridge or the Hoover Dam as examples of what it produced.
The counter argument to this is the government is wasteful and inefficient. Projects that the government takes on could be done cheaper and more efficiently by the private sector.
Interest Rates & Money Supply:
This is a very common solution for the government to stimulate the economy and thus lower unemployment. The government lowers the cost of borrowing for the banks. The banks, in turn, lower the rates for individuals to borrow. This could be a loan to start a business, an individual’s credit card, or someone’s home mortgage. The idea is that if you lower the cost to carry debt, people will spend more. If people are spending more money, the economy grows faster. If the economy is growing, companies will start hiring again. If the economy is growing and money is cheap, more people will start new businesses (or expand an existing one).
Unfortunately, we are at the end of our rope here. The government’s overnight lending rate is at 0%. You can’t go below 0%. Next!!!
The U.S. Government can manipulate exchange rates in the attempt to make the U.S. dollar cheaper. This is done by printing money. It makes foreign products more expensive here and makes our goods cheaper abroad. If our products are cheaper abroad, more will sell. If foreign goods are more expensive than U.S. goods, more U.S. goods will sell domestically. More goods sold, means more money for companies to invest in labor.
The risk is that you can create inflation, and nothing stops other countries from doing the same thing. Let’s say that the United States tries to devalue the dollar and the ECB does the same to the Euro. Both actions negate each other and all you are left with is inflation.
I am not writing you in the hope to pretend that I have all of the solutions to our economic problems. This country is at a crossroads, and any missteps at this junction could have immeasurable effects on all of our future. We are faced with a daunting debt load, and a deficit that is only making it worse. An 8.25% unemployment rate is only making things worse. Getting people back to work is part of the solution to our economic and debt problems. The best solution I see is a combination of government fiscal responsibility (tax increases and cutting unnecessary government spending) coupled with some government stimulus programs. It is imperative to spur the economy, thus giving employers’ confidence to hire more employees. The government must be very careful not to fall into a stagflation economy. This is when you have an economy that is stagnating yet still have inflation. Short-term inflation is not bad if economic activity follows as a result.
Educating our population is an obvious long-term solution. Unfortunately, we have to get our unemployment under control soon or it will continue to weigh down our future economic growth.
As always, I look forward to your comments and questions.
Jeffrey J. Powell
Managing Partner, Polaris Wealth Advisers, LLC
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