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Decimal Digest
23 Dec 2016

Unemployment Rate: The Complete Story?

The unemployment rate is looked at to generate an insight regarding the level of demand an economy can sustain. The unemployment rate in US is at 4.6% its lowest since it reached a peak of 10% in 2008. But labor force participation rate is still at 62.7% and has not recovered to its pre-crisis levels. The employment to population ratio has also not recovered to its pre-crisis levels where it dropped from 63% in 2009 to 59.9% in 20161. The quality of jobs is also a concern as the we see the rise in part time work. Research by Lawrence Katz of Harvard university and Alan Kruger of Princeton University show that during the Obama era people working in temporary jobs increased from 10.7% to 15.8% of the total population2.

The structural shifts in the labor market is also having an impact, the initial reason of retirement is being overtaken by people moving from unemployed to not in labor force as a total percentage of total not in labor force. The number of discouraged workers is increasing and as mean duration of unemployment is still at elevated levels, the resultant loss in skills also has an effect on their further employability3.

The main reason is the decrease in availability of low skill manufacturing jobs which has led to significant increase in the long term unemployed. As manufacturing was being shifted overseas due to upward movement in value chain, higher labor costs and increasing regulatory and compliance costs. The most visible indicator is the rise in employment cost index from 110 to 126 in a time of slow growth4. The reskilling process involves higher technical qualifications and in age of increasing college tuition it became harder for people to go to college. These relatively low skill manufacturing jobs allowed these high school graduates to build their skill base and get experience. A high correlation of 0.73 of civilian labor force participation rate of 25 and above without college degree and manufacturing jobs is indicative of the high reliance of certain segments on these jobs. However due to misguided policies of minimum wage and recently Obamacare, these opportunities have been dwindling. As we know increase in cost of labor leads to increasing capital substitution of labor and outsourcing of jobs. The presence of excessive social safety nets also leads to decrease in funds available for reskilling which is reflected in the hires for manufacturing, which has reached a new normal of 2.2 % from pre-crisis levels of 2.8%5.



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