Underreported Unemployment: Why Those Jobs May Not Come Back

Last Updated Jul 21, 2009 9:21 PM EDT

Today's weekly report of new unemployment claims showed what appears to be a big improvement -- a sharp drop to 522,000. But the seasonal adjustment factors are distorting our perspective, and the numbers are not as good as they look. We should probably be adjusting our long-term perspective, too, say economists at the San Francisco Fed, to get ready for higher level of "natural" unemployment embedded in the U.S. economy after this recession plays out.

The seasonal adjustment factors for employment measures are developed from historical patterns, and aren't giving a clear picture during this recession, reports Asha Bangalore, economist at Northern Trust in Chicago. Typically, auto plants shut down in the early summer to re-tool for the new models, but the sea change in the auto industry brought layoffs earlier this year:

The important point is that folks who would have filed for unemployment insurance in prior years in the month of July have done this earlier in 2009. From Chart 1, the main message is that the rate of job losses has slowed, but [seasonally adjusted] initial jobless claims data overstate the case.

It's hard to know what to compare to, because the seasonal adjustment factors have to be drawn from normal periods, of which this year is not one.

Bangalore also tells us that the old reliable measures for continuing unemployment are undercounting, too, because they miss the new federal programs for extended benefits:

Therefore, a complete tally of continuing unemployment claims should combine the count under the regular state program and the federally funded (EB and EUC) programs. Our calculations indicate that this combined total is 8.8 million on a seasonally unadjusted basis as of the week ended June 27, a significant increase from the 2.86 million reading a year ago. The severity of employment conditions, indicative in these numbers, supports expectations of a lackluster recovery.

And when we get out of this miasma and can stop focusing on the weekly job losses, the measure of full employment, called the "natural" rate of unemployment, is likely to be stubbornly high, report researchers at the San Francisco Federal Reserve Bank. (The unemployment rate never gets to zero, because there are always some people between jobs, or who have just entered the labor force and haven't yet found work.)

The natural rate of unemployment can't be measured directly, so economists triangulate with actual employment and inflation statistics. The Congressional Budget Office reckons the natural rate at 4.8 percent.

Researchers John Williams and Justin Weider at the San Francisco Fed sees full employment at a higher level, however, due to all the slack in the U.S. economic system that has to be absorbed: an auto industry that is restructuring, a housing sector that became vastly overbuilt, and excess capacity in financial services. All are labor intensive industries, and have put plenty of people out of work. Their estimate: full employment now means six percent unemployment.

They cite Nobel prize-winning economist Edmund Phelps, who adds that the greater general uncertainty in the U.S. economy after the recession will also hold back employment.

Fewer jobs are not the only effect: with a higher natural rate of unemployment, inflation tends to stay higher. To wit, the core CPI, excluding energy and food prices, has been steady at two percent throughout the recession.

Last, a small-sample field report on the scarcity of jobs. My friend David works in Center City Philadelphia, and on his way from the train to the office every day, he walks by an employment agency. Until recently, there's been a whiteboard in the window that reads "TAKING APPLICATIONS" with a few job listings: truck driver, fork lift operator. Then the listings were gone, but they were still taking applications. The other day, the board said "NO APPLICATIONS."

"I went into the office and spoke to the woman behind the counter," David said, "and she told me 'I've been here eight years, and it's never been like this.' I asked why they weren't taking applications, was it the time of year?, and she said normally it's fairly busy in the summer. But the economy is just that bad. Any effects of the stimulus?," he asked. "'We haven't seen it,' she said."