Obama's job on the line with jobless

My column in this weekend's Financial Review:

If there’s a single number that could put President Barack Obama out of work it’s the US jobless rate. Since April, the picture has been pretty much the same.

Unemployment has been stuck around 9 per cent and most economists aren’t forecasting big changes for the year ahead. Even the White House predicts a jobless rate of 9 per cent in 2012 with a five-year wait before employment returns to more normal levels.

Despite the grim outlook, there’s no significant jobs initiative from Congress or the Federal Reserve. That seems due to a widely prevalent sentiment that the nation can’t afford a big jobs program. But in all the bickering and feet dragging, something critical has been lost: high unemployment carries a huge cost. Without an understanding of the magnitude of that cost, it’s hard to justify spending on policies to increase employment.

So how big is the cost? Start with how many people are out of work today. According to the official metric, 13.9 million Americans were unemployed in October.

That figure alone provides only part of the story. In addition to the official rate, the Bureau of Labor Statistics tracks what it calls alternative measures of labour under-employment.When these are added to the official rate, a more accurate picture of the unemployment situation emerges.

There are three components of the bureau’s underemployment measure. The first is discouraged workers – people not looking for work at all because they don’t believe there are jobs available to them. This is close to 1 million.

Second, there are people who have been looking for work but didn’t actively do so in the four weeks before the Bureau of Labor Statistics conducted its survey. The bureau calls these people marginally attached to the workforce and there were around 1.6 million in October.

Third, the bureau adds in involuntary part-time workers, people who would like to work full time but can’t find employment or have had their hours cut back. There are about 8.9 million Americans in this group.

The bureau adds these numbers to the official rate to come up with an alternative measure of unemployment with the catchy name U-6. As of October, U-6 was 16 per cent. That means out of a total civilian workforce of 154 million, 25 million Americans were idle or only partially utilised.

The economic cost of that missing output is significant.

While it’s tempting to imagine unemployment at zero, even in the best of times natural changes in industries and movement among the workforce results in some portion sitting idle. There will always be workers who voluntarily forgo an available job because they see better prospects just around the corner. So economists talk about a natural rate of unemployment.

In the last few decades, the natural rate of unemployment in the US has been about 4 per cent. In fact, unemployment was at 4.4 per cent in May 2007. At that time U-6, the alternative measure, was 8.8 per cent. Rounded off, each measure was precisely half the rate today.

Given the average weekly wage of $US795, putting half the jobless and underemployed into full-time positions would increase output by about $US432 billion a year. That represents the direct loss of output, or GDP, from jobless rates twice as high as it could be.

But that’s just a baseline number. The benefit of moving to full employment could be far larger. Economists still use a rule of thumb called Okun’s Law, named after economist Arthur Okun who found a relationship between unemployment and national output in the 1960s. It’s thought a rise in unemployment by 1 percentage point causes real GDP to drop 2 percentage points.

Cutting unemployment in half might lift GDP by $US1.4 trillion a year, three times the increase in wages alone. That is nearly 10 per cent of the total economy. And even that may be just the tip of the iceberg. The value of an additional $US1.4 trillion a year in output over a long term could be something like 10 times that number. A potential $US14 trillion reward awaits if policymakers can shrink unemployment.

None of this considers the human side of unemployment. Diminished health, marital strife, child neglect and social ills are all associated with the stresses of involuntary unemployment. There’s no accepted way of measuring these in dollar terms, but there is little doubt they exist.

Meanwhile, Congress and the Fed dither, apparently relying on an implicit assumption that unemployment really only hurts the unemployed and they may well deserve it. The truth is it’s a huge cost to the whole nation. With next year’s elections drawing closer and no action in sight, job security among Washington’s political class may be at stake.


She is a business commentator for CNBC. Her book The Economics of Integrity was published in 2010. Her column AMERICA INC appears each week in the Weekend AFR.

Anna Bernasek writes on financial markets, the economy, Wall Street and public policy from New York. A former finance reporter for The Sydney Morning Herald, Bernasek has been based in the US since 1999 writing for Fortune Magazine, The New York Times, The Washington Post, and the Huffington Post.