Now I’m going to try and use round numbers to help make this as simple as possible (and I’m going to gloss over a few complexities so we can get to the heart of the matter).
Let’s say you have a population of 200,000 people.
100,000 people want a job. That means you have a job participation rate of 50%.
Now let’s say that 95,000 of those people looking for a job have a job, and 5,000 of those people don’t have a job. That means your unemployment is 5%. And let’s say of those 95,000 employed, 5,000 (5% of the those in the work force) of those are working at part time jobs but want full time jobs. These people are called underemployed. The underemployment rate is the unemployment rate plus those who are underemployed. (Under employment is usually calculated as the percent of underemployed plus the rate of unemployment, but to keep the numbers separate and simple we won’t add them together here).
Now, what idiots look at is the unemployment rate. This is dumb, and let me explain why.
Let’s say the government does something monumentally stupid (so, status quo) like raise the minimum wage. This will cause employers to pull back on hiring. The first thing that will happen is that employers will either through firing the most inept or through simple attrition (when somebody leaves you don’t fill their position). This will cause the unemployment numbers to go up. Let’s say that there are now only 94,000 jobs, or an unemployment rate of 6%. And idiots will be rightfully concerned…but not for long.
Why? Because the first ones hit by minimum wage increases are young people who, without experience aren’t worth the higher wage the employer has to pay, and older people. Those who have a business are not willing to put in the money for training as it will not work as a long term investment. And since these groups know they can’t get a job they will either continue living with mom and dad or go live with their kids and just stop looking for work. Let’s say 2,000 people just give up looking for work. So that now means you have 98,000 looking for work, and 94,000 with a job. Guess what unemployment is DOWN TO 4.1%!!!! Isn’t that great! Raising the minimum wage lowered unemployment from 5% to 4.1%!!! Of course since the participation rate dropped form 50% to 49%, that means that 1,000 fewer people are employed now, but the unemployment number dropped!
And then it gets worse. The rise in minimum wage causes inflation (as it always does) and that means companies that aren’t employing minimum wage positions will have to lay off employees or use attrition practices. So they lay off 1,000 employees. Now we’re at 98,000 looking for work and 93,000 employed. Back to 5.1% unemployment. But don’t worry those 1,000 will soon find minimum wage jobs and kick out 1,000 other less qualified people from those jobs. So now you instead of 5,000 people underemployed, you now have 6,000. Underemployment has jumped from 5% to 8.8%! But don’t worry because another 1,000 people are probably going to give up looking for work (probably more actually but let’s keep the numbers nice and round). So now only 97,000 want to be employed. Oh look unemployment back to 4.1% and underemployment is now only 6.1%. It’s a miracle the unemployment numbers and underemployment numbers dropped. Things must be doing great!
But no. In this situation while the unemployment rate started at 5% and dropped to 4.1%, that masks the fact that there are 2,000 fewer jobs. And a 1,000 more people are earning less than they would like. (And let’s ignore the inflation that’s going on and the fact that most of the other employed people probably aren’t getting raises – but their personal costs just went up.)
So we can see the unemployment rate is very misleading and what is important, first and foremost is the participation rate and followed by that the underemployment rate.
So when Obama touts the unemployment numbers are down keep in mind a few things.
The participation rate is at its lowest level since 1978! From a peak of just over 67% we are down to just over 63% (a 4% drop, keep in mind my example only included a 1% drop). And this drop in participation does not seem to have come anywhere near to an end.
Second keep in mind that underemployment (this is the calculation of both those underemployed and those unemployed) has gone from 7.0% in 2000 to 17.4% (a 10% increase, and my example only had 1.1% increase).
So don’t tell me that the economy is doing well because the unemployment number is down. It’s not. It’s doing terribly.
And it’s not just raising minimum wage that does this (and yes raising minimum wage always does this)... it’s regulations and taxes and oversight and red tape. All government action increases the factors that make employers want to hire fewer employees. And this may be not so great for depriving people of income, hope, and jobs.... but as we’ve seen it can be great for getting the unemployment numbers down. I mean if everyone would just give up looking for work, we could have 0% unemployment.
Basic Math for Liberals | The Conservative New Ager BY CRISAP | SEPTEMBER 13, 2013 · 5:45 PM