Rising productivity, falling unemployment and the shrinking labor force

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Update - The Zero Hedge post which cited an increase of 1.2 million people out of the labor force incorrectly analyzed the data - the piece has been updated to reflect the correct interpretation.

Lower unemployment rates typically benefit society - unless they're caused by more workers becoming "discouraged," in the clinical language of government statistics, and dropping out of the labor force entirely.

The latest release from the Bureau of Labor Statistics contained the heartening news that unemployment ticked down 0.2 percentage points to 8.3 percent from December 2011 to January 2012. This U3 figure, however, measures only those workers out of a job but actively seeking work in the last 4 weeks. As such, it doesn't include those who have simply retreated from the labor force altogether, sustained by savings, welfare, under-the-table jobs, family, illegal income or charity. 

At the bottom of that release, the BLS included a scary figure: about 1.2 million people  ?new members not included in the labor force in January, most of them women. Zero Hedge , a popular financial blog with a distinctly bearish bent, picked up on this figure in a post on Friday, adding a pair of graphs to illustrate the rise. In fact, the apparent surge in the population outside the labor force occurred because the data were revised to incorporate 2010 Census figures; in total, the survey 'found' about 1.5 million new people, mostly above the age off 55 or between 16 and 24 years old. Effectively, fewer elderly Americans died and more were born between 2000 and 2010 than models predicted. Unfortunately, most of those people don't work.

What Zero Hedge initially interpreted as a sudden 1 month jump was actually a statistical anomaly based on the inclusion of new data. However, the blog did pick up on a fairly important drop in the number of Americans in the work force, which ties into a decade-long trend.

The upshot is that the labor force participation rate - the percentage of the total population actually being assessed in standard unemployment statistics - now stands at just 63.7 percent, a 30-year low and a raw total of 88 million people in the U.S. not working.

The labor force and productivity

Let's  look at another BLS release in the context of these revelations. Last Thursday, the bureau issued its Productivity and Costs data for Q4 2011, showing that "nonfarm business sector labor productivity increased at a 0.7 percent annual rate." The rise stems from a 3.6 increase in economic output and a 2.9 percent increase in total hours worked. The American worker, then, is putting in more hours and providing more goods and services. Real hourly compensation increased as well. However, it rose a measly 1 percent on a quarterly basis, while decreasing 1.5 percent year over year. 

Of course, it's not surprising that workers are burning the midnight oil and working harder. They face the grim alternatives of slipping into either unemployment that now lasts , on average, more than 40 weeks, or falling out of the work force entirely. Karl Marx employed the term "reserve army of labor" - the phenomenon is now better known as structural unemployment - to refer to this phenomenon, and anyone with direct experience on either side of the employee/employer relationship knows that the dynamic of a workplace fundamentally changes when it's cheaper and easier to replace workers. Employees become more nervous and a ruthless boss can employ that fear to push harder, though the tactic may backfire when conditions improve and stressed-out employees flee for greener, more sympathetic pastures.

Demographics of unemployment

Not all workers are in this situation, however. It's important to to note that the women comprise the majority of those recently exiting the labor force. This suggests a reversal of the negative trends in the construction, transportation and manufacturing industries which made up the so-called "mancession," as companies shed jobs mostly held by men. Women are now leaving work in greater numbers, while manufacturing jobs recover relatively strongly.

Skilled labor adds another dimension - a survey from Deloitte and the Manufacturing Institute indicated that 600,000 skilled manufacturing jobs remained nationally unfilled in October 2011 while 67 percent of U.S. manufacturers cited "a moderate to severe shortage of available, qualified workers." In both October and November 2011, according to the BLS , employers had a total of 3.2 million openings. How is it possible that so many Americans can't find work while so many positions remain unfilled?

?Two work forces

The work force appears to be bifurcating - on the one hand, a better-trained elite of engineers, scientists, media professionals and other knowledge workers feels secure because their positions are in high demand. Though U.S. knowledge workers must compete against rising professional classes in Asia and other emerging markets, it takes a long time to train a really good systems engineer or an operator for today's most sophisticated and precise manufacturing devices. Longer training times mean it takes longer to grow that workforce, while demand continues to surge ahead, putting the power in the hands of these skilled laborers

On the flip side, unskilled labor continues to collapse in market value . Because they're socially cast as caretakers of both children and elderly relatives, women feel more pressure to save money on childcare and nursing services by doing the job themselves. This could explain why 4 times as many women as men left the labor force. It's more economical to stay home with the kids than to pay for childcare with a second job - especially when that second job holds little security and pays stagnant wages.

Policy makers, investors and the professional class should be wary of these developments. For one thing, the long term unemployed need to raid their savings - including 401(k)s - to live day-to-day, which isn't good for either the current market or the future of the nation. The Occupy movement may have been pushed back by the force of both police and Old Man Winter, but the sentiments they expressed remain very real within a growing segment of the people. Mitt Romney's declaration that he "is not concerned about the very poor" won't be met with much sympathy by those who haven't worked for months or even years. 

No one knows precisely what will happen with the growth of the  long-term unemployed. However, as their numbers swell they're sure to make their influence felt at both markets and ballot boxes in 2012. Society may need to cope in unexpected ways - one of the effects of the decline of blue-collar manufacturing jobs in American cities during the 1970s, '80s and '90s was the rise of inner-city crime and particularly drug dealing. Humanity is programmed to survive, and with the decline of well-paying, legitimate work, hustling on the street becomes a more appealing option . The financial crisis and recession haven't caused in an increase in crime - in fact, the opposite has happened, though that may have more to do with policing than economics .

The bottom line is that everyone needs to pay attention to the total population and the percentage of it in the workforce, rather than just headline unemployment. The latter figure only tells part of the story, after all.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: News Headlines , Economy , US Markets

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Daniel Pereira


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