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by Diane Boudreau
January 09, 2012
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Understanding unemployment

After putting herself through a master’s program at the University of Arizona, Angie Bond landed a job with a genetics consulting firm in the Phoenix area, where she lived with her new husband. In March, 2009, however, Bond was notified that she was being laid off.

“This was not entirely unexpected,” she says, referring to the recession that started in 2008. “When people can’t afford to pay their bills they certainly aren’t paying consultants.”

She began looking for another job, but opportunities were rare. She took a series of short-term positions until May 2010, when she found full-time work as an admissions advisor with a for-profit university.

“After 90 days I was promoted to team leader,” she says. “One morning in December I received an email saying I had been accepted into the management training program. But at 12:30 that same afternoon, everyone who had been hired in the last 12 months was called into a room and given their severance paperwork.”

Bond’s story is, unfortunately, not unique. The United States lost about 8.75 million jobs (6.3 percent) during the recent recession. Today, unemployment remains high at about 8.6 percent nationwide. In Arizona, 324,000 jobs (12.1 percent) disappeared between 2007 and 2010, making it one of the hardest-hit states in the country.

Measuring unemployment
Exactly how hard Arizona has been hit is difficult to measure. In December 2011, news outlets proclaimed that unemployment in the state had dropped from 9.0 percent in October to 8.7 percent in November. According to ASU economist Tom Rex, however, changes of this magnitude are meaningless. That’s because the margin of error for the state’s unemployment rate is nearly one percentage point.

Margin of error is the range in which the right answer can fall. If you report unemployment at 8.7 percent with a margin of error of .9 percentage points, the real unemployment rate could be anywhere from 7.8 percent to 9.6 percent. In other words, November’s unemployment rate could have been higher or lower than October’s.

In addition, Rex notes that the surveys used to get unemployment data are not accurate on the state level.

“Unemployment data comes from a survey that is designed to be accurate nationally and for four broad regions. In some counties of the state, no sampling is conducted. In other counties, those surveyed do not constitute a representative sample of the county’s residents. So I discourage people from looking at state or substate employment rates,” says Rex, who is the associate director of the Center for Competitiveness and Prosperity Research at ASU.

So how can we know Arizona’s true unemployment situation? Rex says that economists use other statistics to form a comprehensive picture of the state’s economy. For example, employment rates are measured separately from unemployment rates, through a census of employers.

“If you look at the employment numbers, Arizona was one of the three states hardest hit in terms of the loss of jobs,” says Rex. Unless many of the laid-off Arizonans moved out of state, chances are good that unemployment rose as sharply as employment plummeted.

Another problem with unemployment surveys is that they only count people who have looked for work within the past four weeks.

“What happens, particularly if the economy is really weak, is that some very long-term unemployed people stop looking for work. They aren’t choosing to leave the workforce, but they exhaust every possible job opportunity,” says Rex. These people are not counted as “unemployed.”

“And then of course there’s yet another category—people that are working part-time or one day a week, because that’s all the work they could get. According to unemployment numbers, they are employed,” adds Lee McPheters, an ASU research professor of economics and director of the JPMorgan Chase Economic Outlook Center at ASU.

This has been the case for Bond, who now works sporadically, consulting and teaching CPR classes. She still hopes to find full-time employment. Unfortunately, interviewers have expressed concerns that she has been out of the workforce for nearly a year.

Comparing recessions
Not all unemployment is bad. In fact, a 4-6 percent unemployment rate is consistent with reasonable economic growth, according to McPheters.

“At least for some people, it shows that they have decided to relocate and start a new life, strike out in a new career. In a way, unemployment is consistent with an economy that has flexibility and change,” he says.

Sometimes jobs become obsolete due to technological advances. For example, when was the last time you saw a “help wanted” ad for an elevator operator or lamplighter?

“In normal times the jobs that become obsolete get replaced by new kinds of jobs, and the economy moves forward. But what we’re seeing now is downsizing without new job creation to go along with it. That’s why we’re stuck now,” says McPheters.

People tend to compare any recession with the Great Depression of the 1930s. Unemployment in the current recession peaked at just over 10 percent—a far cry from the 25 percent of the early 1930s. Still, there are features of this recession that make it worse than anything we’ve seen since then.

"The economy’s still terrible. Well what would it be like if the stimulus program had not spent that money? It would be even worse.”

The U.S. has experienced 11 recessions since the end of World War II. The highest unemployment rate among these, at almost 11 percent, occurred during the early 1980s.

“But during the first seven or eight recessions of that period, the economy returned to the level it was before—with all the jobs back—within a couple of years. In the recession of 1991, it took longer to get those jobs back. And then in the recession of 2001 it took even longer. And now we don’t have them back yet after four years,” says McPheters. “So what makes this recession different is that the duration of unemployment is much longer than we’ve seen in any of the other post-war recessions.”

Obstacles and solutions
The U.S. faces two major obstacles to bringing employment back to pre-recession levels. First, many jobs in certain industries—like manufacturing—have moved overseas.

“The reason that we’re losing those jobs is that we got our standard of living so high,” explains Rex. “Wages in the U.S. are so high relative to other countries that companies can pay a fraction of the labor costs overseas to get the work done at essentially the same level of quality and speed.”

Lowering wages in the U.S. is not a desirable solution. Rex suggests that we focus on creating higher-level jobs, instead.

“What you have to do as a country is create enough high-end sorts of jobs for which these other countries don’t have the skills to compete. The problem is that educational attainment has not increased. We just don’t have enough people concentrating in math and science.”

In fact, Rex notes that even in a depressed economy we have to import workers to fill many of our science and high-tech jobs.

“At some point Americans have to understand that if you want to get a decent paying job in this country, you’re going to have to do something to improve your skills,” he says.

The other problem for America’s future employment is that a large population is now entering the workforce. The number of births in the U.S. dropped after the Baby Boom, but rose again in the 1980s. During the 1990s the number of births almost matched that of the Baby Boom generation. Now all of those people are reaching adulthood and entering the workforce.

So how do we recover from the recession, replace jobs sent overseas, and accommodate a surge of new employees? The public is increasingly demanding that the government do something to address the problem, while legislators bicker about what actually works. What does work?

First of all, Rex points out, Obama’s stimulus program in 2009 was not the failure that many claim it was.

“It clearly had a pretty big effect. Not perhaps as big as you might have thought because so much of it was in the form of tax cuts and other very inefficient ways to stimulate the economy. Yeah, the economy’s still terrible. Well what would it be like if the stimulus program had not spent that money? It would be even worse.”

In reality, the government has a limited ability to affect the economy, according to Rex. In part, this is due to the government sector being a relatively small share of the economy overall. It does not have the resources or tools to compensate for a deep and broad recession.

“We’ve got to get the recovery to spread throughout the private sector economy,” he says.

The Center for Competitiveness and Prosperity Research is part of the L. William Seidman Research Institute in ASU’s W.P. Carey School of Business. The center produces non-partisan reports on various economic issues. Recently the center analyzed ways to create jobs in Arizona. The report recommended infrastructure spending, as well as taking advantage of the federal offer to extend unemployment insurance. (Arizona does not currently participate in that program.)

One tactic that does not improve job growth is tax cuts for the wealthy. Rex says wealthy people tend to direct excess income into savings or investments, often outside the U.S.

“Only a small percentage of that money gets put back into the economy. The Congressional Budget Office shows this in their analysis, and the big private econometric firms like economy.com also have also demonstrated the inefficiency of this type of stimulus,” he says.

The good news
Technically, the recent recession ended in 2009, although it doesn’t feel that way due to the lag in recovery for both jobs and housing. But new data shows that both the country and the state are growing economically.

The JPMorgan Chase Economic Outlook Center provides several economic reports, including the Greater Phoenix and Western Blue Chip Economic Forecasts, and Job Growth USA. These reports rely on forecasts from about 70 economists across the West, including about 20 in Arizona. ASU also produces forecasts using its own models.

“The economy in Arizona bottomed out in 2010 and has been slowly adding jobs all through 2011. If you look at the most recent data we have and compare it with last year, Arizona is in the top 10 states for the number of jobs created,” says McPheters.

Even at the bottom of the recession, a couple of industries continued to grow: health services and private education.

“But virtually every other industry in Arizona now is starting to create some jobs. It’s just nowhere near the pace that people want to see,” says Rex, noting that unemployment probably won’t return to a normal level for at least three to four more years.

McPheters cautions that Arizona’s recovery is directly linked to the national recovery, more so than in some other states due to our dependence on tourism. If there is a national double-dip recession—perhaps due to high oil prices or problems in the European economy—Arizona would see another downturn, as well. However, McPheters remains optimistic about the state’s future.

“For the last five decades we’ve been among the leading growth states,” he says. “All the factors that are responsible for that are still present—they’re just in a half-speed, low-gear sort of mode. But within three to five years I would think the Arizona economy’s going to be one of the stronger state economies in the country.”

For Bond and the hundreds of thousands of other unemployed Arizonans, the upturn won’t come a moment too soon.

 

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