Beware Economists Touting Latest Unemployment Numbers

The jobs numbers reported last week were spectacular, given previous circumstances. Unemployment was down to 3.8 percent with historically high levels of employment for African-Americans. This is great news, especially when one finds the Atlanta Federal Reserve estimating that the economy has the potential to grow at a furious rate of 4.8 percent. That level of growth reminds one of the halcyon days of the Reagan Boom of the 1980s. However, one should remind oneself about what that unemployment number means. The unemployment rate is dependent upon the number of people who are actually looking for work. Given the current rules for reporting unemployment, the 3.8 percent rate is pretty good on the surface. There were 233 thousand jobs created in the month of May. That number is above the average monthly increase in adults entering the workforce, so given a little Kentucky windage, the unemployment rate will come down. Again, these circumstances look pretty good to the casual observer, but one should take a hard look at what those numbers really indicate. Over the past 10 years, an additional 193 thousand adults have entered the workforce every month. Thus, to maintain a constant level of employment, 193 thousand jobs must be created every month, if nothing else changes. In May, there were 233 thousand jobs created. That is only 40 thousand more than what are needed to break even. With the unemployment rate going down .1 of a percent, that means some 150 thousand people left the workforce to make the math work. That is not a good thing. Sure enough, the Bureau of Labor Statistics, the government entity that tracks all of this, reported that the labor participation did, indeed, drop .1 of a percent from 62.8 to 62.7 percent. To provide perspective, if the economy were to produce some 300 thousand jobs a month, month after month, it would take more than seven years to clear most of the 8.7 million workers who are simply not participating at this time. Imagine what having an additional 8.7 million workers would mean to the Gross Domestic Product, the government revenue base and a host of other economic indicators. Of course, there would be the “demon under the bed,” the dreaded monster called inflation.

Supply side economics works, and if one can keep the government out of the way

In a year over year analysis, wages have gone up three percent. Inflation has been around two percent, so real income is improving. With changes in regulatory regimes, tax reform, better trade deals and improving consumer confidence, there is no reason to believe that the economy cannot stay on this upward trajectory. However, I will feel a lot better when I start to see that serious backlog of able-bodied workers getting back into the labor market. Economists, when discussing labor, often mention the reservation wage—that wage level that will entice one to seek employment over not working. As the economy improves and the tax reforms take deeper effect, businesses will begin investing and attempt to expand operations. This competition for workers will put upward pressure on wages, thus more likely presenting reservation wages to a host of those who otherwise are sitting things out. If more and more people choose to work rather than sit, then one will truly have something to celebrate. I have the utmost confidence in the President and my friend Larry Kudlow, Director of the National Economic Council, as they provide stewardship to what I hope is a juggernaut of a growing economy. Supply side economics works, and if one can keep the government out of the way, all boats will truly rise on the rising tide.