CHAPTER TWENTY-EIGHT

Meaningful Unemployment Figures

THOUGH MOSTLY EMPTY GESTURES, the final version of the Humphrey-Hawkins Full Employment Bill—passed by the Congress in mid-October of 1975 and promising simultaneous reduction of unemployment to 4 percent and of inflation to 3 percent by 1983, a balanced budget, a trade surplus, and, for good measure, higher farm subsidies—still contained one bit of serious mischief. It committed the United States to the traditional unemployment index.

For years it had been known to everyone dealing with economic statistics that this measurement, as it came down to us from the Great Depression, had become meaningless and misleading. The most its few remaining defenders still claimed is that it measures with considerable lack of reliability the number of people in the labor force of this country who, if the pay were right and the hours were right, might be available for at least a little work once in a while. For years a task force of economists and statisticians had therefore been at work in the Department of Labor to develop a new unemployment index.

It would have been politically difficult, in any event, to get such a new index accepted; any change would have meant lowering both the official unemployment count and the definition of “full employment,” and would thus have been fought bitterly by Labor. But Humphrey-Hawkins, while fatuous as a “full-employment bill,” made sacred cows out of the wrong unemployment index and of an equally wrong, and meaningless, full-employment definition.

The figures which we need to factor employment and unemployment into its decisions are, however, available and are indeed printed in practically every newspaper every month. Yet few readers, in my experience, know and use the figures properly.

There are three such figures.

1.

The most important and most meaningful one is the number and proportion of people in this country who have jobs. Total employment is far more important than any unemployment figure. As long as both the number of people with jobs and the percentage of the labor force with jobs go up, consumer spending is bound to rise. If both go down significantly over any period of time—three months or more—consumer spending will drop. And if the two diverge, businessmen should be alert for abrupt changes in the labor supply.

Failure to watch the employment rate accounts for many of the serious business mistakes I have seen in the past few years. As most people know by now, both the number of people with jobs and the percentage employed stand at an all-time high, without precedent in the economic history of the United States or, indeed, of any other major country. And this rapid growth took place in years which many economists, using the official employment figures, characterized as “the most serious recession since the Great Depression.”

Actually, both the number of people employed and the percentage of people in employment went down in only three quarters of the six years 1972–78, and then only by the merest flicker. In terms of consumer demand and consumer buying there was, in other words, no recession at all. But a great many consumer-goods and service businesses, seeing only the meaningless but official unemployment figures, completely missed this and, as a result, lost sales and market standing. Even some very big and very well-managed companies have suffered substantial and perhaps permanent damage because they watched the official unemployment figures and thus acted on the assumption of a “severe recession.”

2.

The second figure to watch is the employment and unemployment rate for adult male heads of household. It stood in 1978 around 2.75 percent, which, in effect, means severe labor shortages and very strong inflationary wage pressures. Only in a few bad months of the 1975–1977 recession did it reach true unemployment levels of 6 to 7 percent and only for very short periods.

Unemployment among male adult heads of households is what the official unemployment figure was originally designed to measure, way back in the thirties. Then male adult heads of household were the American labor force. It is not surprising, therefore, that so many people assume that the official unemployment figure still refers to male adult heads of household. It is this assumption on which most economists base their “full employment” budget or the projection of the alleged “income loss” to the country because of unemployment.

It is also this assumption that made Humphrey-Hawkins put the “full employment” level at 4 percent unemployment. Four percent unemployment for male heads of household is indeed full employment in the United States—anything above it is genuine unemployment and anything below it is labor shortage. The economists’ “Phillips Curve,” which attempts to measure the trade-off between inflation and unemployment, also swings from deflationary unemployment into excessive and inflationary labor shortage at around the 4 percent unemployment rate for male adult heads of household. And the unemployment rate for male adult heads of household has been a more reliable indicator of inflationary pressures than even Wall Street’s darling, the money supply.

But of course our official figure no longer focuses on male adult heads of household. They now constitute no more than two fifths of our labor force. The other three fifths are women, the great majority not “heads of household” but “dependents” holding “second jobs,” if not available only for part-time work; people who are officially “retired” but available for part-time work up to the income level at which their earnings endanger their Social Security pension; a good many young adults, not yet burdened with family responsibilities, who optimize their incomes by alternating between periods of full-time employment and periods of official “unemployment,” when they draw tax-free unemployment compensation; unemployables registered for “employment” to be eligible for welfare checks and food stamps; and, finally, a sizable number of full-time students, available for part-time work only and then often for no more than an occasional hour or so on a weekend or evening.

Still, adult male heads of household, while only 40 percent of the labor force, account for some two thirds of all hours worked precisely because they are primarily full-time workers. And they account for the overwhelming majority of skilled workers, managers, and professionals.

3.

The last figure to look at is the one the newspapers print first: the official unemployment figure. Statistically, it is an abomination, an Alice in Wonderland stew of apples, oranges, and red herrings. Nothing can make it valid again. Economically, it is meaningless. A good many people have been trying to make it again a meaningful economic figure by moving the “full employment” benchmark of the official figures from the traditional 3 or 4 percent up to 6 or 7 percent. While more realistic, this still would not make the figure useful and meaningful for any economic purpose—whether forecasting or economic policy.

And yet politically, the traditional unemployment figure is potent. The official figure dominates official rhetoric and thus induces political gestures which, while futile, are likely to be expensive, inflationary, and the more damaging the less actual results they produce. As a measurement of political pressure, the official employment figure is therefore to be taken seriously.

Even if we could get rid of the offi cial unemployment measurement—and Humphrey-Hawkins made this unlikely, for many years—the American labor force has probably become too heterogeneous for employment and unemployment to be measured by any one yardstick. The one measurement that might be valid would, at the same time, be both exceedingly complicated and politically unacceptable. It would convert the number of people available and looking for work into equivalent full-time jobs—the way universities convert part-time and evening students into “full-time equivalents.”

Even then, the figure would have to be adjusted for the number of people (largely young whites) who are registered as unemployed only because it optimizes their income; for those who register for work only to obtain welfare benefits; and for the fairly large number of young people (especially blacks) who are kept out of the labor force by the minimum wage laws.

Such a full-time equivalent measure would probably show today (i.e., October 1978) an unemployment rate of around 3.5 percent compared to the official rate of about 6 percent. But pending the development of an index that reflects the heterogeneity of the American labor force, the businessman—and economist and policy-maker as well—would be well advised to steer by at least two and preferably three separate employment indices: the number and proportion of people in the labor force who have jobs; the employment and unemployment figure for male adult heads of households; and the unemployment fiction of the traditional index.

(1978)