Unemployment in the US

I’ve got a friend who has been unemployed for a year. She has a PhD in archaeology, and experience in both non-profit and for-profit organizations. A graduate degree tends to insulate one against unemployment; for many years the rate of unemployment for those with master’s degrees and higher was less than a third that of the rate for those with only a high school education. But this recession doesn’t spare the educated. Though the disparity between unemployment rates by educational attainment is still large, the recession has narrowed it.

California’s unemployment rate is pushing 12%. Michigan’s is 15%. (They were 7.3% and 8.3% a year ago). Unemployment rates have skyrocketed in the last year, and though this month’s national rate shows a slight improvement (9.5% to 9.4%), these numbers are still eye-popping.

An interesting feature of the numbers is that the labor force participation rates are also declining for all levels of education, as those who cannot find work become discouraged, or move to another activity, such as school, caregiving, or work in the informal economy. The Bureau of Labor Statistics’ U-6 unemployment rate attempts to capture the effect of people moving out of the labor force (or moving to part-time employment when they’d prefer full-time); the U-6 stands at 16.8%.

And these numbers have been getting steadily worse (or holding more or less steady) since the beginning of 2009. Even the BLS’s narrowest measure, called U-1, those unemployed 15 weeks or longer, is at a frightening 5.1%. That’s truly unreal. Over 5% of the labor force has been unemployed 3¹/₂ months or more. In the face of this, the stock market has rallied 45%.

Why should unemployment be so high? It’s a grave sign that the economy has become sclerosed, and cannot quickly adjust the forces of supply and demand. This is the Great Contraction: you lose your job, you must cut expenses, more people per square foot of real estate, fewer hours spent on leisure. This is still the richest country in the world, with 90% of Americans still working. For the labor market to clear, wage rates would have to fall, and with them, so would the housing market, (both prices and rents would be relentlessly beaten down until they reached a proper proportion to household incomes). Many other prices would also fall. All those overpriced services will cost an awful lot less: think of haircuts, dog walkers, personal shoppers, personal assistants. These services and more will be driven down in price by falling demand and price competition on the supply side, as those remaining in these fields attempt to keep a portion of their sales.

What I’m saying has become anathema to the field of economics, yet it’s a simple truth: falling prices can be healthy for the economy. Yet we’re spending trillions to try to keep inflated prices high. If we simply stay out of the way, markets will clear and prices will find their natural level. Then a truly robust recovery can and will begin.