One of the more perplexing economic problems of this year is why the official unemployment rate has been stubbornly hovering around the 9-percent mark despite interventions by the Obama Administration to get the American jobs engine running again. Even when the unemployment rate ticks down to 8.6 percent — like it did in November — pundits are quick to point out that this statistical blip was actually the result of more people leaving the labor force and entering the ranks of the long-term unemployed.
It’s perhaps no surprise that top policymakers at the Federal Reserve and within the Obama Administration are looking into new ways to evaluate the performance of the economy.
It would be irresponsible to ignore the unemployment rate entirely. A stubbornly high rate of unemployment has serious long-term consequences. But the unemployment rate on its own, is not the best way to gague the overall health of the economy. Consumer confidence — another all-important gauge of economic activity — is starting to tick up. Meanwhile, the historic Black Friday shopping surge this year shows that retailers are able to bring shoppers through the door. Consulting firm BCG has even described a "manufacturing renaissance" about to happen in America.
In fact, in some of the nation’s hottest tech hubs, the local unemployment rate is considerably lower than 9 percent. In Silicon Valley, the unemployment rate is closer to 4.5 percent. And that’s a story playing out nationwide. It’s sometimes the case, in some tech hubs, that tech jobs go begging, due to an inability to find the right, highly-skilled talent in the region.
The problem may be that the way we think about the official unemployment rate is an artifact of the Great Depression. Until 1940, according to research done by University of California Berkeley’s David Card, there was no official unemployment statistic in the U.S. It was only in the 1930s, driven by the tremendous dislocation occuring in the economy, that the federal government began thinking about ways to measure unemployment. In fact, until 1936 and the publication of John Maynard Keynes’ “The General Theory of Employment, Interest and Money,” it was actually thought that full employment (i.e. zero-percent unemployment) would be the natural result of a stable economy.
It was Keynes who started us thinking that a certain amount of unemployment was always going to be present barring massive federal intervention. After Keynes, Nobel Prize-winning economists like Edmund Phelps began suggesting that the natural long-term rate of unemployment was actually closer to 4.5 percent. (Phelps recently suggested that the natural long-term unemployment rate may now be closer to 7.5 percent.)
Just as the Great Depression gave rise to the popular definition of unemployment as people both out of work and searching for work, the Great Recession may lead to a new definition of what it means to be "unemployed." As the workforce becomes more global, the relentless digital revolution is imbuing even full-time jobs with aspects of temporary, part-time jobs.
A more accurate employment statistic would be one able to measure all of the entrepreneurial and start-up activity nationwide. It would measure all of the do-it-yourself projects and the products sold on sites such as Etsy. It would measure all of the creative Kickstarter projects that receive crowdfunding. And, perhaps most importantly, it would measure the surprising resilience of “Freelance Nation”, which is going full-tilt despite the ongoing economic malaise. In many ways, the promise of American entrepreneurialism seems brighter than ever, and new Web sites are launching every day to lower the search costs of finding new talent.
Do the traditional unemployment figures accurately reflect the true state of the American economy? That might just turn out to be the most dangerous political question of 2012, especially for the Obama administration, which could be cut off at the knees if the unemployment rate hits double-digits. In many sectors, full-time jobs as we’ve imagined them over the past 70 years may not be coming back anytime soon — if at all. This means we may need to adjust to a future where 7.5 percent is the new zero percent.
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