Growing the US Economy-II Look Beyond the Unemployment Rate

No.
1. 2. 3. 4. 5.

Topic
Summary Introduction Historical Unemployment Rates Appendix 1: The Universal law relating labor force and unemployment level for all countries Reference list of related articles

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1. Summary
In two recent, and related, articles on this topic it was shown that instead of focusing only on the unemployment rate attention must also be paid to the actual employment gap, i.e., the actual number of unemployed workers. This is now clarified further here by considering the relationship between the unemployment rate and the number of unemployed workers, for the period 1980-2012. The highest unemployment rate witnessed during the Obama first term (9.634% in 2010) is virtually identical to the highest unemployment rates (9.698% in 1982 and 9.606% in 1983) witnessed in the earlier years of interest to us. However, an unemployment rate of 9.689% in 1982 meant 10.7 million unemployed but roughly the same unemployment rate of 9.634% in 2010, at the height of the current recession, meant 14.83 million unemployed. Both the population and the labor force had increased significantly during this period.

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2. Introduction
In two recent articles on this topic (click here and here, see links given below) it was shown that instead of focusing only on the unemployment rate attention must be paid to the actual employment gap, i.e., the actual number of unemployed workers. The number of unemployed workers U = (L E) is the difference between the labor force L and the number of employed workers E. This is the basic equation governing all unemployment studies. In general, as the labor force L increases, the number of employed workers E also increases, see Table 1, for the period 1980-2012. Unfortunately, there are always some workers who cannot find jobs, for a number of reasons, chief among them being the requisite job skills. The implications of the largely overlooked E-L relation have been discussed in some detail in Refs. [1] and [2]. 1. Growing the US Economy-I: The Obama Frist Term Record, Published February 12, 2013 http://www.scribd.com/doc/125093206/Growing-the-USEconomy-The-Obama-First-Term-Record 2. Is Full Employment Feasible? Analysis of the Recent US Employment Data, published February 14, 2013. http://www.scribd.com/doc/125452243/IsFull-Employment-Feasible-Analysis-of-the-recent-US-Employment-Data 3. Growing the US Economy-II: Look Beyond the Unemployment Rate, Published February 15, 2013 http://www.scribd.com/doc/125602428/Growingthe-US-Economy-II-Look-Beyond-the-Unemployment-Rate (Current article) It was shown the number of employed workers E increases with increasing labor force x, following a simple linear law of the type E = mx + b, where m is the slope of the E-L graph and b is the intercept made on the E-axis. In this context, we will use the mathematical symbol x for the labor force instead of the descriptive symbol L (likewise y instead of U for the number of unemployed). Three different regimes, with slightly different values of the slope m are revealed, see Ref. [1], if we consider the employment data since President Reagan took office. The slope m > 1 and has been increasing since 1980 with the changes in the US economy. The slope of the E-L graph is a measure of the rate of jobs creation. The numerical value of m > 1 means that jobs are being created at a higher rate than
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Table 1: US Employment Data (1980-2102) from Bureau of Labor Statistics

Year 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Population, P (in 000s) 167,745 170,130 172,271 174,215 176,383 178,206 180,587 182,753 184,613 186,393 189,164 190,925 192,805 194,838 196,814 198,584 200,591 203,133 205,220 207,753 212,577 215,092 217,570 221,168 223,357 226,082 228,815 231,867 233,788 235,801 237,830 239,168 243,284 Labor force, L (in 000s), x 106,940 108,670 110,204 111,550 113,544 115,461 117,834 119,865 121,669 123,869 125,840 126,346 128,105 129,200 131,056 132,304 133,943 136,297 137,673 139,368 142,583 143,734 144,863 146,510 147,401 149,320 151,428 153,124 154,287 154,142 153,889 153,617 154,975 Unemployed, U (in 000s), y 7,637 8,273 10,678 10,716 8,539 8,311 8,237 7,425 6,701 6,527 7,047 8,628 9,613 8,941 7,996 7,404 7,235 6,739 6,210 5,880 5,692 6,801 8,378 8,774 8,149 7,591 7,001 7,078 8,924 14,265 14,825 13,747 12,506 % Unemployed 100*(y/x) 7.14 7.61 9.69 9.61 7.52 7.20 6.99 6.19 5.51 5.27 5.60 6.83 7.50 6.92 6.10 5.60 5.40 4.94 4.51 4.22 3.99 4.73 5.78 5.99 5.53 5.08 4.62 4.62 5.78 9.25 9.63 8.95 8.07 Employed, E (in 000s), x-y 99,303 100,397 99,526 100,834 105,005 107,150 109,597 112,440 114,968 117,342 118,793 117,718 118,492 120,259 123,060 124,900 126,708 129,558 131,463 133,488 136,891 136,933 136,485 137,736 139,252 141,729 144,427 146,046 145,363 139,877 139,064 139,870 142,469

Source: Bureau of Labor Statistics, http://www.bls.gov/web/empsit/cpseea01.pdf

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required by the increase in the labor force due to the new entrants in the job market (as implied by the increase in the labor force). Also, a careful analysis of the data for recent years, 2001-2012, which covers the Obama first term, leads to the intriguing possibility of FULL EMPLOYMENT because of the extraordinarily high rate of job creation, as measured by the slope of the E-L graph. The slope m = 3.135 >> 1 and, if this can be sustained, full employment can be achieved when the E-L graph intersects the full employment line at the critical labor force of about 160.8 million; see Ref. [2] for more details. In the discussion that follows here, instead of the descriptive symbols U, L, and E, we will use the mathematical symbols x and y for the labor force L and the number of unemployed workers U, respectively. The unemployment rate, y/x, is the ratio of the actual number of unemployed workers y and the labor force x. This fractional value is usually converted into a percentage by multiplying by 100, see Table 1. Hence, the unemployment rate will go down if the numerator decreases, i.e., the absolute unemployment level y decreases. It will also go down if the denominator increases, i.e., if the labor force x increases. Although the numerator y, the number of unemployed workers, keeps increasing or decreasing as economic conditions change, the denominator x, the labor force keeps increasing with time due to the natural increase in the population. Hence, as discussed in the earlier articles, it is important to investigate the underlying mathematical nature of the x-y relationship, not just the ratio y/x. This is now illustrated here by considering the relationship between the unemployment rate and the number of unemployed workers, for the period 1980-2012. The data compiled in Table 1 was obtained from the US Bureau of Labor Statistics, see link given.

3. Historical Unemployment Rates (1980-2012)

As we see from the graphical representation of the unemployment data in Figure 1, the unemployment rate has been fluctuating in recent years, since President Reagan took office following widespread economic malaise of the Ford-Carter years. Runaway inflation (and very high consumer interest rates, e.g., for housing and
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credit cards) was the biggest concern then and everyone in the Ford White House wore the WIN buttons, which stood for Whip Inflation Now.
12.000

Unemployment rate 100(y/x), %

10.000

8.000

6.000

4.000

2.000

0.000 1976

1980

1984

1988

1992

1996

2000

2004

2008

2012

2016

Time, t [Calendar year]

Figure 1: Fluctuations in the unemployment rate (ratio y/x converted to a percent) as a function of time t in calendar years since President Reagan took office. In an important speech on October 8, 1974, which was a defining moment of his presidency, President Ford declared inflation as the public enemy number one. Today, high unemployment levels, especially the sustained high long term unemployment level, is probably public enemy number one. The American Dream will not be restored if millions who are still unemployed, and would still like to get a job, cannot be re-employed. Besides empty rhetoric there is NO REAL PLAN to address this URGENT NEED.

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It is also of interest to note that the highest unemployment rate witnessed during the Obama first term (9.634% in 2010) is virtually identical to the highest unemployment rates (9.698% in 1982 and 9.606% in 1983) witnessed in the earlier years of interest to us here. Also, the unemployment rate has been decreasing since 2010, after reaching its highest level, as in the earlier years. Thus, if we only consider the unemployment rates, the present gloom and doom seems to be totally unjustified. In order to understand the devastating effects of what is now being called the Great Recession, we have to look beyond the unemployment rates and consider the actual number of unemployed workers, y. This tells a different story, as we see from Figure 2. The same high unemployment rate now means millions more in the number of unemployed workers, y. This is due to the natural increase in the labor force x, due to the natural increase in the population, see Table 1.
20,000

Number of Unemployed, y [in 000s]

2010
15,000

2012 y = 1619 r 771

10,000

1982 1983 1980

5,000

2000

0 0 2 4 6 8 10 12 14

Unemployment rate, r % [100(y/x)]

Figure 2: The relation between the unemployment rate (ratio y/x converted to a percent) and the number of unemployed workers, y. The changes in the labor force, due to the natural increase in the population, means the same unemployment rate
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translates to several million more unemployed workers. The solid line with the equation y = mx + b = 1619 r 771, envelops all of the data. The slope m and intercept b are determined by considering the two extreme points. The slope m = y/r = y/x = 1619 means a 1% increase in the unemployment rate r (r = 1) equals 1.62 million increase in the number of unemployed (y = 1619).

An unemployment rate of 9.689% in 1982 meant 10.7 million unemployed but roughly the same unemployment rate of 9.634% in 2010, at the height of the current recession, meant 14.83 million unemployed. Both the population and the labor force had increased significantly during this period. Table 2: US Employment Data (1980-2102) from Bureau of Labor Statistics
Year 2000 1998 1997 2005 1988 2004 1994 2003 1986 1993 1992 2012 2011 2010 1982 1983 Population, P (in 000s) 212,577 205,220 203,133 226,082 184,613 223,357 196,814 221,168 180,587 194,838 192,805 243,284 239,168 237,830 172,271 174,215 Labor force, L (in 000s), x 142,583 137,673 136,297 149,320 121,669 147,401 131,056 146,510 117,834 129,200 128,105 154,975 153,617 153,889 110,204 111,550 Unemployed, U (in 000s), y 5,692 6,210 6,739 7,591 6,701 8,149 7,996 8,774 8,237 8,941 9,613 12,506 13,747 14,825 10,678 10,716 % Unemployed 100*(y/x) 3.99 4.51 4.94 5.08 5.51 5.53 6.10 5.99 6.99 6.92 7.50 8.07 8.95 9.63 9.69 9.61 Employed, E (in 000s), x-y 136,891 131,463 129,558 141,729 114,968 139,252 123,060 137,736 109,597 120,259 118,492 142,469 139,870 139,064 99,526 100,834

Selection of the BLS data with step increases in 0.5% (or 1%) unemployment rate. Source: Bureau of Labor Statistics, http://www.bls.gov/web/empsit/cpseea01.pdf

The lowest unemployment rate of 3.99% in 2000 corresponded to 5,692,000 or about 5.7 million unemployed workers. Now, in 2012, when the unemployment
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rate has increased to 8.07%, or roughly doubled, the number of unemployed workers has more than doubled to 12.5 million. The effects of the increase in the labor force (due to increasing population) is is also obvious if we consider how the number of unemployed has increased for each one-half percent increase in the unemployment rate. This is highlighted in Table 2. V. Laxmanan February 15, 2013. Summary and graphs also posted on my Facebook page.

Appendix 1
The Unemployed-Labor Force Relationship A Universal Law for All Countries
For completeness, the relationship between the number of unemployed y and the labor force x is discussed here, briefly. The BLS data, for the years 1980-2012, which was presented earlier in tabular form, is now being presented in the form of a x-y scatter diagram, see Figures 3 and 4. As we will see shortly, this U-L diagram leads us to a rather remarkable and simple linear relationship between the two variables (labor force x and the unemployment level y), if we focus our attention on the highest recorded unemployment levels in US history, going all the way back to 1941. The U-L diagram of Figure 3 reveals a clear separation between the highest unemployment levels recorded in 1982 and 1983 and in the more recent years 2009-2011. A straight line, with the general equation y = hx + c, can be superimposed, as indicated. The slope h and intercept c can be determined by considering the data for 1982 and 2010. This yields the solid line labeled A (h = 0.0949 and c = 216.4) and envelops all of the data. It is also clear that all the
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other x-y data points seem to fall between two roughly parallel lines. The straight line labeled B, has a slope h = 0.093, which is very nearly the same as the slope h = 0.0949 for straight line A. Thus, we can envision a family of parallel lines sweeping through the data set, differing only by the numerical value of the constant c, the intercept.
18,000 16,000

Unemployed, y [in 000s]

14,000 12,000 10,000 8,000 6,000

y = hx + c = 0.0949x + 216.4 Joining 1982, 2010

4,000
2,000 0 0 40,000 80,000

y = hx + c = 0.093x 7074.5 Joining 1999, 2006

120,000 160,000 200,000

Labor force, x [in 000s]

Figure 3: The relation between the labor force x and the number of unemployed y for the period 1980-2012. The fundamental significance of the suggestion being made here becomes quite obvious if we now include the historical data going all the way back to 1941, in the analysis. This data is readily available at the BLS website; see link given with Table 2. The unemployment level for 1941 is the highest recorded for that period, just as the unemployment levels for 1982 and 1983 data were the highest recorded for 1980s and the data for 2009-2011 are the highest recorded for the current era.
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The graphical representation of this small selection of the historical data, see Figure 4, indicates that the (x, y) pair for 1941 falls exactly on the extrapolation of the straight line labeled A in Figure 3. Three different values for the lope h and intercept c were determined by considering the data for 1941, 1982, and 2010, as indicated in the box in Figure 4. The slopes are virtually identical and differ only in the fourth decimal place.

Table 2: The highest US unemployment levels on record Extracted from Bureau of Labor Statistics
Year Labor force, x Unemployed, y (millions) (millions) 55.91 5.56 1941 56.41 2.66 1942 55.54 1.07 1943 110.204 10.678 1982 111.55 10.717 1983 154.142 14.265 2009 153.889 14.825 2010 153.616 13.747 2011 Data Source: http://www.bls.gov/cps/cpsa2011.pdf

In other words, a single constant value of the slope h appears to apply for all the US unemployment data going back all the way to 1941. It is even more remarkable that very nearly the same numerical value of the slope h also describes the U-L data for other countries, with technologically advanced economies (akin to the USA), such as Canada, Japan, and Australia. Thus, it appears that we can envision a series of prarallels sweeping through the U-L diagram for any economy. The theoretical significance of the non-zero intercept c has also been discussed in detail in earlier articles, see refeence list that follows here.

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20.0 18.0

Unemployed, y [millions]

16.0

14.0
12.0 10.0 8.0

6.0
4.0 2.0 0.0 0 20 40 60 80 100 120 140 160 180 200

1941, 1982: h = y/x = 5.118/54.294 = 0.0943 1982, 2010: h = y/x = 4.147/43.685 = 0.0949 1941, 2010: h = y/x = 9.265/97.979 = 0.0946

Labor force, x [millions]

Figure 4: The highest unemployment levels on record in the data compiled by the Bureau of Labor Statistics (see http://www.bls.gov/cps/cpsaat01.pdf) for 1941 and the years 1982 and 1983 and the Obama years (2009-2011) is plotted here. The three highest unemployed levels data fall on a PERFECT straight line with the equation y = hx + c = 0.0946x + 0.2731. This specific equation was determined by connecting the 1941 and 2010 data points. The above straight line is a precise computer generated straight line based on the mathematical equation here. From the average slope of h = 0.0935 deduced from 1941, 1982, and 1983, we arrive at h = 0.0946 for the line joining 1941, 1982, and 2010. The following is from Ref. [7] in the list here. In summary, we now have accumulated further evidence for a single universal value for the slope h in the linear law y = hx + c relating the labor force x and the unemployment level y.
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Japan: Slope h = 0.0949 USA: Slope h = 0.0946

(with one of the three slopes for the US being exactly 0.0949)

Canada: Slope h = 0.0966

5. References to related articles on the Universal law
(The following articles, also available at this website, describe exactly similar findings by the author for the economies of Australia, Canada, and Japan and also discuss the significance of the nonzero intercept in the Universal Law. This is considered to be similar to the work function in physics, introduced by Einstein when he developed his photoelectric law and idea of light quanta. The idea of a work function can also be extended to the analysis of financial data for individual companies.)

1. The Highest US Unemployment Rate: The Obama years and Historical Data (1941-2011) Published July 12, 2012 http://www.scribd.com/doc/99857981/The-Highest-US-Unemployment-RatesObama-years-compared-with-historic-highs-in-Unemployment-levels 2. The US Unemployment Rate: What happened in the Obama years? Published July 10, 2012 http://www.scribd.com/doc/99647215/The-USUnemployment-Rate-What-happened-in-the-Obama-years 3. A First Look at Australian Unemployment Statistics: A New Methodology for Analyzing Unemployment Data, Published July 19, 2012. http://www.scribd.com/doc/100500017/A-First-Look-at-AustralianPage | 12

Unemployment-Statistics-A-New-Methodology-for-Analyzing-UnemploymentData 4. A Second Look at Australian 2012 Unemployment Data, Published July 22, 2012 http://www.scribd.com/doc/100720086/A-Second-Look-at-Australian2012-Unemployment-Data 5. Further Evidence for a Universal Constant h and the Economic Work Function: Analysis of Historical US (1941-2011) and Canadian (1976-2011) Unemployment Data, Published July 24, 2012 http://www.scribd.com/doc/100910302/Further-Evidence-for-a-UniversalConstant-h-and-the-Economic-Work-Function-Analysis-of-US-1941-2011-andCanadian-1976-2011-Unemployment-Data 6. An Economy Under Stress: Preliminary Analysis of Historical Unemployment Data for Japan (1953-2011), Published July 24, 2012 http://www.scribd.com/doc/100939758/An-Economy-Under-StressPreliminary-Analysis-of-Historical-Unemployment-Data-for-Japan 7. Further Empirical Evidence for the Universal Constant h and the Economic Work Function: Analysis of Historical Unemployment Data for Japan (1953-2011) Published July 24, 2012 http://www.scribd.com/doc/100984613/Further-Empirical-Evidence-for-theUniversal-Constant-h-and-the-Economic-Work-Function-Analysis-ofHistorical-Unemployment-data-for-Japan-1953-2011

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