Module 1: Understanding Modern Economics - Unemployment | en - 426 - 36998
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I've done a bunch of videos now on inflation and deflation
and how they can be impacted by capacity utilization.
And the traditional notion of capacity utilization, and this
is what my brain does when someone mentions it, is I
think of industrial capacity utilization.
I imagine factories.
And when people say low utilization, I imagine idle
factories, and when high utilization, I imagine
factories that are running at three shifts and things are
moving feverishly.
But in a service-based economy like we have here in the U.S.
and like we have in a lot of Western societies, most of our
real capacity for what we produce, or our GDP, is
service based, because we're a service-based economy.
And if you think about it, industrial capacity
utilization, it matters, but it matters much more to
manufacturing-based economy.
In a service-based economy, the best measure of
utilization really is unemployment.
And I guess we could say the best measure of
underutilization is unemployment.
With that said, I think it's really important to have a
deeper understanding of how unemployment is measured and
how it's thought about from the Government, and the
numbers you hear on CNN, what they really mean in terms of
the real unemployment picture.
And most of these charts, actually all of these charts
that I have in this video, I got from Mike Shedlock, who
runs the Global Economic Analysis blog.
And I had a conversation with him on Friday and he pointed
out some really interesting things.
That's what I really want to cover, and I think it'll give
us a good general view of unemployment and give us some
clues as to what's going on right now.
But I encourage you to read his blog.
He goes by Mish, and he tells people that the best way to
find his blog is to just do a search on Google for Mish.
And he does a lot of this, where he looks at the economic
data, but he goes several levels deeper than anyone
really would go, especially on TV.
But that's what you really have to do to really discern
what matters.
And I want to give him full credit because he really is
who pointed out a lot of this to me, but I think it's very
instructive to the capacity utilization and
inflation-deflation argument that I've been making.
So right here I have a screenshot from the Bureau Of
Labor Statistics and you could go there, just do
a search for them.
And what most people don't realize is, just like on the
money supply, you have different measures of money
supply, you also have different measures of unemployment.
And the number that you hear reported, at least since 1994,
is U-3, and that's where we'll start.
That's kind of the official rate of unemployment.
I know you can't read this properly.
My screen capture software doesn't do well with this font.
But U-3 is total unemployed as a percent of the civilian labor force.
So it's very important to realize what they consider
unemployed and what they consider the labor force.
They consider you unemployed if you don't have a job and
you have looked for work in the past four weeks.
And this is a really important point.
It really is important to think about it relative to
everything else I'll go over in this video.
Because we've probably had times in our life where we
considered ourselves unemployed or we considered
someone else unemployed, but they had maybe gotten dejected
and stopped looking a little bit or
decided to take a break.
It's important to realize, in the numbers that we hear from
the Government, they don't count as part of the civilian labor force.
Well, let's say, you stop looking for a job for five
weeks, because you wanted to take a break and maybe redo
your resume for awhile, so you're kind of passively looking for a job.
The Government no longer considers you part of the
labor force and you're not included in that number.
They do have broader numbers that do include that.
And I think that's important, because we're actually going
to study the difference between the different numbers.
U-4 is total unemployed.
So it's the number up here, plus discouraged workers, as a
percent of the civilian labor force,
plus discouraged workers.
So they're going to add the discouraged
workers to the numerator.
Let me do this in a different color.
Before you had-- this is the standard one.
You have unemployed over employed plus unemployed, as
defined-- and when we say unemployed, it's someone who
doesn't have a job, but you've looked for a job in the last four weeks.
U-4 is now-- let me do it in a different color.
It is unemployed plus discouraged over employed plus
unemployed plus discouraged workers.
And their definition of discouraged workers-- I just
talked about people who haven't looked or actively
looked for a job in more than five weeks or actually more than four weeks.
You're considered discouraged if you give a reason for that,
and you say, well, I just haven't looked for it, because
I'm discouraged, because I don't think there are jobs for
what I want to do anymore, so that's the reason why haven't looked for it.
And that's when you get included into this bucket.
And then U-5 is that same thing, but what they do is
they add other marginally attached workers.
And the difference between a discouraged worker and a
marginally attached worker, a discouraged worker gives the economic reason.
They say I haven't looked for a job in the past five weeks
because I just think it's impossible.
I want to work but it's just impossible find a job as an
accountant or an engineer anymore.
While a marginally attached worker also says I haven't
looked for a job in the last five weeks, but they don't say
it's because they think the economy is making it impossible.
It could just be that they're-- I don't know--
depressed generally or they don't want to-- it could be a
whole set of reasons.
The important thing is that on the survey that the Bureau Of
Labor Statistics conducts, that they don't literally give
that argument that the only reason that they're not
looking for it is economic reasons, and then they'll be
put into the marginally attached
workers and that's U-5.
And then U-6 is really interesting because it
includes all of these above
but it actually shifts some people.
So in U-5 you would add marginally attached to the denominator there.
In U-6 what you do is you have total unemployed plus all
marginally attached workers plus total employed part-time
for economic reasons as a percent of the civilian labor
force, plus all marginally attached workers.
So the important thing here is, plus total employed
part-time for economic reasons.
That's key, so the denominator doesn't change anymore, but
this unemployed number is going to get bigger.
Because there's some part of the employed population who
are not working 40 hours a week, or they're not working
as much as they want to work, or they're not maybe working
in even the field they want to work.
Maybe instead of working as an engineer, they're working 20
hours a week at the local bookstore or at Starbuck's,
and these people are included in U-6.
And the reason why I want to really highlight that, and
Mish pointed this out to me, is that this is increasing much faster than this.
And we'll think a little bit about why that's happening and
what conclusions we can take.
These are the numbers straight from the Bureau Of Labor Statistics.
I know this screen right here is really hard to see, but if
you look at March 2008, the U-3 number was 5.2% and the
U-6 was 9.3%.
So the difference between the two is about 4.1%.
But if you go to the most recent month, the standard
unemployment number is 8.5%, but the U-6, the one that
includes the discouraged workers, the marginally
attached workers and the people who aren't working full
time for economic reasons, the difference is now 7.1%, so that spread.
People who would like to work, but they've either stopped
looking because they've gotten dejected, or they've just
bitten the bullet and taken a job that they otherwise
wouldn't want to take or taken fewer hours than they
otherwise wouldn't want to take, that's growing.
That really is.
And the reason why we really want to focus on that is
because it tells us that even though the unemployment rate,
the official unemployment rate-- that is increasing very
steeply and I'll show a graph right here, this is actually
work Mish did, where he actually shows that the spread
between U-6 and U-3 has been increasing, and it's been
increasing at an accelerating rate since last February.
That's actually shown right here in this graph.
And he got this from his friend Chris Puplava at
Financial Sense, so I want to give him credit for it.
But you see here, U-6, this is the broad measure of
unemployment that we talked about right here.
That's increasing at an even faster rate than the standard unemployment measure.
And this green line right here, this is actually the
difference between the two.
What's interesting about that is this is kind of measuring
the percentage of the labor pool that's getting dejected, that's getting depressed.
So they're either getting depressed or dejected and not
looking for work, or they're just saying, you know what?
I can't get a job 40 hours a week anymore as an accountant.
I will now go work part-time at the local department store
or do whatever it takes to put some food on the table for their families.
In general, it shows the level of desperation.
And if you look here, and this is really interesting.
This is also from Chris Puplava.
If you look relative to the path, the last major recession
that a lot of people talk about is the early 80's, the
double dip recession, and even though the headline
unemployment rate-- let me make sure I get the right
color-- the headline unemployment rate here is the
blue line, that is still a good bit below.
We peaked out there, and I don't know what the exact
number is, but it looks like about in the mid 10%.
Even though we're a lot lower than that now, we're at 8.2%
right now, if you look at U-6, which is the broadest,
that's spiked up.
Unfortunately, the data for U-6 doesn't go back before 1994.
They actually changed how a lot of things were measured.
The official headline rate, instead of calling it U-3, it
used to be called U-5, but it was, for the most part, the
same measure, but that's changed a little bit.
But U-6 did not exist before 1994 so, unfortunately, we
can't measure U-6 back then.
But a good, I guess, pseudo-indicator for U-6 that
we do have more historical data on is the number of
unemployed for more than 15 weeks.
These are people who have been looking for work, but 15 weeks
or more, they still haven't found a job even though
they've been actively looking for work.
And that, if you look at least while we have U-6 being
measured, it has tracked that broad measure quite well.
So if we can make the assumption that U-6 is always
on that line or above it as it's graphed here, which it is
so far, then U-6 in the early 80's was probably right around
where that line is now.
Maybe it was a little higher, maybe it was up here.
But what this graph really does convey is that that
broadest measure of unemployment is already as bad
as it probably was in the early 80's.
It's just that we don't have that data there.
And if anything, those part-time workers, because
they are employed, so in the official unemployment measure,
they're actually making the number look a little bit better.
Here you had fewer people.
You were either employed or you were unemployed.
If you're unemployed, you made the number look a little bit bigger.
Here you have a lot more people who are kind of
in-between, but they get counted in the employed number.
So they're making the actual reported official unemployment
rate a little bit lower than is actually the economic reality.
I think that's a really important thing to realize
that you have this accelerating rate of
desperation out there in the economy and, if anything, it's
telling us that things are getting worse, and it's
telling us that things are probably as bad as they've
been in some of the worst recessions in history and
they're only getting worse.
And going back to where we started this video, in terms
of capacity utilization and what that might do to prices,
this tells us that labor utilization is
low and going down.
What that tells us, is that the price of
labor is going down.
And you've probably read multiple news reports already
about how this is the first time furloughs are big.
People are actually taking wage cuts.
So you're already seeing deflation in wages.
And when so much of our economy, and even the basket
of goods in the CPI-- and I'll do another video on that --is
service based, if you're seeing deflation in wages,
that's another data point that tells you, at least in the
medium term, we're probably going to see further deflation in prices as a whole.
See you in the next video.

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