The December drop in unemployment: the rest of the story

By Kevin Price

Brian Sullivan of the Fox Business Network was in great form recently when he made one of his frequent visits to my show, the Price of Business. I like to think of myself as a consequential thinker. To look at the intent of policy and to fail to size up the results tends to be disastrous. Sullivan tends to think the same way when he talks about the impact public policy has on an economy.

On my program we turned to the subject of the "substantial" drop in unemployment in December of 2010. This was big news to the Obama administration. ABC News reports that "President Obama today called the job numbers released this morning 'positive news' but said there still is work to be done on the economy. The numbers showed a drop in the nation's unemployment rate to 9.4 percent in December." To say there "still is work to be done" is an under statement, since this shows roughly one out of ten still out of work.

I have been speculating the drop in unemployment as reflective of the fact that there was a change in Congress in the elections one month before. Maybe, but Sullivan suggested a different theory both on my show and in his Fox Business column. In his recent column, Sullivan cuts to the chase: "Is the real reason the unemployment rate dropped because jobless benefits stopped?" He quotes Paul Dales of Capital Economics in Canada, stating "it is possible that the fall in the labour force is due to the long-term unemployed being more willing to admit they are not actively looking for work after their extended benefits expired last month. The unemployment rate may rebound in January, particularly after Congress agreed to reinstate those extended benefits." This is a profoundly simple explanation. This is a viewpoint that makes perfect sense, but is not receiving much air time in the mainstream media.

Sullivan goes on to point out some thoughts of Dan Greenhaus, who writes in his morning note that "'structural unemployment' is becoming a huge problem." Greenhaus notes: "Perhaps most troublesome is the data on the long term unemployed. As a percentage of total unemployed persons, people unemployed for six months or more make up a whopping 44%+ of the group and for the month of December, this was the only duration that did not see a drop. Given the argument that the longer one is unemployed the less employable they become, this runs the risk of becoming a real structural problem for the economy."

We are quick to dismiss "old sayings,' simply because they are "old." We keep repeating them, however, because they often reflect truth. One of my favorites is, "The more you tax something, the less you get of it; the more you subsidize something, the more you get of it." Our tax rates on wealth creation have been approaching all time highs. In fact, without the extension of the Bush tax cuts, our rates were about to become the highest of any industrialized country in the world. Meanwhile, we have been subsidizing unemployment at a historically high rate. There were two years of unemployment benefits. These benefits compete against many jobs that were available.

All this suggests that Brian Sullivan's conclusion may be true, that, now that the Congress has restored unemployment benefits, rates may go up again. Why? Because they will be paid, again to be recognized as unemployed. This should provide excellent timing for policy makers to reconsider the way they help those who are chronically unemployed.

© Kevin Price