What gives with these great state jobless numbers? – Twin Cities

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It’s OK! Even modest Minnesotans can say it! We’re special! We’re really special!

Edward Lotterman

With an unemployment rate of 1.8% for June, Minnesota not only has the lowest such rate in the nation and in our history, but the lowest rate ever chalked up by any state in any year since the Bureau of Labor Statistics started tabulating the metric in 1913.

Huh?

Didn’t another government agency just announce that Gross Domestic Product, the value of all new U.S. output, had dropped April through June? Wasn’t that the second quarterly drop in a row? Isn’t that a recession?

So who’s getting all these jobs? Are they all people who never get scheduled for more than 18 hours per week?

And didn’t surveys taken in early June indicate a large majority of Americans think we’re already in recession?

And what about inflation? Didn’t we just hear that it’s rising at the fastest clip in 41 years? Isn’t that why the Federal Reserve is tightening the money supply to aggressively raise interest rates, thus risking said recession? So why did the stock market go up three days in a row last week because of the Fed increase?

Weren’t those of us who took college econ taught that there is a clear tradeoff between inflation and unemployment — one goes up, the other goes down? It’s so ingrained in our discipline that it can be expressed in a named graph one might have to draw on the final exam.

True, all true. The economy is out of its usual patterns, even for economists familiar with fine print surrounding sundry indicators like consumer inflation and GDP.

Moreover, while I don’t doubt the accuracy of these unemployment numbers — they’ve been calculated the same way for decades — there isn’t the same “tone and feel” to labor markets that prevailed back in the 1990s when inflation was low and employment high.

For most of the 1990s, I drafted the Minneapolis Fed’s section of the “Beige Book” report on current economic conditions compiled before all regular policy meetings. Minneapolis now has all of these available online. Search “Minneapolis Beige Book Archive.”

Looking back through the “labor markets” section in each report from 1996 to 1999, what I remembered was true: The unemployment rate is lower now, but news reports of employers desperate for workers were much more common back then. And upward pressure on wages was more common then. So what gives?

First, any single economic indicator is narrowly defined and has limitations. To understand what is going on with jobs often requires going past the headline “unemployment rate” of 1.8% in June. This number only reflects the percentage of people willing to work who don’t have jobs despite looking for them.

This hinges on the “labor force participation rate” — the proportion of the overall population past their 16th birthday who want to work. For decades, Minnesota has been at or near the top in this measure. It still is, but the rate has dropped post-COVID. So, not counted in the June 1.8% figure are people who are not working and not seeking work. These are counted as “out of the labor force” rather than “unemployed.” So, even with no increase in employed people, the unemployment rate can drop.

For a detailed explanation of this and related factors, search: “EPI Kamper Putting Minnesota’s record-low unemployment numbers in context.”

Another factor is that the “headline” unemployment rate per se does not indicate the mix of full-time versus part-time jobs. One person working 40 hours per week plus four hours of overtime is one job. Two people each scheduled for 16 hours a week, plus another person getting 12 hours are three jobs. So more jobs tallied for the same amount of hours worked — but the single person working the 44-hour week is no doubt doing better financially than the other three.

“Anecdotal evidence” showing that people getting far fewer hours than wanted is increasingly common. The fine print in the monthly Labor Situation report picks up some of this, but it takes time to tease out. Ditto for traditional employees versus contractors versus occasional gigs. Traditional methods for picking up “self-employment” lag real-world realities. These are no longer just farmers, plumbers and owner-operator truckers.

There are other reasons why overall indicators may appear contradictory. One is lags. Federal Reserve tightening will be a factor in reducing employment, but effects of monetary policy changes take a long time to kick in, often six to 18 months. So do changes in Congressionally enacted spending or regulatory legislation. If Democrats think anything Congress or the Fed is doing now will affect inflation or jobless rates by November, they are delusional. But the effects eventually do set in.

Similarly, just as a single number for unemployment or changes in output gives a very incomplete picture, so does the single interest rate that the Fed targets. Moreover, even interest rates measured more broadly while ignoring money supply figures can mislead.

In reaction to COVID, the Fed increased the M2 money supply some 40 percent from March 2020, to March 2022. This measures all currency in circulation plus checking, savings and money-market deposits. That move was nearly three times the average increase of all 24-month spans from 1959 through 2019.

By September 2020, the “monetary base,” a narrower measure of money, was up 98 percent in 24 months. That has tapered back somewhat. It is now only 50 percent higher than when the first COVID case showed up. But despite the 1.5 percentage point increase in the Fed’s target interest rate over its past two meetings, enormous amounts of money still float around. Results on price levels, employment and output would be months later even if that could be sopped up rapidly.

There also is public confusion about perceptions, definitions and relationships. Everyone who buys gas or food senses price rises. Those in stable jobs are much less sensitive to labor market improvements and declines.

Many people who took econ courses or who read financial news have been told that inflation and unemployment are polar opposites, as stated above, that a reduction in one means an increase in the other. That was the dominant belief in economics for decades. But research since the 1970s showed that was not necessarily true. This work explained why we had simultaneous high inflation and high unemployment, or “stagflation,” in the 1970s. But that polar view still is common in many media articles. On the other hand, a high proportion of the population, generally with lower education levels, think from reading headlines that “inflation” and “recession” are synonyms, inherently parts of the same thing.

We are living through a very complex economic time in history. Don’t be surprised that confusion abounds, even among seasoned economists.

St. Paul economist and writer Edward Lotterman can be reached at [email protected]



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