Growing the US Economy - I The Obama First Term Record

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

Topic
Summary Unemployment data for Obamas first term The Employment Gap Historical Data for the Employment Gap Conclusions

Page No.
1 2 4 7 12

1. Summary
Instead of the familiar unemployment rate, it is suggested that the focus should be on the employment gap, the number of jobs needed by the economy, or the total number of unemployed. The number of unemployed, lets denote this by the symbol U, is the difference between the labor force, lets call it L, and the number of employed, E. Thus, U = (L E). This is the basic mathematical equation that governs all unemployment studies. The familiar unemployment rate is the ratio U/L = 1 (E/L), expressed as percentage by multiplying by 100. The labor force L always increases over time due to the natural increase in the population. However, a study of the historical data (for the period 1980-2012, since President Reagan took office) shows that the labor force decreased for the first time during the Obama first term (which can be attributed to the total financial meltdown of 2008). A simple diagrammatic representation to study the employment data compiled by the Bureau of Labor Statistics is also suggested here which also takes into account the natural increase in the population. Three distinctly different periods, distinguished by the slope of E-L graph, are observed. This slope E/L, is a measure of the efficiency of job creation. This, in turn, is related to the familiar unemployment rate. However, the focus on the employment gap, rather than the unemployment rate, helps a better analysis of the efficiency of the job creation by the economy. Page | 1

 2. Unemployment data for Obamas first term

Dear All: I just posted the following message on my Facebook page, along with the table and the graph given here.

Table 1: The US Unemployment Statistics: Obama First Term

Year Population Labor force in 000s 2009 2010 2011 2012 235,801 237,830 239,168 243,284 in 000s x 154,142 153,889 153,617 154,975 Unemployed in 000s Y 14,265 14,825 13,747 12,506 Percent Unemployed 100*(y/x) 9.3 9.6 8.9 8.1 Change in labor force delta x (x) -253 -272 1,358 Change in unemployed delta y (y) 560 -1,078 -1,241

Source: Bureau of Labor Statistics, http://www.bls.gov/web/empsit/cpseea01.pdf Take a look at the data I was able to obtain from the Bureau of Labor Statistics (see link above). Today, in his SOTU 2013 (State of the Union) address, President Obama is widely expected to talk about his plans for growing the US economy. The table here gives the record thus far. Look beyond the unemployment rate (fifth column), which is the ratio of number of unemployed (y) and the number in the labor force (x), converted to a percent. The number of unemployed went up between 2009 and 2010 and has since decreased. But, look more carefully also at the number of people in the labor force (x). The labor force has increased between 2009 and 2012. This is partly due to the natural increase in the population (first column) and the entry of fresh high school and college graduates into the labor force. But, with high unemployment rates that we have witnessed, the change in the labor force is also due to what is happening with those who lost their jobs during the financial crisis of 2008 sent the economy into a tailspin.

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Number Unemployed, y [in 000s]

17,000 16,000

15,000
14,000 13,000 12,000 11,000 152,000

153,000

154,000

155,000

156,000

Labor force, x [in 000s]

Figure 1: Graphical representation of the unemployment data during the Obama first term (2009-2012) compiled in Table 1. While the number of unemployed has decreased the labor force has also increased. The ratio y/x, which is the unemployment rate, has therefore decreased. If the (x, y) data points fall on a straight line with a negative slope, the ratio y/x will decrease as x increases. This is a mathematical property of a straight line. Hence, the claims of decreasing unemployment rates must be investigated more carefully.

The labor force shrank dramatically in the first year of the Obama presidency since discouraged workers left the labor force, reducing the denominator x and thus increasing the unemployment rate. Some of these discouraged workers are now returning to the labor force and looking for jobs. So, we have to look carefully at the changes in the labor force (called delta x, mathematically) and how it is related to the changes in the number of unemployed (called delta y). This is revealed in the graph prepared in Figure 1 here. The data for 2011 was clearly an exception and falls off the trend line seen in this graph. Page | 3

Amazing isn't it? Has the US economy really improved? Look at the numbers and think about it some more -- it has nothing to do with being a Democrat or a Republican or a Teapartier. This is about you and me and our children and retiring parents and about our future. Has the US economy really improved? Has the number of unemployed really decreased relative to the changes in the labor force? Are "good jobs", which means jobs that allow a young person to earn a living wage and start a family, being produced? That is what the US economy did 100 years ago. Even a high school graduate, with no college education, had a "good job" as defined above. A young family could support itself on a single income. That should be the standard by which we judge the performance of the US economy. That is what we mean by the American Dream! Conment: Vj Laxmanan The data for 2012, see last line of table, says it all. The number of unemployed decreased by 1,241,000 but the labor force increased by 1,358,000. In other words, the number of jobs created (which decreased the number of unemployed) is much less than the additional number of people who entered the labor force. I need NOT say anymore. These are supposed to be official numbers coming from the US government. Draw your own conclusions now. Posted on February 12, 2013 at ~ 6:48 AM.

3. The Employment Gap Number of Jobs Needed

Instead of the unemployment rate, let us look at the employment gap, i.e., the number of jobs needed by the economy. If everyone in the labor force has a job, the gap will be zero, i.e., everyone who is looking for a job is able to find a job. The gap, (L E) is just the difference between the labor force (x or L) and the number who are already employed, E, i.e., the quantity E = (x y) in Table 1. So, Page | 4

the gap is really nothing more than the number of unemployed y = U. Table 2 summarizes the data for the 2001-2012. The current employment gap U equals (154,975 142,469) = 12,506 thousands, or about 12.5 million (see last row in Tables 1 and 2). This is the additional jobs that the economy needs in order to achieve the utopian goal of 100% employment, or 0% unemployment rate, where everyone who is looking for a job is able to find a job.

Table 2: The Employment Gap for the US Economy

Year Population in 000s Labor force, L in 000s Employed, E in 000s Unemployed, U in 000s The Employment Gap in 000s y 6,801 8,378 8,774 8,149 7,591 7,001 7,078 8,924 14,265 14,825 13,747 12,506

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

215,092 217,570 221,168 223,357 226,082 228,815 231,867 233,788 235,801 237,830 239,168 243,284

x 143,734 144,863 146,510 147,401 149,320 151,428 153,124 154,287 154,142 153,889 153,617 154,975

x-y 136,933 136,485 137,736 139,252 141,729 144,427 146,046 145,363 139,877 139,064 139,870 142,469

If each new employed person contributes an average of about $5,000 in income taxes, the additional revenues would be about $62.5 billion per year, which means additional payroll related taxes of $1.25 trillion over the next ten years WITHOUT THE NEED FOR ANY INCREASE IN THE TAX RATES. This, to me at least, is what growing the US economy means. If we can do this for the next few decades, the US national debt (now at $16.433 Trillion) will automatically magically vanish. The unemployment gap is illustrated in Figure 2. The solid line is the line for full employment. The gap is the vertical separation Page | 5

between the data points on this graph and the ideal line. This is the number of unemployed the additional employees who could all be contributing payroll taxes and thus help reduce the national debt and the annual deficits.

Number Employed, (x- y) [in 000s]

155,000 152,500 150,000 147,500 145,000 142,500 140,000 137,500

Employment Gap Jobs Needed Vertical Separation

Full employment line

135,000 135,000

140,000

145,000

150,000

155,000

160,000

Labor force, x [in 000s]

Figure 2: Graphical representation of the unemployment data during the Bush-II and Obama first term (2001-2012). Instead of the unemployment rate, we focus here on the employment gap, or the additional jobs needed, i.e., the number of unemployed. This is the vertical separation of the data point from the full employment line. The red diamonds are the data for the Bush-II (younger George Bush years). The blue dots are the data for the Obama first term. The current gap is 12.5 million and this is the number of jobs needed. If the gap is closed, an additional $1.25 trillion in pay roll taxes can be realized over the next decade (an average of $5000 in payroll taxes per new job) without the need for any INCREASE IN TAX RATES.

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 4. The Historical Employment Gap Number of Jobs Needed

Number Employed, (x- y) [in 000s]
160,000 150,000 140,000 130,000 120,000 110,000 100,000 90,000 90,000 100,000 110,000 120,000 130,000 140,000 150,000 160,000

Full employment line, E = L = x

Labor force, x [in 000s]

Figure 3: Graphical representation of the unemployment data for 1980-2012: from the Reagan-Bush era (1981-1993) to the Obama first term (2001-2012). One major unit on this graph (vertical separation from full employment line) represents an employment gapof 10 million. The employment gap was a little more than 10 million as the Carter years gave way to the Reagan years (1980-1982) and then started closing. It has increased again since the financial crisis of 2008 and has been the highest ever (after allowing for population growth).

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Table 3: The Employment Gap for the US Economy

Year Population in 000s Labor force, L in 000s Employed, E in 000s Unemployed, U in 000s The Employment Gap 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

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

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

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

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

This idea of an employment gap, instead of the familiar unemployment rate, illustrated here graphically in Figures 2 and 3, also takes into account the natural increase in the population and is, perhaps, a more accurate and simple measure of what we need to focus on to grow the US economy.

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Employed, E, or Labor force, L [in 000s]

160,000

150,000

Labor Force, x = L
140,000

130,000

Employed, E
120,000

110,000

100,000

90,000 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016

Time, t [in calendar years]

Figure 4: Graphical representation of the unemployment data for 1980-2012: from the Reagan-Bush era (1981-1993) to the Obama first term (2009-2012). The labor force (higher number, blue diamonds) has been increasing as a function of time t, in calendar years. The number of employed (lower number, red squares) has also been increasing. One major unit on this graph, the vertical separation between labor force and the number of employed, represents an employment gap of 10 million. The employment gap was a little more than 10 million as the Carter years gave way to the Reagan years (1980-1982) and then started closing. It has increased again since the financial crisis of 2008 and has been the highest ever (after allowing for population growth). It is noteworthy that the number of employed, E (lower numbers, red squares), did not increase significantly between 2000-2002 and the labor force (higher numbers, blue diamonds) shrank, for the first time, between 2008-2011. Page | 9

Number Employed, E = (x- y) [in 000s]

160,000

155,000

150,000

Full Employment line E=x=L

145,000

140,000

135,000

E = 1.361x 61,593 Bush (2001-2009)

135,000 140,000 145,000

E = 3.135x 343,433 Obama 1st term

150,000 155,000 160,000

130,000 130,000

Labor force, x [in 000s]

Figure 5: The unemployment data for the Bush-II years (2001-2009) and the Obama first term (2009-2012) are reconsidered here; see also Figure 2. The solid line is the full employment line with the mathematical equation E = x. The upward sloping dashed line with the equation E = mx + b passes through or very close through 6 of the 8 data points for the Bush-II years. The slope m and the intercept b can be determined using linear regression analysis. However, we take a simpler approach here by considering the data for the years 2003 and 2006. This yields the equation E = 1.361x 61,593. The slope m = 1.361 > 1 which means that the number of employed is increasing faster than the labor force is increasing. Since the unemployed y = (x E) = (1 - m)x - b, we deduce y = -0.361x + 61,593. Hence, the graph of unemployed y versus the labor force x has a negative slope (see Figure 1). Also, it is now clear why the traditional measure of economic performance, the unemployment rate y/x = (1 m) - (b/x) = -0.361 + (61,593/x) leads to the conclusion of a decreasing unemployment rate, even as the labor force increases. (The fractional value for y/x determined from this equation is converted to a percentage.) Page | 10

Number Employed, E = (x- y) [in 000s]

160,000

E = 1.361x 61,593
150,000

140,000

130,000

120,000

E = 1.271x 44,307
110,000

100,000

E = 1.19x 30,665

90,000 90,000 100,000 110,000 120,000 130,000 140,000 150,000 160,000

Labor force, x [in 000s]

Figure 6: The unemployment data for years (1980-2012) is re reconsidered here. The solid line is the full employment line with the mathematical equation E = x. Three different regimes can be distinguished with slightly different values of the slopes m and intercept b. For the first period, E = 1.19x 30,665 with m and b being determined from the data for 1983 and 1989. For the second period, E = 1.271x 44,307 with m and b being determined from the data for 1992 and 2000. This means that the rate at which the economy was producing jobs (as quantified now by the slope m of the graph) was increasing over the years, as the labor force increased. After the financial crisis of 2008, which lead a sudden and catastrophic increase in the unemployment levels (the number of employed E has dropped precipitously, see Figure 5, the rate of increase of employment levels is again quite high, as seen by the steep slope suggested by three data points for the Obama first term (red triangles here, blue dots in Figure 5). However, the US economy is still far from full recovery as seen by the high employment gap. Page | 11

 5. Conclusions
1. The employment gap, or the number of unemployed workers U, in an economy may be defined as the difference between the labor force L and the number of employed E. Thus, U = (L E). This is the basic mathematical equation that governs all unemployment studies. 2. The familiar unemployment rate is the ratio U/L = 1 (E/L) converted to a percentage. 3. It is suggested here that instead of the unemployment rate U/L, we should focus on the employment gap, i.e., the total number of unemployed workers, U. 4. A simple and useful diagrammatic representation of the employment gap, which also takes into account the natural increase in the labor force (due to the natural increase in the population, over time) is suggested here, in the form of the E-L graphs, the graph of the number employed as a function of the labor force L. On this E-L diagram, we see three linear regimes with slightly different slopes, if we consider the historical employment data of the period 1980-2012, i.e., since President Reagan took office. 5. The slope of the E-L graph is a measure of the efficiency of job creation. It appears that the changes in the slope (denoted here by the symbol m) of the E-L graph are accompanied by a short period where the number of employed E is essentially flat, even with increase in the labor force (sideways movement on the E-L graph). A shrinking labor force, negative slope for the E-L graph, was observed, for the first time, during the first Obama term, and can be attributed to the financial meltdown of 2008 which lead to long term unemployed leaving the labor force.
See also my Facebook Post on February 13, 2013. https://www.facebook.com/vj.laxmanan https://www.facebook.com/photo.php?fbid=4851921934450&set=a.4851921094429.2167039.118905883 0&type=1&theater

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