Why is 20 % of the American Workforce Unemployed?

Posted by John Slater on September 25, 2012

Originally Published at Global Economic Intersection under the title Buddy Can You Spare a Dime?

Written by , Capital Matters

Republicans are heartless monsters who have no compassion for the victims of a financial crash they caused by manipulating Wall Street.”

Democrats are committed to destroy the American system by redistributing the hard-earned products and services of America’s businesses to shiftless moochers.”


Wow, are we making progress in the current political debate!












Follow up:

Cyclical or Structural?

For economists the discussion revolves around a more civil discourse on whether the current high level of unemployment results from a severe cyclical downturn or from a structural change in the American economy. The Federal Reserve has forcefully adopted the cyclical downturn mantra, committing $500 billion per year to the assumption that, with more financial stimulus, the jobs will come back.

Buffalo Springfield’s insight from the 1960s is still valid:

I think it’s time we stop, hey, what’s that sound?
Everybody look what’s going down
What a field day for the heat
A thousand people in the street
Singing songs and carrying signs
Mostly say, hooray for our side

A Big Bet With Millions of Human Poker Chips

We are in the process of making an enormous bet with the American economy. The risks are not trivial: inflation, deflation, financial and social collapse are just a few. Yet what if this bet is being made based upon a misunderstanding of the problem with which we are faced.

Steven Hansen recently produced a rather depressing chart showing that, despite a period of steady economic recovery, civilian employment in relation to population flatlined beginning in late 2009, after a very sharp drop from 63% to 58% during the financial crisis.


The Robot Revolution

The American economy has entered into a new era, a robot revolution that will dramatically transform the nature of work. Most likely we will witness something akin to Moore’s law as increasingly powerful physical robots and automated service systems take over former blue-collar and white-collar jobs throughout the American economy. While there will be beneficial effects from this transformation, including a resurgence of manufacturing in North America, we have only begun to see the amount of dislocation that this transformation will ultimately bring to the American workforce.

We’re now thirty years into the personal computing era, less than twenty years into the Internet Age and only five years into the iPhone era. As with most new technologies, it took several decades for digital computing to get its footing and begin to impact economic productivity in a noticeable way. Today no one would doubt that computerized systems are replacing human labor at an increasing rate, as activities ranging from utility meter reading to drafting of legal documents that formerly employed tens or hundreds of thousands of workers are rapidly being automated.

We’ve only begun scratching the surface. In the next few years millions of jobs will be lost as SaaS (software as a service) systems replace the need for human interaction to address routine tasks such as license plate renewals, provision of banking services, and production delivery of digital information formerly incorporated in physical media such as books, newspapers and magazines. Look around your industry. If you don’t know how this trend is going to impact you, you’re in trouble.


According to the Bureau of Labor Statistics, over the past decade we have seen labor productivity grow at a 2.5% annual rate. At that rate in 28 years we will be able to produce the same amount of goods and services as we do today with only 50% of the current workforce. Assuming that the acceleration of the current efficiency gains from the digital revolution continue (and the pace is likely to accelerate as robots increasingly replace human workers in fields ranging from manufacturing to home healthcare services), it is not a stretch to assume we could reach a 4% annual rate of productivity improvement within the next few years. At that rate our current output will be generated by half the workers we employ today in only 18 years. That should be good news for those panicked over our ability to support a large increase in retired baby boomers over the next 2 decades, but it also implies that an increasing portion of the American population may not be able to find jobs in that future economy unless there is a radical change in our definition of work.

Buddy Can You Spare a Dime?

America made a decision beginning in the 1930s that it would never again allow starvation and homelessness to exist on a mass scale in our nation. Beware what you wish for. I doubt that many Tea Party Republicans are prepared to welcome former federal food stamp (SNAP) beneficiaries on their doorsteps begging for food following the cutoff of benefits they are currently demanding.

We have a serious unemployment problem in America.


The chart above shows 3 measures of unemployment:

  • U-3 (in red) is the measure most popular with politicians because it minimizes the apparent problem. U-3 shows U. S. unemployment peaking at 10% in 2009 and heading down since to a current level around 8%. Unfortunately U-3 is increasingly misleading as it depends upon defining away a large amount of the nation’s unemployment problem by excluding discouraged workers and those working part-time who would like to work full-time.
  • U 6 (in gray) is a more realistic measure that includes part-time workers and short-term discouraged workers.
  • The Shadow Government Statistics alternative unemployment rate includes a measure of long-term discouraged workers as well. Based on this gauge, we are faced with an unemployment problem in the U.S. fully comparable with that of the Great Depression.

None of these measures fully account for PhDs waiting tables because they cannot find jobs in the fields for which they were trained. Whatever your political bent, it is certainly not a stretch that 20% of the potential US workforce is not currently productively employed at the level for which it has been trained. This is roughly double the comparable rate prior to the economic crash.

Wasting Away

To date the United States has elected not to address this problem and, as a result, our welfare expenditures have exploded upward. As a result we are now wasting the productive efforts of 10% of the American population. This is not the American Way and it is a national tragedy of immense proportions. The problem will only get worse as increasing numbers of American workers find themselves without work as a result of the accelerating growth of digital systems and robotic alternatives to human labor. Neither political party has even begun to address this issue.

If we were to poll everyone in America with the question “ can you identify ten unmet needs in our society”, I would hazard a guess that every respondent would be able to identify at least that number. Of course your list might be different from mine, which would include things like improving the parks, developing domestic energy production, improving preschool education, supporting scientific research and exploring undersea resources. Yours might include workforce retraining, better police protection, support for the Symphony, fixing the potholes and universal broadband access. Every list would be different, but everyone would agree that there are many things that can be done to improve life in our nation.

I would posit that neither the welfare state solutions to which we have slowly been drifting, nor our current market economy appear to be providing an answer to this conundrum. We have significant excess productive resources in our societies that are not being utilized to fulfill significant needs they can be easily identified. As productivity gains accelerate, this gap will widen, placing increasing strains on the social fabric. Our greatest challenge is to find ways to marshal these unused resources in a productive way. The wasted output of 10% of the American population represents a significant portion of the current federal deficit, which is poisoning our political discourse and threatens our nation’s financial stability.

Where is the National Will?

In the 1930s the U. S. addressed a similar issue through federally funded make work programs such as the Works Progress Administration and the Civilian Conservation Corps. I am a libertarian at heart and no fan of government management of economic activity, which invariably leads to massive inefficiencies and corruption so this is not a plea to bring back the WPA. What is missing today that the U. S. did have in the 1930’s is a national will to come together and solve the problem.

The ultimate solution to the unemployment issues of the 1930’s was World War II. As a result of the war effort, America was able to galvanize around a single effort and marshal all its productive resources to defeat the Axis powers. Hopefully we can find a common purpose sufficient to bring Americans together without resorting to war.

Almost certainly this is a problem that can only be solved through the combined efforts of government and the private sector. We have many good examples from American history of how this might work, such as the building of national transportation networks, including the railroads, airports and interstate highways, which would have only been possible with government intervention. Similarly national communications networks, starting with the post office, telegraph, wireless and cable television networks and more recently the Internet would have been impossible to create without governmental support and investment.

Perhaps the Space Race provides a model as well. Almost every American in the 1960’s could get behind the dream of a man on the moon. As a result the U. S. brought together the best scientific talent of the day, spent a large percentage of our national budget in doing so and in the process invented the U. S. technology industry that has served as the wellspring of our global economic dominance for the past twenty years.

What’s On Your List?

As a result of each of these societal investments private enterprise has developed new, formerly undreamed of, industries that today employ tens of millions of Americans. I do not doubt that similar opportunities exist today. What we do not seem to have is the vision in our public leadership to identify the opportunities and divert public resources currently being squandered in providing welfare support rather than jobs to tens of millions of Americans, most of whom would rather be working to productively solve the myriad problems that our nation faces.

It looks like we will have to solve this one ourselves. So what’s on your list?

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