Why the Future Depends on Today’s Discouraged Workers

The economy, the stock market and even the November elections will largely be determined by a group of people who are almost invisible to forecasters.

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Economists, investment advisors and political strategists are closely watching the unemployment rate. But few commentators acknowledge just how faulty the employment statistics are. One key problem is that a crucial group of people can’t be tracked and measured. These are the so-called discouraged workers, who have given up looking for employment. They are the economic equivalent of astrophysicists’ dark matter – the particles scattered throughout the universe that can’t be seen but have enough mass to alter the course of everything we can see.

There have always been discouraged workers, of course, but the recent recession has multiplied their number. And it has enlarged a related category, as well, those who could be described as disgruntled workers – the underemployed, who have been forced to accept jobs with fewer hours or lower pay than they would like. These two groups aren’t counted in the unemployment rate either because they aren’t listed as looking for work or because they are listed as already working.

The uncounted include people who lost their jobs and spent months unsuccessfully looking for new ones until they finally gave up; women, and some men, who would like to work but have decided it makes more financial sense to stay home and care for kids instead; and teenagers who have not been able to find entry-level jobs.  There are also older middle managers who have had to take early retirement even though they would prefer to continue working. To those groups, add anyone who lost a job and ended up having to accept a new one that was worse.

And why do these people matter so much? As I see it, it breaks down into three basic reasons:

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They make the employment figures look better than they really are. You might think that the unemployment rate reflects fairly straightforward surveys, but actually the data are heavily adjusted for statistical reasons ranging from new census numbers to the seasonal effects of bad weather. Discouraged workers can’t be counted directly at all, but have to be inferred from the population statistics. The Congressional Budget Office estimates that the increase in the number of discouraged workers since 2007 is equivalent to adding 1.25 percentage points to the unemployment rate (which would thus rise to 9.5%). And if the underemployed are counted as well, you are talking about double-digit unemployment.

They represent some of the most serious structural problems in the economy — and one of the greatest obstacles to a healthy recovery. Unemployment does not hurt everyone equally. Some lose their jobs when the economy turns down, but are hired back for similar work once things pick up again. Then there are those whose lives are permanently altered. Either they are out of work so long that they become unemployable, or they miss a window of opportunity and never really get started again. Last week’s employment report shows that nearly 43% of the unemployed have been out of work for more than 27 weeks.

In every business cycle, the strength and length of the rebound following a recession depends on how much underused capacity can be put back to work. Stimulus may gin up growth among the easily re-employed. But it won’t do much for those who have become unemployable or who lack the skills needed for high-paying jobs. Cranking up the economic stimulus beyond a certain point will only push up wages for those already working and cause inflation that will make the economy stall. To enable the economy to grow for a long time, it is necessary to find ways of including people who otherwise might be condemned to permanent joblessness or employment at a very low level.

The November elections will likely be decided by swing states that have lots of underemployed and discouraged workers. In national polls of all the possible head-to-head matchups, President Obama is running slightly ahead of Republican challengers. But when you look at state-by-state figures, the President is as much as 55 electoral votes short of what he will need for re-election (although these numbers could shift quickly if the economy keeps improving). The reason is that key states – including Florida, Georgia, North Carolina and Nevada – have unemployment above 9.5%. And conditions are also bad in parts of Western Pennsylvania and Eastern Ohio that include voters who could tip those swing states. These are also the places that are most likely to have large number of underemployed and discouraged workers.

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The stock market is up nearly 20% since October, and statistics show that business conditions have been improving recently. But the U.S. economy could start to slow again, especially if a rash of European countries default on their debt or austerity measures there set off a global recession.  The Congressional Budget Office projects that unemployment will rise as high as 8.9% later this year and top 9% in 2013. If that happens, the position of underemployed and discouraged workers will become more deeply entrenched. Their negative impact on America’s future will only become more powerful the longer bad times continue.