On Unemployment, 7.8 Percent of What?

Jobs will be created by investments from private companies, not from government bureaucrats who have never held a job in the private sector.

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Ronald Lazof is managing director of Prism Advisers, LLC and a Job Creators Alliance member.

The Bureau of Labor Statistics' September jobs report appeared to take America by surprise and provide a glimmer of hope while the economy has continued to slow. The published unemployment rate is now down from 8.1 percent in August to 7.8 percent, an unexpected 0.3 percentage-point drop. Surely this must be great news for America.

But is it?

For several months now, while the U.S. economy continued to experience its weakest recovery on record, a declining labor force participation rate pushed the unemployment rate downward, all without strong gains in the number of jobs created. How does this happen? I like the phrase used by the president in the most recent debate: "It's math. It's arithmetic." As more people drop out of the labor force, or give up looking for work, they're no longer counted as being unemployed. It's really that simple. Remember the unemployment rate is nothing more than a percentage and the easiest way to reduce a percentage is to decrease the denominator of the fraction used in its calculation.

[See a collection of political cartoons on the economy.]

However, something changed on the most recent jobs report, the labor force participation rate rose, i.e. more people started looking for work, all while the unemployment rate continued to fall. This has led to an immense amount of confusion as to where the economy currently stands, and where it's going.

Skeptics abound as to the real cause of the drop in unemployment. One very troubling explanation may be attributed to political cronyism. A recent Fox News story titled "Plant that got $150M in taxpayer money to make Volt batteries furloughs workers" paints a clear picture. In 2010 LG Chem, a Holland, Mich. company,  received an investment of over $150 million in taxpayer funds from the Obama administration to produce electric car batteries. In President Obama's words, LG Chem was "leading the way in showing how manufacturing jobs are coming right back here to the United States of America." The troubling thing is, is that after two years of production the company has yet to sell a battery. The batteries are being designed for electric vehicles such as the new Chevy Volt. There's just one major problem—nobody wants to buy them. There's simply no demand for this type of vehicle in the market. This "unexpected" slowdown has caused plant workers to go on furloughs. Simply put, they are being asked to work part-time.  

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The rise in part-time workers was one of the main drivers for the fall in the September unemployment rate. The number of part-time workers who would rather be full-time increased by 580,000. That's almost two-thirds of the increase in the number of people newly employed in September, and is larger than the drop in the number of workers unemployed. The real unemployment rate, judged by the U-6 rate, did not change and remains at an abysmal 14.7 percent. This goes to show that the unemployment problem cannot be solved by simply throwing money at companies that one person, or an entire administration, would enjoy to see succeed. What America needs is bipartisan action from Washington that produces a real fix for what ails us. The upcoming fiscal cliff poses a challenge that only lawmakers can fix. Let's have Washington focus on its business, so that the private sector (all of us) can focus on ours.  

Businesses, both large and small, need private investment, not investments made by government bureaucrats that have never held jobs in the private sector. LG Chem serves as an example that government intervention does not promise prosperity, and in fact, can backfire at the cost of taxpayer dollars. True job creation will only come to fruition when policymakers and regulators step aside and allow businesses to speak for themselves through their actions in the marketplace.

  • Read Chad Stone: To Avoid Fiscal Cliff, Let Bush Tax Cuts Expire
  • Read Keith Hall: Two Surveys, Two Different Stories in Jobs Report
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