Unemployment, Now New & Improved!
This is a transcription of the Jeffeffect podcast from April 12th, 2020.
Understanding Transitional, Temporary, & Structural Unemployment & Why It Matters to You Right Now
Welcome back to The Jeff Effect. This is, of course, Jeff, and I'm still here and evidently so are you.
[0:30] We're going to talk about unemployment, new and improved for a modern man. Here's the thing, the world is quaking in its shoes right now. We are all figuring this stuff out and it feels like the world's falling apart.
Hint, pro tip … it's not.
We're going to be okay in the long run. Unemployment numbers, we're going to see a lot of them. I'm going to let the medical doctors and the researchers talk about, for now - for the time being, let them keep talking about hospital rates and infection rates and stuff of that nature.
I'm going to talk right now about the unemployment rate because ultimately on the other side of this, we have an economy we’ve got to save, and people are going to be screaming about the unemployment rate and GDP and stuff like that. They’re going to throw numbers around. The numbers are meaningless, and they're going to do strange comparisons between one number or one time period in history and another, and go back and forth.
That information is just not helpful.
I want to be helpful, and I came to a realization. I was going to do some different content today, but I came to a realization. When it comes to the unemployment issue right now, I'm probably the best guy in the world to help you understand unemployment in the current situation … at least one of them.
I’ll Be You’re Huckleberry
[1:58] And I'm not just whistling in the wind here. First things first, I’m 55 years old. I've been unemployed more than once. I know what that feels like at most stages in my life. Number two, I have a deep interest in education in macroeconomics. Number three, I love you guys. It sounds kind of cheesy and shallow, but it's absolutely true. I love you and I want you to be happy and understand what's going on. Four, and this is probably the most important, I'm not trying to sell you anything - no products, I'm not saying buy my shirts, I'm not selling you any services, you're not hearing any ads or seeing any ads. There's no revenue opportunity for me in this. I'm not even trying to tell you to vote one way or another. There's no ulterior motive. There's no hidden agenda. I just want you to understand what's going on, and by understanding you can make better decisions for yourself.
If you're laid off now or fired or you have no idea what you're going to do, I'm here for you, and I think you need understand what's going on in the world. Let’s start with this, as a rule, economists - I have a few favorite economists. I love economists. I think like an economist, but economists are really, really good at understanding complex topics and making them even harder to understand and communicate. They do you no good. We haven't had a good communication-based economist in a generation. And so, all my economics brothers and sisters out there — I love you, too, but we’ve got to get better at describing not just what these topics are and what makes them happen, but we need to be able to get the ideas and why it matters and the important concepts. We need to deliver that in a way people can get. That's what I'm trying to do here. You want to know what's going to happen to you and the job market, and if you're going to be okay and if you're going to be able to get a job once all this thing is over. We’re not going to talk about the deep research and analytics of unemployment. It's just not helpful to you. We're not going to tell you all the econometrics models and how unemployment is factored into productivity rates for the nation and the GDP and how they’re inter-related with the interest rates. That doesn't do you any good.
Let’s Talk About Unemployment
[4:52] So let's talk about unemployment. Let's talk about the real issues of unemployment. Why listen to me? You know what? I've been where you are, and I hate it when people use, to support their argument, I hate it when they try to use their resume to support their argument. So you know what, I'm going to support my argument with my anti-resume. This is my anti-resume.
I have been unemployed. Sometimes, that's been abruptly and unexpectedly. I got my ass fired. Sometimes, I had become unemployed unfairly, and let's just say I've learned a lot about bad bosses. Seriously, you have no idea. One time I lost my job as a contractor at a major technology firm. This goes back 25 years. Some people were gunning for my boss and I wouldn't betray him. I wouldn't betray my boss, so they got me out of the way. Sometimes, I had been unemployed by choice for a brief period of time, and I just needed to take and chill for a month or two before I started a new job, and that next job was much better. Even once, I became desperately unemployed - probably one of the worst experiences of my life, and it's really relevant now, due to national crises. We had that double punch hit in 2000-2001. We had the bursting of the dot-com bubble, coupled with the tragic terrorist attacks of 9/11, and that one-two punch. My wife and I were running a small business at the time, and it just wiped us out. I was not only unemployed, but I was sad and depressed for a while. It was a serious situation.
I think that's a little bit analogous to right now. I powered through that. And if you are a decade or two behind me, that experience probably wasn't real to you, but it was very real to me; it was life to me. We might be going through something similar right now, so it might help.
[7:12] During those times, I learned some things. I learned both the real value and real risk of debt. I got myself super educated, both formally and informally, and I put my financial house in order so things are a lot better right now. I got a better boss — I work for myself. Even though I'm tempted to fire myself occasionally, I keep giving myself one more chance because I have so much potential.
Cognitive Bias Existing in the Media
When we get right down to it, you're getting your information from lots of places, including hopefully me. When you watch other media, they're going to be completely worthless. I find them completely worthless. I believe, even on the business stations, they don't know or understand what's going on. And like all humans, they've got biases. They're going to naturally highlight and headline whatever stats or numbers agree with their pre-held biases, and then they're going to have very high [influential] important guests on their talk shows, some of them with impressive titles and degrees and PhD this and Council of Foreign Relations that .... but they're only going to have people on who agree. If they have some poor guest that they don't agree with, they're going to just be mean to them. And again, their whole goal is they're trying to support the narrative, the story and the ideas and the biases they already believe in their head. In the mean time, they’re hoping to get some of your attention and sell you some ads. I’m going to cut through all that. I don't want to talk about any of that superfluous stuff. It doesn't help you.
What Is the Unemployment Rate?
[8:51] I want to tell you about what the employment rate is, tell you about what's going on, and with the different types, and why the unemployment itself - that number - is not super helpful just by itself outside of context, and what you need to think for about the long term, and why it matters to you. Then we'll go on from there.
So, the first thing is, what is the unemployment rate? It sounds simple. It's deceptively simple because there's actually two numbers in there, and we need to understand what those numbers are. What it's not is this. The unemployment rate is not just the number of people who don't have a job. That's not what it is. We actually have a separate measurement for that. It's called “labor force” or “workforce participation rate”. That is the number of people in the country who are either working or are actively looking for work. It's the total of those people. That number naturally does not include under-aged people, people who are retired, or people who are permanently disabled. There are a few other people who fall into interesting categories, but those are the three big ones or the ones that matter. That workforce participation rate has fluctuated over the years. As demographics change, the average of the country goes up, the average of the country goes down, and the economy goes up and down, so that Labor Force Participation rate has fluctuated from about 59% to 68%. More recently, it's been around the range of 63%.
[10:31] So what does that mean? The 63% of the population okay… the whole population of the country is 330 million people, around. Let’s agree to use round numbers for the sake of this conversation because we can be annoyingly precise and it doesn’t help. 63% of the population is about 208 million people. Recently, the workforce participation rate has been 208 million people. The unemployment rate, the thing that they trumpet and flash around the unemployment rate is X, and this is why it's good, and this is why it's bad. The unemployment is a measure of the people in that labor workforce participation group. That 63% - we have 330 million people in the US, 63% is 208 million. The unemployment rate is the number of that 208 million. It's the percent of that smaller number of the people who claim to be looking for work at the time, but that number alone doesn't tell you the whole story because not all unemployment is created equal.
There Are 4 Types of Unemployment … 3 That Matter
[11:50] There are three types, really. Economists can get really out in the weeds on these things, but what you need to know is that there are three types of unemployment. Again, three types of unemployment in people who are actively looking for work - there's transitional unemployment, temporary unemployment, and structural unemployment. Three types of unemployment. I'm going to give you just general examples of all three, because they all contribute to the unemployment rate, but some of them aren’t so bad.
Transitional unemployment. What is that? What’s an example of that? You graduate from college in May. It's kind of hard to get hired in the summer time. It's hard to get hired over the Christmas season, so you are transitionally unemployed sometimes. Sometimes you get recruited right out of school, and life goes on and you buy a BMW and start drinking lattes from Starbucks. Maybe that's your life, in which case, a lot of people don't like you. Transitional unemployment is something like that. You've graduated from school, you're interviewing for jobs, you're finding what career you want, and you're moving on from there. Or, you quit or are laid off from one job and you've got your next job, but your next job doesn't start for a while. I remember that happened to me one time as I stopped a job, and the new company hired me, but they wanted me to start the first week of January. That was fine. I knew I had a nice easier going Christmas than I might have otherwise. They didn't want to bring me on during the holiday season. Half of the staff was going to be on a vacation anyway. It didn't make any sense for them, it didn't make any sense for me. I got the job in mid-November, I accepted the job. They said to hire me and my start date was January 3rd. That is another type of transitional unemployment. I'm in a transition. I'm unemployed, legitimately unemployed and legitimately can claim unemployment insurance and get small payments from the local government in Arizona at the time, but it was transitional. It's not that bad, right?
[14:07] Then you have things that are temporary, what we call temporary unemployment. You get sick. Sometimes you get to keep your job when you're sick; some jobs, they just can't hold them, especially low-paying jobs. There's just no practical way for a small business to hold your job for you if you get sick and that’s why they have insurance policies to cover specific things like this, especially if you're in a risk group for that. You should have those types of insurance policies. It’s called Workman's Comp policies. If you break your leg and you can't wait tables, you can't go to a construction site because you broke your leg, you want that little Aflac duck to be quacking in your ear and bringing you a check. You know what I’m saying? Obviously that's a temporary type of unemployment because you should be able to get a waitress job or construction job as soon as you're healthy again because you have the skills, you have the job, you know what you're doing. You are temporarily unemployed. If you stop and think about it, you can think of 100 ways that there's the occasions of temporary unemployment. You get fired and you are looking for a job. It's usually temporary.
[15:21] Then you have structural unemployment. Structural unemployment is really what we have to worry about. Structural unemployment means that there are no jobs for one reason or another. I'm simplifying this greatly. It means that the economy is not in a position to create enough jobs to meet the demand. There's a lot of nuances to that, but nuances really don't help you that much. With a dip in the economy, if you're unemployed, they measure this by about how long it takes you for somebody who's temporary unemployed or lose their job, they have measures to see whether or not the economy has temporary unemployment or structural unemployment. They see how long it takes the person to get rehired. I'm not trying to pick on a company, so I'm going to make a name of a company up. Say that ABC Corp. lays off 10,000 people. Economists and social scientists say, “Okay, all those people are now looking for work. How long did it take them to get rehired someplace else?” If they get hired in a few months, then it's like, "Oh okay, that means the economy doesn't have a problem.” The economy can create jobs for these people, whether they take higher wages, similar wages, or lower wages or benefits.
The point is there's a job that they can take and that they can move to, so it was temporary unemployment. If it takes them 8 months, 12 months to get a job, we know it’s doing of course economic harm to them, but it tells us that either the economic employment of the region or of the nation, we got to start looking at it, because maybe there's a structural issue. Maybe the economy can't produce enough jobs. I'm just giving you a hypothetical example to explain the concept. Do you understand the difference there?
Where Are We Right Now?
[17:15] Where are we right now? In the current crisis, the job market has just had a huge shock. Just take a deep breath for a second here, and I hope I have a big swath of variety of different people listening to this, but you got to embrace a truth here. We all have to kind of embrace a truth. It doesn't matter what your politics are. It doesn't matter whether you like the current president. It doesn't matter whether you approve of Congress or the Senate. It doesn't matter if you like your current governor of your state. All of that does not matter right now; you think it matters. The truth of the matter is we have to separate ourselves from the political conversation to say the truth is that before this whole pandemic outbreak, crap hell purgatory, that we have to put ourselves through, the economy was running strong. Unemployment was at what many people believe to be as the theoretical minimum, what economists call full employment. Let me tell you what that means.
We know we talked about the three different types of employment: transitional, temporary, and structural. There's actually one more. There's people who just pretend they're looking for work and they don't because they’re what's called the “permanently unemployed”. They're an edge case. People hold them up as an example; they're not. The permanently unemployed is really the smallest piece of the labor pool so I'm just going to set that aside for a second right now. We were at between 3% and 3.5%. You can argue the tenths of a percentage point if you want to be that way about it, but in reality we were around 3 to 3.5% unemployment, which is really low. In that mix, you always have somebody who decides that they don't want to live in California anymore because it’s too expensive and they move to Idaho. They quit their job in California and they're moving to Idaho, and they start a job. They're transitionally unemployed. They have a new job and just haven’t started yet. You can't make that go away. People will always govern their lives that way. There's always going to be some number of people who are transitionally unemployed. There's always going to be some number of people who are transitioning from student life to a working life, and they're getting their first real career job after graduating. Every year, there's going to be some number of those people. You can't have zero percent unemployment because there's going to be some chunk of people who are transitional. No matter how good the economy is, you're always going to have some business that fails for one reason or another, or some little localized hurricane hits, please God forbid, knock on wood everybody and say your prayers at night, that we don't have another hurricane for a while, but a hurricane hits the Florida coast and some businesses close down. You’ll have some people who are temporarily unemployed.
The point is, there's always some number and we argue about what the optimal number is. We can say the optimum level is 2.5% or 3.5%. We can argue about that, but the point being is it's never zero. Unemployment rate is never zero because there's always - yes, some permanently unemployed - very, very small amount. There's always some number of transitional and temporary unemployed people in the system, and we’ll never get to zero. In mathematics, they call it a limit. The limit is zero because you can never get there. You'll just never. You can keep trying to drive unemployment down; you're never going to get to zero.
Historical Low Unemployment, & It Was Real
[20:52] Many people, whether we agree or not, doesn't matter, but everybody agrees that unemployment was really low and the economy was humming along. Some believe it was about as low as it can get. Really. Agree or disagree, but the concept - get the idea. There's a ton of reasons for it, but the reasons that we are at 3-3.5% unemployment, I don't want to get in the politics or the economics of that either because that doesn't help us where we are right now. The point is that the economy, as far as jobs are concerned, it wasn't a bubble. We weren't in a bubble employment. In fact, real demand for goods and services was high and companies were having trouble finding employees because the unemployment was so low. This was starting to influence wages. You can see that the average wage for the first time in a while was starting to creep back up. It was small at first. These things are always small at first. This growth in employment was deep and wide. That means that individual industries were expanding and that was felt across nearly all industries in the country. It was broad-based and deep. But in the last two months, that's all gone to crap.
Optimizing History: The Arm-Chair Quarterbacks Don’t Help
We have all agreed to close things down to try to mitigate the pandemic. The point being is that there’s not a structural fault. There was no structural and no real problem of structural unemployment in the economy prior to the pandemic. As things go forward, you’ve got to embrace something here. Everyone is going to arm chair quarterback the crap out of this thing when it's over. Political nitwits of all stripes will argue over should have done what and when they should have done it. The truth of the matter is this - this sucks for everybody. There may be a few malefactors out there trying to profit from other people's misery, but the truth of the matter is that just about everybody is probably trying to do their best. Some of their decisions that they're going to make, they’re going to be off a bit here and there. And I don't know about you, I ain’t a perfect person. I don't expect any of them to be perfect either.
[23:24] We have to really kind and avoid the reflex to say, "Oh well, we could have saved 16 lives in New Jersey if we'd started a day earlier.” That doesn't get us anywhere. It doesn’t help. When you’re in the middle of a crisis and things are just blooming, nobody has all the information. It's really easy for us, after the fact, to come back and be really critical once we have all the data and all the guys have crunched the numbers and done their charts when this thing’s in our rearview mirror. I guarantee you, people are going to be making a political case out of this, trying to optimize history, which you can never do.
I need to patent that term; let me copyright that term. Make note to self: optimizing history. Make it the domain because it's a good concept. As humans, we like to try to re-optimize history. When you're living through history, however, you are optimizing without complete information. When you're in the future, when you're looking back, it's easy to re-optimize the outcomes because you have more information. Think about that. You know what? I'm going to ring a bell on that one because it is an important concept and it applies to more than just this issue, but let's not get distracted.
[24:42] The truth is this. Nearly all of the unemployment that's going on right now — it happened all at once. It's happened over the last — pick a number — last 30 to 60 days. It's all happened over the last 30-60 days and right now it's temporary. It’s temporary unemployment. The underlying businesses and industries … I see the struggles. Don't think I don't. I have deep, deep empathy. 20 years ago, after 9/11, the national crisis kicked my ass. It took me years to psychology and emotionally recover from that pain, let alone financially. It took a long time. It wiped me out, so I feel that. I feel it in a real and visceral way, probably truer than most people because I lived through it and I experienced it.
I know there's pain out there, but most businesses are hanging on. Landlords are being a little understanding and suppliers kind of get it. There's some money coming from the government — not enough, too much. We'll talk about that later. When things start to come back online, these companies are going to have a chance to stop, take a breath, and then when they're confident that the things really are stabilizing, they're going to start ramping up and they're going to hire people back. Then we'll see some recovery. Now here's where the rubber meets the road.
If there is something that makes this whole Coronavirus pandemic response drag on over another month or so, those underlying businesses are going to start to suffer more lasting and permanent damage. That means over time, unemployment is at risk of going from temporary unemployment (which I believe that most unemployment right now is still temporary unemployment) to structural. That's the real risk. The longer the economy stays repressed, the more businesses will shift from temporary to structural. This is true no matter how much money the Treasury and Federal Reserve throw at the problem. It doesn't matter what else you do. Time can move the problem from temporary to structural. That’s the concept. Let’s be clear. America will be fine eventually. We’ll recover … I hope I don’t sound repetitive but when I do these things, I'm just pretending like I'm talking to you - specifically, you the person listening right now, like I was talking to one single person, so I'm just going off the top of my head.
My Current Predictions for Global Employment Recovery
[27:41] When I think about it, I think Germany is in really good shape, too. The Germans have done a wonderful job managing their economy and industrial base for generations. I think Germany will be fine. The UK will probably emerge a bit slower because they're currently even more socially and politically divided than America is right now. Most of the developed world will eventually be fine in the medium term. It’s important. Let me tell you what I mean by medium term. When I say medium term, I mean the next two to five years. I've even made some kind of bold predictions with a few close friends about what's going to happen. I wrote it out for them and stuff. One of those predictions is that, not saying when we get back where we were, but we're going to get back to the long-term trend in a couple of things in about 18 months, no more than 2 years. I'm planning some content, and I'm talking to you all directly about some of those predictions because they might be helpful to you. Again, I only want to give you information that hopefully helps you understand things and will be ultimately helpful for you.
[28:45] We all want to get back sooner if we can, and at some point we will. Let me emphasize this - at some point, we will trade off some smaller amount of medical health risk to ensure financial and social health is not harmed too badly. That trade off will happen. It's not an easy choice. I got some news for you - it's not an amoral choice. It's a choice made in the real world. Structural economic damage will cost lives and futures, too. I'll do a podcast just about that if we have time.
Unemployment Forecast That Matters to You
What about you, who's listening to me right now? What about your future? What if you're currently unemployed or concerned that you're about to lose your job? It's a real concern, right? We all feel that. I want you to keep your eyes on when you think the economy will get up and running. If we get going by early May 2020, most businesses and enterprises of all shapes and sizes will be able to start planning, and the government will be able to give them the support they need to kind of bridge the gaps. If that happens, then rehiring will come relatively soon. Unemployment - I expect it to hike to somewhere between 16% and 25%, I think somewhere in there, but it'll be short-lived, coming back down over the following two or three quarters. That's kind of the best case scenario right now. We stay in temporary unemployment. We start to recover. It spikes up to somewhere between 16-25%, and then we start going back over the next two to three quarters and get our country back on track.
But, this is what you keep your eye on at the same time. If we do not re-open the country until June or later, I'm going to tell you what I'm going to do. If I start to believe that we are not going to re-open the economy until June, I'm going to break out the econ text books and I'm going start really thinking about the calculations and I’ll revise everything because the rules will have changed. I'm hoping that we don't get there. I'm optimistic that they won't, but given that, you and I in this podcast will have another chat about this right here, in this podcast, and we'll talk about it then, too. Something else, no matter what, and again, we're talking about best case scenario that we get open sometime in May and businesses start to get weaned back into reality. There’s a few businesses and industries out there that, even in the best of circumstances, already have some structural issues caused by the whole pandemic and it's worth mentioning at least one.
Industries Slow to Recover — The Cruise Line Example
Let me give you an example of what that would be: the cruise line industry. The structural unemployment issues they have are advanced. They’ve jumped ahead because it's not that the businesses themselves won't survive, it's not that there won't be ships available for employees to work on, it’s not that they won't have the ability to start up. I even think that the government is going to give them some special financing options to keep them afloat…if you’ll pardon the pun.
[32:24] The real issue is going to be a structural problem with demand. The cruise ship industry has been doing very, very well. They keep building bigger and bigger ships, but it's going to be a problem that goes out beyond. It's going to stand out a little bit because we all have this image in our head of these cruise ships that weren't allowed to dock for weeks because they had some sick people on them. They kind of became these confined plague ships. They were rolling up and down the coast of California and Florida, waiting for permission to come into shore because nobody wanted to have the sick people come on-shore in their town. This is the problem. That imagery is in everybody's head, and there's been a history - fairly recent history - where other sicknesses and stuff like that have spread rapidly on cruise ships. This is going to create a shift, a psychological shift that's going to, in my opinion, decimate demand in the cruise ship industry for the long-term no matter how much money the government throws at them, no matter how tolerant their lenders are, the people who build and operate and finance cruise ships. The structural damage to those industries, I'm not wishing evil on anyone, but in my economic opinion, the damage is already done there.
There's probably a few other industries that have structural damage done in some way to them, so that's just an example. Although I believe we are not in a place where structural unemployment exists for the economy as a whole, you'll find pockets of structural unemployment in certain industries and locations.
Avoid the Click-Bait BS on Unemployment Rates
[34:18] All that said, that's the background. In the meantime, as we’re waiting this out so you and I together can figure out what's going on here, you are going to hear the media. They’re going to show you a ton of crazy headlines and graphs that say things like, “worst unemployment since the Great Depression and it’s the biggest spike since whatever bad day we had a few years ago”, whatever they’re saying. You know that it's just clickbait BS. It just is. These people, they have no freaking idea. A big spike up in unemployment, no matter how high, it's not The Great Depression because… (and I'm going to lean into the microphone here and get really, really close because I want you to listen to this).
In the Great Depression, unemployment was deeply structural. We had high double-digit unemployment, at times 20-30% for a decade.
The numbers they show you about things like initial jobless claims, in reality they're useless to you. They just spread irrational fear. The real issue that everyone in upper levels of government are really worried about is how long people are unemployed. Simply stated, let me kind of boil this down to a simple statement. Ten million people being unemployed for a year is far worse economically than 100 million people being unemployed for a month. It is the sum total of lost wages and opportunity over time and how that changes human behavior. That's the risk - for a month.
[36:14] They say things like this - they say that all of us are two paychecks away from or one paycheck away from poverty. People say things like that, but it's really not true. The whole principle of economics is that we adapt. We change our behavior. And for a month, the government can do things like provide relief, and people can change their consumption and their behavior and adapt. They can go online and they can sell things. You can go on eBay and sell a little bit of your used stuff that you're not using. You can generate a little bit of money online here and there. You can have a yard sale. You can maybe use up a little bit of your savings or retirement money, or you can borrow a few thousand dollars from your parents, whatever. The point being is that for a month, the country can survive a month, all of us as consumers, and I'm in that boat with you. We can all get by for a month or so by adapting, getting our landlord to delay our month or forgive a month’s rent. There are things that are done. For two months, it gets harder. A small percentage of us will start to suffer real permanent harm. For three months, that’s when more businesses close permanently. A large number of people will start to drop into real poverty.
The longer people are unemployed, the more it becomes difficult to recover, or un-recoverable in the short term, because permanent structural damage starts to get done to the economy. To be clear, again, I don't think we're going to get there. I don't think we're there yet. I know a bunch of people who are unemployed right now. Since I've been through that, I have deep empathy for everybody and I also have some suggestions on what to do. In my next podcast, I'm going to jump ahead. In the podcast after this one, I'm going to talk about things that individual people like you and me can do on the short term to get by, and I've mentioned a few of them right now. That's the next podcast.
More Real, Practical Unemployment Advice Coming
In the meantime, if you have specific questions that you’d like answered privately, or if you want me to cover a topic on the JeffEffect podcast, the best way right now is to DM me on Twitter @JeffreyJHardy. Remember there is a light at the end of the tunnel. We're all going to be okay. Stay tuned, and I’ll help in any way that I can.