All of the talking heads are saying that employment is always a lagging indicator of whether a recession is waning. While this is true, the level of employment impacts the ability of consumers to consume and thus has a direct relationship on the time it will take to overcome the impacts of a recession. I hate statistics but unfortunately they need to be used to view the impact of unemployment on the spending power of consumers. Many in Congress and this Administration say that unemployment insurance extensions will help to fund the recovery as the unemployed take their checks and spend it in the marketplace. This is pretty absurd when viewed against facts.
The average wage rate in the US in June was $22.50/hour1 compared to $10.13/hour for unemployment insurance payments2. Basically this says that the purchasing power of the average unemployed citizen is cut in half. The effect of this reduction in wages will translate in these consumers spending the bulk of the UI payments on housing and food with the latter purchases being more for commodity items versus value added food items. It is cheaper to buy a 20# bag of rice than to buy individual rice or pasta foil pack meals. Consumption of higher costs meats and vegetables will also suffer as well as health and beauty care items.
The actual drop in purchasing power is $ 28,897,892,308 PER MONTH or $346,774,707,696 per year. This is 1/3 of a Trillion Dollars and we are not even counting those who are no longer on UI and have dropped out of the work force altogether.
The math is pretty basic: (The statistics are from the Bureau of Labor Statistics1,3)
IF the Unemployed were Working
Total Unemployed in June, 2010 16,600,000
Non Worked hours at 160 Hours/Month 2,336,000,000
Average Wages Per Hour $22.50
Total Gross Lost Wages/Month $52,560,000,000 (that’s billion)
Total Gross Lost Wages/Year $630,720,000,000
What this same Workforce Receive in UI Benefits
Total Unemployed in June, 2010 16,600,000
Average Hourly UI Benefit $10.13
Non Worked Hours at 160 Hours/Month 2,336,000,000
Total Gross Monthly UI Benefits $23,662,107,692
Total Gross Annual UI Benefits $283,945,292,304
Loss in Consumer Spending
Monthly Loss $28,897,892,308
Annual Loss $346,774,707,696
So, where is the “stimulus” for getting us out of the recession?
You could argue that we are never at full employment so these numbers are inflated by half or so. I would argue that these numbers are actually conservative given the number of people who are no longer drawing UI benefits and who have dropped out of the workforce altogether. Some have estimated that the real unemployment percentage is closer to 18% rather than the 9.5% used above. If you subtract 5% from the 18%, and use that number to calculate the losses, the annual loss in spending power is a staggering half a trillion dollars per year.
Consumer goods and other private sector companies are estimated to be sitting 2 trillion dollars in cash. They have been able to accumulate these reserves due to cost reductions generated by massive layoffs and higher revenues generated by price increases they obtained in 2008 and before. They are looking at this reduction in consumer purchasing power and applying the impact to their own product lines. Flat screen TVs, new appliances, automobiles, and other “luxury” items are now out of most consumers’ budgets. Even value added food products and restaurant dining are no longer a priority due to the reduction in disposable income. How long the consumer goods and other private sector companies can maintain their reserves is directly related to a reduction in the unemployed.
Companies will not spend to hire staff or expand plant and equipment due to the uncertainties caused by this Congress and this Administration. They are looking at the government spending sprees, the massive regulations embedded into every piece of legislation that is being passed, and the competition for credit between the private and public sectors, and they see the potential for double digit inflation coupled with double digit interest rates. IF they are doing business in states such as California that have ridiculous budget deficits, they are looking for ways to cease to do business in those states and to move to more business friendly states. These states will undoubtedly attempt to squeeze the last drop of blood out of these businesses so the businesses will have to seek friendlier environments.
The next time you hear a talking head telling you that unemployment is a lagging indicator that the economy is getting better, remind yourself that unemployment is not a lagging indicator but a causal factor in the recession itself. It is a self fulfilling prophecy!
1Average Hourly Wages:
2State by State Unemployment Benefits for 2009
3Employment Situation Summary: