On Friday, the government announced that the U.S. economy added 171,000 jobs in October while the unemployment rate jumped a percentage point, from 7.8 percent in September to 7.9 percent.
The economy is likely to be the number one issue on the minds of voters on election day, so we asked economist Don Klepper-Smith about the latest job numbers and the economic recovery both in the U.S. and here in Connecticut:
Patch: Democrats and Republicans have both used the unemployment numbers to convince voters that the economy is either improving or is still struggling to rebound. What are voters to believe?
Klepper-Smith: If you were to choose one economic statistic that is easily misrepresented it would be the official unemployment rate. The calculation is simply the official number of unemployed people divided by the official labor force, but you have to understand that over the last several years there are certain portions of the unemployed that do not get accounted for in the official statistics.
If you give up looking for work, you are a discouraged worker and you are not included in the unemployment rate and you are not included in the labor force. If you are marginally attached, if you are forced into part time work from full time work, all of these things create sort of a biased statistic.
Job statistics are far more important. The effective rate is a truer measure of unemployment in the economy and it shows that, as of last month, we had an unemployment rate of 14.7 percent. We have to look at that statistic and that's probably your better representation of how this economy is doing.
We need to create between 125,00 - 150,000 jobs each month just to keep the unemployment rate from rising. So, the jobs picture right now is far more important than any unemployment statistic we have.
Patch: Why has the job market been so slow to recover?
Klepper-Smith: One of the things that has taken place over the last 20-30 years is that we see more and more structural change in the business environment and the labor markets. By that I mean things apart from the business cycle that are affecting labor demands.
We talk about demographic shifts, the substitution effect of capitol for labor, increased use of the internet and in some circles, believe it or not, there's actually some discussion as to whether our low interest rates are incenting businesses to borrow more and invest in technology at the expense of labor. So, it's actually having the exact opposite affect of promoting labor growth. We've gone past that point.
We lost just under nine million jobs in the last recession and if we look at the jobs gained back, we're at 46-47 percent. It says that we've probably got several years to go before we get back to that prior employment peak. In Connecticut, the job recovery rate is about 20 percentage points lower, down at about 27 percent.
Patch: How is Connecticut's job market doing in comparison to the U.S. job market?
Klepper-Smith: In Connecticut, a robust economic recovery used to mean something in the neighborhood of 2,000 new jobs each month. That's what we had in prior recoveries. We've got a long way to go. Right now, even if we were to assume a robust job growth scenario in Connecticut of 2,000 jobs each month, which is something that we used to have in the 1970's and 1980s but we haven't seen in a while, even if we were to have that, 2,000 new jobs each month in Connecticut, we wouldn't be getting back to break even until 2016.
Our forecast shows that we're going to be gaining something in the neighborhood of about 5,000-6,000 jobs this year on an average annual basis which represents a gain of about half of one percent. In context, the labor markets in Connecticut are coming back nickels and dimes in slow growth fashion. Next year I think that's going to be down near 3,000-4,000.
Patch: What can Connecticut do to spur job growth?
Klepper-Smith: The numbers just came out from economy.com and it shows that when we start looking at the unfunded liabilities and our debt per capita, Connecticut has the highest level of debt and unfunded pension liabilities of any state in the country at about $9,800 per individual. The bottom line here is that Connecticut has its own fiscal challenges moving forward.
According to Moody's, 40 percent of your long term job growth is a function of the region's cost of doing business. Our cost of doing business is 27 percent above the national average. Anything we can do to make the state more business friendly is going to enhance job creation. My concern, long term, is that with the contingent decline in the dollar, which is expected, we're going to see higher energy prices and it will put us further at a competitive disadvantage because of our reliance on oil. I'm afraid that we're going to be losing these manufacturing jobs because of our cost structures and we're going to be losing out to other states that are going to be more competitive because their energy prices are lower.
We have to be proactive on the economic development front. Our study, that we just released this summer, looking at 19 manufacturing variables shows that we are ranked 30th in the country in terms of manufacturing competitiveness.
I think the one thing we have to look at right now and ask ourselves is what tools do we have to stimulate economic growth? And the bottom line here is that the tools that we have to promote traditional economic growth are either politically unpalatable or ineffective. Here we've had the lowest level of interest rates dating back to the Eisenhower Administration and we've realized it's not just about interest rates.
Here we're in a slow growth mode, the GDP numbers came out at about 2 percent in the third quarter, that came after 1.3 percent in the second quarter. From a fiscal standpoint, there's no real appetite politically for a stimulus package when people are asking the federal government to live within their means like everybody else. So that $787 billion dollars that we spent, the question is what did we get for it? The answer is not much.
We have a situation where, if you look at our current level of debt right now, like everyone else, at some point we need to start living within our means. Domestically, we have problems with a budget deficit now that is out of control and at some point we need to make some hard and fast decisions about living within our means. Because if we do not, the ramifications are a lower dollar, reduced purchasing power in the global market place, and because oil is purchased dollars it means that we're looking at a significant surge long term in oil prices. I think that's the biggest threat, because 30 percent of the rise in gas prices that we've seen in the last several years is due explicitly to the lower dollar and that's of our own doing. Fiscal discipline is in short supply in Washington D.C., they don't simply get it but at some point they need to get that medicine.
Patch: You hear all the time, presidential candidates talk about creating jobs. Can the President really create jobs?
Klepper-Smith: This is a fallacy. The bottom line here is that government does not create jobs, businesses create jobs. The best thing we can expect from government is to create an environment that is supportive to build this growth in job expansion. Government really doesn't belong in the job creation market. They need to be able to create an environment that's conducive for growth. It think it's a fallacy that any politician creates jobs.
Don Klepper-Smith is Chief Economist and Director of Research for DataCore Partners LLC, a Connecticut based professional services firm. Don earned his Masters Degree in Public Administration at S.U.N.Y. at Stony Brook, New York, in 1978 focusing on economics, econometric modeling, statistics and forecasting theory. In 1975, he received his B.S. in Applied Mathematics at Stony Brook.