Tuesday, July 24, 2007

The Low Unemployment Myth

There is a fairly simple law in economics. If unemployment is low, in means that there are more jobs available for the unemployed to choose from, and employers must make better offers. Wages must also rise for current workers, because it is harder to retain employees: many be tempted to find better work due to less competition from the unemployed. Low unemployment = wage growth.

Unemployment is on the decline, but wages have not increased significantly. I refer you to this chart: "Ah," one may ask "But this shows that wages have been increasing at about 4% per year!". These increases have not been corrected for inflation. According to the government, inflation has been running at around 3.3% for 2007. In real terms, the average wage increase has been 0.7%. This is a low number, considering the fact that it is constantly trumpeted that we are in a "job recovery".

The point is that the government isn't giving you an accurate picture of actual unemployment. The unemployment percentages are low, because unemployment pretty much just tells you the total percentage of people receiving unemployment compensation, not the percentage of unemployed in this country. Barry Ritholtz gives a simple summary of how the numbers are fiddled with.

So, unemployment is worse than it should be: maybe it's a few percentage points more. So 0.7% real wage growth doesn't seem that bad. But hold on a moment: what if the government not only fiddled with unemployment numbers, but also fiddled with inflation numbers? When I first looked at how inflation was calculated--by measuring price increases--the amount of tinkering to make the number look lower was astounding. Shadow Government Statistics attempts to reconstruct the number as it was calculated before the Clinton administration. The number he comes up with is actually around 6%. So now we're looking at -2% real wage appreciation. The average working American is therefore getting poorer.

However, measuring inflation using price increases is simply measuring the effects of inflation, not inflation as defined in the dictionary: "Expansion in the money supply beyond the increase in available goods and services. Often misunderstood to mean a rise in prices, which generally accompanies such an expansion." So to look at inflation, one must also look at the rate of increase in the money supply. There are three major "categories" of money supply: M1, M2, and M3. M1 measures "hard" currency like dollar bills and coins and checking accounts. M3 reflects savings accounts and other US money sloshing around the planet. The Federal Reserve in its infinite wisdom has decided to mysteriously stop publishing the M3. Shadow Government Statistics once again has picked up the pieces and recalculated it, and it's at a frightening 13% yearly increase. So, some simple arithmetic here: 4% - 13% is -9%. The average American is falling behind by nine percent a year.

Ron Paul wants the Federal Reserve to start publishing the M3 again. Will you vote for him?


JohnDiddler said...

crap, 13%, it's just getting worse. but i can't seem to diversify into euros. i keep stopping out. i'm naively unwilling to risk a loss in currencies.

Egosumabbas said...

I'm pursuing three strategies: keeping out of debt (to protect from interest rates going up), plowing money into stocks (because rich folks have to stick their money somewhere and that bids up stock prices; a rising tide lifts all boats), and buying up gold when money permits (in case of fire break glass).

In the meantime just be glad we don't live in Zimbabwe

JohnDiddler said...

i'm also moving into stocks. debt's a funny thing, though. with inflation all but guaranteed, i could stand me some debt at a fixed low rate, as with a mortgage, to be paid back with those vastly devalued FutureDollars. thankfully this is precisely what i've got.

Egosumabbas said...

Here are the caveats about debt: obviously variable interest rate debt would be the first to get rid of. Low fixed rate debts are better but are still bad if you lose a job. If it's for a mortgage, that's okay, because you'd have to shell out money for rent anyway.

JohnDiddler said...

it's for a sweet fixed 6% mortgage. i also maintain $150k in available credit, because my work schedule varies throughout the year. i do save money but i move it into tax-advantaged accounts. the dollar might depreciate but having more dollars is still the best response.

Egosumabbas said...

6%? that is pretty frikkin sweet.