Why Economists Are Wrong About Job Numbers

by Fred Siegmund

President Obama is hoping to signal his concern about the growing ranks of the unemployed and focus on longer term strategies to improve the job market by holding a job summit, according to the Washington Post (“Obama calls for White House summit on job creation“).

It is a worthy goal, but reducing the unemployment rate and the number of unemployed is not the same as creating more jobs.

That’s because a majority of Americans live in families that make job decisions that depend on their spouse and the circumstance of other family members.

Can Economists Accurately Predict Labor Numbers?

Economists often act as though individuals make independent decisions when it is time to enter the labor force and become part of the labor supply. Instead, one person losing their job will often mean that two people start looking for work.

To see why, suppose the Mr. in the Smith family has a job as a tool and die maker working in manufacturing. Tool and die maker is one of America’s better paid production occupations, with a median wage reported at $22.32 an hour for 2008 ($46,430 a year) and a 90th percentile wage of $34.76 an hour ($72,300 a year).

As a family, the Smiths might earn $60,000 to $80,000.

The Bureau of Labor Statistics reports that tool and die maker jobs have declined every year since the late 1990’s. With a broad base of manufacturing also in decline, it is easy to imagine a layoff for Mr. Smith.

Economists argue and predict people will work less at lower wages and work more at higher wages, so unless Mr. Smith can find work at his tool and die maker wage, economists expect him to work less after a layoff than before.

How Economists Determine Labor Predications

Economists do not base their predictions on interviews, observation or data. Instead, they rely on conjecture about preferences. Leisure, they argue, is valuable and will be traded for work in the personal preferences of individuals.

At higher wages, leisure time is more expensive because it means giving up those higher wages, and people with standard preferences want less of what is more expensive. Conversely, at lower wages, leisure time is less expensive because it means giving up lower wages, and people will devote more to leisure when it’s less expensive.

Those less devoted to the economists’ way think the Smiths will do whatever they can to pay the bills and maintain their economic status. Mr. Smith will take a job in maintenance or construction or whatever he can find at lower wages if necessary, as well as a second job working evenings or weekends.

We can also expect that Mrs. Smith will enter the workforce looking for work.

Together, the Smiths work more hours at lower wages to keep up, just as they might work less if their wage was higher. People like the Smiths assure that lower wages add to the surplus of labor.

Business owners and economists will be invited to the above mentioned summit. Too often, job summits end up reciting the same ol’ cop out: get some training.

We will hope they recognize that low pay helps create a surplus of labor that makes more jobs a necessary, but not sufficient condition to ease America’s employment problems.

Recognizing something new is a lot to hope, but it’s a start.

About the author: Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com

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