Ah, the unemployment rate. An economist’s favorite statistic! Right? While the unemployment rate may seem like a simple statistic you occasionally see on your nightly news, that statistic is just one of many unemployment rates. Because of this, the “true” unemployment, or the unemployment rate that should be considered official has been a hotly contested subject over the past decade and especially in this past election. This debate however, has been hushed away from the public eye and was probably over shadowed by the flashier and sexier controversies of late. According to the Bureau of Labor Statistics, the current unemployment rate stands at 4.7% as of the end of February, yet on the campaign trail and in office, President Donald Trump has suggested that the current statistic may be underestimating true unemployment in America. In fact, he has claimed that the true unemployment rate may be upwards of 42%. Why is there such a drastic difference in the two rates? Does Trump’s claim have any real backing? What should the real unemployment rate be?

First, let’s talk about how the unemployment rate is calculated. Without getting too technical, the unemployment is simply the number of people who are unemployed and have looked for work in the past 4 weeks divided by the total labor force. The labor force consists all Americans

who are readily available for work. Because of this, we do not include stay-at-home mothers, retirees, full time students, or disabled citizens in that labor force number. There are two other definitions that are important to understand: ‘working age population’ and ‘discouraged workers’. The working age population is simply all Americans above the age of 16. Discouraged workers are those who aren’t working and have given up on looking for work because they do not believe there are jobs available for them. Discouraged workers are considered to be out of the labor force and are therefore, not included in the unemployment rate even though they are willing to work.

So how did Trump get his 42%? Well, he took all the Americans above the age of 16 who weren’t in the labor force, added them to the rest of the unemployed and divided it all by the people in the working age population. This means, that stay-at-home moms, discouraged workers, your retired grandpa, and even you, a full time-student, are counted as unemployed under Trump’s claim. Essentially, Trump’s estimates include people who are unemployed because they choose to be so, which is a normal aspect of a market economy. Why is this an issue? People respond to economic indicators like inflation rates, GDP growth, and unemployment. We see these statistics all the time in our nightly news. Furthermore, how American’s perceive the economy to be fairing effects their spending habits. Additionally, by manipulating the statics, Trump is able to make people believe that the current economic situation fostered under the Obama administration is worse than it really is. Playing to American citizen’s lack of an understanding about what the unemployment really means paints an unfair picture of the last president. Therefore, it is important these data be shown accurately and fairly and that those watching understand what the data means.

There are also various different unemployment rates that fall in-between the BLS’ 4.7% and Trump’s preposterous and misleading 42% claim. To understand these variances, let’s look at what it means to be employed. People who work part-time and people who are underemployed are also included to be employed. (Underemployed means a person is forced to settle for a job they are over qualified for. Like a PhD working in McDonalds.) When you add all those who want to work but have not looked for a job in the past few weeks, the unemployment rates rise by 1% to 5.7%. While yes that may seem small, but that’s still about a million American lives who cannot make ends meet. Furthermore, if you tack on all of those who are working part-time because they cannot find full-time positions, the rate jumps up to 9.2%.

While working part-time can fall under the umbrella of underemployment, there are other factors like a mismatch of human capital to a job (i.e: A PhD at McDonalds). It measures what percentage of people in the labor force are not being used to their most efficient/maximum capabilities. These types of underemployment are important too because they can show how well the labor market is performing in highly skilled and specialized industries. The current estimated underemployment rate is 13.7%.

4.7%, 5.7%, 9.2%, 13.7%, and 42% all tell different stories. It is important to understand the dangers of a populous who is uninformed: potential for manipulation. In a time when alternate facts can take precedent over their widely accepted counterparts and when most media have at least some bias, and therefore, political agenda, that the everyday American can distinguish and dissect these statistics so they can make their own decisions about the state of the economy and consequently, the successfulness of the government in maintaining it. Because of this, Unlike an avid follower of the economy like myself, I doubt the typical American will take the time to research these different rates.  I believe the news must do a better job of bringing statistics like the other measurements of unemployment and underemployment (Not including Trumps bogus claim though.) into the national spotlight.

 

Sources:

 

http://blogs.wsj.com/economics/2015/08/20/donald-trump-is-right-about-42-of-americans-are-unemployed-if-you-include-my-88-year-old-grandma/?mg=id-wsj

 

https://www.bls.gov/news.release/empsit.t15.htm

 

http://www.investopedia.com/terms/u/underemployment.asp

 

 

One of the first actions of the Trump administration was to formally back out of the Asia-Pacific Trade Agreement also known as the Trans-Pacific Partnership. In what is in line with Trump’s protectionist policy, U.S. Trade Representative Maria Pagan stated the United States does not wish to “become a party” for the other nations involved in the economic pact. Though controversial, Trump’s decision is not surprising.

But, to understand what this withdrawal means, first understand the debate free trade and protectionism. At the most basic level, free trade is the idea that countries should be able to trade, well… freely with one another. If you’ve taken Econ 102 or 104 here at Penn State, you’d know that trade can be mutually beneficial when countries specialize in producing only in what they are better at. This allows for the importation of cheaper goods and the ability for a country to consumer more than they can produce. The TPP would’ve helped perpetuate free trade amongst the member countries. Protectionism, on the other hand, is the belief the goods should be produced and consumed within the same country in the hopes that jobs won’t be shipped overseas. The thought is that if a country produces and consumes its own goods, jobs will stay within the country, lowering the unemployment rate and increasing average income. This can be achieved most easily by tariffs, or a tax on traded goods (This is what Trump plans to do in the future.) This would effectively increase the price of foreign goods, making them less desirable to relatively cheaper, home-made goods. This, however, leads to higher overall prices for goods with respective to the cheap, non-taxed foreign goods that could result from free trade. This puts more stress on consumers’ wallets, but the idea they will have more money to spend with higher incomes.

Most modern day economists support free trade, but notable economists have made great arguments for both sides of the argument. In his article, What Do Undergrads Need to Know About Trade? Paul Krugman, esteemed professor and New York Times columnist, supports the notion of free trade reasoning that free trade sits at the very basics of economics, and thusly, should not be tampered with. He cites a parable from a textbook written by James Ingram. The story goes that an entrepreneur is able to convert raw American resources into high-quality, cheap goods with a new secret technology. Though his method is secretive and his company puts many others out of business, he is hailed as a hero of industry for his innovative methods. Then, it’s found that his new “technology” was really him just trading his goods to Asia and buying cheap, foreign goods for a profit, and he is condemned as a robber baron and traitor.

Pun intended.

Moral of the story? Trade is an economic function just like advancements in technology, it’s simply the perspective that people have that we are in competition with other countries (which we aren’t, we mutually benefit from trade.) that puts a bad taste in people’s mouths. Think about it this way, are McDonald’s and Samsung competitors? No, they produce two completely different, unrelated products. But, if you sell enough Big Macs you might be able to afford a new cell phone; two people can benefit when trading Big Macs and cellphones. It’s the same concept for
countries, just at a much bigger level.

Protectionism however, has been present in American history and has been quite successful as well. Look at the industrial revolution of the late 19^th century and the roaring twenties. Both time periods have bustling economies in which America’s industrial power grew exponentially and high tariffs protected American industry. (This the same thing happening in China over the past few decades.) However, it is important to remember the roaring twenties was followed by the Great Depression.

Today, some economists agree with Trump that protectionism may be an important policy in bolstering spending and keeping jobs. In an article for The Wall Street Journal, Grep Ip explains that in certain economies where the interest rate is already extremely low, (I’m talkin’ about you America.) and jobs are being lost to foreign countries in free trade, central banks may not be able to lower interest rates enough to stimulate consumer spending. Ok, let me back up a little if that was confusing. Central banks, like the federal reserve, can raise or lower interest rates in order to increase or decrease consumer spending. If interest rates are lower, people are more inclined to take out loans, to buy homes, and to purchase more long terms goods that can stimulate economic growth. What Ip is saying is that in special situations where interest rates are extremely low, central banks can’t lower them enough to stimulate spending and make up for the loss of jobs. That’s bad. Protectionism therefore, would help balance out this unemployment to consumer spending ratio to form a healthy, goldilocks economy.

At the end of the day, the debate between free trade and protectionism comes down to jobs versus cheap goods and whether they can balance out the economy to have a healthy amount of unemployment (yes, that’s a thing) and consumer spending.

 

Works Cited:

 

Needham, Vicki. “Trump Administration Formally Withdraws from Asia-Pacific Trade Deal.”

TheHill. N.p., 30 Jan. 2017. Web. 01 Feb. 2017.

 

Ip, Greg. “The Case for Free Trade Is Weaker Than You Think.” The Wall Street Journal. Dow

Jones & Company, 12 Apr. 2016. Web. 01 Feb. 2017.

 

Krugman, Paul R. “What Do Undergrads Need to Know About Trade?” The American Economic

Review, vol. 83, no. 2, 1993, pp. 23–26.

Welcome to Sites At Penn State. This is your first post. Edit or delete it, then start blogging!