The most compelling enough justification for continuing with the stimulus spending policies comes from the persisting high unemployment rates in both the US and Europe. Given the weak private investment climate (due to the not so bright medium-term economic prospects), government remains the only source capable of putting to use the large numbers of idle human resources that are a major drag on the aggregate demand.
The June employment data for the US shows that over all, the US economy lost 125,000 jobs, with most of the lost jobs coming from temporary workers hired by the federal government for the 2010 Census exiting their jobs. The unemployment rate declined to 9.5% in June from the previous months 9.7%, mainly because the labor force shrank by 652,000 jobs, as many people stopped looking for work. In other words, unemployment rate fell because "the labor force fell faster than employment". The May jobs report which created 411,000 jobs was deceptive in so far as it was boosted by the federal government's census hirings.
The overall unemployment rate, incorporating those discouraged and marginalized workers, stood at 16.5%, and the economy has lost 7.4 million jobs since the recession began in December 2007. The graphics below show very clear signs that the labor market recovery is very anemic, and without more aggressive intervention it could stumble along for a long time.
Though the unemployment rate has started its decline since the past few months, it still has a long way to go before the job market fully recovers to its pre-recession level. And the pace of job creation has to be much faster if the labor market in the US is to recover fully.
Worse still, the number of long-term unemployed, who are likely to drop-out off the labor market altogether, is at its highest ever. The number of people out of work for 27 weeks or longer, as a percentage of the total civilian labor force, is at its highest level on record at 4.39%. The average length of time that the typical unemployed person has been looking for work increased again in June, to yet another record high of 35.2 weeks.
The Employment-Population ratio, which had been increasing in recent months after plunging since the start of the recession, decreased to 58.5% in June from 58.7% in May.
The unemployment rate in Euro zone was 10.1%, with 15.789 million people jobless in May, and increase of 35,000 more than in April. Across the euro zone, the broad unemployment rate has remained at around 10% for some months now, and given the weak economic prospects, it looks certain to stay there for the short to medium-term. However, there exists wide variations in euro zone unemployment rates, from 7% in Germany to 19.9% in Spain. Accross the 27-nation EU, the variation was even larger, from 4% in Austria to 20% in Latvia.
Worryingly, the unemployent rates across all the beleaguered PIIGS economies rose over May. Further, even among the others, there is enough evidence to support the view that stimulus spending and generous social welfare policies have kept unemployment rates low.
Consumer price inflation across the euro zone was at a low 1.4% and showed no signs of any increase over the month. Modest monthly increases of durable and non-durable consumer goods, 0.2 and 0.1% respectively, suggested no inflationary pressure. Producer prices rose 0.3% month-on-month in May and 3.1 percent annually, in line with economists’ expectations.
Update 1 (14/7/2010)
The number of unemployed workers in May outnumbered job openings in America by a ratio of 4.67 to 1, showing that the economy still has a lot of jobs to create to clear up the huge backlog of unemployed workers.
Update 2 (16/7/2010)
A most striking indicator of the depth of the unemployment problem is the large ratio of unemployed workers per job opening. See Mark Thoma and Economix.
Update 3 (17/7/2010)
Ezra Klein points to this superb graphic (from a Brookings study) that shows the number of months of job growth it would take for the labor market to return to normalcy. Adding new jobs at a rate of 200,000 a month would take us 150 months - or 12.5 years - to get back to normalcy.
Update 4 (19/7/2010)
Times has this demographic break-up of the profile of the 40% plus long-term unemployed.