No Overstatement: Structural Unemployment Is the Biggest Economic Threat

 | Dec 03, 2016 | 12:00 PM EST
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The overstatement of job creation and understatement of unemployment in Bureau of Labor Statistics' monthly reports is a topic I've frequently written about. But as inaccurate and misleading as these numbers have become with respect to the health of the U.S economy and labor, there is one trend that is accurately depicted in the Bureau's data. That's the steady decrease in the labor force participation rate.

Regarding the decline in the participation rate, the general meme in the financial media has consistently been that it is a reflection of an aging demographic and simply an indication of the baby boomer generation retiring.

That, however, is only one component of the issue, a cyclical phenomenon, and does not account for the secular changes to the structure of the economy, which are far more important. 

Even people who appear to understand this, though, also put more weight on the impact of an aging demographic than on a structural change in the economy, which is the exact opposite of reality.

The fact that the labor force participation rate is falling at the same time the unemployment rate is falling indicates that that there is a structural problem in the economy.

The immediate structural problem is that there is a mismatch between the skill sets that corporations need and what people have to offer. The response to that by many economists and government policy makers is that the gap can be closed by education.

But that's not so easy.

The above situation is not static and the skills in demand are changing as the structure of the economy and the way commerce is transacted are changing. And that process is accelerating as technological advances are enabling the replacement of all kinds of human labor at a faster rate than new job opportunities are being created.

The net result is that an increasing percentage of the population is no longer economically viable. What's more, this condition is not going to be reversed by regulatory, tax, and fiscal policy changes at the federal level, intended to prevent domestic U.S. companies from offshoring jobs, as is being proposed by President-elect Trump.

The labor cost arbitrage opportunities that allowed companies to reduce costs by offshoring have largely been exhausted as global labor rates have begun to flatten. I've written about this trajectory and the significant implications of it for several years, but there's been almost no public awareness of the issue expressed by government and business leaders.

A few high-profile folks, such as Tesla (TSLA) CEO Elon Musk, have discussed the impact of technological unemployment on the structure of the economy, but even he is apparently unaware of the immediacy of the issue. A deep thinker like Stephen Hawking, although aware of what the trajectory for technological unemployment implies for governments, economies and societies, does not seem to recognize the immediacy of the issue.

In the near term, monetary and fiscal policy makers are faced with how to deal with a bifurcated economy in which an increasing number of people can't participate and the financial rewards migrating to the shrinking number who can.

I last addressed this in the column, "Gap Widens Between 2 U.S. Economies," and Friday's BLS report continues the pattern. More importantly, I discussed the timing and implications of the trajectory three years ago. The trajectory I outlined for -- when the U.S. economic system can no longer function and thus collapses, which occurs when the percentage of the population that is employed in the private sector dips below 25% and is absolute at 20% -- has continued since then.

So, what does this mean?

Unless substantive action is taken by public and private sector leaders soon, the U.S. economy will face a crisis that's never occurred before -- as will every other country.

The first thing needed is awareness and public acknowledgment of the issue. But neither the outgoing nor incoming executive U.S. administrations have exhibited that. Also, I have yet to see any other world leaders expressing such concern, nor any academics or private sector executives.

Regardless of the failure to comprehend the issue by society's leaders, investors would be wise to become aware of it before others do and the issue begins to resonate with the media.

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