The September 2012 Unemployment Numbers and the ‘Surplus Population’

This post concentrates on the U.S. economy. However, the basic trends are the same in all imperialist countries.

On October 5, the U.S. Labor Department issued its monthly estimate of unemployment for September 2012. Much to the surprise of most observers, the figures showed a drop of unemployment from 8.1 to 7.8 percent. For the first time in 44 months, unemployment dropped below the psychologically significant level of 8 percent.

The reported drop in unemployment gave a much needed shot in the arm for the Obama reelection campaign, which had been reeling in the wake of the president’s poor performance in his first debate with Republican challenger Mitt Romney. As could be expected, Democrats were delighted by the unemployment report, which at first glance seemed to indicate that the lagging recovery from the 2007-09 “Great Recession” was finally gaining momentum.

Republicans, on the other hand, were disappointed, and some could hardly hide their anger. Jack Welch, the former head of the General Electric Company and a staunch Republican, infamous for his “downsizing” and layoffs when he was head of GE, even hinted that the unemployment report was deliberately falsified by the Obama administration to boost the president’s chances of reelection.

Is it possible that Welch is right? As we will see, of far greater importance is what the Labor Department’s rate of unemployment actually measures.

Last month, I examined John Smith’s article in the July-August issue of Monthly Review on GDP (gross domestic product). Smith explained that this most widely accepted measure of economic growth, even by Marxists, is in reality thoroughly grounded in neo-classical marginalist theory. As a result, GDP cannot distinguish between the growth of a country’s own forces of production and the growth of a country’s exploitation of other countries.

The reported “sharp drop” in unemployment, as the capitalist media described the 0.3 percent decline in unemployment between August and September that so delighted Obama supporters, provides an occasion to examine yet another economic statistic that draws widespread attention.

Exactly what does the unemployment rate actually measure? As we will see, the reported unemployment rate is rooted in the false concepts of neo-classical marginalism just like GDP is.

Did the Obama administration lie about the unemployment rate?

Over the years, it has been revealed that U.S. presidents have repeatedly lied about many things. Could the September unemployment report be simply another example of a U.S. administration lying to the American people in order to increase its chances of winning reelection, just as Jack Welch charged?

However, making an accusation is not the same thing as proving it. True, experience has shown that if you accuse the U.S. government of lying about something, you have a more than slight chance of eventually being proved right. After all, the Obama administration, much like its predecessors, has been lying about Iraq, Afghanistan, Iran, Libya and Syria. So why when it is faced with a tough reelection struggle would it not lie about the unemployment rate?

Much of the media immediately jumped on Welch for claiming that the Obama administration issued a deliberately falsified unemployment report. Many articles pointed out that the Labor Department employees who collect and estimate unemployment are civil servants who cannot simply be fired by the president if they do not do his bidding. (1) If the president enjoyed the power to hire and fire the government employees who calculate the unemployment estimates, nobody would take the Labor Department’s unemployment reports seriously.

The problem for those who claim that Obama deliberately faked the unemployment report begins with the fact that the U.S. government and Federal Reserve System need statistics that are at least somewhat meaningful if they are to avoid making disastrous mistakes in economic, and especially monetary, policy.

For example, if deliberately falsified government reports indicated an economic boom that was in fact not taking place, the Federal Reserve System might try to restrain the non-existent boom, resulting in an unnecessary—for capitalism—recession. This is why statistics on employment and unemployment are made by civil servants who are carefully shielded from the Democratic and Republican politicians in the White House and Congress.

If in this case Obama managed to circumvent these protections in order to produce a falsified unemployment report, it is not exactly obvious how he would have been able to do this. Therefore, unless evidence comes to light that clearly shows that the White House managed in this case to override the protections against the manipulation of statistics to the president’s own narrow personal advantage—as opposed to the interest of the class that he serves—it is wrong to make any allegations to the contrary.

Unemployment fluctuates under the capitalist system

As regular readers of this blog should realize by now, the level of unemployment is not fixed but varies with the phases of the industrial cycle. Indeed, we would expect unemployment to be trending downward four years after the eruption of a major crisis of overproduction. Remember, if the current industrial cycle proves to be a “typical” one, a new crisis won’t be due until about 10 years after the outbreak of the last crisis—around 2017, give or take a year or two. Since the reported fall in unemployment is exactly what we would expect at this stage in the current industrial cycle, what is all the fuss about?

Of course, U.S. presidents always take personal credit for upswings in the industrial cycles and the drops in the unemployment rate that are associated with them, which the occupants of the White House in reality have virtually nothing to do with. This is simply the normal demagoguery that accompanies every election—especially presidential elections—in the U.S. Yet even after taking all this into account, there was something rather strange about the September unemployment figures.

Anomalies

A sharp decline in unemployment would imply an acceleration of the recovery as the current industrial cycle moves from the post-crisis stagnation through the average prosperity that precedes a new boom that will lead directly to the next crisis. The problem is that there is no sign of such an acceleration in most of the economic figures that have been coming out for either the world in general or the U.S. economy in particular. Quite the contrary, in fact. Europe has actually slipped back into recession—the most hard hit countries such as Greece having never emerged from the Great Recession to begin with.

Recent reports indicate that even the booming economy of China has been losing momentum in recent months, reflecting a decline in exports to recession-bound Europe. India and Brazil seem to have been affected by the same trend. Indeed, unemployment rates in Europe as a whole now exceed the levels that prevailed during the Great Recession proper. It seems that over the last six months the world economy has entered a phase of “slowdown” if not a full-scale new global recession. It therefore seems unlikely that the U.S. unemployment rate could in reality be falling significantly during the current global slowdown.

Dollar standard

Some of the divergence between the U.S. economy and the European economy reflects the operation of the dollar standard. Under the dollar standard, internationally traded commodities are priced in dollars and U.S. dollars serve as the international means of payment. This system forces governments and corporations to maintain large reserves of dollars, or dollar-denominated assets—near cash—that can be quickly converted into dollars. This creates a demand for dollars that would otherwise not exist. The result is that the United States—both the government and private sectors—can borrow much more money than would otherwise be the case.

Over the last year, the debt crisis involving European governments has been worsening, leading to the current European recession, and at times has even threatened to degenerate into a renewed full-scale global panic that would trigger another deep global recession. Under these conditions, capitalists have tended to move their capital into dollar-denominated, as opposed to euro-denominated, assets. The reason is that the capitalists feel the need to build up dollar cash reserves to meet any sudden demand for payment in U.S. dollars by their creditors. These underlying movements are as always magnified by speculation.

The consequent flow of money capital into the U.S. dollar has allowed interest rates in the U.S. to fall to very low levels. The low interest rates have encouraged “credit-worthy” U.S. homeowners to refinance their home mortgages at much lower interest rates, allowed “credit-worthy” people to purchase new homes, and also encouraged the purchase of durable consumer commodities like automobiles. This so far has protected the U.S. economy to a certain extent from the current European recession and the associated general global slowdown.

Something similar occurred at the time of the “Asian crisis” that broke out in 1997. That crisis began in July 1997 with the devaluation of the Thai baht. Many Asian countries quickly plunged into deep recession, especially Indonesia, which brought down the the bloody Suharto dictatorship. (2) The crisis, however, led to a stampede on the part of the world’s money capitalists into the U.S. dollar.

The dollar soared against other currencies as well as gold, allowing the Federal Reserve System to pump extra dollars into the U.S. economy, which caused interest rates in the U.S. to plunge. A considerable portion of the world’s money capital and with it effective monetary demand shifted from previously booming Asia to the U.S.

The fall in long-term interest rates caused by the massive inflow of money capital from Asia led to the huge housing boom that was to end so disastrously 10 years later. But at the time, the boom in housing and overall relative prosperity led to considerable boasting by the Democrats—Bill Clinton was in office—the U.S. media, and the economics profession about how wonderful the U.S. economy was doing and how this vindicated the neo-liberal “Washington consensus.”

Therefore, instead of the U.S. economy falling into recession, the immediate effect of the Asian crisis was instead a huge growth in the U.S. trade deficit. Later on, the U.S.’s huge trade and current account deficits were to play an important role in the Great Recession of 2007-09. However, as regards the crisis that began in 1997 proper, only when that crisis eased in Asia and money capital began a return flow to Asia in order to buy up depreciated assets did the U.S. economy slide into recession. Something similar seems to be happening now, though this time it is Europe rather than Asia that is threatened with collapse.

It is quite possible that the U.S. economy will experience a recession once the current debt crisis eases in Europe and money capital returns to Europe to buy up depreciated financial assets—and possibly even some Greek islands—at fire sale prices. In any event, if the current economic slowdown centered in Europe were to deepen into a full-scale global recession, the U.S. would inevitably be drawn in and unemployment, far from falling, would inevitably rise sharply once again.

Other anomalies

Overall, considering the current state of the global economy, it seems unlikely that the U.S. unemployment rate would be falling sharply at this time, as the BLS (Bureau of Labor Statistics) September unemployment report claims. But the anomalies don’t end here. There are considerable contradictions within the unemployment report.

The biggest internal contradiction is between the so-called payroll survey and the household survey. The payroll survey is a survey of businesses that asks them how their level of employment changed over the preceding month. As expected, the September employment report indicated that businesses added about 114,000 employees, about enough to keep up with population growth more or less but not enough to reduce unemployment much once the growth in the working-age population is taken into account.

The addition of a mere 114,000 jobs is well below the level that would be expected if the U.S. economy was entering into the kind economic boom that really would reduce unemployment significantly—until the inevitable next crisis, that is. Instead, it is consistent with other economic statistics that indicate the continuation of the abnormally sluggish (compared to previous industrial cycles) upturn that the U.S. has experienced since the end of the Great Recession proper.

But the payroll report is not used by the Labor Department when it calculates its rate of unemployment. Instead, the Labor Department uses the household survey—a survey of households where people are asked whether anybody in their households have been laid off and are unemployed and whether they are currently seeking work or have landed a job. Unlike the payroll survey, the household survey for September reported a big rise in the number of people holding jobs.

The biggest anomaly and some others

While the payroll survey reported only a modest 114,000 new jobs, the household survey indicated that 870,000 more people had jobs in September than in August, an increase that would be surprising even if the world and U.S. economies really were booming. There is a complete disconnect between the two figures.

The anomalies in the Labor Department report do not end here. Despite the September employment report, there are indications that the U.S. economy is indeed feeling the effects of the current global slowdown, even if not to the same extent as Europe. For example, the rise of industrial production that followed in the wake of the Great Recession has virtually ceased over the last few months. The number of workers employed in manufacturing, according to the government’s own statistics, which are highly sensitive to any shift in business conditions, has begun to fall once again in reaction to the world slowdown.

In light of the reported cessation of growth in industrial production and consequent halt in the rise of manufacturing employment, it seems highly unlikely that anything like the surge in overall employment reported by the U.S. Labor Department’s household survey could have actually occurred. The industrial figures are consistent with a stagnant, if not recessionary, economy but not with a booming economy.

When statistics reported by two different methods converge, they reinforce one another, but when they diverge sharply, it indicates that there is something wrong with either one or both sets of numbers. Clearly, the U.S. economy could not have created 870,000 jobs and also 114,000 jobs. One or another or both sets of numbers must be wrong.

The possibility that the real figure is somewhere in the middle, say 400,000, seems rather unlikely in this case because even that increase in jobs would be out of line with what we know about the current state of the world and U.S. economies. If the payroll survey report of 114,000 is more or less correct, which would be in line with current world economic trends, the sharp decline in unemployment reported by the U.S. Labor Department and headlined in the media simply did not occur. (3)

Assuming it is the payroll survey that is correct—and what is known about the current condition of the global economy indicates that it is more or less correct—how could the household survey have gotten the facts so wrong without deliberate fraud?

Seasonal adjustments

One possible answer involves seasonal adjustments. In addition to the cyclical fluctuations, the capitalist economy experiences seasonal fluctuations. For example, relatively few automobiles and houses are sold during the severe U.S. winters. Many parts of the U.S., especially the East Coast and the Midwest, often experience massive winter snowstorms that disrupt both production and sales. Then as the weather warms in the spring and the winter snowstorms cease, sales of cars and houses rise.

Another seasonal factor is the shutdowns in automobile production that occur in the U.S. during its summer months. Every year, the U.S. automobile industry introduces new models. In order to produce the somewhat modified models, automobile factories have to be shut down as they are retooled to produce the new models. During these shutdowns, unemployment rises sharply among automobile workers. Since so much of what remains of the U.S. industrial economy is centered on automobile production, these seasonal shutdowns react on the many factories and shops that produce parts for the auto assembly plants. Then when the factories are ready to produce the new fall models just before the snowy cold winter sets in, auto sales and employment among autoworkers—and workers that produce auto parts—rises.

Perhaps the biggest seasonal factor is the Christmas-centered holiday season. Because of the tradition of exchanging gifts, and especially buying gifts for children to be presented on Christmas Day, retail sales soar in the days and weeks leading up to Christmas. After Christmas, retail sales plunge. These cause major movements in employment and unemployment in factories as well as wholesale and retail trade.

The statistical problem becomes how to deal with these seasonal fluctuations? For example, how do we distinguish between the post-Christmas slump in sales and industrial production that occurs every year and the beginning of a recession? The Bureau of Labor statistics include seasonal adjustments that supposedly make these distinctions. However, the seasonal adjustments can often lead to misleading statistics, since the way in which seasonal factors affect employment and unemployment is constantly changing.

For example, weather conditions are not the same every year. It is suspected that relatively strong economic statistics issued by the U.S. government during the first quarter of this year reflected the remarkably mild winter weather and lack of the usual crippling snowstorms. (4) The much weaker statistics reported in the second quarter of the year seems to confirm that this was indeed the case.

One factor that might at least partially explain the surge reported in the  household survey was the changing pattern of work among students who take summer jobs. As the school year approaches in late summer, students quit these temporary summer jobs. This effect causes a contraction of employment. The Labor Department seasonally adjusts the figures by reporting the creation of non-existent jobs. In the summer, they report fewer jobs created than are actually created so things should balance out across the year—or at least that’s the theory.

Apparently, there was a less than average decline in the number of these temporary summer jobs this year—due to changing seasonal patterns. Perhaps in these hard times students are quitting their summer jobs later than they used to. This might have caused BLS statistics to report the creation of hundreds of thousands of nonexistent jobs when it seasonally adjusted the employment figures for September.

Another factor was a reversal of the decline in government jobs both state and federal that has marked the whole recovery up to now from the Great Recession. In the past, government jobs would grow rapidly following a recession, but not this time.

What caused the reversal of this trend in September? September is only a few months before the 2012 elections. One way the Obama administration and state and local governments as well can improve the unemployment statistics just before the election without directly falsifying the numbers is to bunch government spending in such a way that a surge in government—and government-financed—hiring occurs just before an election.

This can create a misleading impression in data released just before an election that the economy is doing much better than it really is. Not only the Obama but other administrations, both Democrat and Republican, have been suspected over the years of doing this. We would have to “open the books” of government both federal and local to determine to what extent the Democratic and Republican politicians engage in this sort of thing. (5) Perhaps the Labor Department statisticians should make a “seasonal adjustment” for the electoral season.

The nub of the problem and the real danger

The real problem with the BLS unemployment estimates, however, does not consist of possible “fudging” by pro-administration statisticians to make the figures “look better”—unproved in this case—before a presidential election. Instead, it lies with the way the capitalist governments define unemployment. The unemployment figures are designed in such a way that they give government and Federal Reserve System policymakers information on the current state of business—though the government and Federal Reserve have many other ways to determine the underlying trend in business conditions—while concealing the essence of the current unemployment crisis—the growth of chronic long-term joblessness.

The ‘surplus population’ in classical political economy

Back in the 19th century, long before governments released monthly estimates of employment and unemployment, political economists wrote about what was then called the “surplus population.” The surplus population was defined as that part of the population who were not receivers of rents and profits—the propertied classes—or actively holding jobs—the working class. The economists of those days, including David Ricardo, used the so-called law of population of Malthus to explain the existence of a surplus population under the rising capitalist system.

According to the so-called Malthusian law of population, the population inevitably grows faster than the means of subsistence. Even if technological and scientific progress caused agricultural production to soar—which is exactly what happened—the rise in means of subsistence would, according to the Malthusian population theory, cause the population to grow even faster. Therefore, as Jesus is reported to have told the disciples, “the poor will always be with you.”

The surplus population in Marx and Engels

Marx and Engels also noted the existence of a surplus population. They explained, however, that the real cause was not the pressure of the population on the means of subsistence as the economists had claimed but the pressure of the population on the means of employment. Marx refined the notion of the surplus population into the concept of the reserve industrial army.

Marx explained that the disappearance of the reserve industrial army—or surplus population—would be a disaster for capitalism. Indeed, it would represent what Marx called in Volume III of “Capital” the absolute overproduction of capital. (6) If such an absolute overproduction of capital ever developed in the real world, competition among workers for jobs would virtually cease while competition among capitalists for workers would drive up wages—even in the absence of unionization—to such an extent that the continued production of surplus value—and thus capitalism—would be impossible.

In reality, capital is saved from the “disaster” of the absolute overproduction of capital—that is, genuine full employment—by the ever-growing mechanization of production that is rooted in the competition between workers and machines—as wages rise the bosses introduce more mechanization into production—the continued expropriation of the remaining small producers, and last but not least, the periodic crises of overproduction that at regular intervals reinforce the reserve industrial army.

How the marginalists made the surplus population go away

The marginalist economists, unlike their classical forebears, were more interested in “disproving” socialist criticism of capitalism, which was by the time of the so-called “marginalist revolution” increasingly Marxist, as opposed to objectively studying the laws that actually rule the capitalist economy.

According to the marginalists, the capitalist economy has a built-in tendency toward “full employment”—the very condition that Marx considered incompatible with capitalist production for any length of time. Instead of using the term “surplus population,” which began to die out with the coming of the “marginalist revolution,” the marginalists substituted the concept of the “voluntarily unemployed.”

According to the neo-classical marginalist theory, every person has a choice between holding a job at the going wage rate for workers of their particular skills, or choosing leisure. Assuming “perfect competition” prevails in the labor market, marginalism claims that each worker can obtain a job at a wage that corresponds to the amount of value that the worker’s labor will create, assuming the potential worker chooses employment over leisure. Therefore, a large idle population is not really a problem. It is simply the consequence of a free society—as opposed to a slave society—where people are “free to choose” between employment at a wage that corresponds to the value that their labor will create if they choose employment, and leisure.

This neo-classical theory of employment and unemployment forms the basic assumptions used by capitalist governments when they calculate the unemployment rate.

The rate of unemployment estimated by capitalist governments therefore makes no attempt to measure the percentage of the population that is “voluntarily choosing leisure over employment” but only those who are actively seeking work, the so-called “involuntarily unemployed.” Consequently, official unemployment figures measure only a small part of the unemployed population, or to use the more honest 19th-century terminology, the surplus population. Therefore, in order to cover up the current long-term unemployment crisis we are confronted with today, there is no need to actually falsify the figures. Rather, the falsification is built right into the method and assumptions by which unemployment is calculated.

Who is not counted in the unemployment figures?

The huge and growing U.S. prison population, now rising toward two and a half million persons, are not counted as unemployed. The marginalist economists who designed the methods by which the employment and unemployment figures are calculated figure that imprisoned people are not after all “free to choose between labor and leisure” and therefore can never be “involuntarily unemployed.”

The considerable number of young people—many members of oppressed nationalities—who join the armed forces only because they have no chance of finding employment elsewhere—are not counted either. In the New Deal years, when official figures on employment and unemployment first began to be calculated, members of the armed forces were not considered employed. This was an echo of the theories of the classical economists who considered solders to be “unproductive workers,” since they did not produce surplus value for the capitalists.

The marginalist economists have helped the government correct this “mistake” of the New Dealers. Unlike the classical school, marginalism makes no distinction between productive (of surplus value) workers and unproductive (of surplus value) workers such as soldiers. From the viewpoint of the professional economists and the statisticians inspired by them, today’s soldiers are voluntarily agreeing to serve in the armed forces rather than work for a civilian employer or choose leisure. They are therefore counted as employed.

We often hear from the media and the economists how unemployment rates even in the wake of the Great Recession are still much lower than they were during the “Roosevelt prosperity years” of the mid 1930s, now considered by historians as part of the Great Depression. What they don’t mention is that the way of calculating unemployment has been changed. The WPA workers were counted as unemployed by statisticians in the mid-1930s, but they would be considered to be “employed” today for exactly the same reason as the members of the armed fores are considered to be employed.

To pragmatic politicians who probably don’t give a hoot about economic theory—whether classical or marginalist—including the members of the armed forces and all other employees of the state among the employed has the great advantage of making the figures look better. Even more importantly, the method of calculation that yields the lowest possible rate of unemployment best serves the interests of the capitalist class. The lower the rate of unemployment as “estimated” by the government, the less political pressure there is to launch public works programs that would reduce the level of unemployment—assuming we count the workers employed by these programs as employed—but also the lower the benefits that the capitalist class gains from unemployment.

Another way the rate of unemployment is minimized is the practice of counting the people employed part time—even though they are seeking full-time employment—as employed. For example, if an unemployed person agrees to mow a neighbor’s lawn for an hour and receives $10 in return, that person is counted as “employed” just like she would be counted as employed if she was working a 60-hour a week factory job!

The capitalists consider most of the present-day surplus population to be “unemployable.” When you apply for a job, you are given a form that asks you what your last three jobs were. Unless you have just reached working age, you are expected to show evidence of recent employment. If you cannot show such evidence without too many “gaps” in your employment record, it is rather unlikely you will be seriously considered for the job. The longer you are unemployed, the more likely you are to fall into the “unemployable population.” Still worse for people seeking to escape long-term unemployment, with the rise of the Internet it has become much easier for the bosses to check information on job applications.

When a person is unemployed for a certain period and they become “unemployable” in the above sense, they sooner or later become discouraged and stop looking. The bosses have written you off as “unemployable” and the government, media and economists consider that you are voluntary choosing “leisure” over labor and over the “compensation” for labor—wages—and are therefore not really “involuntarily” unemployed!

Marx explained that one of the functions of the “reserve army” under capitalism is that it is a source of additional labor power if the demand for labor power experiences an extraordinary rise. Under these conditions, the bosses will offer jobs to people who they normally would not consider for employment, such as people without a solid recent work history. As word gets out that even people who have been unemployed for prolonged periods or even never held a job before are being offered jobs, previously “discouraged” workers start looking for and finding jobs.

The last time in the U.S. this happened on a large scale was during World War II. During the Depression, the bosses had written off a considerable part of a whole generation of young people as “unemployable.” It wasn’t easy to build up a “solid work history” during the Depression decade. But when the war economy created a huge demand for labor power and the bosses were suddenly competing with the military—almost all the “unemployable” people were drawn either into the military or into civilian employment. As the postwar economy entered a long period of accelerated expansion as part of the aftermath of the Depression and war, many of these formerly “unemployable” workers entered into many decades of productive employment.

The baby boom proves marginalist theories of employment false

Here we find the origin of the “baby boom.” The roots of the baby boom can be traced back to the super-crisis of 1929-33, which ushered in the Depression. In the years that followed, young people found it very difficult to build up an employment record and fell into the category of the “unemployable.” If you were “unemployable” with virtually no prospect of finding a decent job, it seemed pointless to marry and raise a family, since you would lack the means to support a family in anything but direst poverty.

When World War II came, these people were drafted, or if they were older, female or considered unfit for military service, they found work in the suddenly labor-short war economy. This was the “Rosie the Riveter” phenomenon. Millions of victims of the Depression generation proved in practice that they were far from “unemployable.” Then, as the postwar economy entered into a period of accelerated expansion, many of the people who now had proven their worth either in the military or in the war economy were able to find jobs, acquire additional skills, build careers, get married and raise families. The number of babies boomed.

Therefore, the very existence of the baby boom generation, now gradually entering retirement age, is living proof that bosses’ claims about today’s “unemployables” and the theories of the economists about the “voluntarily unemployed” choosing leisure over employment are false.

The Clinton boom and the ‘natural rate of unemployment’

Regular readers of this blog and other students of Marx’s critique of political economy know that the classical bourgeois economists noted the difference between “natural prices” determined by the amount of labor that is socially necessary to produce a commodity of a given use value and its market price, which fluctuates around its natural price.

With the coming of the marginalist revolution and the final repudiation of any notion of labor value, the economists dropped the distinction between natural price and market price. But borrowing some terminology from the rich heritage of the classical economists, they instead developed the notions of the “natural rate of interest” and “the natural rate of unemployment.” I have dealt with the false notion that there is a natural rate of interest elsewhere in this blog.

Here, I will explore why the notion of a natural rate of unemployment is equally false. The economists point out that at any given point in time there are always people between jobs. A worker might want to seek a better job and so she quits her current job and begins a search for a better job. The economists explain that this kind of “frictional unemployment” represents no real problem that the government need concern itself with.

If, the economists claim, “perfect competition” prevailed in the labor market—no unions, no unemployment insurance, no welfare or dole—all frictionally unemployed workers would quickly find jobs. The “choice” confronting the workers then would not be between labor and leisure but labor and death. This indeed is the ideal situation from the viewpoint of capital, an ideal toward which the capitalists are always striving.

If capital obtained its ideal, the highest possible rate of surplus value—the ratio of unpaid to paid work, given the productivity of labor—would be obtained. This would have the further benefit to capital of holding back the rise in the organic composition of capital. (See also here.) This would achieve the highest possible rate of profit. Then only the owners of land and capital who can live off rent and interest would be in a position to choose leisure over wages.

But the marginalists complain that to the extent that “monopolies” such as unions exist in the labor market and the “welfare state” pays the unemployed larger benefits than the value that their wages would create if they were employed, the number of unemployed persons will rise above the “frictional unemployment,” raising the “natural rate of unemployment.” The only real way, the “neo-classical” economists “explain,” to reduce the “natural rate of unemployment” to a minimum is to bust unions and reduce, and ideally eliminate, the “welfare state” altogether—all this they claim in the interest of the poor and downtrodden!

The danger of ‘over-employment’

At any point in time, there will be, the marginalists explain, a natural rate of unemployment. If unemployment falls below this rate, they claim, there will be “over-employment.” When this happens, they explain, the bosses are forced to employ “unemployable” people because they can’t find “qualified” workers that can produce value that corresponds to the wages that the creators of employment—the bosses—are offering. According to the economists, “over-employment” leads to falling labor productivity, eroding work discipline, and rising wage inflation.

When unemployment rises in the wake of a major economic crisis, the economists duly explain that the natural rate of unemployment has risen. Anything above this new higher level, they explain, represents “over-employment.” Even “neo-Keynesian” economists who believe that government should do something when unemployment rises above the natural rate of unemployment also claim that the government should be equally concerned when unemployment falls below that rate. According to our “neo-Keynesians,” the natural rate of unemployment represents “full employment” and any unemployment rate below the natural rate represents “overfull” employment.

During a period of “overfull employment,” the neo-Keynesian economists claim, labor productivity stagnates or falls as unqualified workers who do not produce the value of their wages are drawn into employment, leading to inflation. Under these conditions, the neo-Keynesian economists urge the government to take measures that are designed to raise unemployment back up to the “natural rate.” Governments budgets should be balanced, social programs should be cut back and the “monetary authority” such as the Federal Reserve System should raise interest rates in order to reduce demand and slow the economy, causing unemployment to rise.

Indeed, even more “progressive” Keynesian economists accept the basic argument. Their difference with the “pro-business “neo-Keynesians” comes down to the fact that they define the natural rate of unemployment at a somewhat lower level than “neo-Keynesians”—for example, perhaps at 4 percent unemployment rather than 6 percent or 7 percent.

Before the recent Great Recession, the last time the economists raised their estimates of the natural rate of unemployment was during the deep recessions of the 1970s and early 1980s. When official government unemployment peaked at over 10 percent in many of the imperialist countries in 1982, most economists, while admitting that 10 percent or higher was above the natural rate of unemployment, claimed that the natural rate of unemployment had indeed risen, perhaps to 6 percent or even 7 percent. If the natural unemployment rate was so high, the economists explained, this was due to the “over-strong” trade unions and the “overly generous welfare state.”

However, during the Clinton “boom” of the late 1990s, official unemployment as reported by the U.S. Labor Department actually fell briefly below 4 percent. According to most economists, the U.S. should have been experiencing a major problem of “over-employment,” with labor shortages, skyrocketing wages and accelerating inflation. However, somewhat to the embarrassment of many economists, nothing of the sort occurred. Indeed, there was little upward pressure on wages despite the fact that unemployment levels were below what most economists considered the natural rate of unemployment.

How big is the U.S. surplus population?

The total size of the U.S. surplus population can be roughly calculated by looking at what percentage of the population is participating in the labor force and subtracting that from the total working-age population.

According to the Labor Department, during September 2012 63.6 percent of the “non-institutional population” over age 16 was in the labor force. The labor force is defined as those who are working plus those who are actively looking for a job—the officially unemployed. A crude estimate of the surplus population can be calculated by subtracting 63.6 from 100, giving us 36.4 percent.

It is important to realize that this figure does not include those who are considered officially unemployed—that is, those without jobs but actively seeking work—about 12 million persons in September 2012. If we add the 12 million people that the government considers to be unemployed to the 36.4 percent of the population that is not in the labor force, we have something like the surplus population—though this would include members of the ruling class who really are “voluntarily unemployed.”

The “non-institutional” population of the U.S. over 16 years of age, according to government estimates for May 2012, was about 243 million. Of these persons, about 155 million were counted as part of the labor force, either working or actively looking for work—the officially unemployed. The “institutional population” includes both the imprisoned population plus the very old who live in old-age homes, nursing homes and so on and are presumably incapable of working.

If we subtract the 155 million people who were probably capable of working but were not considered part of the labor force, we get about 88 million persons. If we add the 12 million people who were actively looking for work and were therefore considered part of the work force, we get about 100 million persons.

We should also add let’s say 2 million to take account of the imprisoned population—most of whom are capable of working—which gives us approximately 102 million persons making up the surplus population. These figures do not include those forced into the armed forces due to economic reasons.

Some of the 100 million plus surplus population consists of members of the ruling class who do not have to work due to their dividend, rental and interest incomes, though some members of the ruling class do choose to hold jobs. We would also have to add housewives—and a few househusbands—who choose to perform housework rather than wage labor. These days, most married women are forced to find jobs as well as perform the lion’s share of housework, so those married women who choose not to work if not members of the ruling class proper at least for the most part belong to the more privileged upper part of the middle class.

From the viewpoint of a future socialist society, the idle members of the ruling class who do not need to work and really are in a position to choose leisure over work should also be working. After all, even if the capitalist system allows this privileged minority to live without working, society is no doubt the poorer in the absence of the labor both manual and intellectual most of these people are capable of performing.

Even if we exclude the voluntarily unemployed members of the ruling class and add to them the more privileged married women from the upper middle class who can choose to avoid wage labor plus housework in favor of housework alone, it is apparent that the real number of people who are not working but would work if a genuine full employment economy were created consists of many tens of millions of people. We should also take into account the fact that a huge number of people who are working only part time—even as little as an hour per week—when calculating the size of the surplus population, or Marx’s reserve industrial army of the unemployed.

Long-term trends in the size of the surplus population in the U.S.

Official government figures show that since the late 1940s, there has been an almost steady decline in labor force participation among men. In the late 1940s, just under 90 percent of the male population was in the labor force. This has declined steadily since then to just barely over 70 percent now. Since the Great Recession, this decline has accelerated, but its tendency to decline by no means began with the Great Recession and it would take a lot more than a normal upturn in the industrial cycle to reverse this trend for any period of time.

However, until the late 1990s this trend was offset by a rise in female labor force participation. In the early postwar period—”The Leave it to Beaver Years” (7)—the typical American woman was a housewife who worked in the home rather than selling her labor power to a boss. In those days—the days of relatively strong unions—most American men were able to earn a sufficient wage so their wives did not have to sell their labor power to the bosses and thus bear the double burden of housework and wage labor. But as male participation in the labor force declined, female participation rose from just over 30 percent to about 60 percent in the late 1990s at the height of the “Clinton boom.” But at this point, the rise in female participation in the labor force has halted, while the decline in male participation has continued.

Despite the boasting of the Democrats, media and professional economists, this trend indicates that there was already something very wrong with the U.S. economy during the Clinton boom. It is important to note that the halt in the rise of female labor force participation began about a decade before the Great Recession hit. Since the Great Recession, the female participation in the labor force has joined male participation in a clear downward path.

The real danger

If the the weak growth in employment continues—improving a bit during the boom phases of the industrial cycle but turning sharply negative during recessions—the tens of millions surplus population will only grow larger over time—even if the official unemployment rate shows no tendency to increase and even declines. By its very nature, the official unemployment rate refers to people who are experiencing unemployment that is of short enough duration that they have not yet become “unemployable.”

Wall Street’s reaction to the September unemployment figures

As a rule, speculators on Wall Street pay little attention to the unemployment rate but instead watch the employment figure. In contrast to the media, Wall Street largely ignored the September “sharp drop in unemployment” report, noting simply that payroll surveys indicated a continued sluggish growth in total employment and little improvement in the pace of business. Therefore, stock prices going counter to their general bullish trend this year, generally fell in the days immediately after the unemployment report was issued.

The growth of the surplus population and African Americans

It is well known that the official unemployment rate always shows a much higher rate of of unemployment for African Americans than the rate for whites. The September unemployment numbers were no exception. The official unemployment rate for whites in September was “only” 7 percent. But for African Americans it was 13.4 percent. Hispanics held an intermediate position of a 9.9 percent rate of unemployment. But just like unemployment figures hide the chronic jobless, these figures cover up the extent to which African Americans compared to whites are being forced into the ranks of the “unemployable” part of the surplus population.

The real problem facing African Americans, especially the youth, is not so much the short-term unemployment where they are still actively looking for work with good prospects of landing a job soon—the only people counted as unemployed—but the chronically unemployed who have given up on the search for work, or moved into the world of illegal economic activity such as the world of gangs and the drug trade. Participation in the latter, especially if you are African American, almost always leads to prison, and often “execution” at the hands of the police.

Slavery’s long shadow

In the years after the Civil War, the formerly enslaved Black population of the South was first transformed into sharecroppers as a kind of transitional form of labor between chattel slavery and “free” wage labor. Other transitional forms of labor standing even closer to slavery were the various forms of prison labor symbolized by the largely Black southern “chain gangs.”

Beginning with World War I, a combination of the growing mechanization of agriculture, the industrialization of the South, and the movement of African Americans to northern industrial cities opened up the possibilities of African Americans, traditionally accustomed to the hard manual labor of sharecroppers, finding jobs in the then booming U.S. basic industries. This trend was interrupted during the Depression decade but resumed with the onset of the war economy at the beginning of World War II.

The existence of a growing African American industrial working class greatly increased the ability of the African American people to fight against their white oppressors during the middle years of the 20ths century—the years that turned out to be the high water mark of U.S. domination of world industrial production.

African Americans played a crucial role in building the CIO unions in the 1930s and 1940s. Though the role of the CIO was not what it should have been, it was still a vast improvement over the outright Jim Crow policies of the overwhelmingly white AFL craft unions. The movement to unionize the South in the 1930s was mostly defeated, largely because of the alliance of the CIO leaders with Roosevelt’s Democratic Party, which at that time included the racist Dixiecrats of the South. Still, the experiences of Black workers North and South, whether victorious or defeated in the unionization struggles of the 1930s and 1940s, paved the way for the Civil Rights movement of the 1950s and 1960s that finally overturned legal Jim Crow. It was no accident that Dr. Martin Luther King was actively involved in the campaign to organize sanitation workers when he was murdered in Memphis, Tennessee, in 1968.

However, since the 1960s the combination of the growing mechanization of U.S. industry and especially after 1979 the growing trend toward “de-industrialization” of the U.S. that has moved industrial production to the “global south” has accelerated. An ever-growing number of African Americans have fallen into the “unemployable” part of the surplus population. Already in the 1960s, at the very peak of the postwar prosperity and despite the extra demand generated by the deficit-financed government spending for the Vietnam War, combined with the larger number of Black youth serving in the armed forces, the growth of chronic unemployment among ghetto youth played a major role in the series of urban uprisings that swept the northern urban Black ghettos.

Since that time, the situation has worsened considerably, with the Great Recession being only the most recent blow. For African Americans, even the great historic victory that was won in the 19th century with abolition of chattel slavery is now being undermined. Modern slavery began in the 16th century with the birth of the world market caused by the discovery of gold and silver in the Americas. Slavery played a crucial role not only in the inception of capitalism but lasted well into the age of industrial capitalism. For example, the rise of the steam-driven Manchester, England, textile industry in the early and middle 19th century depended on cheap cotton produced in the southern U.S. by slave labor.

The rapid growth of industrial capitalism in the U.S. beginning in the middle of the 19th century led to the downfall of chattel slavery—though not without numerous slave rebellions and finally the bloody U.S. Civil War—and as we saw the growth of a Black industrial working class was crucial in the ultimately successful struggle against legal Jim Crow a century later.

But recent decades have been characterized by the decline of industrial production in the U.S. This has brought about a renewed growth of legal bondage among African Americans in the form of soaring rates of imprisonment. More and more of all nationalities—but as always disproportionately among African American youth— followed by Latino youth who are also often at least partially descended from enslaved Africans—face the prospect of never holding a regular job even if the U.S. Labor Department reports unemployment rates of “only” 6 or 7 percent, or even 4 or 5 percent.

Unless a dramatic reversal occurs in the U.S. economy, such as last occurred with the 1940s war economy and postwar boom years that followed, about half the youth today can look forward to at best working occasionally in a low-paid service-sector job; be forced into the world of street gangs and the drug trade, which for most will lead to imprisonment or an early death; or be pressed into the biggest “gang” of all, the U.S. armed forces to serve as cannon fodder in the Empire’s endless wars against the oppressed nations of the world. The descendants of the African slaves are disproportionately affected by these trends.

The growth of the surplus population and the decline of the trade unions

The growth of the surplus population, which is creating a growing caste of “unemployable people” acts as a tremendous drag on the employed workers. The employed workers—and not only blue-collar industrial workers but many white-collar workers as well—face increasingly frequent short-term periods of unemployment that threaten them with falling into the ranks of the “unemployable” if they do not promptly find new jobs.

In the heyday of U.S. industrial production, the position of workers was strengthened during upswings of the industrial cycle. While upswings of the industrial cycle continue to occur, with the growth of the surplus population of the “unemployable,” the bosses are increasingly able to say even when the economy is booming and the stock market is soaring that “there are plenty more where you come from.” If you don’t work on our terms at the wages we are offering, the bosses say, not only will you lose your job but you risk soon finding yourself unemployable.

The growth of the surplus population has played a huge role in the decline of the trade unions, and the constant shift to the right—with brief interruptions—of capitalist politics. Under these conditions, the invisible chains of wage slavery inevitably tighten around even the employed workers. This is good for the rate of profit and the stock market but disastrous for the working class and its allies.

What is needed for a new resurgence of the trade unions

Under these conditions, the traditional “bread and butter business unionism”—unionism pure and simple, as Samuel Gompers, founder of the U.S. AFL, expressed it—has now been rendered largely ineffective. Under the historical conditions of the decline of capitalism that we are now living through—barring a new long-term expansion  well beyond the normal upswings of the industrial cycle—the only way a major union resurgence can possibly occur is as part of a general revolutionary political awakening of the working class that aims to abolish the exploitation of wage labor altogether. This is true whether the official rate of unemployment as calculated by the U.S. Labor Department—and its counterparts in other capitalist countries—is reported up or down.

Posted October 28, 2012

_______

1 In defending Obama against the claim that he deliberately manipulated the unemployment figures, much of the media point out that when the secret White House tapes of Richard Nixon (U.S. president between 1969 and 1974) were published, it was revealed that Nixon raged against “the Jews” in the Labor Department. Nixon thought that “the Jews” were overestimating unemployment in order to bring about the defeat of Republicans in favor of liberal Democrats.

Leaving aside Nixon’s anti-semitic slurs, it is possible that Labor Department employees, whether out of genuine liberal convictions or out of fear that a right-wing Republican administration would be much tougher on federal employees, did all they could to make the September unemployment report look as good as possible in order to increase the chances of a Republican defeat. There will be one more unemployment report before the election. It will be interesting to see what that shows.

2 In 1965, with the support of the CIA, General Suharto staged a coup d’etat that stripped President Sukarno of political power making Suharto dictator. The Indonesian Communist Party, the largest Communist Party in the world that did not have state power, was destroyed. The rivers of Indonesia literally ran red with blood as a million or more people were murdered by the military or by right-wing gangs. In the years that followed, Suharto presided over a dictatorial, thoroughly corrupt government.

Unlike the case with Syria today and its president, Bashar al-Assad, the U.S. media never complained about Suharto’s “human rights violations” and rarely even described him as a dictator. Indeed, they expressed their delight about the “free world’s” great victory over Communism in Indonesia at the very moment they were escalating their ultimately losing war against the people of Vietnam and the other Indochinese countries. Suharto was finally forced to resign in May 1998 in the face of mass demonstrations that occurred as a consequence of the collapse of Indonesia’s economy in the wake of the 1997 crisis.

3 Despite the extremely slow pace of the recovery from the deep 2007-09 recession, U.S. unemployment as reported by the Labor Department has declined surprisingly rapidly from over 10 percent to the current 7.8 percent. Most of this decline has occurred due to the fall in the number of people actively seeking work, unlike September’s sharp decline that occurred due to the unbelievable gain of 870,000 reported by the household survey but contradicted by the payroll survey. Every time unemployment “unexpectedly” declines, instead of critically examining the statistics and suggesting ways to improve them to prevent the continuation of such obviously misleading reports, the media headlines them and reports the Labor Department’s “estimates” of unemployment as though they were facts.

The reason the media does this is obvious. The capitalist class, which owns the media, sees high unemployment as a good thing because it drives down wages and thereby increases the rate of profit. It is in their class interest to give the false impression that unemployment is falling rapidly in order to discourage movement demands that could actually reduce unemployment such as public works that would get in the way of the capitalists using mass unemployment to drive down wages and raise the rate of profit.

4 Which many experts in climate and meteorology suspect was associated with global warming.

5 The economist Michael Kalecki, who still greatly influences the Monthly Review school, predicted in the 1940s that the traditional “business cycle” was about to be replaced by a political business cycle. Kalecki, did not understand the real causes of the “business cycle” and much like Keynes believed that the capitalist governments had it in their power to achieve “full employment” if only they wanted to.

However, Kalecki, who grew up in Poland, had a much greater knowledge of Marxism than Keynes did. He therefore predicted that capitalist governments would increase their spending and if necessary print money to finance it in order to reduce unemployment just before elections and then cut back on spending and monetary expansion in order to increase unemployment and attack the working class just after the election.

As we have seen elsewhere in this blog, the Roosevelt administration did exactly that after the 1936 election. During the election campaign of 1936, Roosevelt took full credit for the cyclical upswing that finally set in beginning in 1933. After the election of 1936, which Roosevelt won by a landslide, the administration pursued violently deflationary policies that triggered the brief but deep recession of 1937-38. This recession dealt a powerful blow to the unionization drives of the CIO.

Kalecki’s theory of the “political business cycle” was proven wrong as early as 1960, when the gold drain of 1958-59 caused the election-year recession of 1960, infuriating Richard Nixon, who was making his first run for the presidency that year. Partially due to the recession, Nixon lost to John F. Kennedy. This already showed that the industrial cycle cannot be so easily manipulated by the government and the “monetary authority” as Kalecki thought. Much more dramatically in 2008, the Republicans, which at the time controlled both Congress and the White House as well as the Federal Reserve System, proved powerless to postpone the 2008 crisis by even the weeks that remained until the election.

However, this does not exclude the possibility that between crises—cyclical crises don’t occur every year—capitalist governments can improve business conditions at election time by postponing deflationary policies until after the election, much like Roosevelt did in 1936. The sudden reversal of the long decline of government-sector employment in the September 2012 unemployment rates certainly suggests that something like a Kaleckian “political business cycle” might have contributed to the September unemployment report.

6 By “absolute overproduction of capital,” Marx was referring to a hypothetical situation where the means of production had grown faster than the available supply of wage labor. This is quite different from the “relative overproduction of capital” that we see in the real world where a portion of the existing means of production are idled by the capitalists because they have produced more commodities than can be absorbed by the market at profitable prices.

7 “Leave It to Beaver” was an American TV show that ran from 1957 to 1963. The show was shot only in black and white. It featured the adventures of a boy named Beaver Cleaver and his older brother Wally Cleaver. It is considered perhaps the “best”—by white critics anyway—of the genre of early TV shows that are set in middle-class white suburbia. In these shows, the mother is a housewife and the father holds a steady well-paid middle-class job—he is never a trade unionist.

All characters are white and middle class. In the case of “Leave It to Beaver,” there were only two times during the entire six-year life of the show that non-white characters appeared. In the words of Wikipedia: “Only one African-American had a speaking role during the run of the series; in 1963, Kim Hamilton played a maid in episode 212, ‘The Parking Attendants.’ Five years earlier, an episode featured a Hispanic family, as Alan Roberts Costello played Roberto ‘Chuey” Varella’, a friend and weekend house guest of the Beaver in 1959’s ‘Beaver and Chuey.’ The friend spoke only Spanish, leading to a cruel Eddie Haskell prank.”

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2 Responses to “The September 2012 Unemployment Numbers and the ‘Surplus Population’”

  1. What to make of the “encouraging” 7.8 percent unemployment rate « Louis Proyect: The Unrepentant Marxist Says:

    […] a post titled The September 2012 Unemployment Numbers and the ‘Surplus Population’, he evaluates the trustworthiness of the statistics as well as their meaning within a broader […]

  2. Socialist Webzine: What to make of the “encouraging” 7.8 percent unemployment rateSocialist Agenda Webzine Says:

    […] a post titled The September 2012 Unemployment Numbers and the ‘Surplus Population’, he evaluates the trustworthiness of the statistics as well as their meaning within a broader […]

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