By John Mauldin | July 21, 2011

I wrote about a year ago about how difficult it was going to be to really bring unemployment down. Rather than go back and replay that piece, I am going to pass on a note that my friend Barry Habib sent me today, which is quite sobering, and then add my thoughts. Quoting:

“A healthy employment market is the key to a strong economy. The housing market, along with many other important sectors of our economy, is highly dependent on people feeling confident in their ability to find work. But with the rate of unemployment above 9% and the economy sputtering to recover, everyone is asking how and when will the employment situation improve? This economic lynchpin is a very hot topic, which is also a critical element of many political, economic proposals. But while promising or estimating a decline in the unemployment rate may sound good, when the actual numbers are looked at more closely, realistically, and held to the light of historical performance, the forecasted declines may be far more difficult to achieve.

“For almost 40 years, the average rate of unemployment was below 6%. But the latest recession has pushed the rate far above what had been considered “normal”. So will we get back to the “normal” levels we have been accustomed to? I don’t see that happening for at least a long while. Let’s look at some data.

“There are about 311 Million people in the US. Our natural population growth rate, which compares births to deaths, is 0.6% per year. Our overall growth rate, which adds in migration, is 0.9% per year. There is currently a little less than half of the total population in the workforce, or about 153 Million people. So a 10% rate of unemployment would amount to about 15.3 million people wanting to find work. These factors create the need for job creations that will keep pace with the growing workforce so that the rate of unemployment can at least remain stable. How many jobs need to be created to absorb the growing workforce? About 115,000 per month. This calculation takes the current work force and overall growth rate into account. Therefore, the US must create 115,000 jobs each month just to keep pace!

“These numbers also tell us that if we want to reduce the rate of unemployment by 1%, there must be about 1.53 million jobs created. But remember that our population is also growing. That means young men and women are entering the workforce every day. And the positive migration causes more people seeking employment. During the last decade, there have been two stock market tumbles and a housing crash. This has adversely changed many previous plans to retire, and causing individuals to remain in the workforce longer than they may have originally planned. And if we want to see a reduction in the unemployment rate, we will need to see job creations over and above 115,000 per month. Therefore, targeting or projecting a 1% decline in the rate of unemployment requires 1.53 million jobs created plus 115,000 jobs per month for as long as it takes to achieve the target.

“In order to calculate this correctly, we need to factor in the time frame that this target is being projected over. For example, if the target is one year, then the 1.53 million jobs would be divided by 12 months, or about 125,000 per month. We then add this to the 115,000 needed to keep pace, which brings the total to a lofty 240,000 jobs per month for 12 months average. If the target is for a drop in unemployment by 2% in three years, the total jobs needed to be created are 3.06 Million, divided by 36 months – or about 85,000 jobs per month, plus the 115,000 needed to keep pace with population growth. This means we would have to add and average of 200,000 jobs per month for 3 years. And when we start to look at historical performance, we begin to see just how hard it is to accomplish this.

“For the record, I understand that demographics from 50 years ago are different, as well as different circumstances and moving targets. It’s true we can’t create an exact duplicate set of conditions. And I also understand that as the population grows, the 115,000 jobs needed each month will compound over time. That said, I am keeping it a bit simple so we can illustrate the concept.

“I went back 50-years on the BLS site and found some very interesting data. The best year for job gains was 1978, when the US added an average of 356,000 per month. Best decade was the 1990’s, with 181,000 average monthly gains During the past 50-years the average gains per month were only 124,000. The worst decade was the 2000’s, which actually saw monthly job losses that averaged 10,000 per month.

“We often hear projections on reaching a lower level of unemployment within a certain time frame. Let’s look at a chart to see how many jobs it would take to reduce the current 9.2% rate to a lower level over some different periods of time.

“The colors on the chart help us see how likely this scenario may be. For example, the numbers in the red boxes indicate that this has never been done before during the time frame desired. Green boxes indicate that this is close to a historical average. Blue boxes are an optimistic, but achievable goal. Grey boxes have numbers that have been reached in the past, but very rarely. The yellow box indicates that this has happened only once before – and that is over 50 years of data…meaning a very slim 2% chance.

“We often hear of a return to a 6% unemployment rate. Well if the goal is to do this in 4 years, then the US would need to create just under 250,000 jobs per month on average during this period. There are 47 rolling 4 year periods during the past 50 years. For example 1961 – 1964 is one. Then 1962 – 1965 is the next, and so on. During this time, a level above 250,000 jobs per month average for a 4 year rolling period only happened three times. There were a few more times when the numbers were close, but the chance of this happening was less than 10%. If history is a guide, the promises and projections we have been hearing, will have a very low probability of becoming a reality.

“History tells us that bringing unemployment down to 8% over 4 years is just about 50/50. This is very worrisome. And back to our earlier example of bringing the rate down 2% in 3 years – The 200,000 monthly job gains needed during a 3 year period of time has about a one in three chance of happening, according to the historic data.

“Let’s look at the total needed to get to 7% unemployment in 5 years, or about 171,000 jobs per month average. There are 46 rolling 5 year periods during the past 50 years. There were 17 times where the creations were above the number needed to reach the goal. That is just a little better than a one in three chance. Not very good odds, and worse – this is what many projections are based upon.

“Job creations need to be the central focus of our leaders. Small Businesses create so many of these jobs and should be given the tools to help them do this.”

OK, John here. The times Barry talks about, of large job creation, were during periods of either high innovation or significant home and infrastructure building and increasing leverage. That is just not in the cards now. It requires an economy rocking and rolling north of 4% GDP growth. We are barely at 2%. In May, total state payrolls (the data came out today) were down 64,000; in June they were up 65,200, averaging out to +1,200 for the two months combined.

We keep hearing about what the government should do to create jobs. And the reality is that it can do precious little. Private businesses create jobs, and nearly all net new jobs for the last two decades have come from start-up businesses. What government can do is create an environment that encourages new businesses, get rid of red tape (especially in biotech, where the FDA is mired in the 1980s!), stop creating even more rules that make it costly for new businesses to hire, and so on. I could go on, but the fact is, we are in for a rather long period of higher-than-comfortable unemployment. And that means lower tax revenues and a more difficult economy.