The Job Market, Unvarnished

Both parties' explanations of the numbers fall short of the truth

Where are the jobs? Employment growth has slowed to about 100,000 per month since July, jobs in manufacturing actually fell in September, and politicians are screaming at one another over what it all means. Republicans say that the job statistics undercount the self-employed and entrepreneurs created by the big Bush Administration tax cuts and that the unemployment rate should not be 5.4% but 5% or less. Democrats say that the same statistics underrepresent discouraged workers who have stopped looking for jobs and that the real rate of unemployment is 6% or more.

We'd like to take a nonpartisan moment (if that's possible today) to sort through the rhetoric. We think the Republicans are wrong about the unemployment rate -- it probably should be higher, not lower, because the sharp decline in labor force participation indicates discouraged workers are dropping out and not being counted. And we think the Democrats are wrong about the source of unemployment -- outsourcing is not the major reason for the slow job growth of this recovery. Productivity growth is the real reason.

Measuring unemployment is tricky in an economy as complex as this, but the Federal Reserve believes the payroll survey on which the Bureau of Labor Statistics calculates the unemployment rate is the best available. State tax revenues have been falling over the past three months, tracking the softening labor market. State tax revenues tend to rise and fall with employment. They're now signaling further softness. The Republicans have it wrong on jobs.

But the Democrats don't get it, either. Of the nearly 3 million jobs lost over the past three years, only some 300,000 have been from outsourcing, according to Forrester Research Inc. (FORR ). High productivity growth through the recovery has allowed companies to cut costs and expand production without robust hiring. With oil prices staying at $50 a barrel, they may now be trimming back hiring in anticipation of slower growth for 2005.

The fact is that companies are reluctant to hire partly because they face an unusual array of uncertainties -- the Presidential election, Iraq, terrorism, energy prices, Asian competition. Some are temporary and will soon be resolved. The election is around the corner. But others will challenge the nation for decades to come. America will have to depend on what it does best -- innovate -- to ensure job growth and prosperity. Building protectionist walls against outsourcing is folly. Indeed, outsourcing chips and computer screens to Asia in the '90s lowered the cost of high-tech gear and spread the IT revolution. The same thing will most likely happen as low-end software, design, and other services migrate overseas. Innovation itself will become cheaper

The U.S. has had periods of low or no job growth in the past. It does no good to simply deny them, as the Republicans do today. Nor does it do any good to blame it on outsiders, as the Democrats do. Pragmatic policies that promote innovation, productivity, and economic growth will produce lots of jobs. That's what we need today.

Corrections and Clarifications In "The job market, unvarnished," (Editorials, Oct. 25), we erred in saying that the Federal Reserve believes that the Bureau of Labor Statistics payroll survey is the best available for calculating the unemployment rate. It is the BLS household survey data that are used to calculate the unemployment rate. The Fed believes the payroll survey is the best measure of employment growth.
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