Updated September 4,
On September 4, 2009, the Bureau of Labor Statistics released
its monthly employment report, which showed that, in August, the
unemployment rate increased from 9.4 percent to 9.7 percent. The
establishment survey reported that 216,000 fewer workers were
employed in the last month, exceeding the consensus expectations of
200,000. Job losses are now predicted to continue for the rest of
the year with the unemployment rate topping 10 percent. The further
deterioration of the labor market flatly contradicts the promises
of the Obama Administration that the stimulus bill would halt
unemployment and lead to a labor market recovery by the third
The August Jobs Report
Jobs continued to disappear in August with the unemployment rate
increasing to 9.7 percent, the highest level since the summer of
1983. The August report showed that the unemployment rate for men
was 10.1 percent, far exceeding the 7.6 percent unemployment rate
for women. While 216,000 people lost jobs, this was the lowest
number of lost jobs this year, an indication that the rate of job
losses has greatly slowed.
increase in the unemployment rate from 9.4 percent to 9.7 percent
was caused by job losses, as the labor force participation rate was
unchanged over the month of August. Unemployment for teens jumped
to 25.5 percent, the highest level ever recorded. This is not
surprising since this is the first jobs report that measures the
effect of the minimum wage. Teenagers are one of the largest groups
earning minimum wage and this report reflects their abysmal
continued to be broad with manufacturing (-63,000), construction
(-65,000), and the service sector (-80,000) all cutting employment.
While automobile dealers increased employment as a response to
"Cash for Clunkers" (5,000), the automotive manufacturing industry
continued to shed jobs (-14,800). Employment in the financial
industry also continued to decrease (-28,000), led by the insurance
market (-12,800) and real estate (-8,000). As in previous months,
health care and educational services (52,000) were again the bright
spots in the labor market.
There were few
signs of an impending recovery as total private hours remained flat
and there was only a slight increase in wages.
Stimulus Promises Unfulfilled
While touting the potential benefits of a stimulus package
earlier this year, the Administration claimed that the unemployment
rate would no longer be climbing by the summer of 2009 and that it
would peak at 8 percent. Now, after the passage of the stimulus
bill, the Administration expects unemployment to continue to
increase this year and exceed 10 percent.
In a speech at the Brookings
Institution, Vice President Joseph Biden claimed credit for saving
between 500,000 and 1 million jobs. There is no way to measure the
number of jobs saved by the stimulus bill. A better way to judge
these figures is by the Administration's own predictions of what
the stimulus bill would do to job growth and the unemployment rate.
Chart 1 shows the Administration's projections for unemployment if
Congress passed the stimulus and the actual unemployment rate since
The unemployment rate is already one-fifth higher than the
Administration predicted. It is now expected that the peak
unemployment will be one-fourth higher than its predictions. Even
worse, the promised job creation that was expected to lower the
unemployment rate in the upcoming months has not materialized.
Job Creation Falling
The Vice President claimed that the stimulus bill created or
saved between 500,000 and 1 million jobs. This is demonstrably
false. Job creation has fallen since the stimulus became law-which
is precisely why unemployment has increased so sharply during this
recession. The stimulus has done nothing to reverse this dangerous
Chart 2 shows the new hire-rate as reported by the Bureau of
Labor Statistics. In the last quarter of 2007-the last quarter
before the recession-newly hired employees made up 3.8 percent of
the workforce each month. When Congress passed the stimulus in
February, the new-hire rate had fallen to 3.2 percent. The most
recent data, from June 2009, shows that after the stimulus bill was
passed, job creation fell further, hitting 2.9 percent. Employers
are creating fewer jobs than they did when the stimulus was
Other data also show that job creation has fallen sharply.
Gallup surveys show that far fewer Americans report that the
companies for which they work are hiring new employees than a year
ago. In August 2008, 37 percent of Americans reported their
companies were hiring. That figure has now fallen to 24 percent.
Lower job creation accounts for roughly
two-thirds of the increase in unemployment since the recession
Why has private-sector job creation fallen so sharply? The
recession is the most obvious answer. But a more precise answer is
that businesses are retrenching wherever they can. While taking
measures to survive the immediate downturn, such as laying off
workers, and conserving cash by tightening budgets, businesses have
also grown wary about future economic growth. In addition, the
credit crunch has made credit less available to entrepreneurs who
want to start new businesses.
Consequently, business investment has fallen sharply since the
recession began. Gross private investment in equipment and
software-a good measure of business investment spending-has fallen
by a full 20 percent since the start of the recession. As
businesses cut investments in new projects, they have less need to
hire new workers, and job creation falls.
Chart 3 clearly demonstrates this point. It shows the
year-to-year percent change in new hires and business investment
.  Business hiring has fallen as investment
has dried up. As long as business investment remains low and
entrepreneurs hold off from starting new enterprises, job creation
will remain low-and unemployment, high.
Stimulus Misses the Target
Who creates jobs? Employers with profitable businesses-who
invest and create wealth. The stimulus bill was a grab bag of
traditional liberal priorities that did nothing to encourage
private-sector employers to invest or create jobs: This is why the
stimulus has failed to reduce unemployment.
spending tens of billions of dollars on highway projects that
benefit some businesses but do nothing to reassure other businesses
that their potential investments will succeed. Spending tens of
billions more to bail out state governments does not encourage an
entrepreneur to take the risk of starting a new business.
Government spending programs do not encourage the risk-taking,
innovation, and investment needed to spur lasting job creation.
If anything, the
stimulus discourages investment and job creation. The
enormous increase in federal spending that President Obama has
undertaken raises the prospects of vastly higher taxes or rapidly
rising inflation. The federal deficit is expected to approach $2
trillion this year and to remain well above $1 trillion for many
years to come, doubling the national debt in just five years. This
situation is not sustainable, but businesses can only guess how the
federal government will restore order to its fiscal house, knowing
full well that successful businesses make an attractive tax target.
In the face of such a threatening environment, it is not surprising
that job creation has fallen since President Obama signed the
Investment Needed Now
While the deterioration of the labor market has slowed, jobs are
still being lost. The predictions that were used to promote the
stimulus bill have proven false as unemployment continues to climb.
Replacing private ingenuity and innovation with government-directed
projects is not a solution for short-term or long-term growth.
Policymakers should focus on encouraging private capital investment
and formation by extending the 2001 and 2003 tax cuts. Future
stimulus expenditures should be curtailed as they are not worth the
long-term debt they will incur.
Rea S. Hederman, Jr., is
Assistant Director of and Senior Policy Analyst in, and James Sherk
is Bradley Fellow in Labor Policy in, the Center for Data Analysis
at The Heritage Foundation.