December job numbers and thoughts on a progressive payroll tax system

Posted on January 4, 2013


A few interesting things I want to highlight (including a social security observation):

  • 155k new jobs vs. 150k consensus
  • November’s unemployment rate was revised up to 7.8%, which is the same as December’s rate – 7.8%
  • 58.6% of population is employed and labor participation rate is 63.6%. These numbers are relatively low, and I would argue will continue to stay low so long as Baby Boomers continue to age out of the workforce. A long-term consequence of an increasingly permanent smaller employment-to-population ratio is that additional money will be required for the increasing number of Boomer retirees.
    • Currently under the American Taxpayer Relief Act of 2012 (“Fiscal Cliff Deal”) employees pay 6.2% payroll tax (employers match 6.2%) on income up to $113,700.   This is a regressive tax that disproportionately burdens the poor and middle class – those making less than $113,700.
    • It would make sense to institute a progressive payroll tax that rises with the level of employee income up to a $450,000. For example, for an employee’s first $50,000, then the employer and employee will both have a 4.0% rate. From $50,000 – $87,500 the rate should be 5.0%. From $87,500 to $113,700 the rate should be 6.2%. From $113,700 to $250,000 the rate should be 7.0%. From $250,000 to $450,000 the rate should be 7.5%.
    • This would generate additional revenue for Social Security while reducing the burden of a regressive tax on the poor and middle class.
    • Additionally, while those who make $450,000 per year are unlikely to need Social Security benefits as they age, a progressive payroll tax that taxes up to $450,000 in income does help to safeguard the solvency of the program in the event they will need it.


Jobs Analysis (Courtesy of

Here is the lead paragraph from the Employment Situation Summary released this morning by the Bureau of Labor Statistics, with the bracketed text added by me:

Nonfarm payroll employment rose by 155,000 in December, and the unemployment rate was unchanged at 7.8 percent [from an upward revision for November], the U.S. Bureau of Labor Statistics reported today. Employment increased in health care, food services and drinking places, construction, and manufacturing.

Today’s nonfarm number is higher than the consensus, which was for 150K new nonfarm jobs.

The unemployment peak for the current cycle was 10.0% in October 2009. The chart here shows the pattern of unemployment, recessions and both the nominal and real (inflation-adjusted) price of the S&P Composite since 1948.

Unemployment is usually a lagging indicator that moves inversely with equity prices (top chart). Note the increasing peaks in unemployment in 1971, 1975 and 1982. The inverse pattern becomes clearer when viewed against real (inflation-adjusted) S&P Composite, with its successively lower bear market bottoms. The mirror relationship seems to be repeating itself with the most recent and previous bear markets.

The second chart shows the unemployment rate for the civilian population unemployed 27 weeks and over. The latest number is 3.1% — unchanged from last month. This measure gives an alternative perspective on the relative severity of economic conditions. As we readily see, this metric remains higher than the peak in 1983, which came six months after the broader measure topped out at 10.8%.

The next chart is an overlay of the unemployment rate and the employment-population ratio. This is the ratio of the number of employed people to the total civilian population age 16 and over.

The inverse correlation between the two series is obvious. We can also see the accelerating growth of women in the workforce and two-income households in the early 1980’s. Following the end of the last recession, the employment population has three times bounced at 58.2% — a level that harkens back to the 58.1% ratio of March 1953, when Eisenhower was president of a country of one-income households, the Korean War was still underway, and rumors were circulating that soft drinks would soon be sold in cans. The latest ratio at 58.6% is in the middle of a consistently narrow range (58.2% to 59.3%) since the end of the last recession.

For a confirming view of the secular change the US is experiencing on the employment front, the next chart illustrates the labor force participation rate. We have now dropped to a level first seen in January 1979.

The employment-population ratio and participation rate will be interesting to watch going forward. The first wave of Boomers will continue be a downward force on this ratio. The oldest of them were eligible for early retirement when the Great Recession began, and the Boomer transition to the retirement will accelerate over the next several years.

What is the average length of unemployment? As the next chart illustrates, we are perhaps seeing a paradigm shift — the result of global outsourcing and efficiencies of technology. The post-recession duration of unemployment has continued to rise, with the latest 41.2 weeks setting a new all-time high. We are at a level nearly double the peak in 1983 following the 1981-82 recession.

The last chart is one of my favorites from Bill McBride at Calculated Risk. It shows the job losses from the peak employment month since World War II. Note the addition of the dotted-line alternative for the current cycle, which shows unemployment excluding the temporary census hiring.

The start date of 1948 was determined by the earliest monthly unemployment figures collected by the Bureau of Labor Statistics. The best source for the historic data is the Federal Reserve Bank of St. Louis.


Posted in: Economics, Politics