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Putting The Unemployment Rate In Perspective; America's "Shadow Economy" Spreads To New Services

Aired May 4, 2013 - 9:30   ET


CHRISTINE ROMANS, CNN ANCHOR: A recovery, yes, but is it enough for the millions of Americans still reeling from the recession?

I'm Christine Romans, welcome to "Your Money;" 165,000 jobs added in April, 173,000 jobs a month on average over the past year. That's enough to bring the unemployment rate down to 7.5 percent in April. That's the lowest it's been since December 2008.

Most months we see the unemployment rate fall because people are falling out of the labor force. That's not the case in April. For the first time in a long time, the unemployment rate fell because people went back to work. And monthly revisions reveal more than 100,000 more jobs were added in the beginning of the year than we initially thought.

But to put that in perspective, the unemployment rate was 4.5 percent before this recession. We still have a lot of work to do. One big problem: many of the jobs coming back are low-wage jobs. Largest gains in April were service jobs, retail trade, health care, leisure and hospitality.

I'm telling you, every job in America is important, but some of these jobs aren't the kinds of jobs that you can send your kids to college on. The quality of the jobs we lost, higher than the quality of jobs coming back, and the real unemployment rate is 13.9 percent.

That real unemployment rate, that number represents the total unemployed plus part-time workers who want to be working full time but they can't find a full time position.

In fact the Labor Department, the labor force participation rate now, the lowest since 1979.

Mohamed El-Erian is the CEO of PIMCO, one of the world's largest investors in bonds.

Austan Goolsbee is the former chairman of the President's Council of Economic Advisers, currently an economics professor at the University of Chicago Booth School.

Austan, I know you've expressed concern about the forced budget cuts, how they could hold back job creation.

Does Friday's job report give you any sense of optimism about whether we can sustain jobs growth into the summer?

AUSTAN GOOLSBEE, FORMER CHAIRMAN, PRESIDENT'S COUNCIL OF ECONOMIC ADVISERS: Only a little. You know, you never want to make too much of any one month, but it was a solid month.

My fear is that over the summer, it's not a real magic secret here, if the growth rate of the economy is going to be only a little above 2 percent, the unemployment rate is not going to come down very fast. We're just not going to generate this kind of job growth or faster than this on a sustained basis and that's what we need to do.

ROMANS: So, Mohamed, do you agree? Are we stuck here, are we stuck here, Mohamed El-Erian, with a jobless rate that's like ticking down sometimes but not it's not falling?

MOHAMED EL-ERIAN, CEO, PIMCO: So we've taken a big step towards a better outcome. I'm actually quite encouraged by Friday's jobs report.

If you look at the last three months, we've created 212,000 jobs; long-term unemployment is coming down, like you said, the unemployment rate is coming down for the right reasons.

So this is an important step. Now it's not the whole thing, and we still have the headwinds coming from Washington, we still have slow growth, but it tells me that the underlying economy continues to heal, and that's good news. I wish it were healing quicker, but it's definitely healing.

ROMANS: Austan, let me ask you about the quality of the jobs that are coming back. I see a lot of retail jobs here. I see leisure and hospitality, and I think it's great that consumers feel confident enough to go to the mall, to go to the strip mall, the big box store, to go to a bar or a restaurant, that's wonderful.

But I also know not many of those people working those jobs are going to be able to pay to put a kid through college. So what is the quality of the jobs coming back here?

GOOLSBEE: Well, you know, whenever you start coming back, you're going to have a mix of -- let's call it the skilled distribution -- is going to be mixed. The unemployment rate for college graduates is quite low, you know, 3.9 percent, I think, in this last report.

So if there was going to be improvement in parts of the job market, you would want it to be, I think, in places that have been hardest hit and have the high unemployment rates now.

That said, overall earnings did not -- have not improved very much over the last three months and we do hope to get improvement on that, as well as creating more jobs. So I do think it's fair to keep an eye on that.

ROMANS: I know -- I mean, I look at professional business services, for example, the category in the labor market report, 73,000 jobs created there and some of those can be very good jobs. And I know that when you talk about computer systems engineering, you talk about software engineering, you talk about anything, even software sales and some of the high-tech kinds of jobs, there are talent wars going on in some parts of the economy.

And then, Mohamed El-Erian, there's also desperation going on among people who have been out of work six months or longer. We're not seeing improvement for those long-term unemployed very much.

EL-ERIAN: Yes. It's improving a little bit. It came down to 4.3 million, but we still have a long way to go. I think critically what Austan says is also very important.

If you look at college graduates, their unemployment rate is below 4 percent. If you look at those who left school, their unemployment is above 11 percent.

So we've got an inequality element that speaks to some of the structural issues we have to work on -- better education, better labor retooling, better retraining. These are going to be key if we're going to sustain employment growth and if we're going to bring unemployment down to a more acceptable level.

ROMANS: Now both of you keep talking about the unemployment rate for college graduates. And I should point out, those are for people who have already been in the labor market, right? So a recent college graduate isn't counted in the labor market until they get in the labor market.

So, Austan, it's commencement season, we got all of these kids coming out of college, and they're hearing us say it's at 3.9 percent unemployment rate. But it is going to be a little tough at the beginning for them to get that first foot in the door. I mean, there are some degree categories where kids are having double-digit unemployment.

GOOLSBEE: I think that's a fair statement, though, look, it doesn't take an advanced degree to figure out that people that have more skills and more education are doing better and surviving better in this comeback than our people who do not.

I mean, that screams out of the data, so it's commencement season, I think in some fields, as you identify there, there's tremendous pent-up demand for workers.

In other majors that are not as practical, let's say, or not as oriented around the sectors that are growing, I think you're right. It's going to be a little bit of time likely before they get jobs.

ROMANS: All right. Both of you stick with me because I want to talk about the broader economy in just a moment.

Coming up the Fed says it's going to keep pumping billions into the economy every month until unemployment hits 6.5 percent. We're now one percentage point away. Could the ending of the Fed stimulus cause economic disaster though? And when is the right time to do it? We talk about that next.


ROMANS: As we just mentioned, real unemployment held at 13.9 percent in April. What is that number, real unemployment? Well, that number represents the total unemployed plus part-time workers who want to be full-time and people not in the labor force, but they desperately want a job.

Only six states had a real unemployment rate of less than 10 percent through the first quarter of the year. And the 165,000 jobs added in April is nowhere near the 165 -- 250,000, rather, we need every month for a genuine recovery.

Now remember, President Obama's campaign promise of creating 12 million jobs in four years, remember that promise, our economy simply isn't growing fast enough. There are some bright spots; home values are up. Earlier this week the Case Shiller Index showed home prices in most big cities jumped 9.3 percent from a year ago.

The stock market is pushing higher, records again Friday, 15,000 on the Dow. Mixed signals? You better believe it. As for the stock market, you can thank the Federal Reserve for that, its $85 billion a month bond buying program, no end in sight combined with near zero interest rates make stocks the only game in town.

But that's giving some investors cause for concern.

Mohamed El-Erian, chief executive of PIMCO, the world's largest bond fund, says the Fed's strategy only has a 50-50 chance of leading to economic growth.

Mr. El-Erian is still with us. Mohamed, how do you get to 50-50 odds?

EL-ERIAN: So we look at it as a gut feeling. We look at it and we ask the question, is the Fed using the right tools to achieve its objective? And the answer is no, it doesn't have perfect tools. It's using very imperfect tools.

And as a result of that, the benefits that come with what it's doing is associated with cost and risks. And at some point, the costs and risks are going to become material. So think of the Fed as impacting the destination to a good outcome but it is not in control of the destination. So that is going to need help from Washington and it's going to need help from the rest of the world.

ROMANS: (Inaudible) Austan Goolsbee back in because Washington is something that the Federal Reserve chief announced this week or mentioned this week. The Fed chief planned to keep dumping money into the market, $85 billion a month, and the Fed chief, Ben Bernanke, blaming slow growth on Washington.

So what is holding things back here?

GOOLSBEE: Well, I mean, the main thing that's holding things back is we're recovering from a savage financial crisis-based recession, and so the normal mechanisms of V-shaped recovery largely do not apply.

Now on top of that slow recovery, we're adding significant drag coming from increase in the payroll tax, coming from the sequester, and that's what Bernanke was referring to. But I got to tell you, I disagree a little with your premise that the only reason the stock market is up is because of the Fed action. I think that's confused.

I mean, the -- on the real side of the economy, corporate profits are the highest they've ever been as a share of GDP. And if corporate profits are high you are going to see a strong stock market because that's what the valuations are supposed to be based on.

ROMANS: That's a very good point and they've got a lot of money in the bank, these companies, and they're able to get those corporate profits at record highs without commensurate hiring and so far that has been good for their bottom line, hasn't it?

GOOLSBEE: Yes, I agree with that.

ROMANS: Does that go on in perpetuity?

I mean, Mohamed, let me ask you, do we at some point look at companies that do well but an economy that doesn't? And where does that leave the middle class?

EL-ERIAN: So that's the big question. First on the stock market, undoubtedly corporate profits and cash buybacks and dividends have helped the stock market, but the stock market has come up all the way up here. Part of it is justified, but what we just talked about it, but another part is justified by the Fed very aggressively pushing people to take more risk.

And we see it every single day. We see people being pushed into the equity market by interest rates that are artificially low. So I think it's a combination of real factors and artificial factors that have resulted in the stock market.

And that's why a couple of things are happening. First, investors are, yes, excited; they are making money. But they're really anxious. They understand that this has an element of artificiality.

And second, you get this massive disconnect between how well the financial markets are doing and how poorly the real economy is doing. So the key issue is to reconcile these things by having the fundamentals melt up to where the financial markets are.

ROMANS: What happens, Mohamed, when the Fed stops all of the -- takes the training wheels off the economy, if you will?

EL-ERIAN: Depends why. So if it takes the training wheel off the economy because the economy has gotten to escape velocity then there is going to some minor disruptions in the market but overall it's not going to be a big issue. If it takes the training wheel off because the training wheels aren't working anymore because the Fed has become increasingly ineffective, then we have a problem.

ROMANS: And now here we have -- I just have go to back to Austan Goolsbee -- 15,000 on the Dow Jones industrial average, a jobs report that, by most accounts, was a strong jobs report, clearly stronger than expected, 165,000 jobs created and a measured White House reaction.

I know you used to advise this president, so I've got to ask you, the White House has to be careful because they don't want to sound too confident on the economy in case things go south again, but also because you know, there still are a lot of people out of work.

I mean, if you were advising the president here, how would you have this White House try to be encouraging, but not cheerleading, but acknowledge that there has been progress since this president took office?

GOOLSBEE: Look, I think that's exactly right, both of those points, and I would just add, remember, we add 160,000-plus jobs, that's plus or minus 100,000. This is a very noisy measure so you never want to get too worked up, positive or negative from any one month.

Last month was surprisingly bad, this month surprisingly good, that's going to be part of the trend. The main thing is what is the growth rate of the economy.

ROMANS: I wish -- I just wish we could have months -- every month like February, but I know we can't. Austan Goolsbee and Mohamed El-Erian, very nice to see both of you this weekend. Have a nice weekend.

GOOLSBEE: Thank you.

EL-ERIAN: Thank you.

ROMANS: Up next, out of the shadows but not exactly into the light, a growing number of Americans are working off the books, but not at the jobs you'd think. We're going to reveal this shadow economy next.


ROMANS: With the 165,000 jobs added to payrolls in April, don't count is the growing number of Americans working in the so-called shadow economy -- nannies, construction workers, retail clerks and other unskilled labor often work for cash under the table and don't report their income to Uncle Sam.

But today's shadow economy has become much more than those professions. CNN business reporter Zain Asher joins us now with more on this.

Good morning.

ZAIN ASHER, CNN CORRESPONDENT: Hey, Christine. Yes, you know, these are people with college degrees we're talking about, computer programmers, we're talking about graphic artists and even tax accountants, which is kind of ironic, because they don't always pay taxes on their income, but the bottom line is they're still working, they're still making a living. They're just doing it off the books.


ASHER (voice-over): Who are the people working in America's shadow economy? It's probably not who you think.

PROF. SUDHIR VENKATESH, COLUMBIA UNIVERSITY: The shadow economy isn't necessarily comprised (sic) of people making $5 here and $10 here for a good and service. It's people who are designers, computer programmers, people who are preparing taxes, accountants, making tens of thousands of dollars but who prefer to do it off the books.

ASHER (voice-over): Sudhir Venkatesh is a professor of sociology at Columbia University. He's devoted his entire career to studying the criminal side of the U.S. economy. But he's discovered a growing number of Americans working in the shadows are not typically what come to mind when you think of a criminal.

VENKATESH: They may have skills and what they're doing with those skills is not applying for a job in a formal sense, but they're offering their services to people who might pay for cash or who might give them another kind of payment and they won't report that money to the government. That's really where it becomes a shadow economy, is that they don't report the wages.

ASHER (voice-over): Today's labor market has changed. In a bid to cut costs and stay profitable, companies increasingly rely on skilled freelance labor, even in a legitimate economy.

SARA HOROWITZ, EXEC. DIRECTOR, FREELANCERS' UNION: We see that this is a huge rising trend. It's now 42 million Americans, a third of the workforce, big companies like IBM are predicting that this is going to be half the workforce in just the next 10 to 15 years.

ASHER (voice-over): Sara Horowitz founded the Freelancers' Union, which now counts more than 200,000 members across the U.S., all of whom report their income to the government and pay taxes and Social Security. But she says, the pressure to work off the books is there because freelancers often pay higher taxes than everyone else.

HOROWITZ: Freelancers pay two portions of Social Security tax. They pay the unincorporated business tax in many cities. They are just really taxed so severely that they are the ones who are really providing the economic development and growth. They're in all of the growth industries in America. They are actually overly taxed, not undertaxed.

ASHER (voice-over): Economists estimate roughly $2 trillion worth of income go unreported each year and that lost revenue affects the legitimate economy.

It's harder for businesses to play by the rules if their competitors aren't paying payroll taxes or compensation to employees in the event of injury. And workers in the shadows have no benefits or Social Security and no legal recourse if their boss decides to stiff them.

VENKATESH: What we really need to do is say, OK, it's illegal, absolutely, but you know what, a lot of people there have the ingenuity, the creativity, the power to innovate. And if that's where they are going, we want to help them eventually come back into the mainstream.

ASHER (voice-over): Something experts say will be difficult to do.


ASHER: You know, Christine, we're talking about an extra $500 billion worth of lost tax revenue. That's a huge amount of money. It's basically the GDP of Sweden. And when you think about what this country is going through fiscally, you know, the sequester, $85 billion worth of forced spending cuts between now and September, obviously, that $500 billion could go a long way.

ROMANS: Oh, very interesting. Of course, bringing that labor force into the mainstream would give them the legal protections also that they need that they don't have now and benefits, you know, this is something, even as we talk about immigration reform, I think, talking about the shadow economy and immigration reform and bringing people into the light --

ASHER: Into the mainstream, yes.

ROMANS: -- and into the government coffers as well.

Zain, thank you so much.

Coming up, Justin Bieber is giving his backing to a prepaid debit card, but does it make financial sense for you Beliebers out there to sign up? Find out next.



ROMANS: Prepaid debit cards, Justin Bieber, just the latest celebrity to attach his name to one. The number of these cards on the market is growing and consumers are signing up in droves without reading the fine print.


ROMANS (voice-over): Would you trust Justin Bieber with your money?

What about Russell Simmons?

Maybe Suze Orman? They are all pushing prepaid debit cards.

You load the card with cash and swipe away. But it's going to cost you.

GREG MCBRIDE, SR. FINANCIAL ANALYST, BANKRATE.COM: The fees on prepaid debit cards can really run the gamut, everything from a monthly service fee to an activation fee to even fees for doing things like calling customer service or having a transaction declined due to insufficient balance. Sometimes even checking your balance at an ATM can be enough to trigger a fee.

ROMANS (voice-over): All kinds of fees, all to use your own money. Bankrate looked at 24 of the most widely issued prepaid debit cards; all of them charge fees for different features. And the one celebrities like Justin Bieber are hawking --


ROMANS (voice-over): -- are no exception. For the card he endorses, $3.95 every month just to have it, $2.95 to put money on it from another credit or debit card. You can transfer once from your bank account for free each month, $1.50 for an ATM withdrawal. And if you don't use the card for 30 days in a row, you pay $3.

Bieber gets $3.75 million to put his name on. Spend Smart issues the Bieber card. It defends its fees, saying it's try to help parents and teens start a conversation about reasonable spending.

And Bieber helps get that message out. But Greg McBride from says celebrity cards usually aren't the best value.

MCBRIDE: Consumers that are looking for lower fee, prepaid debit cards can find them. They're just not going to be those endorsed by celebrities.

ROMANS (voice-over): Hey, traditional bank fees are rising, too. Maybe that's why so many consumers don't seem to mind that they are paying so much for prepaid debit cards.

The amount of money put on prepaid debit cards almost tripled from 2008 to 2012. It's expected to top $168 billion by 2015. That's a lot of money, nearly the GDP of oil-rich Kuwait or Romania. It's enough to buy 431 brand new Airbus A380 double-decker planes.

And industry trade group says parents use prepaid debit cards to teach kids about financial responsibility, but financial advisers like Ryan Mack says there are better ways to do that.

RYAN MACK, FINANCIAL ADVISER: Prepaid debit cards essentially spending money to use your own money, but they don't necessarily fix your credit and it costs -- and it is too expensive.

ROMANS: Mack says if you don't have a checking account, look for a credit union in your area and check out or go to to find a local bank that can help you open an account or build up your credit.


ROMANS: Prepaid debit cards are easy and convenient. If that's something you're willing to pay for, go for it, but get smart before. Know the fees, know every single fee and consider your other options. Remember, you don't want to pay to use your own money. You're going to have to try to do whatever you can to avoid that.

All right. I'll be back at 2:00 pm Eastern today for a brand-new edition of "Your Money." Congress spared the traveling public from budget-related flight delays, but what about low-income children? What about seniors? How about jobless Americans?

I'm going to look at America's experiment with austerity, who is winning, who is losing and why. That's right here at 2:00 pm. Until then, you can find me on Facebook at ChristineRomansCNN and on Twitter my handle is @christineromans. "CNN SATURDAY MORNING" continues now.