The 5.8% Unemployment Rate Is an Understatement

Unemployment rate dropped to 5.8% for the month of October 2014. Recovery is here, thanks Obama! Except it’s not. I know this because as a recent graduate myself, I am still unemployed. The problem with the unemployment rate is that it is not dropping due to job growth. It is also not telling the story of how part-time work has taken the place of full-time work since the recession. Here’s why comparing this value with pre-recession values can only provide inaccurate and misleading results.


The part-time shift

So the unemployment rate went down. If all jobs were homogenous, then maybe we could rejoice at this development. But all jobs are not homogenous; there are full-time jobs, that pay benefits and such, and part-time jobs, that normally do not. Full-time jobs generally provide higher incomes for the workers, both because the job tends to be more specialized and pay a higher wage, and because the worker is working more hours. Part-time jobs are ones that generally pay a lower hourly wage and the worker cannot work more than 30 hours per week.

Year

Full-Time Jobs Part-Time Jobs

2007

121.0 million (82.7%)

25.3 million (17.3%)
2014 120.2 million (81.2%)

27.8 million (18.8%)

These statistics are from the U.S. Bureau of Labor Statistics (BLS). What we see is that the proportion of full-time employees has shrunk both nominally and relatively to 2007. There are now 800,000 fewer full-time employees than there were in 2007. The amount of full-time to part-time employees has also decreased from 82.7% in 2007 to 81.2% in 2014. In addition, we see 2.5 million more part-time employees now than we did in 2007, comprising 18.5% rather than 17.3% of the total amount of employed people.

What we have seen is a shift to an increased proportion of part-time workers. Since the recession, the number of full-time jobs has not yet returned to pre-recessionary levels. The number of part-time jobs increased as full-time jobs decreased starting with the recession, and it has hovered around there since.

The number of full-time jobs has been slowly and steadily increasing since 2010, but this is far from a recovered economy. The number of full-time jobs has yet to reach 2007 levels, and all of this in spite of the 13.9 million person increase in the working population (ages 15+) since 2007. The economy is still climbing out of the hole, and any institutional barriers (government restrictions, labor unions, etc.) will only prevent job growth.

If this was a recovered economy, companies would not be hoarding large amounts of cash. Holding a cash balance provides very little return (interest on a 1-year Treasury bond). If there were real investment opportunities in the economy, these companies would be putting their money to better use, such as hiring more workers, expanding production, investing in newer technologies, etc. They are holding money because of uncertainty with the economy.

All we can say is that there was a shift from some full-time positions to part-time positions during the recession and that this shift is still in the process of reversing. How far it will revert to pre-recessionary levels, if at all, is unseen. But the fact remains that there are still fewer full-time jobs than in 2007 levels and they remain decreased in proportion to part-time work since 2007.


The labor force participation rate

The common rebuttal from leftists and media figures would be that “We didn’t pick apart the unemployment rate when Bush was in office, why are we picking it apart now?”. And they would be correct if the assumptions of the unemployment rate between the 2 time periods were held constant. If they aren’t held constant, then we are comparing 2 numbers that represent 2 different states of the economy, each operating under different assumptions. As it turns out, comparing 2014 numbers with pre-recessionary numbers is comparing apples to oranges. Here’s why.

LPRThe labor force participation rate is pretty self-explanatory; it represents the percentage of the civilian population that is currently in the workforce, either employed or actively looking for employment and reported to the BLS. As we can see from the chart calculated by the BLS, it has taken a dramatic dip since 2009. Because this rate is dramatically different from previous periods, we cannot make a side-by-side comparison just using the unemployment rate between the 2 periods. It’s comparable to inferring time series data with the number of observations changing over time, which will give us misleading results. The U.S. has not seen a labor force participation rate this low (currently at 62.8%) since March, 1978, over 36 years ago.

Here’s the data for U.S. population and the labor participation rate for the respective years of 2007 and 2014. The 2007 value is the average rate for the year. Note the “In the Workforce” means either employed or actively looking for employment and report their status to the BLS as actively looking within the past 4 weeks.

Year

Possible U.S. Working Population (Age 15+) Participation Rate In the Workforce Not in Workforce

2007

241.9 million

0.66

159.7 million

82.2 million

2014 255.8 million 0.628 160.6 million

95.2 million

The possible working population (ages 15+) has increased by 13.9 million since 2007, and 66% of this population growth, (0.66)(13.9) = ~9.2 million people, should have been added to the workforce since 2007, yet only 160.6 – 159.7 = 0.9 million people have entered the workforce between 2007 and 2014. Job growth is nowhere near to matching up with population growth.

If we wanted to compare 2007 to 2014, then we would need to assume a 66% labor participation rate (where it has hovered around or above since 1990). With the possible working population of 255.8 million in 2014 and assuming this rate, the amount of people in the workforce today should be (255.8)(0.66) = ~168.83 million people. This is the problem with the unemployment rate; it is not capturing this change in labor participation.

These additional (168.83 – 160.6 =) 8.23 million people not in the workforce should be added to the BLS figure of unemployed people, which stands at 9 million people. This would mean that the real total of unemployed Americans is 8.23 + 9 = 17.23 million; the latter reporting to the BLS, the former being counted as dropped out of the workforce. This would make the real unemployment rate almost doubled what it is reported at, somewhere around 10.5%, if we were assuming the historical 66% labor participation rate of the past 20 years before the recession. Assuming a 66% rate is a conservative estimate; the rate went as high as 67% in years 1998 and 1999, and never dipped below 65.8% between 1989 – 2008.

This 10.5% rate corroborates U-6 unemployment figures, which stand at 11.5%. U-6 is an unemployment measurement that includes people marginally attached to the economy. What this mean is that it does to an extent includes the people we are trying to account for. It includes people that aren’t “actively” looking for work (past 4 weeks) but have indicated that they want to work. They have looked for work within the past 12 months but they are discouraged from looking further for now (“discouraged workers”).

The BLS only counts people that have been looking for employment in the past 4 weeks AND report this information to the BLS. There are several reasons why people have dropped out the workforce. Some may have retired earlier than anticipated because they could not find commensurate employment for their experience. Some may have given up looking and not counted as actively looking. Some may no longer be eligible for unemployment benefits so they don’t bother reporting their unemployment. The reasons don’t really concern us here, all that matters is that there exists a structural break from the previous labor participation rates 20 years preceding the recession that the unemployment figures do not take into account.


What is not seen

So, the unemployment rate is indeed dropping, but it is not dropping because people are finding jobs. It is dropping because people are leaving the workforce and in great numbers. It also overlooks the great shift that occurred in part-time employment that has yet to revert back to pre-recessionary levels, if it ever will.

 

 

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