Is the Employment Situation Really Improving?

Source: Thinkstock

Source: Thinkstock

Over the past several years, Americans have been told that the labor situation in the United States is improving. The evidence used to back this up is the unemployment rate published by the Bureau of Labor Statistics, which has been steadily declining. It has gotten to the point where we are seeing headlines that indicate that the job losses relating to the economic crisis of 2007-2009 are behind us, and that the economy is nearly back to full employment.

But despite these headlines, a look at the specifics regarding unemployment and labor reveals a far more daunting picture: fewer people are working, and if it weren’t for the BLS playing statistical games, the unemployment rate would be rising, not falling. Here’s why.

According to the St. Louis Fed, which collects an enormous amount of data on this subject and on dozens of others, the labor participation rate is at a multi-decade low. The labor participation rate is the percentage of people who are eligible to work (e.g. those who aren’t children or retired) who work or who are actively looking for jobs. The labor participation rate peaked at a little over 67 percent in the year 2000, and it has been declining ever since. It is now 62.8 percent, which is the lowest level since 1978, and it has been declining especially rapidly since the financial crisis when it was about 66 percent.

What this means is that the declining unemployment rate is calculated using a shrinking denominator, and this means that the headline unemployment figure is misleading.

Let us look at an example to see what this means. Suppose there are 100 people who are of working age who are capable of working. With the unemployment rate today at 6 percent, we intuitively think that 6 people are “unemployed.” But actually this 6 percent is of the 63 people who are either working or who are actively looking for work, which means that this 6 percent is only 4 people, but that of our group of 100 people, only 59 are working. Now compare this with an unemployment rate of 8 percent back in 2008 when the labor participation rate was 66 percent. This means that about 5 people out of 66 are unemployed, but of our sample of 100 people 61 people are working.

The point here is clear: even though the unemployment rate is down, the total number of people working has actually declined by about 3 percent from 61 percent to 59 percent!