If you ask around, you’d find out that Americans generally think the economy is crap. For the week ended October 12, Gallup’s U.S. Economic Confidence Index rose to an uninspiring -10, its highest score all year but still reeking of the economic malaise that seems to have settled over the country. The survey shows that just 22 percent of Americans think the economy is “excellent” or “good” while 30 percent think the economy is “poor”. And to rub salt in the wound, a 53 percent majority of Americans believe things are getting worse.
This pessimism is not unfounded. U.S. policymakers barely dodged the bullet during the financial crisis. Whatever victories may have been won by the TARP program or by the Federal Reserve’s unprecedented monetary strategy have felt Pyrrhic, as big business have returned to record profitability while Main Street incomes have remained flat, or worse, shrank. For millions of Americans, the Great Recession isn’t over yet.
At the heart of the issue is jobs. Both fiscal and monetary policymakers have focused on the labor market, determined to put the 8.8 million Americans who lost their jobs during the financial crisis back to work. And to that end progress has been made. The Bureau of Labor Statistics reported in early October that nonfarm payrolls increased by 248,000 in September and headline unemployment rate fell to 5.9 percent. The Obama Administration boasts 10.3 million private sector jobs added since the president took office in 2008.
But labor market data is opaque, and just because we think we see a peak doesn’t mean we’re done climbing. Long-term unemployment is still an outsized problem and income inequality is as severe as ever; according to a MoneyRates.com survey, only 40 percent of Americans feel “highly confident” in their job security, and about half of Americans expect the same or lower wages for 2014.
So what, really, is going on?
1. Labor force participation
Headline, or U-3, unemployment is calculated by the Bureau of Labor Statistics as the total number of unemployed people as a percentage of the civilian labor force. The labor force is those adults (aged 16+) who either are working or are looking for work. The labor force calculation excludes people in the military, the institutionalized, the retired, and anyone who is simply unwilling or unable to work.
As of September 2014, there were 156 million people in the civilian labor force, up by about 400,000 from last year. With 9.3 million total unemployed (those in the labor force without work), down by 1.9 million from last year, you get the 5.9 percent headline rate.
Labor force participation is most often talked about as a rate, showing what share of the total U.S. population is participating in the labor force. In September, the labor force participation rate was 62.7 percent, about 3 percentage points below where it stood before the financial crisis. The graph below shows that the labor force participation rate has declined fairly dramatically during the Great Recession.
It its 2012 biennial labor force projection report, the BLS noted that, “The dominant pattern of declining labor force participation is projected to continue, largely because of the substantial number of baby boomers moving into older age cohorts, in which participation is lower.” Labor force growth is projected to slow to 0.5 percent annually through 2022, which compares against an average annual growth rate of about 1.25 percent between 1990 and 2008.
2. Marginally attached or discouraged workers
Although the size of the civilian labor force is a useful metric, it doesn’t account for every person in the U.S. without work but who wants a job. In order to be included in the civilian labor force, a person has to be willing and able to work, and has to be actively looking for work. Understandably, not everyone without work who wants a job is actively looking.
According to the BLS, there were 6.4 million people not in the labor for who still wanted a job in September. This is down from post-crisis peaks around 6.7 million, but is still very high compared to levels between 4.4 and 4.8 million before the financial crisis — 2.2 million of these people were marginally attached to the workforce, meaning they were willing and able to take a job but had not looked for work in the past four weeks because of family responsibilities, school, bad health or disability, childcare obligations, transportation problems, or because they have become discouraged.
Discouraged workers are those who have given up on the search for work because they believe there are no suitable jobs available — either they don’t have the skills, or the jobs simply aren’t there. There were 698,000 discouraged workers in the U.S. in September, down 154,000 on the year.
Since these people are not included in the labor force calculation, they are not accounted for in the headline (U3) unemployment rate. Stretching the definition of unemployed to include just discouraged workers, we get 6.4 percent unemployment, the U4 rate. Stretching again to include all marginally attached workers, we get U5 unemployment of 7.3 percent.
3. People working part-time for economic reasons
Another issue with the headline unemployment rate is that it doesn’t distinguish between different types of employment. Whether you are employed full-time earning a good wage or employed 5 hours a week earning minimum wage, in the eyes of the U3 rate, you are employed. This means that the headline rate glosses over important variances in employment, which often means it is suggesting a much healthier labor market than is called for.
According to the BLS, there were 7.1 million Americans working part-time for economic reasons in September. Stretching the unemployment rate to its broadest definition and adding these people to those who are marginally attached to the labor force, you get a U6 unemployment rate of 11.8 percent.
Although these alternative unemployment rates are much higher than the headline rate, it’s important to keep in mind that all of them show the same general trend of improvement. U6 unemployment increased in step with U3 unemployment during the financial crisis and Great Recession, and has declined in step during the recovery. This suggests that there has been no abnormal or outsized growth in the number of marginally attached workers or the number of people working part time for economic reasons.
4. Employment-to-population ratio
Unemployment and labor force participation are just two ways to look at the labor market. Another way is to look at the employment-to-population ratio, which measures employment against the total working-age population. This is also sometimes known as the employment rate, and some economists argue that it is a superior way to look at labor market conditions.
This is because the employment-to-population ratio can be interpreted as an expression of how attractive people find employment. Employment is attractive when people are getting a good deal for their labor, and outside of dumb luck, people generally only get a good deal for their labor when the economy is strong.
In September, the employment-to-population ratio was 59 percent, up about 0.4 percentage points on the year. However, while the employment rate has improved some over the past year, it is well below pre-crisis levels. Today, a much smaller share of the working-age population is working than five or 10 years ago. This indicates that the economy is failing to provide employment for as large a share of the population as it once was, which suggests some sort of unfavorable crisis-induced change in the labor environment in the U.S.
5. The quits rate
The ‘quits’ rate is simply the rate at which workers quit their jobs. At a glance, people may not read into this number, but economist Paul Krugman does. Krugman has argued in an op-ed by The New York Times that a low quits rate suggests that workers are afraid to quit their job, even if they are unhappy, because they fear they won’t be able to find another one. He described this phenomenon as “The Fear Economy.”
“The fact is that employment generally involves a power relationship: you have a boss, who tells you what to do, and if you refuse, you may be fired,” he wrote. “So employment is a power relationship, and high unemployment has greatly weakened workers’ already weak position in that relationship.”
From this position, you could argue that a relatively low quits rate is a sign of weakness in the labor market, which has been the case during the Great Recession. The quits rate clocked in at 1.8 percent in August this year, matching its highest rate since the financial crisis. Before the crisis, the quits rate tended to float above 2 percent.
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