How Healthy Is the U.S. Labor Market?


The elephant in the room during a typical diagnosis of the U.S. economy is the labor market. At 7.6 percent, the headline unemployment rate has come down 2.4 percent since hitting a post-recession high of 10 percent in October 2010. This decline has been cited as both an improvement of conditions and misleading about reality.

The problem with the headline unemployment rate is that discouraged workers who are not actively looking for jobs are not counted as unemployed, though they are without jobs. With this in mind, it’s worth pointing out that the labor force participation rate, at 63.4 percent in May, has come down 1 percent since October 2010 and 2.6 percent since October 2008.

There are various contributing factors to this, but many economists argue that the reduction is largely because of discouraged workers abandoning the search for a job. This can put superficial downward pressure on the headline unemployment rate.

The opacity of the headline rate has encouraged investors and market watchers to explore different gauges of labor-market health. One alternative indicator is the employment-to-population ratio, which is not influenced by changes in the number of discouraged workers.

The U.S. Bureau of Labor Statistics tracks this metric, which sits at 58.6 percent — down from about 63 percent before the financial crisis.

Employment to Population

Source: Bureau of Labor Statistics

Gallup, the leading behavioral economic research firm, also tracks this metric as a payroll-to-population, or P2P, ratio. With a new report on Wednesday, Gallup’s measure showed the highest P2P ratio so far in 2013 at 44.8 percent, up from 43.9 percent in May. Gallup’s P2P metric is an estimate of the percentage of the U.S. adult population age 18 and older who are employed full-time by an employer for at least 30 hours per week. The P2P ratio is not seasonally adjusted.

Gallup Payroll to Population

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