Labor market data have been anything but clear recently. According to the Bureau of Labor Statistics, the headline unemployment rate in the United States fell to 6.7 percent in December, down 0.3 percentage points from November, but total nonfarm payroll employment increased by just 74,000. If that sounds low — way too low to meaningfully impact the overall unemployment rate — you’re right. Economists were looking for payroll growth closer to 200,000, and December’s pitiful job growth wasn’t what lowered the headline unemployment rate.
What did lower the rate was a major decline in the civilian labor force participation rate, the share of all adults who are willing and able to work, be they already employed or looking. The labor force participation rate fell 0.2 percentage points to 62.8 percent in December, well below the pre-crisis level of about 66 percent. Labor force participation hasn’t been this low since the late 1970s.
To put it another way, the total number of unemployed people in the U.S. fell by 490,000 in December, but very few of them actually found jobs. The vast majority of them simply fell out of the labor force, giving up on the search for work, and the headline unemployment rate does not account for these people. This means that declines in the labor force participation rate will drag down the headline unemployment rate without actually raising the overall level of employment or improving the health of the labor market.
Because of the problems inherent in the headline unemployment calculation, many economists and market watchers have turned to alternative measures of labor market health. One of those is the payroll-to-population ratio, or the employment-to-population ratio, which is a measure of the percentage of the total adult population that is employed full-time. According to the BLS calculation, this was 58.6 percent in December, unchanged from November and from December 2012.
Gallup also tracks a payroll-to-population metric, but its reading for December and January shows something much different. Gallup’s ratio fell from 42.9 percent in December to 42 percent in January, the lowest level since March 2011.
Another popular alternative to the headline rate is the U-6 unemployment rate, which counts not just those job seekers included in the U-3 (headline) rate, but also those who are marginally attached to the workforce (underemployed) and people working part time for economic reasons. In December, this was 13.1 percent, flat with November and down from 14.4 percent in December 2012.
Gallup also tracks underemployment. Gallup defines its underemployment rate as “the percentage of adults in the workforce who are unemployed or working part time but looking for full-time work.” Gallup’s measure was 17.2 percent in December and 18.6 percent in January.