The unemployment rate is misleading

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On Friday, the Bureau of Labor Statistics reported the U.S. unemployment rate for November was 4.6%. That sounds great on the surface since it was the lowest the unemployment rate has been since August 2007. Too much attention has been paid to the headline unemployment rate and not the underlying data. A deeper dive into the employment data since 2007 helps explain why the unemployment rate is misleading.

What the BLS reported

The BLS reported an increase of 178,000 jobs in their nonfarm payroll report which was only 2,000 lower than economists’ forecasts. The market reaction was relatively muted.

The unemployment rate of 4.6% beat economist forecasts of 4.9% substantially (yes, .3% is substantial). How did this happen?

First, let’s review a few important labor statistics terms because it can be confusing.

Labor force – the sum of employed and unemployed persons of working age

Unemployed – the number of people without a job but are looking for work

Unemployment rate – the number of unemployed divided by the total number in the labor force

Participation rate – the number of people in the labor force divided by the total working-age population

The table below shows how the size of the labor force fell from October to November by 226,000 workers.

If unemployed workers decide to stop looking for work they are removed from the labor force and the number of unemployed workers which explains a portion of the change below. This is accounted for by a DECREASE in the participation rate. The unemployment rate declines when people stop looking for work. It makes sense mathematically but it just proves to me that the unemployment rate doesn’t tell us enough about the health of the labor economy. Therefore the unemployment rate is misleading! Unemployed workers can either find jobs or leave the labor force to achieve a lower unemployment rate.

 NovemberOctoberChange
Labor Force (in thousands)159,486159,712-226
Unemployed (in thousands)7,4007,787-387
Unemployment Rate4.6%4.9%-.3%
Participation Rate62.7%62.8%-.1%

Why has the participation rate fallen?

The chart below shows how the unemployment rate has come full circle since it was last reported at 4.6% in 2007. What has noticeably changed is the participation rate which fell from 65.8% to 62.7% now.

Why the unemployment rate is misleading

The change in the unemployment rate and participation rate since August 2007

We have a labor force of 159 million now versus about 153 million back in 2007 but more people today are either not working or looking for work. We all know someone who is of working age but for whatever reason is not working.

A near record number of people are in the Social Security Administration’s disability program. I understand that it can be very difficult to receive these benefits so it is more difficult for people to abuse the system. This still accounts for nearly 9 million people not in the labor force.

People in SSA disability (thousands)

People in SSA disability (thousands) Source: SSA

Another government program that has increased is the Supplemental Nutrition Assistance Program (SNAP). If people can rely on the government to cover their basic needs such as food, then they have less incentive to work. At least the number of people on food stamps appears to have peaked in 2013.

Food Stamps on the rise

Food Stamp Recipients Source: USDA

College students who can stay at home with their parents and receive healthcare coverage through the Obamacare changes could mean fewer students are looking for work. I also see fresh college graduates struggling to find work in their fields which means either accepting a job below their skill level or going back to school to earn an advanced degree.

Whatever the reason, the US economy needs more people in the workforce if we want a healthy, growing economy. We need people to come back into the labor force even if it means the unemployment rate must go back up.

Conclusion

It is a difficult thing to comprehend. There are nearly 100 million people who are of working age that are not working or looking for work in the United States. The unemployment rate does not show this. The unemployment rate says we are close to full employment but we know some of those 100 million people probably want to work and should work.

I am hopeful with the new administration there will be changes to incentivize some of these people to re-enter the labor force. In the meantime, look past the misleading unemployment rate and dig into the data to see the true labor picture on the first Friday of each month when the data is released.

 

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