For decades, the state of the American economy has often been judged by the official unemployment rate as put out by the U.S. Labor Department on the first Friday of every month.
There has been a lot of talk about the unemployment rate, especially as the Great Recession peaked in 2009 and all through the rest of President Obama’s administration, especially as the official number slowly came down from a peak of 10.0 percent to the most recent posting at the end of Obama’s term of 4.8 percent in January 2017.
There has been much ado in the press on both the left and the right about the legitimacy of the official unemployment figure. Why? Because there are all kinds of numbers that can alter the number and give a different picture as to what is really going on.
U-3 vs. U-6
No, these are not two rival bands to U2. These are two column headings you may find when you look at the actual unemployment report instead of the articles produced from the report. The U-3 number is the official unemployment number, which is the percentage of people actively in the workforce but are not working (in other words, actively seeking work and who have been unemployed for at least three months). The U-6 number, which some will claim is the “actual” unemployment number, takes into account those who have been out of work for at least six months.
What is the really key number here is not the U-3 or U-6 percentages, but rather the size of the workforce. As that number changes, the unemployment numbers change. The workforce number is not static, and it especially has not been during the Great Recession and its aftermath.
The unemployment rate is based on the size of the workforce pool, which is determined by the number of people eligible to work, the number of people actually working, those in part-time and full-time employment and those not working but actively searching for employment.
What will you will notice as you add those numbers up and look through the unemployment report over the last seven or eight years, you will find that the size of the workforce has dwindled downward, meaning that more and more people are quitting the workforce altogether – even to the point of not searching for jobs anymore. There were months where the math didn’t add up – the number of jobs created in a month didn’t meet the number required to send the unemployment rate down 0.1 percentage point if the workforce number had remained steady, and yet the number would go down.
Over recent years, the number has dropped more because the workforce (or labor participation) population has dropped and is not as much a result of jobs being created at any dramatic pace.
The “Missing Workers”
The phenomenon with the workforce is a subset of workers called the “missing workers” by the Economic Policy Institute. The group has been tracking unemployment and making a connection with this group of workers, which the EPI defines as workers who “due to weak job opportunities” are neither employed nor actively searching for work.
What the EPI has noted is the the number of “missing workers” spiked during the Great Recession, and has not returned anywhere near the pre-Recession numbers. The EPI’s data set shows that at the end of 2006, there were an estimated 660,000 “missing workers” while the unemployment rate sat at 4.6 percent. As of January 2017, the unemployment rate was at 4.8 percent, but the number of “missing workers” was estimated at 1.85 million – nearly three times the 2006 level.
In August 2009, the missing worker number was 410,000. The very next moth it shot up to 1.22 million, and that number has remained at more than 1 million every month since, except for one (the number dropped to 770,000 in March of 2010) – and this includes nine of 10 months in 2015 in which the number topped 3 million. All the while, the official unemployment rate continued to trickle downward.
By the way, the 1.85 million “missing workers” in January was the first month the number was below 2 million since August of 2010 – more than six years.
If you add in “missing workers’ to the unemployment equation, the “real” unemployment rate, according to EPI data, would be 5.9 percent, not 4.8 percent.
When the next unemployment report come out, look deeper into the numbers and don’t take them on face value. When you read about how many non-farm jobs were created in a month, take a look at the unemployment rate and the workforce participation number. A sign of strengthening is actually if the jobs created number goes up, but so does the workforce number. In that sense, the unemployment may not drop and might actually stabilize or move higher temporarily.
If you notice the workforce participation number ticking up, then you should eventually notice the jobs-created number go up as well. If that number does not seem to go up at a similar rate to the workforce, then there may still be weakness in the market that will have to work itself out. It is possible that workforce optimism may precede the actual strengthening of the economy, but if there is anyting the last 10 years have taught us is – never take your news with a single bite. Always chew more information before digesting.
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