Last month the government said that 8.1 percent of the American work force was unemployed, down from 9 percent in April 2011. Cue the golf clap.
Compared to an unemployment rate that was well above 10 percent in the early part of the Obama Administration, 8.1 percent sounds nice. But it is a moral victory at best. The reality is that the labor market stinks. Just ask college graduates. Or black guys over 19 years old. Or the New York Knicks.
So where is the disconnect between the headline statistics and the reality on the ground? The answer is an unfortunate circular problem.
What the Data Say
Let us start with some of the data. The unemployment rate headline number would actually be higher if it counted people who want a job, but have not looked for one in the past month because they are so discouraged by their prospects. Labor economists use the term labor force participation to refer to the total labor force (including people working and people looking for work) as a percent of the civilian noninstitutional population.
In April 2012, labor force participation was 63.4, the lowest rate since January 1981. This means that while unemployment has fallen from its high mark of 10 percent in October 2009, the percentage of Americans in the job market has also fallen from 64.9 percent that same month down to 63.4 percent 30 months later.
Over the last 20 years, the usual trend is for labor participation to expand as unemployment falls. This is because workers are being added to payrolls, and thus cutting down on unemployment. However, as you can see in this graph below, after the recession ended in the summer of 2009, both participation in the labor market and unemployment numbers have been falling. This suggests that the lower unemployment number is really just because so many people have stopped looking for work. Annoyingly, it doesn’t mean that the nation has increasing employment.
Of course, the White House would complain that there have in fact been new jobs created over the past few years. And that wouldn’t be wrong. Temporary employment from stimulus spending and more business confidence in the recorvery have keep the unemployment rate from being higher. But they have not been enough to make much of a dent in real unemployment.
So what should the unemployment rate be? It depends on how many uncounted workers really want jobs. To get an idea of what it could be, consider the following:
A year ago, the labor force participation rate was 64.2 percent. Still low relative to participation highs back in 2000, but nearly a full percentage point more workers contributing to the economy then the government says there are today. If we were to assume, however, that in fact the labor force was the same today as it was in April 2011 (not that much of a creative stretch), then the unemployment headline figure would have printed at 8.9 percent for the last month.
We could apply the same logic and estimate that if labor force participation were at the pre-recession April 2007 levels, then the unemployment rate would currently be 11.1 percent. And if you were to go all the way back to April 2000, when the labor force participation rate peaked at an all time high of 67.3, then unemployment rate for today would be 13.1 percent.
Lucky for the Obama presidential campaign, the labor force measurement is not as big as it was 12 years ago, and so the unemployment statistic reported in the news is 8.1 percent.
This is not the end of the story, however. If this labor force trend were the result of the recession then we could hope for an employment recovery in the near future. However, it turns out that the declining labor force participation rate is not a new phenomenon caused by the recession or financial crisis. As the above graph shows, the rate of individuals in the job market has been declining for over a decade. And that is where the circular problem kicks in.
The Value of Labor Growth