Monday, February 20, 2012
The True Unemployment Rate: 36%
Workforce participation is the metric that really matters.
by John Hayward
How would you define “unemployment?” Statistics on unemployment are bandied around in the media all the time. Changes in these statistics are hailed as good or bad news for the President, with varying degrees of emphasis from the news networks, depending on which party the President belongs to. But what do these statistics truly measure?
Would you define “unemployment” as measuring “people who want a job, but can’t get one?” This is, broadly speaking, the definition embraced by the Bureau of Labor Statistics. The trick to making those numbers dance lies in measuring “people who want a job.” The widely reported U-3 unemployment metric, currently standing at 8.3 percent, is very aggressive in shaving off people who have not made recent efforts to find work. It is further distorted by massive “seasonal adjustments,” which made over a million people vanish into thin air last month.
This is why the official unemployment rate gets lower when the American workforce contracts. Workforce contraction is a very bad thing. People who simply cannot find work, and languish on unemployment insurance for years, are the last thing a prosperous country needs… but those people don’t count in the official unemployment rate. For example, if everyone under the age of 25 abruptly stopped looking for work, it would be an economic disaster, but the official unemployment rate would go down, because the pool of people looking for work would get smaller.
(That’s not quite as far-fetched an example as it might sound, incidentally. Even the heavily-massaged U-3 unemployment rate currently sits at 23.2 percent for ages 16-19, and 13.3 percent for ages 20-24… and it’s about two percent higher for young men. Policies that increase the cost of labor, such as minimum-wage increases and mandated benefits, have a particularly punishing effect on young entry-level workers, since their labor has less intrinsic value than experienced older employees.)
This is precisely what has been happening under Barack Obama. The workforce is contracting with horrible speed, but it has the beneficial side effect of making the official unemployment rate go down a little, although 8.3 percent is still pathetic. The Administration bounces happily before the cameras and announces its policies are “working,” and job creation is now “on the right track,” even as their best months post job creation only slightly in excess of population growth – and they’ve only had a few such months. Pundits begin wondering if the old political rules that say re-election is impossible with unemployment over 6 or 7 percent might not apply to this President, if he can campaign on a slowly declining unemployment rate.
Another side effect of the way our unemployment statistics are prepared, and reported, comes when America's employment picture is compared to the figures from other nations. Are the unemployment statistics reported from, say, Greece or Italy calculated in precisely the same manner as the American U-3 rate? If not, then how can we make valid comparisons between them?
Since the concept of people who aren’t looking for work is so fluid, and some of those people have clearly been persuaded not to look for work because of job-destroying government policies, it might be more logical to measure unemployment using the standard incorrectly offered by the Bureau of Labor Statistics for the U-3 rate: “total unemployed, as a percent of the civilian labor force.” That’s what the U-3 rate claims to measure, but it doesn’t, not by a long shot.
What is the current percentage of working-age Americans, eligible to participate in the civilian labor force, but not currently working? Answer: 36.3 percent.
That’s the worst labor participation rate in three decades, and it’s part of the worst employment picture we’ve seen since the Great Depression. Labor force participation is the number we should really be looking at, even more than the unemployment figures cooked up on the monthly basis by the Bureau of Labor Statistics. Those figures have their uses as well, but it seems reasonable to measure the overall health of the economy by the number of people who simply are not participating in the labor force.
This would always be a much higher number than the BLS unemployment statistic, even when the economy was humming along at maximum power. There are always going to be working-age people who drop out of the labor force, for reasons that have nothing to do with the nation’s overall economic health. The labor force participation rate hasn’t exceeded 67 percent in the past decade, so we would be looking at a true “unemployment” number that bounces between roughly thirty and forty percent. The difference between good and bad percentages is relatively small, which makes the true “unemployment” figure less sexy for news coverage, and therefore less useful to politicians… but it’s more logical to measure small changes in a large, accurate number than big changes in a small, largely fantastic number.
Writing at Red State, Rep. Jim Jordan (R-OH), who chairs the House Subcommittee on Regulatory Affairs, Stimulus Oversight, and Government Spending, offers an eye-popping chart measuring the effect of President Obama’s “stimulus” policies on workforce participation:
Jordan writes in support of the Jobs Through Growth Act, a package of dramatic reforms that includes a flat tax with two low rates, reduced corporate taxes, regulatory relief, and increased domestic energy production. Those are the sort of changes America needs to make, if we want to do more than fiddle with imaginary unemployment numbers, whose very definition is subject to “adjustment” on a massive scale. Those who define “unemployment” as “the number of working-age Americans who aren’t working” should waste no time on small reforms.
To read another article by John Hayward, click here.
To read a related article, click here.
Posted by Brett at 4:21 PM