There was a lot of positive press surrounding January’s jobs numbers. Most of it centered on the number of jobs the economy has created over the past few months and how the unemployment rate has improved (although the unemployment rate ticked up slightly in January from 5.6% to 5.7%).
But, are the unemployment numbers as encouraging as reported or are they painting an overly optimistic picture of labor market health because of the way the government calculates the official unemployment rate? The distinction is important. For those middle and working class Americans who are still unemployed or underemployed it would be unfair for us to get comfortable with a labor market that’s weaker than it appears at first glance.
Since December of 2012, I’ve written a number of articles on how the Bureau of Labor Statistics’ (“BLS”) official unemployment rate is a poor barometer for measuring labor market health principally because of how the BLS determines who is in the labor force. The BLS removes people from the labor force unless they’ve looked for a job in the past 30 days. This is like looking at a professional baseball player’s batting average but ignoring the at bats where he didn’t get a hit unless they happened in the last 30 days. Doing so might tell you something, but it wouldn’t tell you what kind of season he’s having. This is part of the reason why Gallup Chairman Jim Clifton recently wrote in an excellent article that the official unemployment rate is “extremely misleading.”
So, how did the employment situation really stack up in January? Well, the labor participation rate was 62.9%, up 0.1 of a percentage point over December. Labor participation has now been 63% or lower for 14 of the last 15 months. It was last as low as 63% in April of 1978 during the Carter Administration. Despite all the positive coverage, there seems to be general agreement that labor participation is disturbingly low.
How did this impact January’s 5.7% unemployment rate? President Obama has been using January of 2009 as a comparison point for how the economy has performed stating that "[b]y every economic measure, we are better off now than when I took office." So, I will use that date for comparison purposes here.
In January of 2009, the labor participation rate was 65.7% (at least one metric that isn’t better now than when he took office) and the unemployment rate was 7.8%. Were the labor participation rate 65.7% today, the unemployment rate would be 9.7%. In other words, the entire improvement in the unemployment rate since President Obama took office (from 7.8% to 5.7%) is due to a decline in labor participation. Had labor participation held steady, unemployment would be 9.7%.
In human terms, because they are either unemployed or out of the labor force, this means an historic number of Americas are waking up each day without a job.
Addressing the disturbingly low labor participation rate, the President’s defenders often claim that it has dramatically declined because Baby Boomers are retiring. To some extent, this is true. But, even for those ages 25 to 54, prime working age Americans, the labor participation rate has declined.
When President Obama took office in January of 2009, the labor participation rate for this group was 82.8% and the unemployment rate was 7%. In January, the labor participation rate for this group was 81.1% and the unemployment rate was 4.8%. Sounds good but, were their labor participation rate 82.8% today, the unemployment rate for 25 to 54 year olds would be would be 6.8%. All but 0.2 of a percentage point of the improvement in the unemployment rate even for prime working age Americans is due to a decline in labor participation.
So how does all this match up with the fact that, in the last three months, the economy created over one million jobs – the best performance in nearly 20 years? Well, the survey that the BLS uses to determine the number of jobs the economy creates (the Establishment Survey) is very different from the survey it uses to determine the unemployment rate (the Household Survey). The Establishment Survey measures the number of jobs the economy created. The Household Survey measures the number of people employed. The numbers never match up. In part this is due to differences in survey methodology. In part, it’s due to what they measure.
For example, in January the Household Survey found that there were 7.5 million people working multiple jobs. While such individuals work at least two jobs, the Household Survey counts them as one person with a job. In other words, when calculating the unemployment rate, the BLS counts 7.5 million people as employed who account for at least 15 million jobs.
Both surveys do consider part time and full time jobs equivalent. So, in calculating the both the number of jobs the economy has created and the unemployment rate, the BLS considers someone working 2 hours a week just as employed as someone working 40 hours a week. The employees certainly wouldn’t consider these jobs equivalent, but they are equivalent for purposes of the official unemployment rate.
While the number of jobs the economy creates is certainly important, for purposes of determining the health of our labor market, both the quality of those jobs and the number of people who are actually working are even more important. The BLS does report a measure of unemployment that considers those who have looked for a job in the past 12 months and those working part time who want a full time job as unemployed. January’s unemployment rate for this group was 11.3%.
While it’s good to see positive job creation in recent months, we still have about 9 million people who are unemployed, over 6 million additional people who are not in the labor force but want a job now and another 6.8 million who are working part time but want a full time job. The jobs numbers are better. But, as Voltaire stated, “better is the enemy of good” and as Jim Collins stated, “good is the enemy of great.” After nearly six years of the slowest recovery in decades, our economy needs great. We need to create quality jobs at an accelerated pace to get Americans back into the workforce and employed.
Thanks to America’s private sector and fracking, the drop in the price of oil has certainly put much needed cash in consumers’ pockets, helping drive economic growth without government stimulus or subsidies. But, while the jobs numbers have improved directionally, they have not improved to the point where we can relax our efforts. We still need policies out of Washington encouraging private sector investment, job creation and the kind of economic growth that improves the lives of more working and middle class Americans.
