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June 02, 2007

Is Unemployment Worse Than You Think?

Barry Ritholtz thinks so:

Most of us think about the unemployment rate going down due to more people getting jobs. But there's also another way the official unemployment rate can go down. It happens when the denominator -- the bottom number of the fraction -- goes down.

And that is what has been occurring again recently. The Labor Pool has shrunk, making the unemployment rate look better than it actually is.

I dunno. Here's a look at the labor force participation rate for the civilian population, aged 16 and over:




It is certainly true that the participation rate has been heading down over the course of the year. In the longer view, however, the change looks pretty unexceptional. If you break things down by age, you see some pretty standard looking variation in the participation of prime-age workers...




... and yet another pronounced slide in the participation rate of 16-19 year olds:




That drop in the participation rate of teenagers accounts for about one-third of the decline in the overall participation rate.  What's more, the participation rates of individuals over 55 have been essentially flat, a marked change from the last decade over which those rates steadily rose. Combined with the declining rate of the youngest group of workers, the tailing off of participation among AARP-aged workers is enough to explain the entire decline in the aggregate participation rate since the beginning of this year.

You might define "recently" as "since 2000 or so", and there you would be justified in claiming a broad-based decline in the number of people choosing to participate in U.S. labor markets.  But I use the word "choosing" intentionally, as I'm convinced that the post-2000 changes in labor force participation rates (or employment-to-population ratios, if you like) reflect trends that are largely independent of the business cycle.

You may not join me in that belief, but broader unemployment measures -- those that account for discouraged workers, marginally attached workers (those not listed in the labor force, but who nonetheless say they want work), and part-time workers who say they would like full-time work -- don't suggest that the standard unemployment statistics are leading us astray:




Is unemployment worse than we think?  I kind of doubt it.

UPDATE: pgl fills in the some of the numbers to the pictures above -- and notes that Dean Baker is not as sanguine as I.

June 2, 2007 in Labor Markets | Permalink


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» Unemployment and the credit cycle from Interfluidity
Much of the chatter surrounding the latest BLS release has focused on a spike in the denominator of the unemployment statistic, the fraction of the population either working or actively looking for work. Courtesy of the indispensible [Read More]

Tracked on Jun 8, 2008 1:49:53 PM


Big Picture makes up a lot of stuff without any facts

Posted by: Cassandra | June 02, 2007 at 05:50 PM

Great analysis. Often people who cite the U-6 rate (or other measures) as evidence that the true unemployment rate is much higher never provide any historical context. They rely on people to compare the present day U-6 number to historical U-3 rates.


"We're being lied to. The real unemployment rate, the U-6 number, is 8%."

"Okay, is that good or bad?"

"Aren't you listening? 8%!"

Posted by: Steve | June 02, 2007 at 06:02 PM


I wonder how the denominator gets adjusted for the illegal immigrants that are employed in this economy. Would that affect the unemployment numbers in a positive direction?

Posted by: XP-77 | June 02, 2007 at 08:35 PM

Thank you XP. Those wage slaves send their little checks back to Mexico, so shouldn't that dilute the claim that this should be counted as a US job? Moreover, isn't this crowding out the now-too-expensive carpenter for the cost effective 'material mover'? Is it possible that our productivity numbers are inflated because the hours put in by "illegal aliens " are not fully accounted for?
I like the Nat for describing this labor report as a downward shift to poorer remunerated service jobs and possibly not as durable either. Are these the kind of jobs that will get you into a GM truck? Not really.

Posted by: calmo | June 03, 2007 at 02:52 AM

"It happens when the denominator -- the bottom number of the fraction -- goes down."

Since when does a ratio go down when the denominator goes down? (given we are in positive numbers)

It's not because the denominator (labor force) goes down. It's because decreasing labor force participation improves the ratio between available workers and available jobs. This makes the nummerator decrease at a faster rate than the denominator, which decreases the unemployment rate.

Posted by: pinus | June 03, 2007 at 03:30 AM

The Denominator (Labor Force) gos down, total employment appears to goe up.

Unemployment rate% is 100 - total employment

Posted by: Barry Ritholtz | June 03, 2007 at 05:56 AM

As the Denominator (Labor Force) goes down, total employment appears to go up.

The Unemployment rate % = (100 - total employment)

Posted by: Barry Ritholtz | June 03, 2007 at 05:56 AM

Your first chart is totally consistent with my post:

The Labor Participation Rate was over 67.4% in 2001; It subsequently fell to about 2% to ~65.6%, It appeared to have bottomed and and began to improve in 2005 -- but has since started heading lower again.

Now, a 2% or so drop doesn't sound like a lot, but remember there are 143 million workers in the US. That drop equals about 3 million people. These are folks who are willing to take a full time job, have been unable to find work, and have exhausted their unemploment benefits.

They do not count in the "official" Unemployment Rate statistics. However, BLS actually does measure these folks in their "augmented unemployment rate" -- the jobless people who aren't counted among the officially unemployed.

That measure is 7.4%.

Posted by: Barry Ritholtz | June 03, 2007 at 06:09 AM

Nice point that the drop in the participation rate is from teenagers.

OK, next question. Why are teenagers dropping out?

the minimum wage is too low.
school has gotten more demanding.
crowed out by illegal immigrants.

What other idea do people have?

Is this a good thing or a bad thing? I can see arguments both ways.

Posted by: spencer | June 03, 2007 at 09:06 AM

It is common knowledge that if the US counted the unemployed the way Europe does, our unemployment rate would be comparable to theirs.

Posted by: me | June 03, 2007 at 09:53 AM

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