The following Originally appeared in Human Events on December 10, 2012.
On Friday Dec. 7, The Bureau of Labor Statistics (BLS) released its November unemployment numbers and the unemployment rate declined from 7.9 percent to 7.7 percent. Most people would assume this is good news indicating that our economy is heading in the right direction and creating jobs at a rate that will quickly reduce the number of people who are unemployed.
Unfortunately, neither assumption is correct. Our economic decline is continuing with a greater percentage of people dependent on government and a lower percentage of people with jobs.
Given the current state of the jobs market and the number of people leaving the labor force, the official unemployment rate taken alone has become a very poor indicator of economic growth. The key to determining whether our economy is growing is to take a look at the underlying numbers. In particular, two metrics that the BLS calls the “labor force participation rate” and people “not in the labor force” that “want a job now” have become increasingly meaningful economic indicators.
What the BLS calls the “Establishment Survey” showed that the economy created 146,000 jobs in November (while the employable population increased 191,000). However, the Establishment Survey is not the survey BLS uses to calculate the official unemployment rate. Rather, it uses the “Household Survey.” According to the Household Survey, there were actually 122,000 fewer people employed in November than were employed in October. With fewer people employed, it seems reasonable to assume that the unemployment rate would increase. Yet, counterintuitively, it declined. Why?
Let’s do the math
The answer lies in the math. Obviously, the unemployment rate is the percentage of people in the labor force without jobs. However, not every unemployed person is considered a part of the labor force. For example, the BLS removes from the unemployment rate calculation people it considers “marginally attached” to the labor force. This includes people “who want and are available for work, and who have looked for a job sometime in the prior 12 months” but have “not searched for work in the 4 weeks preceding the survey.” A subset of those “marginally attached” to the labor force are “discouraged workers” “who want and are available for a job and who have looked for work sometime in the past 12 months” but “are not currently looking because they believe there are no jobs available or there are none for which they would qualify.” In other words, even though these individuals are unemployed, and have stopped looking for a job, BLS excludes them when calculating the percentage of the labor force that is unemployed.
To see how this works, let’s assume we have a labor force of 100 people with 10 people unemployed and 90 people employed. The unemployment rate would be 10 percent. Now let’s assume that the economy creates no new jobs, 2 people lose their jobs and 5 people give up their search for a job because they believe there are none available. We now have a labor force of 95 people as 5 people became “discouraged workers” and dropped out of the labor force. We also have fewer people with jobs as two people lost their jobs taking the employed total down to 88. Finally, we have fewer people who are unemployed because, although 2 people lost their jobs, 5 unemployed people become discouraged workers dropping out of the labor force leaving us with 7 people unemployed (the 5 unemployed people who remained in the work force and the 2 newly unemployed people) rather than 10.
With a total workforce of 95 people and with 7 people unemployed, the unemployment rate would go down from 10 percent to 7.4 percent despite the fact that that the economy created no new jobs, two additional people lost their jobs and the jobs situation was so bad 5 people simply gave up looking for work. The point is that, if you are trying to measure whether our economy is creating jobs, the unemployment rate alone is a poor indicator. It is the underlying numbers that reveal the real state of the economy and job creation.
Indicator of economic decline
Looking at the November unemployment rate calculation in this context, the number of people employed declined 122,000, going from 143,384,000 in October to 143,262,000 in November. So, as noted above, fewer people had jobs. Since fewer people were employed, it seems reasonable to assume that more people were unemployed. However, the number of unemployed people also went down, declining by 229,000 from 12,258,000 in October to 12,029,000 in November. So, there were both fewer people in the labor force with jobs and fewer people in the labor force without jobs.
This apparent inconsistency between a decline in both the number of people with jobs (122,000) and a decline in the number of people without jobs (229,000) raises the question of where these 351,000 people went. The answer is that the total number of people in the labor force went down by 350,000 from 155,641,000 in October to 155,291,000 in November. Because the decline in the number of people who were unemployed (229,000) exceeded the decline in the number of people employed (122,000), the unemployment rate went down from 7.9 percent to 7.7 percent. However, this was not because the economy was creating jobs at a sufficient pace to cause a decline in the unemployment rate. Rather, it was because, while the entire labor force declined, the number of unemployed people declined more than the number of employed people. This indicates economic decline rather than growth. In fact, digging a little further into the numbers supports the proposition that we are in a continuing economic decline.
Civilian labor participation rate
BLS also measures what it calls the “civilian labor force participation rate.” This is the number of people in the labor force (those with jobs or who have sought a job in the last four weeks) as a percentage of the people in the total employable population. The employable population includes individuals over 16 years old who BLS defines as in the labor force plus those BLS defines as outside the labor force or, simply, the entire population eligible to be in the labor force.
The labor force participation rate is an extremely important number indicating the percentage of the total employable population that is actually in the labor force. A higher percentage indicates that more people have jobs or are actively seeking employment. A lower percentage may indicate a declining economy as fewer people are employed or believe they can find jobs.
Key number: 542,000 people
In November, as noted above, 350,000 people left the civilian labor force. The employable population also increased by 191,000 people going from 243,983,000 in October to 244,174,000 in November. As such, the number of people in the employable population but not in the labor force increased by a total of 542,000 (basically, the 350,000 people who left the labor force + the 191,000 who entered the employable population) going from 88,341,000 in October to 88,883,000 in November.
As such, the “civilian labor force participation rate” declined from 63.8 percent to 63.6 percent as the employable population grew and the labor force shrank. This was the second lowest labor force participation rate of President Obama’s term (the lowest was 63.5 percent in August) and otherwise the lowest labor force participation rate since December of 1981 when it was also 63.6 percent. The month after President Obama took office; the labor force participation rate was 65.8 percent. It has never been that high since and has consistently and rapidly declined over the past four years.
A decline in the labor participation rate can indicate either a poor economy or a demographic shift, or both. For example, people retiring will cause the participation rate to decrease. However, at least one study has shown that while “more people as a ratio are working in these so called retirement years than before the recession,” labor participation rates “have dropped dramatically for people in their prime working years and thus there really is a large segment of the population that probably needs a job that [is] not being counted as unemployed.”
People “not in labor force” and “want a job now”
The BLS also measures the number of people “not in the labor force” that “want a job now” which would seem to support this study’s conclusion. In November, the number of people “not in the labor force” that “want a job now” increased by 230,000 going from 6,587,000 in October to 6,817,000 In November. This is the second highest number of President Obama’s term (the highest was 6,957,000 in August). It is also the second highest number of people “not in the labor force” that “want a job now” since the BLS started collecting the data in 1994. The month after President Obama took office; this number was 1,135,000 people lower at 5,620,000. It has never been that low since and has been consistently and rapidly increasing over the past four years. This is an extremely negative sign for our economy indicating both that fewer people have jobs and that fewer people believe they can find jobs.
As such, despite November’s improvement in the official unemployment rate, our economy remains very troubled. The trend over the past four years and continuing through November is towards an increasingly larger percentage of the employable population dependent on government assistance funded by the incomes of an increasingly smaller percentage of people in the labor force. Decreasing the number of people in the labor force and increasing the number of people dependent on government indicates a seriously troubled economy following the failed European model. Increasing both the costs of doing business and the regulatory burdens on the private sector exacerbates this trend. The only way to reverse it is to work with and encourage America’s entrepreneurs and small businesses. I respectfully suggested a number of ways the current administration could reach out to the private sector in a recent Human Events article. If we want real increases in employment, we need job creation and we need to support job creators.