The following originally appeared in The Orange County Register on May 25, 2014.
As Mark Twain is often credited with saying, there are lies, damned lies and statistics. When the Bureau of Labor Statistics released April’s jobs numbers, the headlines were flush with phrases such as “hiring kicks into high gear” or “payrolls surge, jobless rate hits 5-1/2 year low.” A closer analysis of the numbers shows that America’s labor market is far from healthy.
First, the good news from April: The Establishment Survey (the survey the BLS uses to estimate how many jobs the economy is adding) showed an increase of 288,000 jobs, an encouraging number. In addition, the Household Survey (a separate survey that the BLS uses to calculate the unemployment rate) showed a 0.4 percent decline in unemployment from 6.7 to 6.3 percent.
Now for the bad news: The Household Survey also showed that 73,000 fewer people were employed in April than had been employed in March.
April’s unemployment rate declined not because more people had jobs but because the labor force declined by 806,000 people, a number roughly equivalent to the population of San Francisco. The unemployment rate is simply the percentage of unemployed people in the labor force. When unemployed people drop out of the labor force, the remaining unemployed people constitute a smaller percentage of the total.
The BLS defines the labor force participation rate as the percentage of the population over age 16, available for work and either employed or actively seeking employment. In April, because 806,000 people dropped out of the labor force, the participation rate dropped from 63.2 percent to 62.8 percent.
Had the participation rate simply remained at March’s 63.2 percent, April’s unemployment rate would have increased 0.2 percent from 6.7 percent to 6.9 percent. In other words, the unemployment rate declined in April solely because people left the labor force, not because of an increase in the number of Americans who found a new job.
This is hardly a recent trend. Unemployment peaked in October of 2009 at 10 percent. At that time, the labor force participation rate was 65 percent. If the participation rate were 65 percent today, the unemployment rate would be 9.4 percent instead of 6.3 percent. In real terms, only 0.6 percent of the improvement in the unemployment rate over the past 4 1/2 years has come from an improving labor market. The rest has come from a decline in the number of people in the labor force.
Declining labor force participation creates a vicious cycle:
• Those who are unable to find jobs, drop out of the labor force, are less likely to find work and become reliant on government assistance. Labor force participation is already precipitously declining. As you would expect, the number of people dependent on government programs, such as food stamps and Social Security disability, is dramatically increasing.
• A declining percentage of the population is employed and able to subsidize (through taxes) these growing government assistance programs.
• Government then increases taxes to make up the difference.
• With increasing taxes and increasing benefit costs, the incentives for job creators to expand are reduced, and businesses create fewer jobs or eliminate jobs.
• With reduced job opportunities, new job seekers are unable to find work and we’re back to step 1.
This cycle condemns America’s youth to economic stagnation and deprives them of the opportunities and dignity that come with prosperity and a job. To put this lost opportunity into perspective, over the past six years, from April 2008 to April 2014, the population has increased by 14,241,000 people while the number of people employed has decreased by 463,000, and the number of people unemployed has increased by 2,116,000.
Where are the rest of the people? The number of people not in the labor force increased by 12,589,000 during this period and now includes a total of more than 92 million people. It has been, and remains, a bad time to be looking for a job.
Congressional Budget Office Director Douglas Elmendorf testified earlier this year that reduced labor force participation was “the central factor in slowing economic growth.” He further stated that “later in this decade and beyond, the principal reason why we think economic growth will be less than it was for most of my lifetime will be a slower rate of growth by the labor force.”
Elmendorf’s comments emphasize the distressing nature of the history of the labor force participation rate going back to March 1978, during the Carter administration; the last administration during which labor participation was as low as 62.8 percent (it has hit 62.8 percent three times since October).
Defenders of the president’s economic policies argue that this disconcerting decline in labor participation is due to baby boomers retiring, rather than the president’s economic policies. This is simply untrue. Even the CBO attributes the participation rate’s decline 50 percent to economics (poor job prospects in the current economy) and 50 percent to demographics (the aging of the population).
The numbers indicate a greater impact from economics, particularly for America’s youth. April’s labor force participation rate for 16-to-19-year-olds was 33.2 percent, the lowest level recorded since 1948, when BLS started tracking the data. In April of 2008, it was 7.5 percent higher at 40.7 percent. BLS projects that, between now and 2022, “[b]ecause of the decreasing labor force participation rate of youths and the prime age group, the overall labor force participation rate is expected to decline. The participation rates of older workers are projected to increase.”
To view a decline in the unemployment rate apart from the labor force participation rate’s impact is neither a lie nor a damned lie: It’s a misleading statistic. Unless we reverse the current precipitous decline in labor force participation, even with a declining unemployment rate, future generations will never experience the level of economic opportunity past generations have experienced. Our economy needs more private-sector jobs, and our government should be doing all it can to encourage American businesses to create them.