Monday, September 9, 2013

Just How Distorted is the U.S. Unemployment Rate Number?

On the first Friday of every month, I go through the jobs report and note the grossly distorted statistics.

For example, please see BLS in Wonderland written Friday, September 6

Every month I conclude with a couple paragraphs like these:
Grossly Distorted Statistics

Were it not for people dropping out of the labor force, the unemployment rate would be over 9%. In addition, there are 7,911,000 people who are working part-time but want full-time work.

Digging under the surface, much of the drop in the unemployment rate over the past two years is nothing but a statistical mirage coupled with a massive increase in part-time jobs starting in October 2012 as a result of Obamacare legislation.
Wonderland Statistics

This past month I had a couple of extra paragraphs:
Compared to recent Gallup surveys, these BLS stats regarding the base unemployment rate and the alternative measures as well are straight from wonderland. For details, please see Gallup Says Seasonally-Adjusted Unemployment Climbs to 8.6%; Who to Believe (Gallup or the BLS)?

I believe Gallup. Thus, I expect more downward revisions in jobs, and upward revisions in the unemployment rate.
Let's take a look at BLS data to get a handle on what is happening, and why.

Civilian Labor Force Participation Rate



The participation rate is the "labor force as a percent of the civilian noninstitutional population."

Explaining the Graph

  1. Women entered the labor force in huge numbers as two-wage earners per household became the norm
  2. An internet boom provided ample jobs for those who looked for jobs (and you have to look for a job to be a part of the labor force)
  3. A dotcom crash followed
  4. In response to the dotcom crash, the Fed blew the biggest housing and credit bubbles the world has ever seen, but the effect on the participation rate was small
  5. The housing boom turned to bust, but even in the recovery, the participation rate continued to decline

It's Not Demographics

Many people believe demographics explains the decline in the workforce. However, that's not the case.

To prove the point, let's focus in on an age group that is generally not retired and historically not in school.

Civilian Labor Force Participation Rate - 25 to 54 years



Notice how the participation rate of those 25 to 54 has been in steady decline since
the year 2000 except for a slight uptick in the housing boom years.

Allowing 6-7 years after high school for college education, most of those 25 should be looking for a job or have a job. Yet the trend is unmistakable.

Rick Newman, writing for Yahoo Finance posted the following table in Here Are the Real Labor Force Dropouts.



Here is a chart I posted previously in Normalized Unemployment Rates; Cyclical vs. Secular Forces

Participation Rate by Age Group



Not in Labor Force Want a Job



To be in the labor force you have to want a job and look for a job. To be "unemployed" you have to be in the labor force.

At the start of the recession, there were 4,648,000 people who wanted a job but were not considered unemployed. There are now 6,285,000 people who want a job now but do not have one.

That is an increase of 1,637,000.

Adding just the increase back would raise the labor force to 157,123,000 from 155,486,000. It would raise the number of unemployed to 12,953,000 from 11,316,000. And it would raise the unemployment rate to 8.2%.

But why stop there?

It's All In The Definition

The definition of "unemployed" is what it is (for political reasons), but by my more practical definition "you are unemployed if you want a job and do not have one", the corresponding numbers would be as follows:

  • Labor Force: 155,486,000 + 6,285,000 = 161,771,000
  • Unemployed: 11,316,000 + 6,285,000 = 17,601,000
  • Unemployment Rate: 17,601,000 / 161,771,000 = 10.9%

Actual Employment

We can arrive at similar conclusions by looking at the number of employed. Once again the age group 25-54 is the most logical to study. (Total employment is not the best measure because of demographics, those over 60 retiring voluntarily).

Employment Rate: Aged 25-54: All Persons in the United States



Demographics sure does not explain that chart so something else must. The answer is threefold:

  1. Rampant Disability Fraud
  2. It Doesn't Pay to Work
  3. School: Kids stay in school for advanced degrees because there are no jobs, and middle-aged persons out of a job going back to school.
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Rampant Disability Fraud

I have talked about disability fraud on numerous occasions. Here are a few examples:



Please read that last link above. It's a real eye opener.

Not in Labor Force With a Disability



I would love to show data pre-recession. Unfortunately, the data only goes back to mid-2008. We can see however, that nearly 23 million Americans are not in the labor force because of "disabilities".

I suggest "fraud" is more like it.

It Doesn't Pay to Work

The second reason the unemployment rate is artificially low is "It Doesn't Pay to Work".

I wrote about this recently in Why Work for $7.25 When Welfare Pays $15.00 in 12 States and $8.00 in 33 States? Is a Low Minimum Wage the Problem?

School

I hardly think hiding out in school because there are no jobs (when you really want a job) should constitute someone being "not in the labor force" (yet it does).

So What's the Real Unemployment Rate?

If you use my definition, "you are unemployed if you want a job and do not have one" then the starting point is 10.9%.

But what about those who do not have a job and don't want a job because of disability fraud or welfare considerations?

Factor that in and the unemployment rate would be several points higher, say 14-15%.

However, that does not count another 7% who have a part-time job but want a full-time job.

So if you watch the unemployment rate drop month after month, and you think the number is grossly distorted and totally void of common-sense reality, you are absolutely correct.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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