Today I want to talk about the unemployment rate and how it is used to pull the wool over your eyes in regards to the effects of the current recession.
As I have discussed in previous posts, the current recession started around 6 years ago when the housing bubble burst, nearly causing a catastrophic meltdown of the financial system. The end result was that US government stepped in and very selectively doled out aid to Wall Street and to specific non-investment, non-bank institutions to help keep our financial house of cards from completely collapsing. Europe, following in our footsteps in both falling into recession and working to cure it, did much the same thing, but on a national level, offering up huge loans for austerity (i.e. cutting the budget to meet certain deficit targets).
Since then, the nation and the world, has been watching unemployment rates with the frenzied fascination of someone waiting for a bomb to be defused. Unfortunately, the unemployment rate is a very misleading measure of the health of the labor economy. The reason? How it's calculated. Most people believe that the official unemployment rate is calculated based on the number of working aged adults not currently employed, but they are wrong. That is actually the labor participation rate (Note: labor participation rate is the rate of employment among working aged adults expressed in percent. But since there are only two option, employed or not, it also reports its opposite, the number not employed). The unemployment rate is based on a survey of 60,000 US families and involves more complex math and fudging. It determines the number of people currently employed in those families, those currently actively seeking work based on a set of narrow criteria, and those that are not in the labor force (who are not counted for purposes of the unemployment rate). It then extrapolates this out to the entire country and then weights the answers (hence my use of the word fudging). But don't take my word for it, read the description of it from the Bureau of Labor Statistics itself. http://www.bls.gov/cps/cps_htgm.htm
So this brings us back to my initial point, how is this used to pull the wool over our eyes. The answer is in the two statistics themselves. While unemployment rates peeked in 2009 and have been steadily decreasing, the labor participation rate is still more or less on the decline. http://data.bls.gov/timeseries/LNS14000000 (unemployment rate) http://data.bls.gov/timeseries/LNS11300000 (labor participation rate). In fact, labor participation rates have been on a fairly continuous decline since the tech bubble burst around the year 2001 (which you can see by adjusting the dates shown in the above link). Why are the two different? Because unemployment only includes those people who fit the narrow definition of actively seeking work. As you stay unemployed, you move from the actively seeking work category into the "discouraged worker" category and cease to be counted. So why do we focus so much on the unemployment rate and not on labor participation? Supposedly we do this because it focuses on those actively seeking work and thus is a more fair measure of the economic activity of the nation. But I think the reality is that the government and the media focus on this rate because it is much more likely to improve over time (as workers get moved into the non-counted discouraged worker category). After all, if you focus on labor participation, then it looks like the real estate bubble was just a plateau in the continued failure of the American economy. Politicians seeking re-election don't like that because it makes them look incompetent and news papers don't like it because doom and gloom doesn't sell papers, get viewers or help them with advertising revenue. So they together hype the rosier picture.
The reality though is something else. We have record low levels of labor participation in this country not seen since before the 80's boom and women entering the work place. And if the last time we saw participation this low was back then, it means that now, with most women of working age working, we are in much more dire financial straits than we were then. I.E. most of those women in the past were not employed and not seeking a job by choice, not because of the terrible economy (and the stagflation of the 70's was a terrible economy). Now we have more people looking, not finding and being moved into the "discouraged worker" camp slowly bringing unemployment rates down. Doesn't sound as nice as when the government or the papers trumpet the unemployment rates' decline does it?
So don't let the unemployment rate fool you, we are still in dire financial straits. Until we see steady improvement in the labor participation rate, it meas most of the unemployment declines came from people "leaving the work force".
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