Earlier this month, many (especially on the left) were overjoyed when the latest employment report showed a drop in the unemployment percentage from 9% to 8.6%. However, as economist Brad DeLong observes, these numbers aren’t as rosy as they seem.
What we saw in November, instead, was a 15 basis-points decline in the unemployment rate generated by more people at work. That is welcome. But most of the decline was a 25 basis-point decline generated by a fall in labor force participation. Workers as a group did not become more optimistic about their long-run employment opportunities, but rather less. That is not welcome. It is harder to pull people into employment if they are out of the labor force than if they are in the labor force and unemployed. Hence the fall in the labor force participation rate leads us to mark down the long-term potential output growth path of the American economy.
As most of you probably know, the usual U3 unemployment rate that is released by the BLS each month is actually a bit creative in its definition of unemployment. By the BLS’s definition, the unemployment rate is the ratio of unemployed workers to the total size of the labor force. Sounds reasonable, right?
However, where the definition gets tricky is when we define what constitutes “unemployed”. From the BLS Glossary:
Persons aged 16 years and older who had no employment during the reference week, were available for work, except for temporary illness, and had made specific efforts to find employment sometime during the 4-week period ending with the reference week. Persons who were waiting to be recalled to a job from which they had been laid off need not have been looking for work to be classified as unemployed.
So, for example, a person who has not looked for a job in 2 months would not qualify as unemployed. A person who has given up looking for work would not count as unemployed. As you can see, it is possible to have a drop in the unemployment rate just from a reduction in the amount of people looking for work. A key statistic here is the labor force participation rate, which conveniently is tracked by the St. Louis Federal Reserve. As you can see, this number has been dropping steadily, even after the economy started growing again.
Here’s where it gets depressing: If you adjust for this drop, the unemployment rate would be close to 11%, instead of the official 8.6%.
So there we have it, the drop in unemployment is a farce, and nobody seems to be talking about it. Undoubtedly, this is something the candidates should be hammering Obama on.