July 6, 2015
The June Unemployment Rate Fell to 5.3%,
but …
It seems as though there usually is a “but” when the
unemployment rate falls by more than expected by the cognoscenti. The consensus estimate for the June unemployment rate
was 5.4%, down from May’s 5.5%. Instead, the BLS reported that the June
unemployment rate fell to 5.3%, its lowest reading since April 2008. Might this
be cause for celebration if one were not an economic masochist? Au contraire, according to the
mainstream media talking heads. After
reporting the larger-than-expected decline in the June unemployment rate, the
talking heads quickly inserted the “but” – but the labor force participation
rate fell three-tenths of a point to 62.6%, its lowest since October 1977. The
simultaneous decline in the unemployment rate and the labor force participation rate is consistent with the notion
that the unemployment fell because people dropped out of the labor force due to
discouragement over poor job prospects. So, recork the champagne, right? Wrong.
Before getting too deep into this, let’s define some
terms. The “headline” or U-3 unemployment rate is the ratio of the number of
people who are unemployed to the civilian labor force. Of course these numbers
are estimates “blown up” from responses solicited from a relatively small
sample of households. To be considered unemployed, one has to have been
available to work if the opportunity to do so had arisen and have actively sought
employment. The labor force is defined as the sum of people 16 years old or
older who are employed or are unemployed (unemployed, i.e., according to the definition
given above).
Let’s run through a couple of numerical examples of how
the unemployment rate might fall. Let’s assume that the total number of
“officially” unemployed is 5 million and the labor force is 100 million. In
this case the unemployment rate would
be 5% (5/100 x 100). Now let’s assume that the number of unemployed falls by 1
million to a total of 4 million and the labor force increases by 1 million to a
total of 101 million. In this case, the unemployment rate falls to 4%, rounded.
Alternatively, suppose that the number of unemployed again declines by 1
million to a total of 4 million and the labor force also declines by 1 million to a total of 99 million. Lo and behold,
the unemployment rate again falls to
4%, rounded. By the laws of arithmetic, if both the number of unemployed and
the number of the civilian labor force decline, the unemployment rate also will
decline if the percentage decline in
the number of unemployed is greater than the percentage decline in the number
of the civilian labor force. And, arithmetically speaking, this is what
occurred in June. The number of unemployed fell by 375 thousand or by 4.3% as
the civilian labor force fell by 432 thousand or by 0.3%, resulting in a
decline in the unemployment rate of two-tenths of a percent.
The question arises as to whether the drop in the number
of unemployed was related to the drop in the labor force. For example, did 375
thousand people who in May were classified as unemployed become discouraged
with their job prospects and throw in the towel with respect to seeking
employment. If so, these people would no longer be categorized as unemployed if
they had stopped looking for a job. And if these 375 thousand people were no
longer looking for a job, they would no longer be counted in the civilian labor
force. Thus, the labor force number would drop, too. This decline in the June number
of unemployed and the labor force being due to discouragement of job prospects
is just an hypothesis. We cannot make this determination simply by observing
the simultaneous declines in both the number of unemployed and the labor force.
When a decline in the unemployment rate is accompanied by
a decline in both the number of unemployed and the labor force, media talking
heads look to the participation rate for clarification as to why the
unemployment rate fell. For the life of me, I do not know why they look to the
participation rate for clarification, but they do. The labor force
participation rate is defined as the number of people in the civilian labor
force (i.e., the sum of the number of employed and unemployed) as a percent of
the population 16 years old and older, or the “potential” labor force. All else
the same, then, a decline in the labor force would result in a decline in the
labor force participation rate. As I noted above, in June, the labor force
participation rate declined by three-tenths of a percent to decades low of
62.6%. But this does not tell us why
the labor force dipped in June. Perhaps people became discouraged with their
job prospects and dropped out of the labor force. Perhaps not. Perhaps people
dropped out of the labor force because they retired. Perhaps they went back to
school. Perhaps they dropped out of the “official” labor force to perform the
most important of jobs, rearing a newborn child. So, the behavior of the labor
force participation rate does not provide us with much “color” regarding the
behavior of the headline unemployment rate. A decline in the unemployment rate
and a decline in the labor participation rate are necessary conditions for an explanation of the decline in the unemployment
rate being related to people dropping out of the labor force because of discouragement
due to poor job prospects. But they are not
sufficient conditions. In other words, more information is required to make
such a judgment.
The critical information regarding the sufficient conditions is contained in
Table A-1, “Employment Status of the Civilian Population by Sex and Age”, of
the Household Survey section of the Monthly Employment Situation. Line item 8
in this table is [number of people] “Not in labor force”. Line item 9 in this
table is [number of] “Persons who currently want a job”. If the principal
reason people are dropping out of the labor force is discouragement over job
prospects, then we ought to see approximately equal increases in the number of
people not in the labor force and the number of those people not in the labor
force expressing an interest in obtaining employment. Chart 1 shows the
month-to-month changes in the number of people not in the labor force and the
number of these people desiring a job.
Chart 1
In June, the number of people not in the labor force
increased by 640 thousand. Of that 640 thousand, there was only an increase of
18 thousand that desired a job now. This does not comport with the hypothesis that the decline in the June
unemployment rate was the result of people dropping out of the labor force
because of discouragement over job prospects.
But wait. There’s more. There’s Table A-15, “Alternative
Measures of Labor Underutilization”, in the Household Survey section of the
Monthly Employment Situation. One of the measures of labor underutilization is
the U-5 unemployment rate which takes into consideration not only the
“officially” unemployed but those unemployed categorized as “marginally
attached” to the labor force. Persons
marginally attached to the labor force are those who currently are neither
working nor looking for work but indicate that they want and are available for
a job and have looked for work sometime in the past 12
months. Discouraged workers are included in this category
of marginally attached workers. If the headline unemployment rate (the U-3
measure of labor underutilization) and the participation rate were falling
primarily because people were dropping out of the labor force out of
discouragement, then the U-5 measure of labor underutilization, which takes
into consideration discouraged workers and others who are only marginally
attached to the labor force, would not
decline and might even increase. Chart 2 shows the month-to-month changes in
both the U-3 (headline) and U-5 measures of the unemployment rate. In June, both the U-3 and U-5 measures declined
by two-tenths of a percentage point, suggesting that job discouragement did not account for the decline in the
headline unemployment rate.
Chart 2
I don’t know why the media talking heads do not look at
line items 8 & 9 in Table A-1 and at Table A-15 in the Monthly Employment
Situation report. Perhaps it is because they look only at the BLS press
release, which does not include these items. I place little weight on the
Monthly Employment Situation in assessing the current state of the U.S.
economy. The data are based on samples, not universes. The data get revised
many times over. But the media talking heads ought not to compound errors by
ignoring relevant information in the report bearing on their hypotheses.
Paul L. Kasriel
Senior Economic and Investment Adviser
Legacy Private Trust Co. of Neenah, WI
Econtrarian, LLC
1 920 818 0236
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