Editor's note: This piece was co-authored by Michael Talent.
Last Friday’s jobs report was dismal. The labor force participation rate, that is, the percentage of the total population that is either working or actively seeking employment, dropped to 63.3%. That’s the lowest rate since May of 1979. Under Presidents Reagan, Bush and Clinton the labor force participation rate grew as high as 67.3% in April of 2000. All of that growth is now gone and the numbers are back to the lackluster growth and economic malaise that characterized the Carter presidency.
However, the “official” unemployment rate still ticked down to 7.6%. In light of this bizarre result, it is time to stop using the official unemployment rate as the principle means for measuring the labor market’s health.
This decrease in the unemployment rate was a direct result of the decrease in the labor force participation rate and nothing more. Fewer people actively seeking employment means the unemployment rate falls. This is because of how the Bureau of Labor Statistics calculates the unemployment rate. When people stop looking for work—because of, for example, a lack of jobs—the BLS subtracts them from both the labor force and the ranks of the unemployed. The net result is a decrease in the unemployment rate. So the more people who give up participating in the work force, the more the government will report that unemployment has declined.
To understand the participation rate’s effect on the “official unemployment rate,” look at the impact of keeping the rate constant over time. The unemployment rate peaked in October 2009 at 10.0%. Since that time, the labor force participation rate has dropped 1.7 points from 65% to the current 63.3%. Holding the participation rate constant at its October 2009 level of 65% would produce an “official” unemployment rate today of 10.0%, identical to the “official” rate in October of 2009. So, the entire improvement in the unemployment rate since October of 2009 is due to a drop in the participation rate. Rather than indicating an improving labor market, the decline in both the “official” unemployment rate and the labor force participation rate indicates a depressed and stagnant labor market.
It’s a sweet set up for those who are in power. They can say that unemployment is going down even as the labor market declines. If no one in the United States had a job, and everyone had given up looking for work—and the real unemployment rate was 100%—our government would tell us that the unemployment rate was zero.
So what measurement should we use to determine the health of the labor market? An honest assessment would look at the number of jobs created, not the number of people who give up looking for work, and compare that to the growth in population. In a recent article, we proposed a more realistic and informative metric which we call the “Growth Ratio”. http://townhall.com/columnists/andrewpuzder/2013/04/05/jobs-numbers-demystified-n1558261.
The Growth Ratio is simply the ratio of the year-over-year growth in household employment divided by the year-over-year growth in the non-institutional population—that is, the number of people who could be in the labor force. This fraction tells us whether job creation is keeping pace with, running ahead of, or falling behind population growth. A Growth Ratio equal to one indicates that employment grew as fast as the population; under those circumstances, all else being equal, the unemployment rate should remain unchanged.
A Growth Ratio above one indicates job growth in excess of population growth, which should reduce the number of unemployed people in the labor force and result in a lower unemployment rate. A ratio between zero and one indicates that, while employment grew, it grew slower than the population. A negative ratio indicates that employment fell over the time period. To produce a true economic recovery that would meaningfully reduce real unemployment, employment growth should be above one, which means it is greater than population growth.
What does the Growth Ratio show about the March jobs report? The ratio clocked in at 0.90 in March, showing that year-over-year growth in employment failed to keep pace with year-over-year growth in the labor-eligible population. In the 31 months since the Growth Ratio turned positive, the average ratio has been 0.95, indicating that, on average, yearly employment growth has failed to beat yearly population growth during the “recovery” on a monthly basis.
In other words, employment growth has failed to keep pace with population growth. The labor market is losing ground. Nor can the dismal March jobs report be blamed on the sequester. While March’s Growth Ratio was lower than in recent months, it is not an outlier when viewed in light of the overall trend since the recession officially ended — which clearly shows that employment growth has hovered around population growth.
The official unemployment rate has hidden this fact well. Ever since October 2009, the rate has been falling, not because the US is adding jobs, but because fewer people are actively looking for work. Many of them want jobs, but simply give up in frustration after repeated but failed efforts to find one. This takes them out of the labor force and drives down the official unemployment rate. In fact, the BLS reported that in March there were 6,722,000 people out of work who “Want a Job Now,” that it excluded from the ranks of the unemployed. In the real world, these people are unemployed, but in the government’s world, they have vanished from the labor force. Adding them back into the labor force and therefore the ranks of the unemployed produces an unemployment rate of 11.4%.
The punch-line of the March jobs report is that Americans should no longer consider the “official” unemployment rate as a reliable measure of the opportunities actually available (or unavailable) to working age people. The “Growth Ratio” is a truer measure, and it shows, at best, a tepid recovery with a stagnant labor market. Welcome to the Obama economy.