What’s the Real
Story with the Employment Situation?
The release of the December
2013 Employment Situation has left us with a disturbing picture of the current
state of the labor markets, a condition that has been troubling – to say the
least, for the last several years. On
the one hand, in the Current Population (or Household) Survey we see an
Employment number that is a respectable 143,000 higher than November 2013. Further, we see a reduction of 490,000 from
the unemployment rolls. The problems
arise from the fact that there were 178,000 adds to the Civilian
Noninstitutional Population, but a decline of 347,000 in the Labor Force. Where did those 347,000 people go?
Now the change in Labor
Force is equal to the change in the Employed (143,000) plus the change in the Unemployed
(-490,000). While there were an added
143,000 in the Employed, when we include the negative 490,000, we end up with
347,000 people leaving the Labor Force altogether. [On a net basis] when we include the 178,000 that
were added to the Civilian Noninstitutional Population, this brings the total
net increase of the ‘Not in the Labor Force’ category of the Civilian
Noninstitutional Population to 525,000.
This means that 525,000 more people were removed from the Labor Force
(neither employed nor unemployed) in December 2013.
According to the NBER (National
Bureau of Economic Research), the US
has been out of recession since June 2009.
Going back to employment levels in November 2007, since the recession
began in December 2007, one would naturally assume that the employment growth
would have surpassed that November 2007 level since we are six years down the
road. The truth is that we have yet to
reach that level of employment, in spite of the fact that we have added around 14
million to the working age population since November 2007.
Another bellwether that we’ve
been looking at is the Labor Force Participation Rate. This measure from the Civilian Population
Survey compares the Civilian Labor Force (Employed + Unemployed) with the
Civilian Noninstitutional Population.
While the historic measure throughout the last decade (2000-2010) was
around 66%, the December reading of 62.8% was the lowest since March 1978.
One of the central themes of
this recovery is that we’ve seen the U3 unemployment rate drop at a fairly
rapid pace. Now keep in mind that the
unemployment rate has dropped a very respectable 1.2%, from 7.9% in January
2013 to 6.7% in December 2013. The main
question to ask yourself is did that drop in the unemployment rate result from
a movement to the employment side of the Labor Force (again the Labor Force =
Employed + Unemployed), or did it result from a movement out of the labor force
because of the difficulty of finding jobs?
A key measure of health in
the ‘Employment Situation’ is the Labor Force Participation Rate.
One would hope that the Labor
Force Participation Rate would either stay the same (movement from Unemployed
to the ranks of the Employed) or rise (movement back into the Labor Force from
the ‘Not in the Labor Force’ component of the Civilian Noninstitutional
Population). Unfortunately, any
‘Employment Situation’ gains in terms of the reduction in unemployment have
translated into a deteriorating Labor Force Participation Rate. In fact, if we were to overlay the Labor
Force Participation Rate of 65.5% from July 2009 (the Recession ended in June
2009), we would have a 10.5% U3 Unemployment Rate, not the current 6.7% U3
Unemployment Rate. This is simply
because between the change in the Civilian Noninstitutional Population (grew by
10.875 million) and the change in the Labor Force from July 2009 through
December 2013 (grew by 435,000), the ‘Not in the Labor Force’ component of the
Civilian Noninstitutional Population expanded by (10.440 million). This resulted in a Labor Force Participation
Rate that fell from 65.5% in July 2009 to 62.8%.
To illustrate the import of even
small changes in the Labor Force Participation Rate, consider this: if the
Labor Force Participation Rate had remained at the level it was in July 2009,
65.5%, and that rate was reflected in the employment level (with the same
number of unemployed), there would be 6.7 million more people working. These workers, if contributing $50,000 per
person to the GDP, would add $335 billion to the economy on an annual basis and
roughly $100 billion in new taxes (with at least some offset in terms of
unemployment benefits and or other welfare payments such as food stamps).
One of the criticisms leveled
at the falling Labor Force Participation Rate (LFPR) is that much of the
fall-off can be explained by the growing ranks of Baby-Boomers heading for retirement
(born 1946 through 1964). While there
are certainly retires in that segment, the fact is that the real fall-off in
the Labor Force Participation Rate is at the younger ranges of the age groups.
In short, this ‘recovery’ has
dealt a blow to labor force participants in their prime earning years (ages 40 to 55). In addition to those segments, it’s also very
important to note that the young participants (ages 16-34) have been hurt the
most by the lack of opportunities in the labor markets. The irony, of course, is that the older
employees are hanging around in far greater numbers.
Lastly, while we’ve covered this
ground on several occasions, it bears repeating.
The two surveys we use in
determining the Employment Situation on monthly basis are the Payroll or
Establishment Survey (also referred to as the Current Employment Statistics or
CES) and the Household or the Current Population Survey (CPS). While the Payroll Survey typically gets a bit
more notice from the media when the (December 2013) Employment Situation Report is published (typically the first Friday of the
month…not the case in January 2014), the Unemployment Rate and a variety of
other Employment Situation measures are derived from the Household Survey.
It’s always a good thing to
see how many jobs are either created or lost in the Payroll Survey and