What’s become of the Labor Markets over the Past Several Years?
Our Concerns regarding the Labor
Force Participation Rate (LFPR) go back to 2010
dedicating many issues in our newsletter to the ongoing problems in the labor
market – in fact; we first mentioned the problem posed by the collapsing Labor
Force Participation Rate as far back as five years ago in May 2010:
The Civilian Labor Force
Participation Rate (LFPR) Summary
The Labor Force
Participation Rate (LFPR) measures the Labor Force (Employed + those Unemployed
actively seeking employment) divided by the Civilian Noninstitutional
Population. The significance of this
measurement is that it captures both those folks: 1) employed and 2) those
people unemployed, but actively seeking employment. While a persistently high unemployment rate is
typically an incendiary topic, the good side of it is that it can also signal
hope for those affected, assuming jobs are forthcoming. What we’ve found over the course of the past
several years is that while jobs have been created and filled, employment
levels have only recently reached the point where they were in 2008.
When you have
significant levels of people not employed over a very long period of time
(2009-2014), it’s no wonder you have millions moving out of the labor force,
resulting in the lowest Labor Force Participation Rate in 37 years
(1977-2014). While there are many
explanations for the deterioration of the Labor Force Participation Rate
(LFPR), including the expanding group of Baby Boomers (born 1946-1964) moving
out of the labor force toward retirement and younger folks requiring more
education to meet the demands of an increasingly competitive global labor
market; the truth remains that many people have remained on the sidelines – out
of the labor force, who would otherwise be contributing to this arguably
stalled or at least middling economy.
Highlighting the U-3 Unemployment
Rate (the official Unemployment Rate) and the Payroll Employment Survey (from
the Current Employment Statistics, or CES)
It’s one thing to
record and analyze the monthly data, which of course has not typically been all
that great once you get beyond the U-3 Unemployment Rate and employment figures
from the Payroll Survey; but this time around, we will take a longer ‘look
back’ and then we will dig into the characteristics of the age groups across
the spectrum (if not in this newsletter, then certainly the very next one).
covered the U-3 Unemployment and Payroll Employment Survey ground extensively,
but it won’t hurt to review it just the same.
The Official U-3 Unemployment Rate
and the more inclusive U-6 Unemployment Rate
reported unemployment data from the U.S. Department of Labor, Bureau of Labor
Statistics, highlights the U-3 Unemployment Rate. When we speak of unemployed, we are referring
to those counted in the Labor Force who are not employed, but are actively
seeking employment. From a historical context,
in a somewhat normal employment market, reporting the U-3 unemployment number
would typically suffice. Following a
recession, it would not be unusual for the unemployment rate to actually rise a
bit, due to what is referred to as the ‘encouraged worker effect’. Simply put, as the economy recovers, more
people enter back in to the labor force searching for jobs that are either
waiting to be filled, or in the making.
When the jobs pipeline begins to fill more quickly, you would expect the
unemployment numbers to fall and the employed numbers to rise even more
rapidly, to absorb those from the ranks of the unemployed and also the new
entrants into the Civilian Noninstitutional Population.
In the following
two illustrations, we show two measures of unemployment over a several year
period. Keep in mind that U-3, or the
official unemployment rate came in at 5.5% in March 2015, while the U-6 or
broader measure of unemployment registered 10.9%. Both rates are coming down, but as we’ve
noted earlier and will see later in this article (and the next), the
unemployment measurement can be misleading when we are digging into the details
in the labor markets. If, on a net
basis, the Labor Force (Employed +Unemployed) was on the rise, then it would
bode well for the labor markets in general, since that would indicate that
workers would either be encouraged by jobs immediately available (those added
to employed for the month), or those jobs that were going to be filled in the
near term (encourage those unemployed, seeking employment). Even if the ranks of the unemployed were on the
rise, or being back-filled by those moving out the ranks of those ‘not in the
labor force’, then this would certainly signal a rebounding growth in the jobs
discussed the differences between the Payroll Survey (CES) and the Household
Survey (CPS) on numerous occasions, but short story is that the Payroll Survey
is a formal monthly data gathering endeavor targeting larger entities, like
companies and government agencies; while the Household Survey bases its data on
phone calls to individuals, asking them a series of questions including whether
or not they are working. Since the
Household Survey includes calls to those people in the Payroll Survey and also
the self-employed, those working at small businesses, agricultural workers,
etc., it actually is larger in scope than the Payroll Survey (Payroll counts
every job where an individual is working, while the Household Survey only
counts one job --- you’re either working, or you’re not).
The ‘employment’ number
that the media focuses on in the monthly labor reporting is the Payroll
Survey. While the Payroll Survey is effectively
a subset of the Household Survey (http://www.bls.gov/opub/mlr/2006/02/art2full.pdf); they can, at
times, vary significantly on a monthly basis.
In comparing the
CES Employment (Current Employment Statistics) to the CPS Employment (Current
Population Survey), both have performed anemically between 2008 and 2014: the
CES Employment grew by a total of 1.1 million; the CPS Employment expanded by
under 300,000; while the CNP (Civilian Noninstitutional Population) grew by 16
million. This breaks down to around
3,000 jobs per month for the CPS Employment and 13,000 per month for the CES
Employment over the last seven years (2008-2014). In that same seven year period, the CNP
(Civilian Noninstitutional Population) grew by 191,000 per month.
Even if we focus
on the (Civilian) Labor Force (Employed + Unemployed actively seeking
employment) the picture painted over the last several years is alarming. The Labor Force grew by 2.8 million from 2008
through 2014, with 2.5 million of that growth reflected in a greater number of
people unemployed, while less than 300,000 were added to the employment rolls.
and most troubling about the shrinking ranks of the unemployed is that, on a
net basis, they are just not moving into the other side of the labor force: the
employed side of the labor force house.
This phenomenon is illustrated by the fact that while the unemployment
rate (and the numbers of unemployed) is coming down very nicely, the Labor
Force Participation Rate remains very low.
This is not to say that people are not moving from the unemployed
category to employed status, but when we look at things on net basis, that is
when we look at the Labor Force Participation Rate over a period of time, there
are not enough jobs (Employment) being created to move adequate numbers from
the Unemployed and new adds to the Civilian Noninstitutional Population to move
the LFPR upward, let alone maintain its current level.
From 2011 – 2014 Unemployment
fell by 5.2 million, yet the Labor Force only expanded by 2.0 million. Furthermore, 10.1 million people were added
to the Civilian Noninstitutional Population in that same four year time frame.
The Labor Force Participation Rate
(LFPR) Continues to dampen any hope for a Significant and Sustained Recovery
So how do we get from a Labor Force Participation
Rate in 2008 of 66.0 % to a 62.9% LFPR in 2014 (62.7% in April 2015)?
straightforward: with a marginal LFPR from 2008 - 2014 of 17.4%, the 66% LFPR
in 2008 dropped to the 62.9% level in 2014.
The Labor Force
[Employed 0.3 million + Unemployed seeking employment 2.5 million), while the
Civilian Noninstitutional Population expanded by 16.1 million, leaving us with
a marginal Labor Force Participation Rate (LFPR) of 17.4% from 2008-2014.
This is why it is important to understand that while a falling unemployment
rate is typically a harbinger of healing labor markets, if those folks (on a net basis) move out of the Labor Force,
rather than being added to the ranks of the employed, then the woes persist.
employment must continue to grow at a rate high enough to absorb entrants into
the Civilian Noninstitutional Population (roughly 200,000 per month), along
with those leaving the ranks of the unemployed. Without sufficient job growth,
then the Labor Force Participation Rate will continue at the same low levels.
In taking a look
back at the recession and recovery in the 1980s we saw massive job growth,
following a recession that coincided with a large group from the tail end of
the Baby Boomers entering into workforce.
In spite of the large number of people on the sidelines, the job growth
was strong. The unemployment rate was very
high (9.7% in 1982) and remained above 6% through 1987, but the Labor Force
Participation Rate grew from 64.0% in 1982 to 65.6% in 1987. The main point of course being that
significant job growth was sufficient to absorb the new adds to the Civilian Noninstitutional
Population and ‘encourage’ the unemployed to hang in there while the economy
The Recession December 2007 – June
2009 and Recovery 2009 and Onward First, it is
important to note that the latest ‘official’ recession, as dictated by the
National Bureau of Economic Research (NBER) ran from December 2007 through June
Now, in looking at
the massive fall-off in jobs in 2009 in particular, the disappointment in the
jobs associated with the ‘recovery’ through 2014 barely recoups those jobs lost
from 2008 through 2010, never mind the new additions to the Civilian
Noninstitutional Population, or the millions who were at first unemployed, and
later moved out of the Labor Force entirely (again, on a net basis).
As noted earlier,
we will be drilling down into the various age groups in the very next
Monetary and Fiscal Policy Review
We often look to
the government for answers in terms of directing or managing economic recovery,
growth and/or stability. We look to the
Federal Reserve Board (FED), to direct the monetary policy. On that score, they have kept the targeted Federal
Funds Rate [through massive purchases of financial securities as directed by
the Federal Open Market Committee (FOMC)] in the 0.0-0.25% range since the end
of 2008 http://www.federalreserve.gov/monetarypolicy/openmarket.htm.
This accommodative behavior by the FED has certainly helped in terms of the
stock market, but even with low interest rates, unless businesses grow and take
advantage of the low interest rates, then job growth will remain flat. Furthermore, with the move by pretty much the
rest of the world to depreciate their currencies, relative to the US dollar,
it’s difficult to envision any kind of growth in the export sector (outside of
oil and gas, perhaps). This of course
will reduce net exports (exports minus imports) and lower Gross Domestic
On the fiscal
side, increasing budget deficits and non-growth targeted policies, will only
serve to further exacerbate the current labor market issues. The argument of course is that if we raise
taxes, this depresses the economy, but if we reduce taxes at current spending
levels, this will serve to increase deficits and pile more on to the exploding
national debt. While the pro-growth,
reduced taxes argument will likely cause higher deficits in the near-term,
especially without some spending reductions; the truth is that without growth there
is no hope of bringing those idled workers in the ranks of the unemployed and
those sidelined (‘not on the labor force’) back into the employed status.
The simple truth
is that we need more people working to fund government programs, including
Social Security, Disability, Medicare, and Medicaid; and we also need them
working to raise the slumping, real median income levels. The only way that this will happen is if the
economy grows sufficiently to hire those idled workers.
pundits cautioning us not pit income distribution against growth – meaning,
that those same pundits have determined that they are mutually exclusive and
somehow diametrically opposed. Again,
the fact remains that without growth, there is no hope of a more balanced
income distribution that would satisfy anybody.
We at this newsletter have stated repeatedly that growth and a more
equitable income distribution is best arrived at through via a ‘competitive
free market’ model.
On to the
characteristics of the labor markets by age group in the next newsletter…happy spring
(or fall if you’re below the equator)!