In the March 2016 Labor Report the Labor
Force Participation Rate registered 63.0%, the highest since March 2014; by May
it had fallen to 62.6%, the lowest since December 2015.
The Employment Situation Report for May 2016 was
terrible, with the 664,000 leaving the labor force. The ‘Not in the Labor Force’ component is
equal to the monthly change in the Civilian Noninstitutional Population (205,000)
less the change in the labor force (+26,000 employed -458,000 unemployed).
*rounding on Not in the Labor Force
total: CNP 205,000 – (26,000 Employed -458,000 Unemployed) = 664,000
The Employment Situation for the month
of May 2016 in Review
the month of May 2016, the employment situation continued its spring swoon with
664,000 people leaving the labor force. Over
the last two months, 1,226,000 people left the labor force. In the six months prior, from October 2015
through February 2016 976,000 were added to the labor force (leaving the Not in
the Labor Force component of the Civilian Noninstitutional Population). The labor markets were looking positive for
the first time in years and the bottom fell out yet again in April and May.
net results of lethargic economic growth combined with a slack labor market is
that we are probably around $1.5 trillion short on the real GDP side for 2015
and at least 9 million short on the workforce side based on a ‘normal’ Labor
Force Participation Rate of 66% which was about the average from 2006 through
2009. Simply put, the economy is not
growing at a fast enough pace to absorb the surplus labor.
the increased numbers of folks more fully participating in the job market, flat
or lower wages are the norm. Why pay
higher wages when there is excess capacity in the workforce? For that matter, as an employer what
justification would you have raise wages in a situation where price increases
spell doom in such a highly competitive sales environment? Keep in mind there are several million folks
sitting on the sidelines waiting for an opportunity, any reason to jump back
into the workplace.
also keep in mind that this is coupled with a less than robust, effective
demand for your products in the first place?
How can you have robust demand for products when you have several
million people not working, who could be employed, but don’t have the financial
means to purchase the products?
conclusion, without substantial or at least adequate economic growth, there is
no need to hire more people at any wage level.
The irony here is that the Fed Reserve (the Federal Open Market
Committee or the FOMC in particular) continues to discuss driving up the Fed
Funds Rate (thus pressuring up at least short-term interest rates) and the
Federal government continues to press for more regulations aimed at driving up
the cost of doing business. Both the
implied monetary (Fed) and actual fiscal policies (let’s not forget to point
out the mad dash to implement executive orders in particular) only serve to
increase uncertainty and burden the business sector. The thing to keep in mind is that the private
sector is the engine for economic growth and by extension, jobs!
we will do a rundown of the components in the labor picture as presented in the
Household Survey (Current Population Survey) which is conducted by the Census
Bureau for the Bureau of Labor Statistics on a monthly basis.
first at the Civilian Noninstitutional
Population, (CNP: includes the segment of the total population which is 16+
years of age that are not counted in the various institutional population
measures such as the military, prisons, etc.) it grew by 205,000 in May, which
is pretty much on par. Again, the CNP number is estimated, but typically ranges
from 180,000 to 225,000 on a monthly basis.
Keep in mind that there is no upper age limit on the CNP, so this
captures retirees as well. The point is
that with the CNP, unless there are at least 130,000 of the new entrants
absorbed into the labor force (employed or unemployed), then the Labor Force
Participation Rate falls.
The Labor Force includes that portion of
the CNP which is either employed or unemployed – but actively seeking
employment (this constitutes the U3 or ‘official’ unemployment level). When the monthly Labor Force change is less
than the Civilian Noninstitutional Population amount, then there is a net
outflow from the Labor Force; conversely, when the number is greater than the
CNP, as was the case in February 2016 with 555,000 being added to the Labor
Force, then there is a net outflow from the ‘not in the labor force’ component
of the CNP. In May 2016, 458,000 people
left the Labor Force. While employment
increased by 26,000, it was overwhelmed by 484,000 people leaving the ranks of
the unemployed (no longer actively seeking employment). The point is that while the unemployed
dropped by 484,000 they did not move into the ranks of the employed.
The Labor Force Participation Rate (LFPR) measures
the relationship of the Labor Force divided by the Civilian Noninstitutional Population. Going back to prerecession levels (2000-2008)
the Labor Force Participation Rate had been in the 66.0% range. After reaching a nearly 40 year low in
September 2015 of 62.4%, the Labor Force Participation Rate rebounded to 63.0%
in March (the highest since March 2014), but fell to 62.6% in May. Keeping in mind that the labor force is equal
to those employed plus those unemployed actively seeking employment (U3
Unemployed), even sticky or rising unemployment are not necessarily bad things
so long as they eventually move into the other side of the labor force – the
by 26,000 in May 2016. When we reference
the ‘Employment Situation’, this uses data drawn from the Current Population
Survey. The Current Population Survey
(CPS) and the Current Employment Statistics (CES) both measure changes in
Employment. While the CPS is smaller in
size than the CES (also referred to as the Payroll Survey), it covers a wider
swath of the population than the latter.
Current Population Survey (CPS) is a monthly survey of households conducted by
the Bureau of Census for the Bureau of Labor Statistics. It provides a
comprehensive body of data on the labor force, employment, unemployment,
persons not in the labor force, hours of work, earnings, and other demographic
and labor force characteristics. Current Population Survey, a sample of 60,000
households; data are collected by personal and telephone interviews. Basic
labor force data are gathered monthly; data on special topics are gathered in
periodic supplemental surveys.
Each month the Current Employment Statistics (CES) program surveys
approximately 146,000 businesses and government agencies, representing
approximately 623,000 individual worksites, in order to provide detailed
industry data on employment, hours, and earnings of workers on nonfarm
The Employment Population Ratio measures
those Employed divided by the Civilian Noninstitutional Population (CNP). The significance of the ratio is that it
provides insight into how many people are rowing the boat. For May 2016, the Employment Population Ratio
had dropped to 59.6 from a nearly seven year high of 59.9% in March 2016.
The Unemployment level fell by 484,000 in
May 2016. On the surface a fall in the
U3 Unemployment might appear to be a positive sign; unfortunately, only 26,000
jobs were added, resulting in nearly all of them also leaving the labor force
an aside, the U6 measure of unemployment (underemployment) includes the U3
folks (not employed, but actively seeking employment) along with those who are
discouraged (non U3 component of U4), marginally attached (non U4 component of U5),
and those who are working part-time for economic reasons (non U5 component of
U6). The U6 Unemployment number is not
published, but the U6 Unemployment rate is http://www.bls.gov/news.release/empsit.t15.htm.
The U3 Unemployment Rate measures that
portion of the labor force that is not employed but actively seeking employment
divided by the total Labor Force (employed + unemployed). The U3 Unemployment Rate fell from 5.0% in April
2016 to 4.7% in May. Unfortunately,
while the unemployed fell by 484,000, most of those people ended up leaving the
labor force altogether (on a net basis).
We seem to be going on a wild ride in the labor markets; we’ve gone from
an ‘Encouraged Worker Effect’ in March where the unemployment rate ticked up
due to more people actively seeking employment to a ‘Discouraged Worker Effect’
in May, where the unemployment rate dropped due to people leaving the labor
force altogether. The shortage of job
opportunities on the horizon tends to swell the not in the labor force component
and the unemployment level and rate often fall as was absolutely the case in
The U6 Unemployment Rate is a better
measure of the health of the labor markets because in addition to the U3 rate
(not employed, actively seeking employment), it also takes into account those
people who are discouraged, marginally attached, and those who are working
part-time for economic reasons. While
the U3 Unemployed was 7.4 million and the U3 Unemployment Rate was 4.7%, the U6
Unemployed level was 15.4 million and the U6 Unemployment Rate remained
unchanged from April at 9.7%.
in the Labor Force’ component of the Civilian Noninstitutional Population
(CNP) is simply the CNP – Labor Force (LF) [where the Labor Force is equal to
Employed + U3 Unemployed]. The bad news over
the last two months is that 1.2 million people left the Labor Force. So for May 2016 205,000 were added to the
Civilian Noninstitutional Population, while the Labor Force fell by 458,000
[26,000 Employed -484,000 Unemployed] with a net increase in the ‘Not in the
Labor Force’ of 644.000!
Rule of thumb…for every 1% the unemployment rate is higher than natural rate,
GDP (economic output) gap is 2% lower than where it would otherwise be. If
unemployment rate is 5% higher than full/natural/high employment, then you
simply multiply 5% X 2 = 10% (shortfall in GDP or economic growth)
Okun's Law...66.2% Labor Force Participation Rate
In the following exercise, we are using a modified version of Okun’s Law to
illustrate how the Labor Force Participation Rate can mask the unemployment
rate and potential economic growth.
2016 – Current Population Survey (Household Summary)
This is just a rough estimate based on an unemployment rate modified to fit a
The missing jobs: 16,571,000 (modified Unemployment Rate based on 66.2%
LFLPR) - 7,436,000 actual U3 Unemployed = 9,135 in the not in the Labor Force who
would otherwise be employed or at least be counted in the unemployed.
that means we would be around 9 million short on the jobs
front if the Labor Force Participation rate was in the 66% range.