The illusory jobs recovery

The government recently reported that the economy added 155,000 payroll jobs in December while the unemployment rate remained unchanged from a revised 7.8% November rate. Payroll employment has increased by 1.8 million over the past year, with growth averaging about 153,000 jobs per month.

These headline numbers are in line with what we have seen for most of the second half of 2012 and are routinely called “solid.” During the campaign, President Obama ran on the fact that the unemployment rate has gone down since its peak in October 2009. But the actual picture of the economy is quite different from what the administration suggests. What the “recovery” has produced is a degrading total labor force and an economy that is barely producing enough jobs to keep up with population growth.

Most people believe, understandably, that the unemployment rate is the number of unemployed adults divided by the total number of adults. But that is incorrect. The best way to think of the official unemployment rate is as a fraction where the numerator and denominator are defined as follows:

Numerator: The number of unemployed adults who do not have a job, are available for work and are looking for work. This figure excludes unemployed adults who do not report having looked for a job in the previous month.

Denominator: The number of people in the numerator plus the number of people who are employed.

When adults stop looking for work, they are subtracted from both the numerator and the denominator. When you subtract the same amount from both the numerator and denominator in a fraction, the fractional percentage goes down. So the more people who give up participating in the labor force, the more (perversely) the government will report that unemployment has declined.

If no one in the United States worked or was looking for work, our government, in all its wisdom, would report that the unemployment rate was zero.

The unemployment rate has fallen in recent years largely because so many people have left the labor force. The labor force participation rate (the percentage of the population considered to be part of the labor force) was 63.6% in December 2012, unchanged from November and down 0.4 points from December 2011. This decline is responsible for about six-sevenths of the decline in the unemployment rate in 2012, or 0.6 points off the 8.5% rate the country faced in December 2011. Only one-seventh of the decline can be explained by actual growth in employment. Without this drop in labor force participation over 2012, the unemployment rate would be 8.4%.

Such a phenomenon is not unique to this year. This declining labor force participation rate has been a hallmark of the current recovery and the driving force behind the improving unemployment rate. The peak unemployment rate was 10.0%, reached in October 2009. It has since fallen 2.2 points, to 7.8%. However, more than 90% (2 points) of this drop is due to a 1.4-point drop in the labor force participation rate, from 65.0% to 63.6%. Without this drop in the labor force participation rate, the unemployment rate would be 9.8% today. During this same period, the number of people the government reports as “not in the labor force” but who “want a job now” has increased by 746,000, or 12%. Were the labor market improving, this number obviously would be decreasing. So claiming that the job market is in recovery is simply wrong. The economy may have stopped shedding jobs, but it has yet to stop shedding workers.