Should We Focus On Jobs Or Unemployment?

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The time is late 2009. In a small mid-western town an interviewer is asking a household member questions that will classify him as either working, unemployed, or out of the labor force in the government's monthly employment survey.

Having determined that the respondent is not employed, the interviewer asks if he wants and is available for work and has looked for a job in the past four weeks. The respondent replies, yes, he wants and is available for work, but he hasn't looked for a job for some time.

He explains: "This is a one factory town and the factory's shut down because of the recession. When it's operating, the factory employs most everybody in town who's a worker, except for the stores on Main Street. And they haven't been hiring because business is bad due to the factory shutdown. Everyone knows the factory's closed, so there's no point in looking for a job because there aren't any to be had."

The interviewer makes a mark on her form.

"If you don't mind me asking, what is Uncle Sam going to call me?" asks the householder. "I mean, how will I be classified?"

"Not in the labor force since you haven't looked for a job in the past four weeks," the interviewer replies.

"But I'm unemployed. So is most everybody in town."

"Well, we have another category called labor underutilization. Besides the unemployed and involuntary part-time workers, the total rate, called U-6, includes discouraged and other marginal workers who want and are available for work and who have looked for a job sometime within the past year."

"But," says the respondent, "the factory shut down 16 months ago and there would have been no point hunting for a job since then because there weren't any jobs anywhere around here, just like now. At the first sign of jobs you can bet everyone will be pounding the pavement and making application."

The interviewer marks her form. When she finishes the interview, the householder again asks how he would be classified.

"Not in the labor force," the interviewer replies.

"How about that other category you mentioned, underutilized, because I sure am."

"You didn't meet the job search requirement for that, so your classification will just be not in the labor force."

The respondent shakes his head. "I'm not counted as unemployed or underused. That doesn't make sense to me. There must be lots of small-town folks around the country in the same boat."

When a few weeks later the official labor force report was released by the Labor Department, it showed that the labor force participation rate dropped in December 2009 along with a related increase in the number of people classified as not in the labor force. For the recession as a whole, the drop in the labor force participation rate was the sharpest in any postwar downturn.

In January 2010 the employment market turned around, and by April nonfarm payroll jobs were up by 573,000 over December, with more than 80 percent of the gain occurring in the private sector. Total civilian employment put in an ever stronger showing, rising by 1.66 million in the four months since year end. However, an influx of non-participants into the labor force fully offset the increase in employment, holding the unemployment rate close to double-digit levels.

Though the job market is expected to further improve in the months and quarters ahead, the unemployment rate is not expected to decline by much, if at all, at least for a time. A year from now, even under the most optimistic job outlook, the official unemployment rate is likely to be lower, though still above nine percent, but with lower hidden unemployment.

History is instructive. In most labor market recoveries during the postwar period, increases in employment were shared by those counted as officially unemployed and the jobless waiting on the sidelines. This was reflected in a declining unemployment rate together with a rising labor force participation rate as non-participants entered the employment market in response to the improvement in job opportunities.

There was a notable exception to this pattern. During the 1981-82 downturn, the labor force participation rate did not move downward, so there was no big buildup of "hidden" unemployed outside the labor force. Consequently, in the initial stage of the subsequent recovery nearly all of the job growth went to the officially counted unemployed who were actively looking for work.

In the latest recession, the opposite took place. The participation rate dropped sharply, building up an unusually large contingent of jobless outside the labor force who are ready and willing to compete with the active unemployed for jobs.

If there's an empirical rule, it's that the larger (smaller) the accumulation of hidden unemployment during recessions, the smaller (larger) the decline in officially measured unemployment during recovery.

Every additional job means one more person employed. Whether that person comes from hidden or officially measured unemployment doesn't make a lot of difference. In part it's simply a reflection of how unemployment is defined - where the line is drawn on the length of qualifying job search. To get a more meaningful picture of how well the labor market is doing, it makes more sense, at least for the time being, to focus on job growth instead of unemployment. Policies that target the unemployment rate will be off the mark.

Alfred Tella is a former Georgetown University research professor of economics. 

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