Unemployment Data Tell Different Stories

Payroll jobs rose last month by a modest 117,000 after seasonal adjustment, just enough to push above the line of statistical significance, though not enough to absorb normal population additions to the labor force. The July increase followed two successive months of job changes that again failed statistical significance despite their upward revisions.

The 9.1 percent unemployment rate in July was not statistically different from the 9.2 percent rate in June, though it was widely hailed as an improvement. The rate has varied little since April.

Total civilian employment collected by the household survey is more comprehensive than payroll employment, and is sister to the official unemployment data which come from the same household survey. Civilian employment failed to show any improvement in July, and allowing for population growth, the unemployment rate would have been expected to tick up. The only reason it didn't was a 0.2 point drop in the labor force participation rate (the percentage of the working-age population that is in the labor force) as more frustrated jobless gave up active job search and retreated to the sidelines.

Corrected for last month's labor force disappearance, the 9.1 percent July unemployment rate increases to 9.3 percent.

The labor force participation rate last month fell to 63.9 percent, its lowest level since May 1983. The employment-population rate, a measure of labor utilization, also hit its lowest level in 28 years, 58.1 percent last month.

Contributing to the uptrend in "hidden" unemployment are growing numbers of jobseekers who have completed their allowed time on extended unemployment compensation and so have given up on job search, which is not costless. Many of those sidelined will apply for disability, another last resort escape hatch for the desperate.

In the last two months the labor force participation rate fell by 0.3 point. Had the participation rate held steady, the unemployment rate would have increased from 9.1 percent in May to 9.5 percent in July.

The results are even more dramatic if the comparison is extended back to the business cycle trough in June 2009. (Although the economy has since been in recovery, the employment-population rate tells us that the labor market has been in recession since late 2007.) A level participation rate since mid-2009 would have resulted in the addition of 4.2 million unemployed to the official count, raising the unemployment rate from 9.5 percent 25 months ago to 11.5 percent last month.

Since the 2009 business cycle trough payroll employment has risen by only 697,000 or an average 28,000 a month - a pathetic showing. Total civilian employment has done even worse, showing no increase at all.

Question: has the employment - unemployment relation shifted? A comparison of periods of labor market weakness since 1990 shows that for a given loss in employment, a smaller share has been going into officially recorded unemployment since late 2007 than previously, with a greater share going into uncounted hidden unemployment.

This suggests that the official unemployment rate may have become biased by not picking up as much unemployment in the recent period of labor market weakness as it did in the past. If so, the reason could be that the greater severity of the latest period of employment weakness has had a stronger discouraging effect on the jobless, possibly worsened by a growing structural mismatch between their work skills and the skills in demand. This is a subject that needs further investigation.

At least one number in the latest employment report was positive - the 10 cent increase in the average hourly earnings of private nonfarm workers in July. But even so, the year-over-year increase in consumer prices has been picking up in recent months, resulting in a decline in inflation-adjusted hourly earnings.

While the modest rise in payrolls last month is a hopeful sign of more jobs to come, the household data paint a bleaker picture. Economists are toning down their forecasts for the second half of this year and for 2012. An economic growth rate of 2.5 percent is beginning to look optimistic. But the combination of productivity and population growth could easily eat up that amount of GDP growth, leaving little or nothing to help employment.

It's looking more and more as if the unemployment rate will be in the 8 or 9 percent range come election day next year. That's something the president may not be able to survive.