America's Increasingly Irrelevant 'Unemployment Rate'

Once upon a time in America, grown men were expected to work a job, women were expected to stay home with the kids, and families were expected to cover expenses with their own earnings. There was no welfare state to step in for the unfortunate, or the feckless. This was the land for which the "unemployment rate" was invented.

The "unemployment rate" was a pretty good tool for measuring the problem of workless-ness in that long-forgotten America. But we don't live in that country any more. Consequently, our old-fashioned "unemployment rate" has become an increasingly inaccurate barometer for measuring the health of the American labor market and the well-being of the American public.

About a century ago - say, at the time of the 1920 Census - women comprised only a fifth of our formal workforce. (Women back then worked very hard-probably harder than men even-but almost all of their labor was unpaid toil at home.) In this earlier era, paid work was more or less a male occupation, and practically all men capable of working were in the labor market: either working for pay or looking for paying jobs. They had to. In a society that lacked not only public welfare guarantees, but even rudimentary social insurance, the prospect of not finding work raised the terrifying possibility of utter destitution- for oneself and one's family.

But that old world no longer exists even though we use that same unemployment rate today. The workplace is no longer a men's club -- in 2014, fully 47% of the civilian labor force is female. And while being without work still entails hardship, it is no longer the financial disaster and source of shame it once was. In that former America, there was basically no alternative to paid work for able-bodied men; no alternative economically, and no alternative socially. But this is no longer true today. Thanks at least partly to the growth of government support programs, voluntary joblessness - or something close to that - is, increasingly, a viable lifestyle option.

Thanks to fundamental changes in the nature of work and society in modern America, the unemployment rate has progressively been losing its erstwhile significance as a social indicator -- and even as a marker of labor market performance.

Under old America's unforgiving conditions, the "unemployment rate" and the "work rate" (or employment-to-population ratio) were likely to correspond quite closely. Today, by contrast, a declining unemployment rate no longer presages recovery in the labor market. Why? Because the rate does not account for people who have stopped looking for work.

As recently as the 1970s and early 1980s, the unemployment rate and the work rate tracked closely (but of course inversely) as may be seen below in the first two graphics. With the recessions of the 1970s and 1980s, unemployment rates went up-and work rates simultaneously went down. Conversely, when unemployment rates fell, work rates snapped back up.

A very different dynamic is at work nowadays. We can see this by looking at the period from 1999 to the present. Since the crash of 2008, there has been an obvious and almost total disconnect between the U.S. unemployment rate and the nation's work rate. We have seen a gradual and continuing improvement in reported unemployment since 2010, but for the past four years the work rate has essentially flat-lined. Our unemployment rate doesn't tell us anything about the work rate any more.

How can this be? The answer is straightforward, if troubling. Simply put, there are no longer just two employment statuses in America. There are now three: 1) employed; 2) unemployed; and 3) choosing neither to work nor to look for it: i.e., the "flight from work" group.

The postwar phenomenon of "flight from work" has been most evident, and acute, among men. As women moved into paid positions over the past two generations, a growing share of men seem to have checked out of work altogether. This is even true for men of prime working ages-the 25-54 group.

The flight from work among men of prime working age can be seen in Figure 5. There is no stable long-term relationship between the unemployment rate and the work rate here for the postwar era as a whole. In the early postwar period, a 6 percent unemployment rate meant about 8 percent of this group had no work. Today it means about 18 percent have no work. For any given unemployment rate, the proportion of prime working age men actually at work seems to be inexorably falling over time. This discrepancy is due to the flight from work

Even for men of prime working age, the flight from work now looks like the dominant determinant of male workless-ness. We can see this from Figure 6, which presents the fraction of the non-workforce accounted for by the unemployed from 1948 to the present for this key working age group. Although the annual readings are erratic (more or less following the business cycle), they trend downward. For most of the postwar era, the flight from work group has comprised a majority of such non-workers-and today they are a distinct majority. For every such unemployed man today who is looking for work, there are another two who reportedly are not even looking. Note this is not a new situation to be attributed to the 2008 crash (or alternatively, to the Obama Administration). It is many decades in the making.

If we want to understand - much less fix - what ails our labor force today, we have to measure its problems first. Unfortunately, our old-fashioned "unemployment rate" has become an increasingly inaccurate barometer for measuring the health of the American labor market and the wellbeing of the American public. Other, better tools exist. We must learn to use them.