The Unemployment Rate Should Lose Its Job
Recent economic headlines have probably left you scratching your head. Last week, we learned that GDP decreased by an alarming 2.9% in the first quarter, continuing a trend of weak growth since the end of the recession in 2009. Normally, this means that unemployment should be getting worse, or at least not improving much. And yet, the BLS reported last Thursday that the unemployment rate fell again in June. It's now 1.4 percent lower than it was at this time last year, suggesting the economy is strengthening.
So what's really going on? Are Americans' job prospects getting better or worse?
To find an answer, the first step is to look beyond the BLS' headline unemployment rate, because it's more misleading than helpful right now. Instead, consider four measures: Total Nonfarm Payroll, the Civilian Employment-Population Ratio, Job Seekers per Job Openings, and the U-6 rate. Together, these reveal a labor market that isn't quite as bad as the first quarter's GDP numbers suggest, but still far too weak to declare a full economic recovery.
As many have noted, one problem with the BLS' monthly unemployment number is that it fails to include unemployed people who have quit looking for work, distorting the true state of the labor market. So, while the latest unemployment rate is significantly lower than it was one year ago, it doesn't tell us to what extent the decrease has been caused by more people finding work, or more people giving up looking for work.
No one statistic can fully answer this question, but four figures taken together give us a good sense for whether last week's falling unemployment rate is good news, bad news, or something in between:
· Total Nonfarm Payroll is a measure of the number of workers in the economy, allowing us to track how many jobs have been created or lost. The good news is that the economy has added 9.1 million jobs since February 2010, when total employment was at its worst after the last recession. The bad news is that so many jobs were lost during the recession that it took 50 months (May 2014) for the economy to fully regain all the lost jobs -the longest recovery time since the Great Depression.
· The Civilian Employment-Population Ratio measures whether the economy is creating enough jobs to keep pace with population growth. Here, there is some cause for concern. In each recession after WWII, the Civilian Employment-Population Ratio has increased, which means job creation grew faster than population. However, since the beginning of the most recent recession, the ratio has fallen almost four percent as population growth has outpaced new job creation. While this follows a trend we've seen since the late 1990s, the drop has become much more severe over the past six years.
· Job Seekers per Job Openings measures the number of unemployed people compared to the number of job openings. Usually, this ratio falls as the labor market improves and increases as the labor market gets worse. As of April (the last month for which data is available), there was an average of 2.2 unemployed persons for every job opening. That's down from a high of 6.2 unemployed persons per job opening during the last month of the recession, but it's still higher than when the recession started over six years ago.
These three measures provide a fuller picture of the situation facing people trying to find work. But, they don't reveal much about people stuck in part-time jobs (the underemployed), or those who have given up looking all together.
· The U-6 Rate solves this problem by measuring the percentage of people who are unemployed, underemployed, and who have dropped out of the labor force. While the U-6 rate has fallen five percent from its high in 2010, it's still 12.1%-almost four percentage points higher than it was when the recession started.
Under normal circumstances, the BLS unemployment rate gives us a rough and ready way to assess the labor market. But the past six years of deep recession and slow recovery have been anything but normal. Headlines proclaiming rapidly falling unemployment often fail to consider what's causing the decline, offering a misleading view of the real circumstances facing job seekers.
When we look at a broader set of data available to us, we see that the declining unemployment rate has masked slow job creation, underemployment, and workers leaving the labor force. If we don't understand the extent and nature of these problems-or that they even exist in the first place-we simply won't be able to solve them.
Right now, the unemployment rate is more a source of confusion than clarity. Let's look for better ways to measure what out-of-work Americans are really up against.