The Unemployment Rate Is the Most Useless Measure of All
What’s the most useless economic measure that gains the widest attention among economists, the media, investors, money managers and policymakers? Among a disturbing number of indicators, a strong case can be made that it’s the unemployment rate.
The latest stab at the unemployment rate by the U.S. Bureau of Labor Statistics was 4.4 percent in June. Particularly since the unemployment rate dipped to the 4.3 percent to 4.5 percent range over the last few months, there’s been a great deal of prattling on among assorted “experts” about the U.S. economy being at full employment. Of course, “full employment” is another dubious and moveable concept.
In reality, the unemployment rate in and of itself is of little value when it comes to figuring out what’s going on in the labor market. Instead, the information with real value is found in the underlying data from which the unemployment rate is calculated or is related, that is, the labor force and the employment level.
Consider, for example, that the current 4.4 percent unemployment rate (calculated as the number of unemployed divided by the civilian labor force) was matched in May 2007. Does that mean that the labor market is in the same position today as it was ten years ago? Absolutely not, but assorted talking heads seem to treat it that way.
Today, the labor force participation rate (i.e., the civilian labor force as a share of the civilian noninstitutional population) is 62.8 percent. But in May 2007, it stood at 66.0 percent. Similarly, the employment-population ratio (i.e., employed as a share of the civilian noninstitutional population) stood at 60.1 percent in June of this year, compared to 63 percent in May 2007. So, at the same unemployment rate, there were much larger shares of the population participating in the labor force and working in May 2007 than there were in June of this year.
Since there’s been a great deal of discounting the importance of the labor force participation rate and the employment level given baby boomers growing older, let’s consider the 25-54-year-old population, that is, individuals in prime working years. The unemployment rate for this group stood at 3.8 percent in June. That was the same rate prevailing in, for example, February 2007. But in June 2017, the labor force participation rate for this group registered 81.6 percent versus 83.2 percent in February 2007. And as for the employment-population ratio, it came in at 78.5 percent in June of this year compared to 80.1 percent in February 2007.
So, we see that a lower labor force participation rate and lower employment-population ratio can still result in a similar, or even lower, unemployment rate. That renders the unemployment rate rather empty in terms of providing substantive economic information, while also making the concept of “full employment,” again, rather meaningless.
In addition, it’s even dicey to consider directional moves in the unemployment rate. After all, the unemployment rate can decline even with an increase in the number of unemployed if the labor force expands at a faster rate than the unemployed. And then we can have the not unusual situation whereby both the labor force and the level of employed are expanding, yet the unemployment rate also can be on the rise, as significant numbers of people re-enter the labor force. That’s actually what happened in June of this year, as the unemployment rate moved up from 4.3 percent to 4.4 percent, but both the labor force participation rate and the employment-population ratio climbed.
So, it’s long past time to stop focusing on the unemployment rate, and instead, zero in on other data that provide substantive information about the labor market. As for the latest numbers and trends, we can see that while the labor market has improved some over the past few years, based on the fact that both labor force participation rate and the employment-population ratio continue to linger near 30 to 40 year lows, the employment picture remains underwhelming. “Full employment” it most assuredly is not.