Saturday, September 8, 2012

Watch That Denominator

A fall in the joblessness rate
Would normally seem to be great,
Excepting, of course,
When there's less labor force,
Deflating the weight of that rate.

When the August unemployment rate was announced on Friday, its decline from 8.3% from 8.1% may have seemed like good news. In reality, the employment data were disappointing, because the number of nonworking people has actually increased. The growth in non-farm payroll employment of 96,000 fell short of the 
125,000 consensus forecast; neither did it meet the rate needed to accommodate new entrants into the job market.

However, not all nonworking people count as "unemployed" because the federal statistics only tally those who are working or actively seeking work. This is the definition of the labor force, which is divided into the number of unemployed job-seekers to give the unemployment rate. When the jobless become discouraged and stop looking for work, they are no longer considered "unemployed" or part of the labor force. Thus, they decrease both the numerator and the denominator of the unemployment rate by the same number, which lowers the rate. It is therefore also important to monitor the labor force participation rate, i.e., the labor force divided by the working-age population.

As shown in the graph, the labor force participation rate remained fairly constant at around 66% during the Bush years, until the onset of the financial crisis in the fall of 2008.  At that point, labor participation began a decline that has continued in the Obama years.  It now stands at 63.5%. A true recovery will have to bring those lost participants back into the labor force.

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