Out of the Labor Force

Said an analyst, closely critiquing
The job market trends that are peaking:
"One is struck once again
By the outflow of men
From the ranks of employed or jobseeking."

"This development's long been projected
With retiring boomers expected,
But nothing so strong
Came to push it along
As the 2008 fiscal wreck did."

"Whereas once the laid-off might be prowlin'
For jobs from the ads they'd been scourin',
Many downsized afresh in
The current recession
Are optin' for throwin' the towel in."

Last Friday's non-farm payroll data incited more than the usual discussion for the fact that the unemployment rate declined even as more people were not working. This prompted much discussion (including limericks) of the labor force participation rate, which has declined sharply since 2008. The Atlantic's Derek Thompson anticipated this discussion when he asked earlier in the week: "Why Are So Many Men Dropping Out of The Workforce?" Not only has the LFPR declined in the last few years, but men's participation has been in decline for three generations.

Since the 1950s, men have slowly flowed out of the workforce as women have flowed in. Some of this male outflow stems from an aging workforce headed into retirement. In the Great Recession, older men may look pessimistically at their job prospects and decide, in many cases, that their wives' incomes and their social benefits comprise an acceptable fallback position. Thompson concludes that "the combination of an aging workforce (which we cannot control) and a weak economy (which we can control) has tugged down the participation rate, which in turn has tugged down the unemployment rate -- and threatens to make us poorer in the long term."

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.

Government is the Problem

When politically seeking causalities
For our tepid employment realities,
It seldom is heard
How shrinkage occurred
At states and municipalities.

Friday's Non-Farm Payroll report of 69,000 jobs added was shockingly lower than the consensus expectation of +150,000. The disappointment dominated stock markets, news programs and weekend punditry. Many repeated the question: what will it take to get companies hiring again? Seemingly lost in the discussion was the fact that, while private employment rose slowly, government employment actually continues to fall. The Calculated Risk blog schools us:

So far in 2012 - through May - state and local government have lost 7,000 jobs (8,000 jobs were lost in May alone though). In the first five months of 2011, state and local governments lost 126,000 payroll jobs - and 230,000 for the year. This graph shows total state and government payroll employment since January 2007. State and local governments lost 129,000 jobs in 2009, 262,000 in 2010, and 230,000 in 2011.

Remember folks, jobs in the public sector are just as important for the economy as those in the private sector.

Non-Farm Payroll Holiday

When unfortunate news is disclosed
On a day that the market is closed,
Investors are hopin'
That, at the next open,
It's better than firstly supposed.

The US stock market was closed for Good Friday, as were European exchanges, and thus could not react to the surprisingly weak employment data that came out on that day. The Bureau of Labor Statistics announced at 8:30 AM last Friday that non-farm payrolls increased by 120,000, much less than the 200,000+ increases in the previous three months, and definitely below expectations. Unable to trade on the news, market professionals thus had all of a three-day weekend to mull it over, a weekend punctuated by Easter and Passover celebrations. Is it possible that festive gatherings with family afforded the trading community a new perspective? We'll find out on Monday at 9:30 AM on Wall Street.

Payroll Report

In discussing employment statistic'ly
Economists measure holistic'ly;
When the news is depressing,
They're sure to be stressing
The parts that read more optimistic'ly.


Thanks to Kelly Evans of the Wall Street Journal's News Hub and Ahead of the Tape for the challenge of taking the sting out of a bad payroll report.