Politicians often paint an overly rosy picture of economic data when they are in the administration, and put a negative spin when they are in the opposition. Statistics regarding the labor market are no exception. Below I attempt an objective analysis, and debunk claims that the decline in the official unemployment rate is not reflective of reality. However, I also show that any improvements should not necessarily be credited to the current administration. When reading, please remember that you can magnify a graph by clicking on it.
The most frequently-cited labor-market statistic is the unemployment rate, which is compiled by the Bureau of Labor Statistics (BLS). It is computed by dividing the number of unemployed workers with the sum of employed and unemployed workers. This sum is the labor force. To be considered unemployed, a jobless worker must have looked for employment four weeks prior to when they were surveyed. In May 2018, the U.S. unemployment rate, shown below on a monthly basis, stood at 3.8%, the lowest it has been since the late 1990s, and before that since the 1960s. Clearly, this is something to be happy about.
Some critics claim, however, that the low unemployment rate is an artifact. They argue that the drop is due to previously unemployed workers becoming discouraged and quitting their search. When this happens they stop being considered unemployed and are removed from the labor force. The critics argue that this explains the decline in the labor force participation rate, the percentage of the adult population that is either employed or looking for a job. The labor force participation rate on an annual basis is shown below, and we do observe a decline since 2000. Other critics argue that the official unemployment rate masks that some workers who are considered employed are working part-time because they are unable to find full-time employment. Finally, a third group suggests that while the unemployment rate may have gone down, the decline has not materialized in higher earnings for workers. Let's look at these claims in detail.
Is the decrease in the labor force participation rate due to unemployed workers becoming discouraged? The answer is no! It is mainly due to the fact that the baby-boomers continue to age and retire. When they retire, since they are neither employed nor looking for work, they are removed from the labor force. To show that this demographic trend is responsible for most of the decline in the labor force participation, I graph below the labor force participation rate of adults between the ages of 25 and 52. People in this age-range are typically not eligible for retirement. Hence, fluctuations in this rate are more likely to be driven by changes in employment opportunities than demographics. Here, too, we see a decline from 2000 until 2013. However, it is much smaller. More importantly, since 2014 the rate has been increasing, just as the unemployment rate has been falling. Therefore, it seems that the recent drop in the unemployment rate does reflect an improvement in labor market conditions, which has motivated prime-age workers to re-enter the labor force.
Alternatively, we can look at broader measures of unemployment, compiled by the BLS since 1994. These are shown below, on a monthly basis. The red line adds to the number of unemployed the number of discouraged workers. These are workers who had looked for employment in the 12-month period before they were surveyed but not in the past four weeks, and who gave up looking because they felt that their search was futile. Adding discouraged workers makes little difference, however, since it raises the joblessness rate by less than half of a percentage point relative to the official rate. The green line adds to the unemployed all marginally attached workers. These are workers who had looked for employment in the 12-month period before they were surveyed but stopped looking, regardless of the reason why they quit. Hence, this group includes discouraged workers but also workers who stopped looking because they decided to, say, go to college. Adding all marginally attached workers still makes little difference, as it raises the joblessness rate by less than one percentage point relative to the official rate. Finally, the purple line adds to the unemployed all marginally attached workers and those working part-time because they cannot find full time employment. Including underemployed workers to the pool does make a difference, since it raises the rate of joblessness by about four percentage points. Of course, one can argue that this rate overestimates unemployment, since those working part-time are at least partially employed. In any case, what matters for our purpose is that the four measures move together, so in terms of historical trends it does not matter much which one we look at. In fact, choosing the broadest measure suggests that the improvement in the labor market since 2010 has been greater, as this rate fell by more than nine percentage points while the official rate fell by about six. Visually, both the purple and the blue lines have been falling but the purple line has fallen faster, thus closing the gap with the blue line.
The most frequently-cited labor-market statistic is the unemployment rate, which is compiled by the Bureau of Labor Statistics (BLS). It is computed by dividing the number of unemployed workers with the sum of employed and unemployed workers. This sum is the labor force. To be considered unemployed, a jobless worker must have looked for employment four weeks prior to when they were surveyed. In May 2018, the U.S. unemployment rate, shown below on a monthly basis, stood at 3.8%, the lowest it has been since the late 1990s, and before that since the 1960s. Clearly, this is something to be happy about.
Some critics claim, however, that the low unemployment rate is an artifact. They argue that the drop is due to previously unemployed workers becoming discouraged and quitting their search. When this happens they stop being considered unemployed and are removed from the labor force. The critics argue that this explains the decline in the labor force participation rate, the percentage of the adult population that is either employed or looking for a job. The labor force participation rate on an annual basis is shown below, and we do observe a decline since 2000. Other critics argue that the official unemployment rate masks that some workers who are considered employed are working part-time because they are unable to find full-time employment. Finally, a third group suggests that while the unemployment rate may have gone down, the decline has not materialized in higher earnings for workers. Let's look at these claims in detail.
Is the decrease in the labor force participation rate due to unemployed workers becoming discouraged? The answer is no! It is mainly due to the fact that the baby-boomers continue to age and retire. When they retire, since they are neither employed nor looking for work, they are removed from the labor force. To show that this demographic trend is responsible for most of the decline in the labor force participation, I graph below the labor force participation rate of adults between the ages of 25 and 52. People in this age-range are typically not eligible for retirement. Hence, fluctuations in this rate are more likely to be driven by changes in employment opportunities than demographics. Here, too, we see a decline from 2000 until 2013. However, it is much smaller. More importantly, since 2014 the rate has been increasing, just as the unemployment rate has been falling. Therefore, it seems that the recent drop in the unemployment rate does reflect an improvement in labor market conditions, which has motivated prime-age workers to re-enter the labor force.
Alternatively, we can look at broader measures of unemployment, compiled by the BLS since 1994. These are shown below, on a monthly basis. The red line adds to the number of unemployed the number of discouraged workers. These are workers who had looked for employment in the 12-month period before they were surveyed but not in the past four weeks, and who gave up looking because they felt that their search was futile. Adding discouraged workers makes little difference, however, since it raises the joblessness rate by less than half of a percentage point relative to the official rate. The green line adds to the unemployed all marginally attached workers. These are workers who had looked for employment in the 12-month period before they were surveyed but stopped looking, regardless of the reason why they quit. Hence, this group includes discouraged workers but also workers who stopped looking because they decided to, say, go to college. Adding all marginally attached workers still makes little difference, as it raises the joblessness rate by less than one percentage point relative to the official rate. Finally, the purple line adds to the unemployed all marginally attached workers and those working part-time because they cannot find full time employment. Including underemployed workers to the pool does make a difference, since it raises the rate of joblessness by about four percentage points. Of course, one can argue that this rate overestimates unemployment, since those working part-time are at least partially employed. In any case, what matters for our purpose is that the four measures move together, so in terms of historical trends it does not matter much which one we look at. In fact, choosing the broadest measure suggests that the improvement in the labor market since 2010 has been greater, as this rate fell by more than nine percentage points while the official rate fell by about six. Visually, both the purple and the blue lines have been falling but the purple line has fallen faster, thus closing the gap with the blue line.
Finally, what about the claim that despite the drop in the unemployment rate there have been no gains in labor earnings? The graph below shows the real (adjusted for inflation) median weekly earnings of wage and salary workers. The median earnings is the earnings right in the middle between the lowest and the highest. We can see that contrary to that claim, median earnings have, in fact, been increasing since 2013, and are now higher than they were before the Great Recession.
The conclusion that can be drawn once all these numbers are put together is that the current labor market is tight, and that during the past half decade there has been an improvement in labor market conditions both in terms of employment opportunities and in terms of earnings. At the same time, the improvement began before the current administration took office. Hence, it is way too early to assess its footprint, as to do so we would need to examine whether the improvement accelerated or decelerated since President Trump took office, and we don't have enough data for that. Finally, while these numbers should make us happy, there are some signs of trouble. Specifically, there is some indication that since 2010 there exists a greater mismatch between the workers seeking employment and the jobs that are available to those workers. But more on that on the next post.
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