Wednesday, July 16, 2014

Is the Unemployment Rate Meaningful?

The Bureau of Labor Statistics (BLS) reported earlier this month that 288,000 jobs were created in June and the unemployment rate decreased to 6.1%.  Headlines in response to the June report were positive.

A look beyond the headlines reveals that unemployment and under-employment remain in an unhealthy state.  The BLS “U6” report is a broader measure of unemployment that includes those marginally attached to the labor force.  The U6 unemployment rate was 12.1% in June and may represent better the condition of the job market.

The labor participation rate in June was a disappointing 62.8%.  The labor participation rate is the percent of the working age population that is actually working or seeking work.  In June, 156 million of the 248 million people of working age were working or seeking work.  146 million were employed and 9.5 million were unemployed – generating the unemployment rate of 6.1%.

The labor participation rate was steady for twenty years between 65% and 67% when in 2009 it began a steady decline to its current rate of 62.8%.   A labor participation rate three points lower than its norm represents 7 million people who have exited the labor force.  The bulk of those departures (5 million) were younger and older workers, but two million of the core 25-54 age group exited the workforce after the recession.

The decline in the labor force participation rate cannot be waved off with sound bites that the baby boomers are retiring.  Federal Reserve Chair Janet Yellen in testimony before the Senate Banking Committee on July, 15, 2014 confirmed, “labor force participation is weaker than one would expect based on the aging of the population.”

Recent studies indicate up to 75% of the 7 million people not participating would return to the work force if afforded the opportunity.  Those over 54 years of age that turned to Social Security Disability Insurance when they could not secure a job and unemployment insurance expired are not likely to return to the labor force.

Another area of concern is the trend toward part time jobs.   Nearly all of the new jobs created in June were part time.   The BLS reports that 7.5 million people are presently working part-time due to economic reasons.  They accept part-time jobs because full time positions are not accessible.  This is a growing and disturbing trend.   It may be linked to the Affordable Care Act, but further analysis is required.

Stagnant wages rising less than two percent annually since the recession will remain low without growing the economy, moving people back into the workforce, and transitioning part time workers to full time.  There is inadequate competition for jobs to push wages upward particularly for unskilled labor that must also compete with migrants both legal and illegal.

The economy must generate about 125,000 jobs each month to keep pace with population growth.   In addition, to reach a target unemployment rate of 5% in 2015 an additional 140,000 jobs must be generated each month for a sustained monthly net job growth rate of over 265,000 jobs.

A sustained twelve month period of 265,000 jobs generated each month would be impressive, but it is not sufficient to address those who have left the labor force or those who are underemployed.  The economy needs to grow at a faster pace.   The average annual 2% increase in the gross domestic product (GDP) of the U.S. since the recession must rise to a sustained 3% or greater to create the opportunity to move large numbers of people back into the work force and the underemployed into full time positions.

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